The Hardball Times -- Jeff Angus

Book Excerpt: Management By Baseball

Jeff Angus — 2006-05-03T04:03:15+00:00

The following is an excerpt from Management by Baseball: The Official Rules for Winning Management in Any Field by Jeff Angus. For more information on the book, which was released this week by Harper Collins, click here.

Shelving Wood, Pumping Hart—Stealing 2nd Against the Cult of “At Will” Employment

Once in a while, there’s a lesson in baseball that just turns everything you think you know on its head and makes you wonder why you never noticed reality before. As we slip into The Incongruous Zone, we won’t use Rod Serling as our guide, but call upon former Cleveland Indians general manager John Hart to point out how much smarter baseball is than business at managing talent.

Take how we hire talent in the late 20th- and early 21st centuries. Mainstream U.S. economic wisdom holds that we’re exporting unskilled jobs to lower-pay labor markets and that’s great because we’re growing skilled jobs here. Those skilled folks will benefit additionally because lower-pay labor will produce goods for Americans at lower cost, so we’ll be earning the same and paying less.

Skilled people, by definition, know how to do something valuable. But universally, organizations strive for “at will” employment, where the employer may discharge the employee at any time without cause, without notice, and generally without a golden (or even tin) parachute. In exchange, the employee may resign at any time without notice. “At will” is a rational hiring model for low-value-added commodity businesses with a dynamic labor pool, like seasonal farm work.

Farmers need pickers, but only for a short period, and the skill differences among workers have a small effect on product quality or quantity. In a fair market, pickers and growers will adjust prices to find efficient pay for work. The at-will ability of the picker to pack up her machete in the middle of the day and move to a better-paying spot, or for the grower to give the ax to lower-performing workers if good weather stretches the time for harvest, lubricates the efficiency of a fair market.

With skilled jobs, though, why would we hire people at will, a strategy clearly meant for fungible jobs? Baseball doesn't, even though, synchronistically, “at-will” was invented by Horace Wood, a creative legal scholar, a year after the founding of the National League in 1876. Baseball signs its talent to contracts with specific duration. Like reliable Java programmers, competent project managers, creative accounting whizzes, smooth salesfolk, or the members of ZZ Top, major leaguers are skilled employees. They are, in management’s opinion, the best 1,200 people in the world at what they do.

When an organization spends $35,000 looking for, finding, interviewing, selecting, and making an offer to a person they hope will be one of the best 1,200 Java programmers or one of the best critical care nurses, or one of the best long-haul truck drivers, why does it strive to work out an at will set-up with her? Look at it rationally. You hire someone with special talents. In exchange for the potential benefit of laying her off in a downturn or when stock analysts need to be fed a bit of ledger de main, you surrender control over her efforts.

The cost of her leaving is not just in recruitment, but in her knowledge walking out the door. That organization can count on training and acclimatizing her replacement, meaning lower initial productivity and schedule slippages. Even the creative accounting geniuses at the U.S. Department of Labor can’t tell how much this costs and perhaps this is why the dysfunctional habit persists.

Baseball knows, though. In 1876, baseball was reeling from five years of labor chaos. Skilled players moved from team to team in response to offers of better pay, or the chance to play alongside better teammates, or in front of more fans. I n 1994, American employers were reeling from the effects of skilled employees changing organizations at the drop of a cap to garner better compensation, more interesting work, or better chances to build skills. In both eras, executives were ballistic about skilled labor instability.

In baseball, the solution was enforceable contracts. Sign the talent to a relationship of fixed, known length. This solution worked for the owners for almost 100 years. In business, the “solution” was…at-will employment? At-will, invented in the 1870s, minimizes loyalty while lubricating the ability of skilled labor to move on—that is, it was a total failure for employers because even when the shop doesn’t intend to chuck the talent overboard, the threat is implicit every day of the relationship.

The more skilled and employable the talent, the more likely they’d jump ship, leaving a higher concentration of roster plaque and passive people. At-will made worsened employment instability until Alan Greenspan bailed out the skilled-sector economy with his second recession in 2001, crashing it.

Great managers take advantage of others’ counterproductive compulsions. Ex-Cleveland general manager John Hart's front office team recognized one and revolutionized baseball personnel patterns based on an idea floated by now-Colorado Rockies G.M. Dan O'Dowd. Before Hart, Free-Agency Era teams pretty much acted uniformly based on this treadmill.

- Bring up a prospect.

- Keep his salary as low as possible for three years until he’s eligible for salary arbitration. In arbitration, his pay goes way up.

- At six years he becomes a free agent. His pay goes way, way up.

- Let him go. Sign another free agent or go back to start of this cycle.

Now, you’ve lost half the player’s highest-skill years to another team, plus you need to pay for another guy, someone you don’t know as well and have to invest some resources to learn about.

The Indians’ front-office, however, invested in a smokin’ farm system, generating a lot of fine young players. Then they short-circuited the cycle, signing players to longer-term contracts before arbitration, essentially capturing talented players’ best years. Hart eventually moved on to the Texas Rangers, and his front office cohort Mark Shapiro inherited the general manager job. While a few other franchises have tried to copy the model, Shapiro and the Indians still are the masters of it. Shapiro initiated another round of short-circuiting in 2004 – 2005, and the team just got really competitive in the latter season, finishing 93-69, and presaging an interesting run.

RULE 5.03 Follow your Hart, scrap your Wood. Organizations that have employees that represent hard-to-replace (or expensive-to-replace) value should sign the talent to enforceable contracts of fixed duration and dump the dysfunctional “at will” delusion.

Think about it. How much does turnover cost you in resources you can measure? How much in lost time, knowledge, and lower productivity? How many quarters of comparative advantage will you gain over competitors by recapturing that waste and pouring it into productivity? What prevents you starting a Hart pilot right away, and what will you do about it?

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Book Excerpt: Management By Baseball

Jeff Angus — 2006-05-02T05:06:15+00:00

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

The uncloned, real-life Alex Rodriguez is in between these legendary successes and failures as an RBI man. Here are his numbers adjusted for opportunity during the period 2001-2004 (Ruane hasn’t yet published 2005 data).

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

In A-Rod’s best year, 2002, he led his league in adjusted RBI. He’s been a good performer, adding to his team’s ability to win by knocking in runs.

In baseball, the momentum of the implicit has been hard to overcome. Branch Rickey pointed out ages ago three reasons to ignore un-adjusted RBI, but even a recognized genius struggles to overcome the faith of the lazy-minded. In your organization, there are a breathtaking number of implicit, unquestioned assumptions. A key element of intellectual self-awareness is to question one’s own and one’s employer’s implicit assumptions. Otherwise, one invests in illusions like ROE or whatever distortions hold sway in a shop.

Only when you overcome the limitations of your own and others’ implicit assumptions can you consistently meet and manage change, our inevitable battery-mate.

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