The Value Proposition in the NBA

Arturo Galletti is an electrical engineer and statistician by education (masters in electrical and computer engineering), by vocation (he was worked across the past ten years  for the US government — as well as Baxter and Johnson & Johnson — to convert data into information and improvement actions),  and by passion (Minitab is great for stress relief and winning fantasy leagues). He was born and lives in Puerto Rico.  But his undergrad years were spent in Boston and he bleeds Celtic green. In this post he offers some advice to the two newest members of the NBA’s ownership fraternity.

Recently, two very uncommon new owners have come into the NBA to take over moribund and troubled franchises. I am of course talking about Mikhail Prokhorov with the Nets and Ted Leonsis with the Wizards. What makes them uncommon as owners is not jetting around the world with Russian supermodels, or surviving a plane crash, or their great individual wealth.  No, both these men are shrewd business men who have been involved in successful professional sports ventures (the Washington Capitals in the NHL for Leonsis and CSKA Moscow clubs for Prokhorov). This fact may make these new owners, perhaps in contrast with their predecessors, uniquely qualified to rebuild and run their teams in a way that aligns with the value proposition in the NBA.

Wikipedia defines “the value proposition” as “an analysis and quantified review of the benefits, costs and value that an organization can deliver to customers and other constituent groups within and outside of the organization. It is also a positioning of value, where Value = Benefits – Cost”.  Any new businessman getting started in a new venture must identify what drives value in his enterprise. So a new owner of a failed NBA franchise might ask how exactly does one measure a successful franchise in the Association?  How do I measure the personnel I hire to run my team?

While not typically clear in other industries, value in sports is driven by wins and cost is driven by payroll.  And both of these factors are known. Simply put, a new owner wants to get more wins per dollar spent than his competitors, and any metric measuring an NBA team’s success as an organization must focus on this particular issue.

Our first goal should be to calculate the going rate for a win in the NBA. Let call this metric Value per win for a Season. Logically this should be based on the total number of wins available in the regular season (number of teams in the league times 41) and the total amount of money paid to the players (Total Payroll in the league according to USA Today). Once we have those two numbers we divide Payroll by Number of Wins.  The results for each season from 2004-05 to 2009-10 are as follows.

  • 2005   $1,351,875.37
  • 2006   $1,347,250.02
  • 2007   $1,478,280.47
  • 2008  $1,610,619.97
  • 2009   $1,755,324.58
  • 2010   $1,730,023.66

By combining this with WP48 & Win Produced, any billionaire in the NBA worth his salt  should be able to evaluate the value of the players in his roster.  Specifically, we can calculate Player Net Value, which equals Wins Produced* Value of a Win – Player Salary. For the Nets and Wizards this looks as follows:  

For the Nets, only six of the seventeen players who donned their uniforms in 2009-10 were worth what they were paid. The Wizards did better (11 of 24 players), but the situation is reversed when we look at players under contract for 2010-11. The Nets have nine players under contract, and five should be worth what they will be paid. The Wizards, however, can look forward to starting 2010-11 in the hole with six of the eight players under contract. 

Now that we’ve looked at player evaluation, let’s start looking at evaluating an overall organization. First, let’s figure out the value of all the players on the payroll. We’ll call this Roster Value by Season. This will be determined by multiplying the number of wins a team achieved (we are using actual wins but one could also use total Wins Produced) by the Value per win for a Season. We have a choice here as to whether or not we use regular season wins exclusively or include playoff wins as well. For the sake of simplicity, we will stick with just the regular season wins (in the future, though, this analysis can be expanded to incorporate playoff success or failure). 

To illustrate, let’s look at the Phoenix Suns in 2004-05.  The Suns won 62 games that season.   With each win costing an NBA team $1,351,875 in 2004-05, the Suns Roster Value was $83,816,273.  In other words, this is what the Suns — if they were paying for wins at the average NBA rate — should have had to pay to achieve 62 wins in 2004-05.

When we look at actual cost, though, we see that the Suns had an outstanding season (even if the Spurs bounced this team in the Western Conference Finals in 2005).  To see this point we will calculate GM Value (or GMV), which is simply Roster Value by Season minus a Team’s Payroll.  The Suns in 2004-05 had a payroll (according to USA Today) of $35,259,424.  Consequently, the team’s GM Value was $48,556,849.  So the Suns spent nearly $50 million less than one would expect (given the number of wins the team won and the cost of each win to a typical NBA team in 2004-05).

So now that we have this shiny new tool let’s put it thru some paces.  Specifically, let’s look at all NBA teams – since 2004-05 – and see if any lessons can be learned.

What can our new owners learn from the above tables? It might be a good idea for both owners to look at the Spurs and Suns.  You’ll note that these two teams were the only franchises to have a positive GM Value for every year (or pay less than the going rate for wins each season). Both these teams have consistently put a quality basketball product in front of their fans over the last six years. And they have not overpaid for talent in the process. 

The Suns are an especially interesting case.  The media has often lambasted the decisions of this franchise.  The 2004-05 Suns, though, are in fact — according to the numbers assembled – the best team from the past six seasons.  And again, the Suns have maintained a positive GM Value in every season since. 

Can the Nets and Wizards transform themselves into franchises similar to what we see in Phoenix and San Antonio?  It is certainly possible for teams to turn things around quickly.  For example, Oklahoma City (from 23rd in 2008-09 to 2nd in 2009-10) and  Portland (from 29th in 2004-05 and 2005-06 to 1st in both 2008-09 and 2009-10) provide ample proof that course corrections are possible with patient management and (mostly) good drafting.

For Mikhail and Ted wholesale changes and new beginnings are not only desirable, but certainly possible (as this analysis suggests). The road to recovery may be long (or short) but the path has been travelled before. But patience and frugality — not panic and splurging — are the orders of the day.

Update: It has been noted that salary numbers from USA Today differ from what is reported elsewhere.  Another source of salary data is the website of Patricia Bender.  The analysis can be re-done with these salary numbers and here is what you find.  The Value per win for a Season would be as follows:

  • 2005   $1,437,764
  • 2006   $1,537,971
  • 2007   $1,572,602
  • 2008  $1,671,230
  • 2009   $1,747,932
  • 2010   $1,708,642

The Phoenix Suns GM Value with these numbers was $44,884,629.  And here is what we see for each team.

The analysis with Bender’s numbers appear quite similar.  Again, Phoenix and San Antonio look very good. And the Knicks are quite poor across the entire sample why the Nets are the worst team in 2009-10. Thanks again for these comments. 

- Arturo Galletti

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