Billy Beane: What MBAs Can Learn From MLB

Billy Beane: What MBAs Can Learn From MLB

Mel Duvall

When you have to run a major league baseball team—or any organization—on a shoestring, you can’t afford to roll the dice with the payroll and hope for the best. You have to make every dollar count.

And making salaries count is the guiding principle Oakland A’s General Manager Billy Beane uses for drafting talent and signing established players. While the Yankees and Red Sox are spending $185 million and $127 million, respectively, on their player payrolls this year, the A’s will spend just $59 million. “I don’t have the resources that other clubs have to throw around, so I can’t afford to make decisions based on emotion,” says Beane.

Since Beane became GM of the A’s in 1997, he has taken a methodical and analytical approach to finding and managing baseball talent. He looks for blue-plate specials—players who have been passed over by other teams because they have some kind of wart, such as a slow fastball or poor running speed, but who have proved statistically that they have the knack for striking players out or getting on base.

Between 1999 and 2003, the A’s under Beane’s leadership achieved an average cost per win of only $388,000, the best in the major leagues. That figure is arrived at by dividing the team’s total payroll by the number of wins in a season. The team’s total win records have been in the same ballpark as the Yankees’, but it has cost the Yankees an average of $1.23 million per win to do it.

There’s a business lesson in Beane’s approach: It’s possible to build an all-star team without a bunch of all-stars (or a bunch of M.B.A.s) and their accompanying salaries. The trick is being able to judge day-to-day performance so that you can find the solid people who consistently do what it takes to make the organization successful. For example, a player who might not bat .300 or hit 50 home runs, but is able to work a pitcher and get a base on balls, isn’t highly valued by most teams, but he clearly helps his team by getting on base and giving his battery-mates a chance to drive him home for a run.

For instance, a lot of teams overlook players like Scott Hatteberg. While Hatteberg, who has a career batting average just over .260, hit only 12 homers last year and 15 the year before, he has a consistently high on-base percentage (he finished 13th in the American League with a .374 in 2002). On-base percentage tracks the number of times a player is able to get on base with a hit or a walk, both of which put his team in a position to score. Beane places a high value on on-base percentage and says that, by comparison to other major leaguers’ on-base percentage, Hatteberg is probably worth about $6 million a year. But since few people look at players the way Beane does, the A’s only needed to pay Hatteberg $950,000 this year to secure his services.

To find the players he’s looking for, Beane relies on Sabermetrics—statistical analysis that looks past the most obvious stats, such as home runs and RBIs. Sabermetrics instead focuses on things like a player’s “runs created” statistic, which, basically, counts the total number of times he gets on base, be it by walk or hit, and factors in an added value for the power of a hit, be it a single or a home run. The purpose of the stat is to determine how much the batter does at the plate to create an opportunity for his team to score a run.

Beane and his assistants use software from E Solutions, called ScoutAdvisor, that not only keeps track of pro player stats, but allows the A’s to compile metrics on young prospects and to perform various searches to find the players with the most potential.

Which brings up another business lesson from Beane: It’s not enough just to build a system that collects massive amounts of information about an organization’s human capital. You have to be able to use that information to look for insights and to test theories so that it can be put to competitive advantage. Think you know what kinds of people make the best sales or customer service representatives? Then test it and prove it.

All the attention given to Beane and his reliance on statistical analysis has created more competition for the so-called hidden gems in baseball, including driving up salaries for players with high on-base percentages. Other teams are copying his methods or hiring his protégés, as was the case when the Los Angeles Dodgers named Paul DePodesta their GM this spring. DePodesta, a Harvard graduate, had been Beane’s number-crunching assistant GM since 1998.

“Other teams are placing a higher value on the kinds of players we want,” says Beane. But at the same time the spread of like-minded GMs to Toronto, Boston and now Los Angeles makes it easier to wheel and deal, particularly for multi-player trades with other teams. “I know I can call Paul [DePodesta] or Theo [Epstein of the Red Sox], and they’ll understand a trade and why it makes sense,” Beane says.

But not everyone has picked up on his technique. And that’s just fine with Beane. He just hopes they’ll keep doing things the same old way and use up their payrolls on mega-stars. “There’s this assumption that you have to have a certain player—a Mark McGwire or Jason Giambi,” he says of two former A’s stars. “But the moment I start acting that way, I’m screwed.”

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.