***As a rabid fly fisher, I tend to think about things in terms of tying a fly or standing in a stream or other fishing terms. But I’m also a rabid hockey fan, and with the trade deadline having recently passed and the new season about to get underway, my new “Stream of Thought” blends the topics of hockey and asset quality control. In it, I explore how Asset Management helps determine an NHL team’s performance and worth. ***
The National Hockey League (NHL)’s March 3rd, 2023, trade deadline has passed. I must confess, much to my wife’s dismay, I spent countless hours reading, listening, and watching NHL trade news. What she may not have known, though, was that while I was glued to the news from a hockey perspective, there was also a work angle.
Interestingly, two words were mentioned frequently by team management, coaches, and hockey media analysts throughout the trade talks. And as an old-
school asset manager and quality control guy, they jumped right out at me: Asset Management.
Asset Management is critical to establish a winning team. It starts with the ownership group. They must hire a solid general manager and then give them the autonomy to manage and build the team without interference. This is often easier said than done. The general manager must hire a coach who is aligned with management’s vision of what kind of team they want to pull together. The coach, in turn, will hire assistant coaches and support staff to achieve the end goal of winning. Everyone will have input into what kind of players they need to build a good team. But it is up to management to make sure this happens.
But before any of those decisions can happen, you must do your pre-work. Gathering good information and then planning based on that data will result in the best decisions. All of these are parts of good Asset Management practices. This is true of asset-intense industries like oil and gas or pulp and paper, in a stream fly fishing, or building a great hockey team. With a proper strategy, your assets will last longer, perform better, and provide the best ROI possible (like bringing home the Stanley Cup.)
The Pre-Work: Gathering Data About Your Assets (aka Scouting)
Everything begins with knowing your asset’s abilities and potential. In hockey, this starts with scouting. Great scouting intel is an essential building block to success. So naturally, having that intel and also having a first-round draft pick gives you the best chance to acquire an elite player.
However, when building a team for the future, it is the lower draft picks (especially 2nd, 3rd and even 4th round) that can pay big dividends down the road. This is where scouting plays an even more critical part. These players may not make the club in the first couple of years, but they will populate your farm teams and develop there.
Having a system full of promising prospects that you can draw from is so important when building a team for the future, a team that will be highly competitive over many years. In my opinion, team-nurtured talent (successful draft picks developed in a team’s system) is by far the best way to build a successful and profitable team. It may be painful and slow at the beginning, but as these players develop, you will have a highly competitive team for many years. Also, the better young prospects you have on the organization’s farm teams, the more trade potentials are possible for that final Stanley Cup push, especially before the trade deadline.
Re-tooling versus Re-building Your Team: Assets In, Assets Out
The month and week leading up to the NHL trade deadline are always exciting, emotional, and a source of anxiety for the players, management, ownership, and fans like me (just ask my wife). It is a high-pressure condensed period of trade frenzy where many teams often pay over-market value for players. How they manage assets is determined mainly by whether they are a Stanley Cup contender long-term or short-term.
Re-tooling for a Short-Term Win
Teams that are short-term Stanley Cup contenders often treat the trade as a shopping spree. These buyers are re-tooling their current team and looking to load up with established stars before going into the playoffs. As the deadline approaches, it can turn into a frenzy of buying to fill holes and adding depth to their line-ups for the upcoming playoffs and the final push for Lord Stanley’s Cup. It can be a short-term solution, but it also might be the key to ending the season as champions. So, they are busy bringing assets in.
Re-building for the Longer Term
Then there are the “sellers.” These teams have decided that now is the time to re-build for the future. They trade away their established NHL players for future draft picks and/or young prospects. Typically, re-building occurs when the team is made up of older players with large salaries. They have gone through many years of mediocrity and continually miss the playoffs. Management and owners dismantle the team with a view to re-building around their younger star players by trading for draft picks and prospects. This is a long-term solution that can lead to the team becoming competitive for many, many years. They are in an “asset out” phase.
If you are re-building, the draft is where you will realize your biggest benefits and get a better bang for your buck over the long term. Drafts come with inexpensive entry-level contracts and huge upside potential.
Re-tooling versus Re-building: A Tale of Two Cities
Since the 2013-2014 season, Tampa Bay Lightning has been in the playoffs seven times and will be once again in the 2022-2023 season. Tampa Bay has won the Stanley Cup twice in three appearances during this time.
In comparison, the Vancouver Canucks team has only made two playoff appearances and are not expected to make the playoffs in the 2022-2023 season. In addition, they have never won the Stanley Cup. The big question is why. There are many reasons, including most likely poor Asset Management.
Tampa Bay has made great Asset Management decisions. They went the route of re-building. They had a long-term plan. In a recent podcast from “Rob Talks Hockey” Rob discovered that during the Lightning’s back-to-back Stanley Cups in 2019-2020 and 2020-2021, they had 15 team-developed players. Out of a 20-player game roster, up to 75% of their players were drafted and/or developed by the team!
The Canucks, on the other hand, refused to re-build and chose to re-tool instead. As a result, this season they only have seven team-developed players, and two are not even playing full-time with the parent team. Furthermore, since the 2012 season, they have made 12 first-round draft picks and 79 draft selections overall. That shows that very few current roster players have been developed in their system.
Invest in Your Players
Poor drafting limits your trade abilities because you have very little in terms of strong young prospects. Instead, you are forced to trade more established and productive players. Unfortunately, these players are usually the ones that you want to build a team around. In addition, poor drafting leads teams to acquire players through free agency, which is very expensive and problematic because of salary cap space limitations.
Poor scouting and even poorer Asset Management decisions over many years lead to poor performance. However, good scouting decisions and drafting good players beyond the first round can make a difference. These strategies develop depth and give your organization a deep well of solid young prospects to develop.
The Business of Hockey: Measuring a Team’s Worth
Many factors determine a team’s worth, the biggest being the size of the market in which they operate. A large-market team may have a value several times that of a small-market team. According to Forbes Magazine, the New York Rangers are the NHL’s most valuable team, worth $2.2 Billion. The Toronto Maple Leafs rank second at $2 billion. In contrast, the Arizona Coyotes are worth approximately $450 million. This is because the Rangers play in a large-market area while the Coyotes play in a small-market area. The difference is enormous, even with the mitigating factors of the salary cap and league revenue-sharing. The Rangers’ annual revenue is approximately $250 million, while the Coyotes’ is around $127 million. Playing in a large market area makes a big difference, even if your team has not recently won the Stanley Cup. The Toronto Maple Leafs play in Canada’s largest market, and even though they haven’t won the Stanley Cup since 1967, they still pulled in $90 million just in media revenue last year.
Salary Caps
We live in a salary cap era, meaning rich teams cannot buy all the best players through free agency. Therefore, they are limited in the amount they can spend on their players for a season. It is a way that most professional North American sports leagues try to level the playing field between small-market and large-market teams. For example, an NHL team’s “cap space” is $82.5 million for the 2022-23 season.
A professional sports team is an enormously expensive business to operate. Buying an NHL team can cost well over $800 million, depending on the team’s success. Even if the team owns its arena, there are still large expenses such as utilities, property taxes, interest, maintenance, and possibly rental fees. Other big expenditures are team travel and accommodation costs, marketing, advertising, insurance… the list goes on and on.
Revenue comes from ticket and merchandise sales, and when the team owns the arena, they can also benefit from concession and parking revenue. If the team is in a large-market area, TV rights with large advertising revenue can significantly increase overall revenue. Making the playoffs can bring business bonus revenue, for some teams as much as $5 million per game. There are four best-of-seven rounds to the Stanley Cup. One team could play (but not probable) 28 games in the playoffs. So, financially speaking, not making the playoffs is simply NOT A GOOD THING! It can make a difference in whether a team is profitable, especially if located in a small-market area.
The Impact of Asset Management
Just like in any business with assets, poor Asset Management decisions made by the team’s managers and owners can lead to years of poor performance. Failing to make the playoffs could mean millions of dollars of lost revenue. In addition, bad trade and especially free agency decisions could lead to crippling long-term player contracts. In a salary cap era, a long-term, high-price contract for a player not performing up to his potential can severely limit the team’s ability to trade the player and get something back in return. On the other hand, if a team is under the cap, they have more freedom to make deals, making it easier to add players without losing too much, such as coveted first-round draft picks.
An Asset Management strategy can determine whether a team as a business is successful.
Summary
Dynasties are not built overnight, and it is harder than ever in this cap-salary world. Can you win a Stanley Cup through free agency and trades? Yes, you can, especially if you already have a team close to making the Stanley Cup finals. If a team has only a few holes to fill, good trades before or at the trade deadline in March could get you there. If this is the case, then it is absolutely the right move to give up a few high draft picks for a chance to win the cup.
In the 2022/23 season, the Toronto Maple Leafs, New York Rangers, and the Boston Bruins made significant player additions just before the trade deadline on March 3rd. Will it pay off? Well, I guess we will find out in a couple of weeks. Adding players at this time is a choice that management will make when they feel they have a chance to go all the way. But it usually comes with a cost. It can be expensive, and in many cases, you must find creative ways of staying within the cap-salary. Decisions have to be based on good player intel and scouting information. The wrong Asset Management decision could result in long-term pain by taking the chance for short-term gain.
Asset Management strategies include gathering information, good planning, proper player development, and solid analytics. Armed with all of this, good decisions can then be made on how a player will fit into the team’s overall vision for the future. It is essential when considering the team’s makeup and performance. Everyone wants a team that is always highly competitive and always in the playoffs.
Whether short-term or longer-term, an Asset Management strategy plays a huge role in a hockey team’s success. Asset Management can help them make the playoffs, potentially bring home the Stanley Cup, and be profitable.
To re-build or re-tool? Well, that really depends on the team’s current roster. But no matter which direction the team chooses, I believe it’s pretty obvious that good scouting, gathering the right information on prospects, proper player development, and planning leads to good decision-making and is all part of a good Asset Management program…and all are the keys to success.
What do you think? Am I off the mark? Many of us are very passionate about hockey, and I would love to hear your comments!
Have some fun and share your thoughts on other everyday situations where Asset Management principles apply in hockey. In the spirit of continuous improvement, I’d love to hear from you, my fellow hockey fans, fly fishers, and asset managers!
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