Friday, May 7, 2010

Does Arsenal's Policy Make Sense?


After a deeply dispiriting, hugely disappointing end to the season, including two abject performances against the might of Wigan and Blackburn Rovers, it is hardly surprising that some Arsenal fans are beginning to question whether Arsenal’s policy is still the right one. By this, I don’t mean that they are questioning whether the 4-3-3 formation is preferable to good old-fashioned 4-4-2 (though they are), but whether the club’s policy of shunning big money transfers, while focusing on youth development will produce success.

Actually, when we talk about the transfer policy, that effectively also covers the wages policy, for these are two sides of the same coin at Arsenal with Arsene Wenger controlling an overall budget for transfers and wages. In particular, Wenger has admitted that Arsenal cannot afford to follow a policy that involves both high transfers and high wages. The first part of this was already obvious to the club’s supporters with little money being spent on bringing new players in, but what might have been less obvious is that Arsenal have found enough money to substantially increase the wage bill – even though the wage structure is as tight as it ever was.

Interestingly, their North London rivals Tottenham have adopted almost exactly the opposite approach, namely spending a huge amount on purchasing new players, while having a payroll about half as large as Arsenal’s. A better comparison for Arsenal might be another team from the Big Four (at least one that’s been there longer than five minutes). Given that Chelsea operate in a different financial plane, maybe the best comparative for Arsenal is Manchester United, who have outspent Arsene’s team on both counts. Over the last four years United have spent about £55m more on salaries, while their net transfer spend is also £45m higher (£125m if Cristiano Ronaldo’s world record £80m sale to Real Madrid is excluded as a spectacular one-off). So, United have spent at least £100m more than Arsenal in this period, but they do have a lot of silverware to show for it: one Champions League and three Premier League titles, which is precisely four more trophies than Arsenal.

"The anti-Arsenal: Shirty Harry"

In fact, the Gunners have consistently spent less than their rivals over the last few years in the transfer market. Since the 2005/06 season, Arsenal is the only club in the Big Four (and the nearest challengers) to make money from buying and selling players. Incredibly, their net transfer spend surplus of £28m is at least £100m better than their peers – with the exception of United, because of the Ronaldo deal. The other clubs’ net spend is significantly higher: Chelsea £94m, Liverpool £84m (rubbishing Benitez’s claim that he has lacked funds), Tottenham £92m (the famed Redknapp effect), Aston Villa £90m (thank you, Mr. Lerner) and, of course, Manchester City with a barely credible £236m (“money can’t buy me love” – or indeed 4th place).

For Arsenal to spend not just less, but so much less than these clubs and still remain competitive is testament to the incredible job that Wenger has done with the funds available. The manager has steadfastly refused to endanger Arsenal’s financial security by splashing out large sums on over-priced, big name players. If there were any doubt, the club’s stance was clarified by new chief executive Ivan Gazidis last September, “We believe transfer spending is the last resort. That’s a sensible view to have. Re-signing players is a far more efficient system.”

These comments were very revealing. As we have seen, the transfer budget is only part of the story at Arsenal, but here was Gazidis explicitly eulogising re-signing players in the current squad. In this material world, that effectively means awarding the players improved terms and this was confirmed in the last interim accounts, when chairman Peter Hill-Wood described the re-signing of 17 first-team players on long-term contracts as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets.” While Arsenal’s activity in the transfer market last summer was minimal, they were extremely busy building the team from within, announcing new deals for Van Persie (£60,000 to £80,000 a week), Walcott (£40,000 to £60,000 a week), Song, Denilson, Bendtner, Eduardo and Fabianski (!) amongst others.

"Theo gives thanks for his pay rise"

While explaining how the move to the Emirates has helped boost the club’s profits, director Danny Fiszman actually boasted, “the wage bill is very similar to Manchester United’s and substantially above Liverpool’s. It’s substantially below Chelsea’s, but that is expected.” Not only that, at £104m it’s considerably more than the payroll at the chasing pack: Manchester City £83m, Villa £61m, Spurs £59m, Everton £49m. Boosted by massive growth in match day receipts and broadcasting income, Arsenal’s annual wage bill has increased by almost 60% in the last five years from £66m to £104m. Despite this, the wages to turnover ratio has actually fallen from 57% to a highly respectable 46%, which is the second best in the Premier League.

In this time, Arsenal’s headcount has risen by 30% from 293 to 384, but this is almost entirely due to (cheap) ground staff and administrators. The number of players is virtually unchanged at 62, so the increase in wages is purely down to significant inflation. All these figures are from accounts that are a year out of date and the salaries growth in the interims implies that Arsenal’s annual wage bill will rise to £120m, which is probably reaching the upper limit if the club wants to remain prudent.

We can be reasonably sure that this is the case, for Arsenal have a very conservative wage structure. At least they do to the extent that they very rarely pay top dollar for the best players, which can be seen by the list of the top 50 footballers’ salaries, featuring just one player from Arsenal: Andrei Arshavin down in 47th place. Cesc Fabregas has almost certainly joined this august list, but other clubs still feature far more often: Barcelona 8, Chelsea 7, Real Madrid 6, Manchester City 6 and Manchester United 4. Arsenal’s approach is different: the top players might not earn that much, but the rest of the squad is relatively well paid.

"Worth £10m of anyone's money"

Does this egalitarian ethos make sense? One result is that average players like Almunia, Denilson and Diaby earn more than their talents deserve, which is a double whammy, as it would also be difficult to sell them with other clubs unwilling to match their inflated salaries. The other implication of the rigid wage structure is that Arsenal will struggle to attract world-class players like Fernando Torres or David Villa. This can be demonstrated empirically by the number of high transfer fees paid, assuming that this is what it takes to purchase a world-class player (though admittedly such a list will include a few duds). Arsenal have only bought seven players with a fee over £10m (Vermaelen, Arshavin, Nasri, Hleb, Reyes, Wiltord and Henry), while Chelsea have bought three times as many (21), Manchester United have bought more than twice as many (16) and even Liverpool have bought more (9).

What is really striking about the wage bill is the allocation, as much of it is given to the youngest players, who earn much more at Arsenal than other clubs. For example, it was reported that Aaron Ramsey was offered £850,000 by Arsenal compared to £350,000 by Manchester United. Granted, that now looks like money well spent, but it is indicative of the different wage policy. From a financial perspective, this is a shrewd strategy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first-team squad. Another benefit of this plan is that it encourages loyalty to the club (or Arsene) among young players, but there is also the risk of complacency setting in. While many fans understand the strategy, it still goes against the grain to reward these players for: (a) not winning any trophies for five years; (b) spending lengthy periods in the treatment room with assorted injuries and ailments.

The problem is that it is very difficult to cut wages, unless you live in Greece. As Arsenal’s annual report said, “There continues to be significant upward pressure on players’ wage expectations and the activities of other clubs in the market and the introduction of the 50% income tax rate from April 2010 mean this looks set to continue.” This is compounded by the weakness of Sterling, which has declined from €1.50 to €1.15 to the Pound over the last couple of years.

"Suited and booted"

Let’s take the example of a foreign player who earned £60,000 a week two years ago. His annual gross salary would have been £3m with take-home pay of £1.8m (€2.7m). Following the increase in the tax rate from 40% to 50%, net pay would fall by £300,000 to £1.5m. That is further reduced in Euro terms from €2.250m to €1.725m, thanks to Sterling’s decline. In total, the annual salary has effectively been slashed by almost €1m (from €2.7m to €1.725m). I don’t care how well paid anyone is, a 35% cut in your salary has to hurt. So, what’s the player going to do? That’s right – ask for more money.

Some have argued that this does not matter, as many footballers in Spain have not actually been paid by their clubs, which is one way of cutting wages. This has resulted in the Spanish players’ union threatening to strike. This may be a factor for smaller clubs, but I’m not sure that it is that relevant for Arsenal, as they should theoretically be competing with the likes of Barcelona and Real Madrid for the cream of the crop – and they are paying their players.

The market is also artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, leading to the so-called “financial doping” so despised by Arsene Wenger. We know all about Chelsea’s enormous wage bill (about £150m), but it surely won’t be long before Manchester City get close to this. Their last accounts reported a 50% increase in salaries from £54m to £83m, but that does not include their spending spree last summer, when they attracted many big names (Adebayor, Tevez, Barry, Lescott, etc) to the club with generous packages. Conservatively assuming £100,000 a week, City’s payroll has probably risen by over £40m to around £125m this season.

"The artful dodger"

This is why Arsenal have developed a squad-building technique that is very different from their main competitors in the Premier League. As explained by Wenger, “The club’s strategy is to favour the policy of youngsters ahead of stars and to count on the collective quality of our game.” Rather than buy established players, Wenger would prefer to search for unpolished gems, so he has set up a worldwide scouting network. The financials are compelling: instead of spending £15m on a transfer fee plus £20m on wages (five-year contract at £80,000 a week), the club can get several teenagers for minor compensation fees, say, £250,000. Not all of them will make the grade, but those that don’t are usually sold for a tidy profit. Arsenal are now recognised for their youth development programme and state-of-the-art training facilities, while former player Gilles Grimandi, now scouting in France, adds, “We are able to attract the most promising prospects, because we have a calling card stamped ‘Arsene Wenger’. They know they will get the chance to play. It is one of our principal arguments.” And, of course, the great money paid to youngsters at Arsenal helps.

What most people don’t appreciate is that there are, in fact, two elements to Arsenal’s youth policy. The one that everyone understands is buying young players from other clubs, developing them for a few years, hoping that they will ultimately become a fixture in the first team, but selling them for good money if they do not. You could argue that the emergence of Cesc Fabregas is enough on its own to justify this policy, but there have been other success stories. Alex Song is a case in point, especially as Wenger saw potential that most others didn’t, but Nicklas Bendtner is another good example.

However, given that there are only 11 places available in a team, the law of averages would suggest that most prospects are sold. The process was explained by one of Arsenal’s scouts, Tony Banfield, “If it is felt they might not be good enough, they are sent out on loan to get more first-team football with the idea that it might improve them. When they return, if they are better, they might stay, otherwise the club look to sell them.” So, not only does a loan player benefit from playing experience, but he is also placed in the shop window to enhance his transfer value. In this way, Sebastian Larsson and Fabrice Muamba were first loaned then sold to Birmingham City in 2007. In addition, the club profits from sell-on clauses, the best example being David Bentley, who was sold to Blackburn for an initial £2.5m with a further £7.5m going Arsenal’s way via his subsequent transfer to Spurs.

"JET - do you wanna be in my gang?"

The second strand is what you might describe as the extreme youth policy, which was outlined by Wenger two years ago, “If you want to completely develop a player, ideally you take him at the age of five and you bring him right through to the first team. I have tried to build an academy that will recruit young local lads. At present, we have exceptional under-14s and under-16s. Technically, they are extraordinary.” He continued, “My priority will always be to keep the players I already have, because above all I believe in the virtues of teamwork. I want to have success by building a team with a style, a know-how, a culture of play specific to the club.” The idea is to bring a talented group of players together for sustained success. This is the approach that Barcelona, and Ajax in days gone by, have adopted. Some argue that this is too much of a gamble and it’s certainly a courageous long-term strategy in this most short-term of industries. However, as the great Johan Cruyff said, “If you have a good youth development system, then it is obvious the first team will one day be good too.”

The great hope for Arsenal is the exciting group of players that passed their way to a glorious success in the FA Youth Cup last season, most of whom have been together since they were 11 (or younger) at the Hale End Academy. Nine of the starting team that demolished Liverpool in the final are English, fulfilling Wenger’s vision of nurturing local talent. Many of them have already emerged in the Carling Cup, but are not quite ready for regular starting places in the first team, so have been loaned out with a fair degree of success: Jack Wilshere (Bolton), Jay Emmanuel-Thomas (Doncaster), Henri Lansbury (Watford), Kyle Bartley (Sheffield United), Gilles Sunu (Derby) and Sanchez Watt (Leeds). Meanwhile, Craig Eastmond has made a handful of appearances for Arsenal in the Premier League.

The importance of developing players and keeping them together, as opposed to trying to integrate new buys, seems intuitively correct, but luckily for Arsenal fans it has also been proved by statistical analysis. In their intriguing book “Soccernomics”, Simon Kuper and Stefan Szymanski used twenty years of research on football clubs to demonstrate that “spending on salaries explained 92% of their variation in league position”. In plain English, the higher your wage bill, the greater your chance of success. On the other hand, there is almost no correlation between transfer spending and doing well. Their analysis only goes up to 1997, but this year’s Premier League tells the same story. With one game remaining, the top three positions are filled by the three teams with the largest wage bills – in exactly the same order. Chelsea pay the most and lead the table, followed by Manchester United with the second largest payroll and then Arsenal whose salaries are third highest. In fact, the top seven places in the Premier League are occupied by the first six teams in the “wages league” plus Tottenham (who are 8th).

But it’s a double-edged sword, as wages are also the largest cause of clubs going into debt. The first sign that Portsmouth were in trouble came when the players’ salaries were paid late. As a director at one of Europe’s top clubs said, “We’re a great business, except for our players’ wages.” This has led to a widespread belief that footballers’ salaries should fall, but this seems unlikely, given the simple reality that the more a club pays players, the more matches it will win.

Billy Beane, the legendary general manager of the Oakland Athletics baseball team, has praised Wenger’s methods. The subject of Michael Lewis’ wonderful “Moneyball”, Beane is one of the world’s most influential sports executives, having used statistical data to find new ways of valuing baseball players, and is a great admirer of the Arsenal manager, “Nothing strangulates a sports club more than having older players on long contracts, because once they stop performing, they become immoveable. And as they become older, the risk of injury becomes exponential. It’s less costly to bring on a young player. If it doesn’t work, you can go and find the next guy, and the next guy. The downside risk is lower, and the upside much higher.”

As they say, imitation is the sincerest form of flattery and many other clubs now strive to emulate Wenger’s policy. Even those perennial big spenders, Chelsea and Manchester City have lauded Arsenal’s youth set-up as the way forward. Admittedly, Chelsea’s compliments came from Guus Hiddink, just before he exited stage left, and the source of City’s praise was Garry Cook, their appalling chief executive, but even Fabio Capello lavished fine words on Arsenal’s structure, “I’ve had the opportunity to look at Arsenal’s academy and their work is incredibly good. It’s a very important example for the other English academies.”

"Thumbs up for Arsenal's academy"

But is it successful? In terms of winning trophies, obviously not (or not yet). Nor can you say that the youth policy is a complete success when your central defenders have a combined age of 67 (Sol Campbell 35, Mikael Silvestre 32). However, Arsenal have qualified for the Champions League ten years in a row, which hardly any other club in Europe has managed. Furthermore, their record in the Champions League since the break-up of the “Invincibles” (after losing to Barcelona in the 2006 final) is no worse than that exalted team. If you allocate 5 points for winning, 4 points for reaching the final, 3 for semi-final, 2 for quarter-final and 1 for last 16, the current team acquired 8 points in the last four seasons, which is exactly the same as their more experienced predecessors. Yes, I know anyone can play with numbers, but it still suggests that the team is not on a downward trend.

The team’s performance should also be considered in the context of the dramatic changes in the football landscape post-Abramovich. Arsenal have been competing against billionaires for whom money is no object, who have tried to buy immediate success, e.g. Chelsea spent nearly £400m in the first three years after the arrival of their Russian oligarch; Manchester City splashed out over £250m following the influx of Arab money. Some clubs, notably Manchester United and Liverpool, have decided that it does not matter if they don’t have any money, opting to build up substantial debt instead, while other clubs have adopted a “see no evil, hear no evil” approach to potential saviours, which has predictably ended in tears, e.g. Portsmouth, West Ham.

This relative financial weakness has been compounded by the constraints arising from the construction of the Emirates stadium. In the future, this will generate significant profits, but there is no doubt that Wenger has been operating with one hand tied behind his back over the past few years, forcing him towards the youth policy. Making a virtue out of necessity, Wenger advised the board, “We have good youngsters and can still compete at the top level.” This was in stark contrast to comments he made in the 2003/04 season, “I'm convinced that up front now you need to be young. A goalkeeper is best between 30 and 35. Central defence, I would say best age 26 to 34. Midfield between 26 and 32 and a striker between 24 and 30. Those are the top ages.”

"Wengerball"

At least Arsenal will not fall foul of UEFA’s financial fair play initiative, which will be phased in from 2012. Clubs will have to comply with these new rules before they are allowed to take part in the Champions League. As it stands, Chelsea and Manchester City do not qualify, though cynics might say that this is before their lawyers get involved.

In any case, there should be great respect for what Arsene Wenger has done at Arsenal these last few years. He has guided the club through the substantial upheaval of leaving its spiritual home of Highbury for the Emirates; developed a squad of exciting young players; and kept the team competitive, while playing the most attractive football in the country. All of this despite having to operate under major financial constraints at a time when other clubs have been flush with new money (both legitimate and dodgy). This is no mean feat, but there is a risk that Wenger has become too focused on the club’s finances, which is presumably why Michel Platini chided him for having a business mentality, rather than a football one.

Now that we know that the club has a large transfer budget, it may be that the emphasis on youth is tweaked this summer. The team is too inexperienced, though this has been exacerbated by the numerous injuries, and there is optimism that this will be addressed. Only yesterday, Wenger said, “We have plenty of young players. If we bring some players in, then they have to be experienced players. The additions will be minimal, but if there are some, they have to be really top class.” So, not a major over-haul of the policy, just a fine-tuning.

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