Maintaining Financial Flexibility: A New Market Inefficiency? – Part One

As the fallout of Jason Heyward and Ben Zobrist signing with the Cubs settles around us, the idea of creating a team spilling over with flexibility on the field has been crystallized in our minds. My late-night lineup doodling revealed a dizzying array of possibilities, with as many as six players having the ability to provide excellent production out of the coveted second spot in the order. There is diversity of handedness, multiple players who can play an array of positions, and a mix of contact, on-base, and power skills. In short, Joe Maddon is sure to have plenty of options to keep him entertained all summer long.

However, there is another aspect of each transaction this year that carries significant importance, but may be nuanced enough that the average observer could overlook the potential impact: with each deal the Cubs have struck the virtue of maintaining financial flexibility has been upheld.

We’ve witnessed an interesting development during this period of free agency: The seemingly endless spigot of financial resources flowing from mega-teams such as the Yankees and Dodgers appears to have been turned off, or at least dramatically slowed. The Dodgers were outbid for critically-important ace Zack Greinke by divisional rival Arizona, and the Yankees have completely ignored the talent-ridden top of the free agent market. Two years ago, each of these realities would have been hard to fathom, but I believe there are two reasons this has happened. The first being bloated, aging payrolls for each team somewhat handcuffing their ability to address needs through free agency. The second reason being that they now recognize that payroll flexibility in a given offseason carries heavy importance in creatively improving your team year-in and year-out.

What Theo Epstein has created in Chicago is a dynamic example of maintaining year-over-year flexibility, even while lacking elite payroll capacity. Let’s review each of the major transactions the Cubs have made this year, and then in part two of this series we will juxtapose their future payroll obligations against each team in the Central Division:

Free agent acquisitions:

John Lackey

Term: Two years

Average Annual Value: $16 million

Total Value: $32 million

Yearly Breakdown: Signing Bonus of $7 million ($2M due 12/15, $5M in 2017), Year One: $12.5 million, Year Two: $12.5 million

The signing nearly every Cubs fan had to fully digest before getting on-board with may actually end up being the biggest bargain. We need to be careful not to expect the same production that Lackey provided in 2015 (2.77 ERA, 3.57 FIP), but we also need to remember that’s not what he’s being paid for, either. With $12.5 million per year, he’s paid more like the two-win pitcher he’s likely to be, as he benefited significantly from a depressed BABIP (.295) and a HR/9 rate (.9) that could rise and negatively-effect his traditional stats. This also explains the chasm between his 2015 bWAR (5.7) and WARP (2.3), as WARP isn’t as quick to forgive luck-induced results. However, it shouldn’t be overlooked that his late-career resurgence works in perfect concert with a spike in his swinging-strike rate, registering over 20 percent in each of the previous three years while residing between 15-18 percent in the three seasons preceding 2013.  Lackey slots perfectly into the number three slot in the rotation following Jake Arrieta and Jon Lester, and the contract commitment is just two years. While an imperfect fit from a fan perspective, it’s a perfect fit from both a rotational and payroll standpoint.

Trevor Cahill

Term: One year

Average Annual Value: $4.25 million

Total Value: $4.25 million

Yearly Breakdown: Year One: $4.25 million

Once an effective starting pitcher (ninth in Cy Young voting in 2010!), Cahill found himself cast off in 2015 and searching for an opportunity. He found one in the Cubs bullpen, and instantly transformed into a dominant reliever. There aren’t really any smoke-and-mirrors to point to with Cahill’s resurgence, just a genuinely massive spike in his velocity when he became a reliever. The added velocity allowed him to set up his off-speed pitches more effectively, which in turn allowed him to elevate his strikeout rate dramatically to 11.9 per nine, up from career rates hovering around six per nine. In an offseason that saw Joakim Soria and Ryan Madson each sign multi-year contracts worth in excess of $20 million, landing Cahill for just $4.25 million on a one-year “prove-it” deal is another signing likely to pay dividends for Epstein.

Ben Zobrist

Term: Four years

Average Annual Value: $14 million

Total Value: $56 million

Yearly Breakdown: Signing Bonus: $2 million, Year One: $10 million, Year Two: $16 million, Year Three: $16 million, Year Four: $12 million

With a bit of irony, Zobrist’s contract represents the highest risk of any of the Cubs’ offseason additions. At 34 years old, there exists the possibility that Zobrist could break down and make multiple years of this contract regrettable. However, the diversity of his skill set lends well to an aging players ability to continue forth with meaningful contributions. If the theory that his defensive value was hampered by an injury last year holds any water—as his bat was as stellar as ever—you could be looking at a four-win player who’s being paid like a two-win player. It’s also intriguing that the final year of the contract is at just $12 million, allowing them the flexibility to engage in the loaded 2018 free agent market knowing that Zobrist’s final year is a lesser-paid year. In totality—even with the intrinsic risk of signing an aging star—this is likely to be another free-agent deal laced with value that has the appropriate structure to avoid hampering long-term flexibility.

Jason Heyward

Term: Eight years (player opt-out clauses after years three and four if certain plate appearance thresholds are met)

Average Annual Value: $23 million

Total Value: $184 million

Yearly Breakdown: Signing Bonus: $20 million (paid in four $5 million yearly installments from either 2020-2023 or 2024-2027, depending on if opt out is used), Year One: $15 million, Year Two: $21.5 million, Year Three: $21.5 million, Year Four: $20 million, Year Five: $21 million, Year Six: $21 million, Year Seven $22 million, Year Eight: $22 million

Heyward is a player I’ve been dreaming on for years, as I felt his upward climb into super-stardom may be more of a progression than an explosion. We are witnessing that progression take place, but perhaps in ways that the baseball community still doesn’t appreciate to the fullest degree. While he does offer tremendous value defensively and on the basepaths, his bat may have become underrated because of the relative lack of power. It should be noted that since his sophomore slump in 2011, he has steadily improved his on-base percentage each year thanks to a clockwork-like bump in his contact-rate in the strike zone (from 78.2 percent in 2012 to 92.9 percent in 2015). A few more seasons of building upon his on-base skills and developing his ability to create loft could enable Heyward to be an elite offensive force. At just 26 years old, he could play out this entire contract and still be just 34, meaning his best seasons offensively could still be in front of him.

Now, on to the flexibility and value this contract could provide. It may sound silly considering the man just guaranteed himself $184 million, but this contract may turn out to be a relative bargain from the Cubs’ perspective. Being that Heyward is just reaching his prime and has been a roughly five-win per-year player thus far in his career, it doesn’t take too much imagination to envision him delivering 35-40 wins over the life of the deal. At the going rate of between $7-8 million per win on the free-agent market, a rough valuation for Heyward this offseason could have been more like $280-300 million. Now, I am sure many of you are screaming about the inefficiencies of defensive metrics and the difficulty in parsing their value, and it is true that we have much to learn in this area. However, outfield defense has long been an overlooked aspect of the game, and I actually trend towards believing it may be undervalued more than overvalued by current iterations of advanced metrics. This contract will be intriguing to follow, as it could go a long way in teaching us about the relative value of outfield defense.

Finally, let’s review the curious opt-out clauses in his contract. Heyward will have the right to opt out after year three of the deal, and also after year four if he reaches 550 plate appearances in 2019 (meaning he’s been fully healthy). The short answer is this: You need to be fully prepared for Heyward to opt out after three years, which means the Cubs likely just signed the best free agent on the market for three years and $78 million, which is a staggeringly good value in today’s market. It is of absolutely no coincidence that the first opt out is after three years rather than four, as the 2018 free agent class is shaping up to possibly be the best in history. Further, the inclusion of the second opt out after four years only in the case of health suggests that the Cubs may be offering him incentive to opt out, banking on his skill set of speed and athleticism to decline more quickly than normal after his prime, and in turn leaving them the flexibility to re-enter the free-agent market sooner rather than later. It is regularly suggested that opt outs increase the downside risk of a long contract in case of injury or ineffectiveness, but that isn’t reality. The possibilities of negative-value exist whether a player has the option of getting out of the contract or not, they are simply guaranteed risks in a deal without an opt-out clause. I’d also argue that the inclusion of an opt out may actually motivate a player to perform at a higher level during the seasons before his option. Quite simply, Epstein just nabbed the three most valuable years of an MVP-caliber player’s career, and managed to do so without sacrificing a stitch of long-term financial flexibility in the process. Even after signing the best free agent on the market to a long-term pact, the pump remains fully primed for the free agent class of 2018.

Trade acquisition:

Adam Warren

Term: Three years (first year of arbitration eligibility)

Average Annual Value: Determined via arbitration

Total Value: Determined via arbitration

Yearly Breakdown: Year One Projection: $1.5 million

As recently as 13 months ago, it was nearly inconceivable that the Cubs would remain on the sidelines while the upper-crust of this class of starting pitching free agents signed contracts, but that is exactly what happened. Rather than adding another inflexible contract of an over-30 pitcher, they instead chose to diversify the expenditure between Heyward, Zobrist, and Lackey. The resultant of this strategy became a search for rotational depth with value-driven upside, a description that Warren fits perfectly. During a Winter Meetings conversation I had with Eno Sarris, he referenced a piece he wrote in March that detailed reasons why Warren could be a breakout candidate in 2015. While the breakout didn’t occur in a flashy Arrieta-like fashion, he did provide 2.5 wins despite being shuttled between the bullpen and starting rotation. Sarris correctly predicted the requisite dip in velocity as he moved from his role in the bullpen to the rotation, but his velocity should still play well enough given his plus-changeup and five-pitch mix. Make no mistake, Warren’s repertoire is that of a starting pitcher, and I believe the Yankees did him a disservice by not simply establishing him in their rotation prior to the 2015 season. If the Cubs’ management decides to place Warren in the fifth-starter spot in the rotation, I wouldn’t be surprised in the least to see Warren leverage that opportunity into a 3-3.5 win player as he benefits from his first taste of the National League.

As emotionally difficult as it was to overcome trading fan-favorite Starlin Castro, the move made tremendous sense financially—and not just from perspective of Castro’s contract—but we’ll get to that in a moment. Warren brings along with him three years of cheap control, as he’s projected to make just $1.5 million via arbitration this year, and his arbitration value is likely to be suppressed because of his short track-record of starting. In a series of intriguing moves, this is perhaps my favorite move of the offseason. Warren offers interesting upside and plenty of team control, while having limited downside and a discounted price tag.

Trade departure:

Starlin Castro

Term: Five years (final season is a team-option with a $1 million buyout)

Average Annual Value: $11,285,714

Total value: $56,428,572

Yearly Breakdown: Year One: $7,857,143, Year Two: $9,857,143, Year Three: $10,857,143, Year Four: $11,857,143, Year Five: $16 million ($1 million buyout)

Ah, Starlin. What was and always will be with the player I just couldn’t quit. My colleague Rian Watt summed up my feelings beautifully, so I will avoid recounting them in too much detail here. For all of the financial and baseball reasons that made me love this deal, I equally loathed it from my perspective as a selfish fan. The debut, the hits, the twirl, and mostly the criminally unfair criticism from fans and national media alike; I will defend Castro’s time with the Cubs until the end.

After I wiped my tears and said goodbye, my preference for logic over emotion took hold and reminded me that this deal made tremendous sense from a financial flexibility standpoint. It is of no coincidence that Castro’s total contract value—if his option is picked up by New York, of which there is a legitimate possibility it will be—matches the $56 million given to Zobrist, though the latter comes at a higher annual value as the commitment is four years rather than five. Epstein essentially consolidated Castro’s dollars and win-value into four years of Zobrist, thus maximizing the same amount of money into more wins in a shorter period of time. The Yankees provided Warren as a (possibly delicious!) sweetener, making the deal even more palatable.

Final Thoughts

The easy answer this offseason was to simply give David Price the keys to Chicago and let the next seven years play out. What Epstein chose to do instead was diversify and retain flexibility by separating the window of contention squarely into two parts: the first part being a roughly three-year window with Arrieta, Lester, Heyward, Zobrist, Lackey, and Miguel Montero as the main supplemental pieces to the young core. The second window will center around acquisitions coming from the vaunted 2018 class, which means largely hop-scotching over the weaker 2016 and 2017 free-agent classes. The core of Kris Bryant, Addison Russell, Anthony Rizzo, and Kyle Schwarber has an expiration date, and surrounding them with the right pieces is critical to maximizing opportunities to navigate the murky world of playoff baseball. This offseason has gone to great lengths in ensuring the ability for that to happen for six full seasons. From where we sit today, demarcating two specific contention windows is a brilliant strategy, and essentially the exact opposite of what the Yankees did two years ago.

Baseball is beautiful in part because of its utterly unpredictable nature. The Washington Nationals were dubbed the clear “winners” of last offseason, and were promptly anointed as the team to beat in the National League. We all witnessed how that belief played out. Absolutely anything can and will happen, but the moves that Theo Epstein and Jed Hoyer have made this offseason have gone a long ways to fill holes without considerably sacrificing long term financial flexibility.


Part two of this series will focus on the long term financial flexibility of each team in the Central Division. 

Lead photo courtesy of Jerry Lai-USA TODAY Sports

Related Articles

Leave a comment

Use your Baseball Prospectus username