Anguish isn't just part of the Cleveland sports fan's culture; it becomes part of its very identity, seemingly embedded in the city's very DNA. It is this tidal force that franchises such as the Cleveland Indians, Browns and Cavaliers come up against each season.
Ken Stefanov, CFO for the Indians, has to combat this on two ends: providing the financial and organizational foundation to build a winning team on the field while addressing the sober economic reality of competing in a market that draws roughly a fifth of the annual revenue of the New York Yankees.
As the calendar turned to June in this, the Indians 111th season in the American League, the Indians have become baseball's biggest secret, racing to the top of the Central Division. But that success hasn't equated to the turnstiles: Less than half of the seats at Cleveland's Progressive Field are full and season-ticket sales are at their lowest since the Indians moved into their current stadium in 1994.
Stefanov discussed with Business Finance how the Indians, with all the organization's small-market challenges, is really not unlike any other corporation: financial rigor and strategic insight need to be tightly linked; uncertainty demands flexible strategies and the development of alternatives for growth.
Business Finance: From a financial perspective, tell me a little bit about the economic landscape you're working with and how that translates on the field and running the business?
Ken Stefanov: The local economy, obviously, is quite different from the one we were operating in during the 1990s and it's quite different from even five to 10 years ago. The competition isn't just with the local sports teams, like the Cavs and Browns. We're an entertainment business and people have options.
We work based off where the team is in relation to the business cycle. You ramp up, develop players and hopefully make a charge on top of the business cycle for competitiveness on the field. Then, the way the economics of baseball work is that you've got to be fiscally responsible and maybe take it down because players leave for bigger contracts you can't afford. So you learn to deal with the business cycle, and you learn to budget accordingly.
BF: Where is the team within that business cycle right now?
KS: The state of the [Indians] franchise is good. I say that in light of the whole Dodgers situation. We have to be very realistic about where the team is at and what the market will bear. While it appears we may be in the midst of a recovery economically, we have some very serious concerns about the Northeast Ohio economy and where it's going. Statistically, we've seen unemployment is down. It's dropped to 9.3% in Northeast Ohio. Last year, it was up 1.5%. So there are some glimmers of hope. But it's my job to be realistic and take the emotion out of the baseball side of things.
BF: Where do you see the role of finance contributing to the success of a ballclub?
KS: Well, for us, the big picture here is, as an organization, to win a World Series. We're also here to make the fans—the focus of our attention—entertained. We want to reinvest in our ballpark, and we want to have a positive impact on our community. Those are our four goals.
To do that, though, we have to be creative, especially in finance. There may be very little difference between the finance departments at the Indians and the Yankees and a Fortune 500 company. But I think it's my charge to make sure that the little difference that there is counts for a significant influence on the operations of the company.
BF: Within the confines of the finance department, how do you overcome that competitive disadvantage?
KS: We have to be that much sharper in our decision-making process day to day. We have to spend wisely. And it's that pressure to be smarter that I think will make a smaller-market team successful or not successful.
One of the things we have made an investment in as a small-market team is in my IT department—which I oversee—we have developed our own proprietary software applications. We do not share these with other teams. One [application] focuses on scouting, another identifies metrics and trends and then another is a video coaching system for adjusting mechanics for the players.
This is where small-market teams really have to separate themselves. Maybe the Yankees have a comparable system, and maybe they don't. But because our margin is so thin, we have to excel in other areas because we'll never win the outbidding game.
BF: As a CFO, what are some innovative financial tools that you are applying to create more accurate reporting and visibility?
KS: We have recently undergone a task force with the Cavs and Browns. We're three sports teams in a small market, and we've agreed to collaborate on where we, as a united group, might realize some synergies and avoid duplication.
On office supplies, for example, we consolidate our purchases to garner better volume discounts instead of all three teams buying from separate vendors. We are looking at all of our commodities that we all use and trying to apply this concept to it. Some other areas we are looking at are accounts payable and payroll, along with maintenance expense with our facilities, travel expenses with our scouts and player development people and food and beverage efficiencies.
The Indians have embraced the whole Six Sigma process, drilling down to core processes of how we can improve our operations. Many people have been trained in this philosophy and many committees have been formed over the last four years that have proved very fruitful to us. We have improved our processes in regard to food and beverage concessions, ballpark commodity purchases, tickets sales initiatives and ticket acquisition procedures.
BF: The collective bargaining agreement expires in December this year. But compared with the NFL and NBA, baseball appears to have as positive a relationship with the player's union as it's ever had. What do you think has changed?
KS: It's taken a while to get there. Major League Baseball as an industry has revenues of $6 billion. The players are well compensated. We still have what I believe is the strongest player's union. But we have developed a healthier and open relationship with them. That wasn't easy, but it's helped both sides to get there.
BF: Having seen what the sport went through over the past 25 years, are you seeing mistakes the other leagues are making in their posturing and actions?
KS: I'm not proud to say we've, 'Been there, done that,' but we have. History is repeating itself. A lot of things the NFL is doing, we did. I still have my old 1994 potential strike budget. I'm never totally comfortable, so I keep this stuff handy.
Prior to maybe eight years ago, the owner's relationship with the union was toxic, disjointed. The guys couldn't be in the same room together. That has changed tremendously, and that's really a credit to Commissioner [Bud] Selig and his approach, and Rob Manfred, our chief negotiator. He has a very good relationship with Michael Weiner, who replaced Donald Fehr. I'll stop short of saying that they're friends, but I think they respect each other and the dialogue is much healthier than it's ever been.
Hopefully, we'll do some revamping in revenue sharing and we'll get some better control on how we'll do international draftees.
BF: What is your role, along with the owner, in relation to the finance committee?
KS: There's a senior group which is made up of about six people, which includes the owner.
We get together weekly to talk about a myriad of topics, such as operations, finance, publicity, team makeup, to what's going on in the minor leagues. We run the full gamut. When I'm called on, my role is to basically give a financial picture of where the company is at and where we could be going. I prepare my budgets in 100,000 paid attendee increments and, based on that, we can get a pretty good gauge on the effect of attendance both paid and inpark— because there is a difference—and what it does on profitability.
I go through a number of scenarios and try to anticipate questions and contingencies. What I also bring is the sense of a macro outlook and a micro outlook. I think all of us—and we're essentially a small company—have to have the ability as a senior manager to be able to deal with the macro, but not lose sight of the micro. That helps us immensely in terms of just the little things that help me protect assets to manage my cash, to manage my debt levels, to give ownership the information they need.
BF: Has the budgeting process used in sports evolved in recent years?
KS: Absolutely. Because of the way baseball attempts to make teams compliant in terms of debt levels and profitability, the way we have to share numbers on revenue sharing, yes, the budgeting and forecasting models have become quite sophisticated.
When I first came to the Indians back in 1990, coming from Arthur Andersen, we were in the dark ages. Through a lot of different courses of action over the last 20-plus years, we have developed a culture that all department heads need to be in tune with their numbers, just like any other business.
When I first came aboard, there was a sense of, 'Don't worry about it, the finance guys will take care of it.' But we can't do it all. I need each department head to be able to tell me what his or her expense overages and underages are and manage the numbers, so I get better information. So we've cultivated an environment that stresses the importance of staying close to your numbers and staying close to your budget.
BF: In baseball, a team is constrained by a limited number of teams and the length of its season. Where will growth for the Indians come from?
KS: We work in a very sensitive economic environment right now. One of the things that we're trying to do is maximize the use of our ballpark. We are going to aggressively attempt to have more non-baseball events. We're having a music festival here this summer and this past winter we concluded our first Snow Days festival, where we turned the ballpark into 10 ice-crafted tubing lanes and had a half-mile skating rink. We're going to try to garner more interest in the brand connected to the use of Progressive Field and generate some profit from that.
BF: Earlier, you referred to the cyclical nature of the sport. Are there times when you can't match the business cycle to the on-field performance?
KS: Well, the 2007 season was a very successful year for us on the field. We were one game away from going to the World Series, and we had a very talented team. But we only brought in 2.2 million fans that year.
From my standpoint, that was disheartening, quite frankly. Part of the issue was we got hot at the end of the year. From a finance and profitability standpoint, I love the way this team is going right now. It's generating excitement and fans now have more inventory to choose from for choosing future games. When you get hot on Sept. 1, you only have seven to 10 home games left.
There's not much more you can do. The next year, we were very optimistic, but the team got off to a bad start, and our baseball people thought it was in the best interest of the club to trade some marquee players, such as CC Sabathia.
BF: As CFO, what is your perspective on that age-old baseball law that iconic talent will be out-priced for small market teams?
KS: That's where we can't compete. For us, we have to manage the business cycle. We took a lot of negative publicity for trading Sabathia. But we have to get young, talented players in return. That's the tough part of our business. Fans think irrationally. They want us to keep Sabathia at all costs.
One of the things we talk about is that if we had won the 2007 World Series I think it was very much of a dream, a fantasy, to think we would have kept that team intact. It was always going to be those four or five teams that would outbid you in the free agent market. Milwaukee found that out. They thought they'd sign CC, and he took them to the postseason, but he left in free agency and they got nothing in return. I'm not sure who got the better end of the deal. I think we did. It's all about survival.