June 14, 2024

The Domestikated Life

One Passion

Conceptual Parallels Between Football Free Agency and Cost Accounting

Cost accounting is designed to help managers understand the costs of running a business and making decisions, however it is a concept that does not, and need not, be limited strictly to traditional business models. In the National Football League (NFL), general managers (GM’s), team presidents, and owners need to make similar financial decisions on extending contracts to its current roster members, releasing its players, and offering new deals to prospective free agents. The cost-accounting system is the result of decisions made by managers of an organization and the environment in which they are made, and no doubt about the multi-billion dollar business professional football has now become.

Instead of materials and machinery, NFL executive management have to assess depreciation of its direct labor force and whether their existing, as well as future, value legitimizes the cost it would take to pay that individual what they seek or realistically would accept. The reason that this is so subjective, however, is because we’re dealing with actual human beings, not things or products. While this is not a necessarily a tax write-off, an NFL team can evaluate their personnel accordingly based on the current cost adjustment (i.e. the salary cap) and the asset depreciation that is the football player on the decline.

There’s also the matter of accelerated depreciation, particularly for the running back position, based on the number of hits, injuries, and physical wear and tear a player incurs over the course of a career. In addition, players of an advanced age (such as 30 years and older) are regarded at a significant disadvantage, while young players are deemed as appreciating assets, especially if they are signed to reasonably-priced rookie contracts. The need to remove any inherent biasness in these front office evaluations is very necessary, but nevertheless is perceived as slights (offending the released player or making an “insulting” offer) when in fact they are made as a business decision, not as a personal one.

Activity-based costing (ABC) is a system for assigning costs to products based on the activities they require. In the case of NFL free agency, activities are those football plays performed on the field that results in yards, touchdowns, and subsequently in wins. Executive management can then use that resulting activity cost data to determine where to focus their operational improvements in order to maximize value so that to eventually fulfill the ultimate goal: win championships and satisfy die-hard fan base. To achieve such success, alternative internal accounting methods, such as balanced score cards, can help GM’s make better short-term decisions as well as help provide better measures of performance in the long-term for the organization as a whole, thereby aligning the GM and owner interests.

When making the final business decision on a player’s futures, it’s critical to consider all the above variables. For instance, in the recent case of Thomas Jones, the New York Jets decided to part ways with the 31 year old running back after a 2009 season which included his most productive season rushing the football (over 1,400 yards and 14 touchdowns) to shield the team from paying his upcoming $3 million roster bonus on top of a $2.8 million base salary. In addition to his age, he had a career high 331 carries in the regular season and appeared to wear down a bit down the stretch as rookie Shonn Greene started to get the majority of the carries. As an organization, the Jets could not rationalize paying a player they considered on the decline this amount and decided to move in another direction. Jones would later sign a two-year, $5 million deal with the Kansas City Chiefs in March of 2010, a clear example of two varying accounting principles and each team’s respective analysis; as it turns out, Jones had a productive first-year with the Chiefs before having a down season last year at the age of 33.

The above example is one of hundreds that occur in a given offseason and epitomizes the varying accounting level systems team use to assess, judge, and eventually offer or deny contracts. It’s for these reasons teams employ chief contract negotiators and why the one’s that devise the precise formula are so highly-sought after and the franchise’s that hire them are usually the successful ones.