Order Now

 Print this Article
 E-mail this Article

Book Excerpt: Management By Baseball

Unquestioned Assumptions: Return on Equity is the RBI of Business

Some business executives manage their operation for ROE (return on equity). The experience of these folks offers an excellent example of missing the point even when they have accurate data (Chapter 6), because they can achieve a target that doesn’t advance their operation. They have an analog in baseball: teams that value players based on RBI (runs batted in).

ROE is a perfectly logical-sounding statistic that encourages its devotees to distort their investments in ways that undermine the business’ vitality and long-term survival. RBI is a perfectly logical-sounding stat that encourages many general managers to pay extra millions for ordinary players based on those G.M.s’ inability to step back and examine their implicit faith in “the way it’s always been.”

ROE is one small measure among many, it’s highly contextual, and it may mask more important factors. An exec can increase a company’s ROE in a dozen ways that will undermine a company. If I cloned myself and managed two companies with everything identical except “Company A” had less equity as a result of some poorly chosen spending and “Company B” was storing cash for some prudent investments, the clone who managed “A” would have better ROE than the “B” clone. Not because of skill or ability to advance the company, but simply because of the “benefit” of having less equity.

The RBI is parallel, a highly contextual measure, and it may mask more important factors. The most prolific homer hitter in the majors the last five years (2001 – 2005) Alex Rodriguez is a great RBI man. The Yankee clean-up hitter has 100 or more RBIs in eight consecutive seasons (1998-2005). Awesome. But he’s a clean-up hitter, so he usually has the three other Yankees best at getting on base batting in front of him. When he comes up, there’s a better chance of him hitting with men on base. He has many runners who represent RBI chances.

Let’s test opportunity. Bat Alex clean-up and clone him thrice. Bat his clones leadoff, fifth and eighth. In the first inning of every game, Leadoff A-Rod is the first one to the plate, so once each game he's guaranteed an at-bat with no one on base to knock in. His next time up he’s likely to bat behind the #9 batter (usually the least-skilled in the line-up), incrementally reducing the probability of runners on base.

Batting-Fifth A-Rod isn’t quite as hosed But the guy who bats in front of him (the Original A-Rod) is the most productive home run hitter in the majors over the last four years, and when he’s whacked one over the fence, the fifth hitter is coming up with the bases empty. In fact, Batting-Fifth A-Rod, by being a very scary dude to pitch to, is going to see fewer baserunners during the season because pitchers aren’t likely to intentionally walk the clean-up hitter to face Batting-Fifth A-Rod.

Batting-Eighth A-Rod is dinged, too. The batters in front of him, hitting 6th and 7th, are among the weakest in the lineup, and their strength is likely power hitting, not high on-base average, so they may not be on base when our last A-Rod gets up. To undermine our clone further, he’s going to have the #9 batter, the least-skilled on the lineup card, next up. Of course, this increases somewhat his chance of being walked intentionally, and with men on base, increases greatly his not getting good pitches to swing at, because an opponent is more afraid of being hurt by a scary hitter like Batting-Eighth A-Rod than by walking him and facing #9’s dubious batting skill.

Like a sales team that has regions or account portfolios with highly variable potential, RBI opportunities are not evenly distributed throughout the lineup. Therefore, it’s not a solid measure of helping the team, or “how good” a player is. A batter can do a great job but have fewer opportunities, while another has more opportunities and delivers less, and RBI will reward the less-effective one. Sales managers too often use “gross sales” as a metric the way team executives generally use the RBI: a survival that’s become an article of faith.

You can make useful measures for employees, sales or otherwise, the same way you can make RBI a useful stat. Adjust it for opportunity as researcher Tom Ruane did. One, take the average probability of delivering an RBI in every combination of baserunners-on and number of outs for a batter at the plate. Two, find out how many times that batter has been up in each situation. Three, project how many RBIs the league average should be, and compare his actual RBI count to what the average would achieve in that composite set of situations.

Look at Ruane’s table of the best and worst performers in opportunity-adjusted RBI since 1960. RBI is what you think it is, and ERBI are the number of RBI a league average batter would get in the runs-on-base and outs situations the player faced. Over is the number of extra (or when negative, fewer) RBIs the batter had than that league average. RPRW is the ultimate value, RBI adjusted to the context of the batter’s home park and then converted into the number of extra wins a batter’s actual RBI production would add for his team. So Barry Bonds in 2001 added about nine wins to the Giants’ season over the league average with his RBI production, and Neifi Perez in 2000 cost the Rockies between four and five wins.

BEST              TEAM(s)      RBI  ERBI    Over   RPRW
Barry Bonds       2001 SF  N   137  52.3    84.7    9.4
Mark McGwire      1998 STL N   147  65.6    81.4    8.9
Harmon Killebrew  1969 MIN A   140  67.7    72.3    8.5
Dick Allen        1972 CHI A   113  52.0    61.0    8.5
Roger Maris       1961 NY  A   141  67.2    73.8    8.4
Sammy Sosa        1998 CHI N   158  78.1    79.9    8.4
Willie Stargell   1971 PIT N   125  59.0    66.0    8.3

WORST             TEAM(s)      RBI  ERBI    Over   RPRW
Neifi Perez       2000 COL N    71  90.6   -19.6   -4.6
Neifi Perez       1998 COL N    59  79.6   -20.6   -4.4
Walt Weiss        1995 COL N    25  48.5   -23.5   -4.3
Ivan DeJesus      1978 CHI N    35  61.5   -26.5   -4.3
Walt Weiss        1996 COL N    48  66.2   -18.2   -4.0
Larry Bowa        1974 PHI N    36  65.8   -29.8   -4.0
Felix Fermin      1989 CLE A    21  53.7   -32.7   -3.9

NAME              YEAR TEAM     RBI   ERBI  Over   RPRW
Alex Rodriguez    2001 TEX A    135   84.4  50.6    4.9
Alex Rodriguez    2002 TEX A    142   80.3  61.7    5.6
Alex Rodriguez    2003 TEX A    118   73.9  44.1    3.7
Alex Rodriguez    2004 NY  A    106   85.0  21.0    2.2