The Financial Constraints Fallacy

Or… The Article I Should Have Written.  If you’ve no idea what I’m referring to – great!  I don’t want to rehash drunken prose.

I do want to dig into ‘financial constraints’.  An often used buzzword to describe Arsenal’s timid and shackled treatment of talent acquisition in recent years.

The key question – Is it a good business decision to limit investment in your product based upon debt?

Well, that greatly depends upon what that debt is.  If you’ve been borrowing to keep the lights on and you continue to bleed money, you may have no choice.  But what if you’re borrowing to expand and improve the company; do you let your product go stale (curtail investment) while you do it?  Most businesses would say absolutely not.  Most businesses have consistent Research and Development investment regardless of debt or whatever else is going on.  Its considered key to their company, key to their product, too precious to let go stale or allow competitors to surpass.

Arsenal chose to curtail investment – and I believe wrongly.  And even if you think it was right – it wasn’t even accomplished consistently.  Let us take a look at Arsenal’s transfer spending – or R&D budget (of course its not the be all end all of ‘R&D’ spending, there is an Academy, but this is the variable and the bulk of it when used properly).

Looking at the Arsenal Annual Reports as far back as available online (2004-2013), I’ve charted revenue and transfer spending below.  (Transfer spending looks differently in the Annual Reports than some would think – transfer fees sometimes have conditions on them.  The Annual Reports show exactly how much money changed hands that season – other sources will apply the entire fee (if they know it) to that season, sometimes unaware of conditions).

Source: Arsenal Annual Reports

Source: Arsenal Annual Reports

What we can see is a rise in revenue, but a decline in transfers.  Given the scale it may be hard to see, so lets look at it as most companies do – as a percentage of revenue…

Source: Arsenal Annual Reports

Source: Arsenal Annual Reports

What is now more readily apparent is the decline in player acquisition investment over the years.  Probably no surprise to Arsenal watchers, but this would be a startling chart to most businesses.  Most businesses would find this trend unacceptable and would not allow it to happen.  A company like General Electric keeps a rather consistent 4% R&D budget no matter if they are building a new facility, factory, or purchasing new equipment.  A company that depends more on R&D like Intel, about 15% – again, even when building new factories or updating manufacturing lines.  Arsenal should not have let this fall as it did.

And what about prior to 2004?  I’d love to get a better look.  If anyone has reliable information please let me know where it is.  What I did do was get reliable revenue numbers back to 1999 (overlapping years tracked accurately with Arsenal Annual Reports so the early years should be trustworthy as well).  But now I have to use other transfer sources than Arsenal Annual Reports – transfer sources that will disagree and not match up to annual cash flow as reported by Arsenal.  But even when looking at this – the trend remains true – a decline in investment in talent acquisition.

On the left is numbers, on the right is  Same trend.

“But but but – we built a new stadium!”  Oh I know, I haven’t forgot.  I don’t mean to brush it off, only to highlight that most successful companies would not do it this way.  Sure, the stadium build was more substantial to Arsenal than perhaps a new factory is to Intel.  It would be like Intel replacing all of their factories at once.  A little apples and oranges here.  So, lets take a look at this stadium debt.

Going back to Arsenal Annual Report information only, I’ve added some more data points to the chart – Net Debt, and Wages.  (Net Debt was used because Total Debt was not consistently reported on as far as I could see, and Net Debt takes assets into account, which is fair.  It also trended the same when both were reported).  Lets take a look:

Source: Arsenal Annual Reports

Source: Arsenal Annual Reports

The orange line shows the increase in Net Debt as the stadium was being built, moves made, and enhancements added.  Pretty sizable to be sure – so what were the impacts?  To get things under control we must have got the wage bill down, it dwarfs a transfer budget after all… Nope, as we can see the wage bill increased at a nominal rate that we would expect – debt be damned.  Good.

We already know that transfer investment dropped, and we assume it was because of debt.  But if we look closely, we had debt, and increasing debt, from 2004-2007.  But in those years we continued to invest in talent (green line more than 0).  How did we do this?  Didn’t we have crushing debt?  Heck the revenue just started climbing and now we stop investing?  What gives?

It was like an OMG! collectively went off and we stopped, dropped into a fetal position, and began muttering to ourselves.  Save a January Arshavin purchase in ’09, we’ve spent F%$# all from ’07 until Ozil.  Certainly this had to be because of that crushing debt.  Well perhaps not, once again – that debt was significantly reduced, to pre-2004 levels, in 2010.  Surely that meant the shackles should have come off and talent acquisition investment begin anew!  But no, it did no such thing.  We continued to shout ‘financial constraints’ from the rooftops, foolishly.  So many drank the Kool-Aid.  Why was it OK in ’04, ’05, ’06, ’07 – but in 2010 and beyond, with increased revenue and less debt, we’re under financial constraints?

Was this all emotional based decision making?  They didn’t change their minds until the bill breached 300M – in a OMG! moment.  And failed to change them back again well after it wasn’t ‘crushing’ anymore – still wounded from the aforementioned OMG! moment.  Emotional creatures we are, but when running a business – leave that at the door.

And where is the consistency?  Why was it OK to increase the wage bill?  To keep our players, to compete with market prices perhaps?  But then why not do that with transfers as well?  Its a pretty small number in the grand scheme of things after all.  Curtailing talent acquisition should have been the last purse string pulled shut.  It has direct impact on your product.

In my opinion we never should have allowed talent acquisition to lapse as it did, debt be damned.  Its our only product.  It requires care and feeding.  We also should not allow this ‘financial constraint’… well, …bullshit, to persist.  Its no excuse, not even a bad one.

This is no critique of what we did do – we brought in great players, just not quite enough.  We performed admirably… and here it is again… ‘with what we had’.  The other phrase that gets under my skin.  ‘With what we had’ == ‘financial constraints’ == ‘tight purse strings’ – and they’re all poor, broken excuses.  Poor, broken excuses for people that should have performed better (The Board, Arsene Wenger – all culpable).

Naturally there is no guarantee that this investment would have resulted in trophies.  But even being in the hunt a little longer, finishing a little higher, getting a round deeper in competitions – would have reaped some benefits.  Arsenal would have resonated even more globally.  Commercial deals would have been more lucrative.  Attracting new talent even easier.  We could have come out even better than we have.  And it was a failure in decision making that has limited us – not debt.  They didn’t have to do it, they choose to do it.  And not even in a reasoned manner.

I hope these days are behind us.  I hope this summer’s failed pursuits as much as Ozil success, are indicators that this paralyzing fear of debt has, at long last, been overcome.

Top of the table!  Up the Arsenal!



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