Reduce 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.

Rugby Australia’s current operating budget is $80m (excluding the $30m paid to the Super Rugby franchises) and the four Super Rugby franchises have annual expenditure of roughly $20m each for a total spend of about $160m 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% — i.e. $80m.

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 $80m spent by the Super Rugby clubs, about $22m is player payments so assuming for a moment that you don’t touch the players at all, the pool you’re looking at is $58m.

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 etc.) so I’ll assume a saving of $50m which leaves $8m to be spread out among the state bodies.

We also pay $1m 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 Less 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 ~$38m annually — a bit over $250K 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 3 years, awarded on a rolling-basis — i.e. 8 of each contracts awarded each year
• Wallaby Contract Values : 6 x $1m, 6 x $900K, 6 x $800K, 7x $700K (all per annum) = total cost of $20.4m
• Junior Contract Values: 6 x $200K, 6 x $190K, 6 x $180K, 7x $170K (all per annum) = total cost of $4.4m
• Total player cost of $26 million plus another $3m or so in match fees for a saving of ~$9m

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. 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 $19m 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 10 ‘rugby staff’ on an average of $400K plus $100K in costs per person and costs of $100K per contracted player, that still only gets you to $10m. Where does the other $9m go? It goes in the bin — another $9m 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 matchday and corporate cost lines which together come to ~$26m.

One simple solution could be out-sourcing. Instead of having an in-house matchday 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 out-source model could save you another $10m 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 —$50m

Player Costs — $9m

Rugby Costs — $9m

Admin Costs — $10m

SANZAAR payment — $1m

Total — $79m

So not quite the achieved goal of $80m 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 is tackled in the next post.