The Philadelphia 76ers, Sam Hinkie and the Long Game

This post is ostensibly about a sports team that I’m a fan of, but it’s also about business management, investment and the decision-marketing process.

Last night, Philadelphia 76ers GM Sam Hinkie announced his resignation. I’m going to spare the detail for those who haven’t followed the Sixers since Hinkie was appointed in 2013. In summary, he was novel in that he took the mind-set of an investor, working for an ownership group comprised largely of professional investors, and attempted to use a long-term view, asymmetric information, disciplined financial management, scientific approaches, and unconventional strategies to change the rules on how to manage a pro sports team. Despite the pain of the past 3 years, I was all-in. But I’m also realistic in why it ultimately didn’t work. (Note: I say didn’t work only in the sense that Hinkie is no longer in charge, but I believe it has a great chance to succeeding.)

In financial terms, Sam Hinkie ran out of liquidity. The currency in this case isn’t dollars, but rather the backing and the patience of the ownership group to see his long-term plan for the Sixers through.

Personally, I want to see it work. Most Sixers fans have endured 3 seasons of suffering, with expectedly and unexpectedly bad turns, to see the light at the end of the tunnel. But the curiosity of doing it differently in an attempt to get different results. The way the Sixers were doing it wasn’t working in the past decade, and it resulted in some terrible decisions. This approach has been done in baseball by the Houston Astros in the early part of the decade, and the payoff is undeniably there. I wanted to see what a nerd could do for my sports team. Sam Hinkie is smart. Some argue too smart, but no one questions his intelligence, and his ability to think differently, approach problems and find uncommon opportunities to exploit. Those are characteristics that make him one of the business people I admire.

A Different Kind of Sports Guy

He’s not the normal sports guy. Sam Hinkie is the answer to the question, “How would a hedge fund investor fund a professional sports franchise?” He is a Stanford GSB grad, a quantitatively-inclined, deal-making executive who worked under Daryl Morey of the Houston Rockets. With the Rockets, he saw first-hand the ability to opportunistically go all-in to acquire a franchise-altering, under-valued, rarely-available player in the James Harden deal of 2012 (never mind that the Beard is a perpetual defensive liability). Hinkie doesn’t talk much. He doesn’t enjoy being in public, nor sharing how he makes decisions.

Forbes wrote this about Hinkie’s background:

Hinkie’s business acumen and mastery of statistical analysis is unquestioned. While earning an MBA at Stanford, Hinkie advised the 49ers and Texans on strategies to implement while constructing their NFL Draft boards, before working part-time with the Rockets. With Houston, Hinkie was instrumental in the acquisitions of Kyle Lowry and Patrick Beverly, one of the NBA’s top defensive stoppers. The executive also used innovative analytics to quantify Shane Battier’s value to the team, even when the ball was out of his hands. Hinkie could resurrect his career by returning to Houston to help bolster a disappointing Rockets’ team that is on the verge of missing the playoffs.

His parting 13-page letter sent to Sixers’ shareholders with his resignation reads like an investor letter from Warren Buffett, whom I’m sure inspired this format, tone and composition. And just Tuesday, he spent over 60 minutes (amazing, given his preferred reticence) in a Q&A with ESPN’s Zach Lowe. (Yes, I listened to the whole thing, and came away excited for the future before the bombshell happened.)

The Process vs. The Results

It wasn’t merely a conversation about sports. In the Lowe interview, he talked about the philosophy for making the right decisions, and the repetitive process for honing that skill. He made the case that the decision-making process (that which you control, including what you know, what is knowable, what assumptions you question and allowing the best idea to win regardless of origin) trumps the outcomes of those decisions. He talked about evaluating and scrutinizing past decisions, and the only way to do so in an intellectually honest way was to write down the thinking at the time of the decision. He noted that the right decisions might lead to the wrong outcomes, and vice versa, but that doesn’t mean they were wrong. For anyone who reads Warren Buffett, this will sound very familiar. When people talk about “trusting the process”, the decision-marking process to me is what Sam Hinkie finds sacrosanct.

In Hinkie We Trust(ed)

I trust the process. Mostly because the previous way of doing it for the Sixers wasn’t going anywhere. The previous regime had laid the cupboard barer than most people understood. If we were going to go with Hinkie, the ownership group had to have known they were playing a long game. With Hinkie, I trusted that the Sixers are in a good place as long as they make sound, rational decisions with a reasonable time table (i.e., the opposite of the Brooklyn Nets and the Sacramento Kings).

The Sixers had embarked on an unprecedented, and oft-derided, approach to running an NBA team built on a multi-year, deliberate rebuilding process that sought to find long-term, sustainable advantages. On the talent acquisition site, it required a conservative approach towards taking on obligations, taking back assets from other teams in needs, accumulating draft picks with a high-potential to be franchise-altering, finding not-obvious talent (i.e., undrafted free agents, international players and 2nd round picks) and keeping as much score as possible. On the basketball operations side, it involved heavy use of in-game analytics, charting, sports science and player development. That’s the approach, and that’s the process.

The experiment is over, as we know it. The optimist in me says that the Sixers are in a great position to turn the corner. The assets accumulated over the years are ready to bear fruit. And it’s not just this summer, but they are well-positioned for the next several summers (including owning the aforementioned Sacramento Kings’ future 1st round pick and having as close to a blank slate on future salary obligations as possible). However, Sam Hinkie is no longer going to be in charge. He could have shared control, and personally I wish that he would have. But I imagine that he was principled in deciding that the “process” that he has undertaken would be come into friction with whomever comes on to replace him (turns out, it’s the chairman’s son…talk about a process.)

Here’s where Hinkie’s approach hit its roadblocks in his approach:

1. Assets are People Too. Investing is a lot more dispassionate than talent acquisition. Investing can be done without any kind of relationships or interaction with the assets being purchased. This is simply not the case in managing a pro sports team, which hinges on personal relationships and reciprocal trust. It’s not only being in the position to do so (having the assets for trade, the draft picks and the cap room), and having the adeptness in charting the course and decision making. An NBA team isn’t acquiring a stock, or an ownership stake in a company. It’s bringing in a person that is a unique talent, and that person has some level of say in the matter. With free agents, they have the most level of control. In trades, they still do because they can use a pending free agency as leverage. Even in the draft, the player (and their agents) can decide what information to share and whether to meet with the team (for example, it was reported that Porzingis’ agent blocked the Sixers).
2. Not Investing in a Bubble. Hinkie’s approach was that of a fund manager. In the Michael Lewis’ book, The Big Short (I didn’t watch the movie yet), Michael Burry earned billions of dollars betting against subprime mortgages, and still burned his investor relationships because of scar tissue created while making and supporting his contrarian bet (that mind you, turned out to be right). And that’s for a hedge fund. An investor in a hedge fund is in a very different position than the fan base of a pro team. There are only 30 NBA teams. As an investor into a fund, you’re either in, or your out, and you have lots of places to invest your money if you don’t like what’s going on. With NBA teams, fans have finite options, and those are usually well entrenched. And everyone has an opinion about how to manage a team.
3. Too Many Bosses. In retrospect, Hinkie’s view for the long term required buy-in from all too many sides. This is why it was such a unique, unprecedented and risky proposition from the start. Unhappy fans, ticket goers, and advertisers don’t have the same options to go elsewhere. As a result, the reaction and external pressures are going to grow stronger if the on-court results aren’t there. This is despite having an objectively strong position to succeed in the very near future.
4. Operating in the Open. Hinkie’s approach to running a pro sports team was also reminiscent of managing a stealth technology company (think biotech or Theranos), one that can operate outside of the public consciousness while building for the long-term. This wasn’t possible at the Sixers. There are games being played, fans coming to the arena, and constant news coverage. A team’s GM is a public figure and the decisions are subject to outside scrutiny. A pro basketball team has some elements of a public trust, as you have an entire fan base that is at emotionally if not financially invested (through tickets, gear, TV viewership). Sometimes rightly but a lot of times wrongly, they expect visible, incremental results.
5. Culture at the Team-Level. Lastly, in the NBA, the culture of a team comes from the coach and the players. Hinkie, as the GM and head of basketball operations, can put things in place. But unlike a company where the CEO can set the culture of the team, the culture is driven by the right balance of coach and players. The model franchise for winning in this area is the San Antonio Spurs, who have had a strong base of RC Buford (GM), Gregg Popovich (coach), and then the triumvirate of Tim Duncan, Tony Parker and Manu Ginobili as players. The Sixers not coincidentally have a coach who was long time with the San Antonio Spurs, as head of player development and assistant coach. But he lacks the track record and gravitas to drive the culture. Not to say that the right coach can be the sole driver of this. In rare cases, names like Pop, Phil, Pat, and Doc can do it. But those are the exceptions and in most cases you need players, the right players, to buy in and drive that culture. Given the tight management of the salary cap, there was the players ended up being all young twenty-somethings being forced into the fire.

One Forecast

As the Sixers succeed, Hinkie’s stock will rebound and the experiment will begin again somewhere new. He’ll find a team where he can contribute to their success. Ideally, it’s an established franchise like the Spurs or a well-run, up-and-comer like the Celtics.

If he doesn’t, at least he can make a future on FanDuel and DraftKings. And then buy his own team.

Photo Credit: Washington Post