Football's example can help companies score

John Kay no Financial Times de ontem:

Like many lecturers, I have a library of presentation slides. The most frequently used is 15 years old and relates the performance of English soccer league clubs to their expenditure on players. Both wages and transfer fees over a 25-year period are included. The message is that you get what you pay for. There is a strong relationship between cash spent and average league position.

There were some outliers. Aston Villa never fulfilled its potential. But two performances were much ahead of econometric predictions. Teams managed by Brian Clough had always done better than their objective calibre. Some team leaders make a real difference.

But the outstanding story was Liverpool. Liverpool and Manchester United had invested more than others. But while the performance of Manchester United was exactly what our equations predicted, Liverpool had done much better. Manchester United had assembled a group of outstanding players. Liverpool had assembled an outstanding team.

The story of the 2006 World Cup is that outstanding teams defeated groups of outstanding players. All players in top sides are very good. The reason the countries in the final four were not the ones pundits expected was that their predictions were based on the quality of individual players. But the trophy goes not to the best players, but to the best team.

My footballing slide is popular mainly because references to football bring back to life audiences battered into somnolence by harangues on transformational change. But the serious purpose of the analysis is to illustrate that business success is not simply a matter of acquiring the best people, technology or resources. Businesses create value by establishing a difference between the cost of their input and the effectiveness of their output. The Italian team was more than the sum of its parts, the Brazilian team was not.

The difference between output and value added is relevant to every type of business, but especially important for the professional services company – whether it is a football team or an investment. Goldman Sachs and McKinsey do not simply attract exceptional people – so did Manchester United and Brazil. Like Liverpool and Italy, these businesses achieve more than would be predicted from the quality of the people alone.

That makes these companies very profitable. By sharing that excess profitability with their talented employees they keep them in post and maintain their leadership position. The mechanism is equally powerful in reverse. Enforced relegation would be a devastating penalty for Juventus’s involvement in Italy’s match-fixing scandal because it would force the value of the team below that of the players.

But what are the characteristics that distinguish a great team from a group of great players? Organisational knowledge belongs to the business rather than the individuals who make up the business. My footballing research group was impressed by the systematic way in which Liverpool assembled through post-match debriefing and disseminated through pre-match briefing an extensive corpus of information about other players, other clubs and other pitches.

But their main explanation of Liverpool’s relative success came from a simple economic model of the game of football. A player can kick for goal or pass the ball to a better situated player. His choice will depend on the degree to which his incentives relate to the performance of the team, rather than his performance as an individual and on his expectations about whether the next player will shoot or pass in turn. Because an individual’s behaviour depends on expectations of the behaviour of others, teams will become locked into particular states. In some, the shooting game is the dominant mode of behaviour, in others, the passing game. Individuals joining a team will find it best to conform to the local style, so these equilibria are stable.

That is why transformational change cannot be achieved by talking about it and my audiences were right to be more interested in the footballing metaphor than in the guff that had gone before.