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ARC: Let sleeping dogs lie
The Australian newspaper couldn’t resist last weekend giving the dear departed dog of the ARC a kick to try to breathe some life into its prostrate carcass, and have a sly dig at the new ARU in the process.
It must be a pretty slow news week in Australian rugby as editor Wayne Smith was reduced to a transparent advertisement for the old regime, and a none-too-subtle backhander in the direction of “a select group of powerful Sydney clubs”.
Exactly which clubs are in question is unclear, however according to the article, “the ARC made it easy for them by coming in so badly over budget, but the haste with which it was killed off was still unseemly and, frankly, suspicious”.
I’ve got to say, this line of conspiracy-theory journalism makes me shake my head. I wonder just how much money the ARC would have had to burn, and just how small the crowds would have had to be before the pro-ARC-at-any-cost lobby would agree that whilst it was a unarguably a brilliant spectacle and a great development opportunity, it probably wasn’t quite worth the flabbergasting amount of cash that it burned through.
Perhaps the most imprudent paragraph from article in The Australian was this one. “There is no denying that the ARU’s cash reserves are down, but that was going to happen anyway in a World Cup year, let alone in a World Cup year in which the long-awaited third tier competition finally, belatedly was launched. This year’s figures will be dramatically better. Some $8 million is heading the ARU’s way, Australia’s cut of the IRB’s World Cup pie. As well, another $3m is set to flow into the ARU coffers from the Hong Kong Test against the All Blacks in November, another initiative of the Flowers regime.”
Where to start with that? How about the money? According to the 2006 ARU Annual Report, the ARU had cash reserves of $22,486,000 at the end of the financial year which means that when the ARU burned through $4.7 million in its first year of the ARC, the amount was equal to almost 21% of its available cash. Try going to any CEO in the country and tell them you have a program which is going to burn 20% of their cash at bank in year 1 and still more in years 2 and 3, with no guarantees of ever turning a profit, and see how many of them give you the green light.
Of course, some would have us believe it is about cost cutting, and that with some judicious slicing and dicing, the ARC could have continued on its way. Anyone who tells you that could use a refresher in basic economics, since the rate of cashburn would need to be more like 5% than 20%. No-one appears to have yet worked out a plan for dropping a full $3,500,000 off last years operating figure, or a way to compete with the 3 other codes for the crowds who didn’t turn out in the required numbers at the ARC games.
In any case, why doesn’t the launch of a major third tier initiative in a year when expenses are highest, and when the attention of the majority of the market is diverted by one of the biggest sporting events in the world, deserve scrutiny? Most marketing managers in the ASX 100 would say that this strategy wasn’t sound, and they’d be right. But, according to The Australian, it doesn’t matter because we’re getting $8M from the IRB for the World Cup and another $3M from the mooted November Hong Kong Test against the All Blacks. Unfortunately, editor Wayne Smith wrote in his article Barbarians back on menu that “the Wallabies can look forward to a five-match tour in November, starting with the still-to-be-confirmed Test against the All Blacks in Hong Kong” which would suggest that unless he knows something he’s not telling us, the $3M he’s banking on is also “still-to-be-confirmed”.
The Australian finishes by making the assertion that the Hong Kong Test was “another initiative of the Flowers regime”, as though this was one of many achievements. In the above paragraph, that regime managed to burn over 20% of the ARU cash reserves; schedule a major new product launch (the ARC) in competition with the biggest global event in its market (the RWC); sell out history and tradition between Australia and its greatest foe, the All Blacks; and move the Test in question to Hong Kong where few of the true fans of either country will get to see it anyway – if it actually goes ahead. Achievements indeed.
My point is this. It is fair to say that pretty much everyone in Australian rugby agrees that we need a third tier. It is the pressing requirement in Australian rugby development right now. But whatever the new enterprise is, it has to adhere to some commercial business principles. In that respect, the rules for the ARU are no different to BHP, NAB or any other corporate you’d like to name.
Basic cash management suggests that you don’t burn through 20% of your available reserves in year 1 of what is likely to be non-profitable exercise. If it looks like you’re going to repeat the experience, you probably need to think twice about continuing.
Risk management principles would indicate that heavy investment in, and sole ownership of, an organisation where your only available personnel are members of a militant union which is clearly hostile to you, is not a good idea. Some of the risk at least needs to be shared or offloaded.
There must be a cash return on investment. If not immediately, then it would be reasonable to expect to break even at around 3 years. If there is no guarantee that the enterprise will ever be profitable, then there is no reason why any organisation should invest money in it.
Talent development is not a valid reason for an investment of this magnitude. To put it in perspective - in 2001 for example, the training and development budgets of S&P 500 companies represented between 5% and 20% percent of total corporate profits. If the ARC was a training and development program and its loss was expressed as a portion of ARU profits it would be a tough equation, since the ARU had a net deficit before tax of $6,339,000 in 2006. However, using a mean S&P yardstick of 12.5%, the ARU would have had to make a $37.6 million profit for this expenditure to be valid as a training and development expense – a turnaround of a massive $43,939,000.
Even averaged across players, the numbers make a mockery of the talent development argument. There were roughly 240 players in the ARC. If 20 of those players went on to secure new Super 14 contracts (5 new players per franchise which is unlikely), the talent development cost to the ARU for 2007 would have been about $235,000 for every unproven rookie who gains a Super 14 contract.
It is eminently clear to those with a grasp of business principles that the ARC was a great concept, but one which was executed with an exceedingly optimistic economic outlook. In the commercial world there are often good ideas which cost stacks of money and which just don’t work. The Segway springs to mind. The talent is not in coaxing these ideas along and keeping everyone happy. Those who have read Seth Godins book “The Dip” will know that the real talent is in making the decision to quit a cul-de-sac and move on to something with a genuine future.
Of course such a decision leaves the decision-makers wide open to criticism – in this case the criticism that they are somehow in bed with the “powerful Sydney clubs”. This sort of fear-mongering doesn’t help.
It is true that some clubs may benefit more than others. Just as in the corporate world, some companies benefit more than others, by planning, building their organizational and economic strength and being ready to take advantage of opportunities when they came by. In this way it appears that some of the strong clubs may well benefit from the possibility of a national competition geared towards clubs, but this is not conspiracy, it is simply commerce. Top level rugby, unfortunately for those of us who were reared on the innocence, loyalty and joyous simplicity of amateurism, is now a commercial enterprise first and foremost. In this sense, to paraphrase The Australian, it is mischievous to now dump all the sins of the ARC axing in the lap of an administration whose priority is to ensure that Australian rugby is brought back to financial viability.
I used to have an accountant whose mantra when making business decisions on acquisitions, or capital expenditure, was never to justify the expenditure with non-financial criteria. As he used to say, “Always make the commercial decision”. The ARU has done just that, and made an unpopular but commercial decision.
Now that decision has been made, The Australian opines “It remains to be seen what the ARU’s vision for the future might be”. Indeed it does. Perhaps we could at least wait and see what that vision is before condemning the process that led to it.
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