How to fix Australian rugby, Part 2: Reducing operating costs

For rugby in Australia to survive, it needs to cut costs. Given the deterioration in the media landscape and the game’s waning popularity, revenue will decline and cuts are necessary to balance the books.

Click here to read Part 1 of this series

Rugby Australia’s current operating budget is $80 million (excluding the $30 million paid to the Super Rugby franchises) and the four Super Rugby franchises have annual expenditure of roughly $20 million each for a total spend of about $160 million per year. Taking the dual mindsets of desperate times call for desperate measures and never waste a good crisis, I am setting myself a goal of reducing this by 50 per cent, i.e. $80 million.

Step 1: Eliminate a layer
Anyone who has done corporate transformation projects knows the easiest way to find efficiencies is to reduce the layers in the middle of the system. In most organisations, this means reducing middle-management headcount, in the case of Australian rugby it means scrapping Super Rugby altogether.

The current format isn’t delivering for the Wallabies, it’s not delivering for fans and it’s not delivering commercially. Rather than performing complicated reconstructive surgery, the better solution is just to get rid of it altogether. Of the $80 million spent by the Super Rugby clubs, about $22 million is player payments so assuming for a moment that you don’t touch the players at all, the pool you’re looking at is $58 million.

(Photo by Patrick Hamilton/AFP via Getty Images)

You could assume that you just take these costs out altogether but even in my structure you do need some infrastructure at the state level (especially for coordinating grassroots) so I’ll assume a saving of $50 million, which leaves $8 million to be spread out among the state bodies.

We also pay $1 million to SANZAAR central funding, which doesn’t make a lot of sense with no Super Rugby and no Rugby Championship (I’m scrapping that too) so that can go as well.

Step 2: Pay fewer players
Current
Of the 195 professional rugby players in Australia about 150 are aligned with the four Super Rugby teams — 36 to 40 for each. Extrapolating from the various annual reports, it appears the total cost of employing these guys is $38 million annually — a bit over $250,000 each, which seems about right.

Options
To get this number down there are only two options — pay each player less or employ less players. The first option doesn’t work without accelerating the player drain to Europe and Japan but employing less players means supporting less professional teams so what do you do? The question is answered above — you cut the Super Rugby teams and pay less players.

Solution
Cut the number of contracted players down from 150 to 50, structured as follows:
• 25 contracts for the most valuable players (Wallabies contracts)
• 25 contracts for the players aged 23 and under deemed to be the most promising (junior contracts)
• All contracts are for fixed pre-set values and for a fixed period of three years, awarded on a rolling-basis, i.e. eight of each contracts awarded each year
• Wallabies contract values: six worth $1 million, six worth $900,000, six worth $800,000, seven worth $700,000 (all per annum) = total cost of $20.4 million
• Junior contract values: six worth $200,000, six worth $190,000, six worth $180,000, seven worth $170,000 (all per annum) = total cost of $4.4 million
• Total player cost of $26 million plus another $3 million or so in match fees for a saving of $9 million

I’ll fully explain the logic for this in another post but it boils down to paying more to attract the best young talent, keep the best players in Australia year-round and letting everyone else fend for themselves.

(Cameron Spencer/Getty Images)

It obviously means a lot less professional rugby players in Australia at any given time but changing the competition structure and eligibility rules hopefully means this doesn’t impact either the product for fans or the success of the Wallabies.

Step 3: Trim the fat
Somehow, Rugby Australia manages to spend close to $19 million between Wallabies team costs and high performance and national teams. I would love to see a breakdown of these costs because this seems ridiculous.

If you assumed a staff of ten rugby staff on an average of $400,000 plus $100,000 in costs per person and costs of $100,000 per contracted player, that still only gets you to $10 million. Where does the other $9 million go?

It goes in the bin — another $9 million in savings.

Step 4: Outsourcing
I am going to say up front that I don’t know too much about how any of these functions truly operate other than to say that every single thing I have read regarding the current financial state of Rugby Australia says that head office is bloated and this is reflected in the match-day and corporate cost lines, which together come to $26 million.

One simple solution could be outsourcing. Instead of having an in-house match-day operations team, why not outsource to a specialist event-promoter like TEG? Instead of having an in-house sponsorship sales team, why not outsource to a specialist rights commercialisation agency like GroupM or IMG? We already seem to outsource a lot of the rights negotiation so why not outsource the other commercial functions to people who do this stuff for a living.

You’d need to structure the deals the right way to align the incentives but very basic economics tells you that putting specialists in charge leads to better outcomes and at a minimum you’d dramatically reduce the fixed cost base. Operating under this outsource model could save you another $10 million easily.

Some combination of these two steps seems to have already been completed with the recent round of cost savings at Rugby Australia so it will be interesting to see what (if anything) the consequences are.

Summary of savings
Super Rugby — $50 million
Player costs — $9 million
Rugby costs — $9 million
Admin costs — $10 million
SANZAAR payment — $1 million
Total — $79 million

So not quite the achieved goal of $80 million but pretty close and a much smarter and leaner operating model for Rugby Australia. Cost is only half the problem though — maintaining and growing revenue is every bit as important and will be tackled in the next post tomorrow.

This post was originally published on Medium.