Formed in His Image

Formed in his Image

How Theo Epstein rebuilt the Cubs’ financial statements, and why his decisions might bring billions.

As Theo Epstein guides the Cubs organization into his fourth season with the Chicago Cubs, the team that emerges from the dugout looks nothing like the team that he inherited in October 2011. In fact, there will be no more than two players in the entire organization who were on the big-league roster when Epstein took over for Jim Hendry.

Perhaps even more noteworthy than the turnover in personnel, though, is the financial overhaul that has taken place since the 2011 season ended.

Hendry’s final season at the helm was a year that saw the Cubs finish 71-91, 25 games back of the division winning Milwaukee Brewers. Along with Hendry being relieved of his general manager duties, it was also Mike Quade’s final season as manager.

Perhaps more concerning than the sheer outlay of payroll (and the inability to translate spending into wins), is that not only was the team bad, they were bad and old, with very few players who were viewed (then or now) as building blocks. The pattern was to spend money on players who had performed well in the past, but were also past their prime. Hendry was paying for past performance.

Enter Epstein. After accepting taking over as president of baseball operations in October 2011, Epstein’s first mission was an honest assessment of the talent level in the organization at all levels. The results were not encouraging.

During the Hendry era, the Cubs established a pattern of acquiring high-priced, splashy free agents that drove their annual payroll consistently north of $120 million. The Cubs had become a consistently losing team filled with high-priced veterans, an unacceptable combination. Even worse was that Hendry continually paid (and traded) for big name players who had performed well in the past, but were past their prime. The average age on the Cubs rosters from 2008 through 2011 was 30 years old.

The big-league roster earned $135 million in 2011, and was headlined by five players earning $14.5 million or more (Alfonso Soriano at $19 million, Carlos Zambrano $18.75 million, Aramis Ramirez $14.6 million, Ryan Dempster $14.5 million, Kosuke Fukudome $14.5 million). Each of these players was over 30 years old for the 2012 season, and only one of them was ever a significant contributor for the club again (Soriano).

The farm system was mediocre at best, ranked 23^rd by Baseball Prospectus prior to the 2011 season. At that time, the top prospects were Brett Jackson, Josh Vitters, Hak-Ju Lee, and Chris Archer (the latter two were traded in a package that netted Matt Garza prior to the season). The organization wasn’t drafting well, they weren’t developing their own players well (only Starlin Castro and Wellington Castillo are still with the team), and they weren’t trading well (Archer and Josh Donaldson are the most notable homegrown Cubs who were traded for pitchers who are no longer here).

The conclusion Epstein reached was that the talent level across the organization was low, and the average age of their big-league club was high. Those two metrics needed to be reversed, and the team had to begin paying for future performance, not past accomplishments. To achieve these goals, a total rebuild was required from the ground up. The fastest way to change a team’s fortunes is to slash payroll—clear out the big contracts so the front office can add players that fit their vision.

Epstein immediately took aim at the players who had bloated contracts, and he determined that these players were not going to be a part of the future, so they had to be a part of the past. Keeping these veterans who were still productive, but not elite players, would have meant likely winning enough games to finish in third place, but never contend. He took decisive action, and was able to remove Ramirez, Zambrano, Fukudome, and Dempster in his first year, and Soriano in 2013.

The next step in the plan was to begin stockpiling talent from the lowest levels of the organization. Unfortunately for fans, building the farm system is most efficiently accomplished when a club is drafting in the top ten consistently. This meant loading up the big-league roster with young, inexpensive players who needed to be developed. Doing this helped to “earn” high draft positions while reducing the salary expenditures significantly.

From the end of the 2011 season to the beginning of 2012, Epstein was able to cut payroll by 17 percent from $134 million to $111 million. That $111 million figure includes the $16 million the club had to pay the Marlins to take Zambrano.

Between 2012 and 2013, Epstein was able to further reduce the total payroll expenditures from $111 million to $107 Million, but that figure is extremely misleading. Of that amount, $17.5 million was used that season to extricate them of Soriano’s contract.

In 2014, total payroll expenditures dropped again to $92 million, but again, that number doesn’t begin to tell the entire story. As part of a continued push toward the future, Epstein divested the team of the remainder of the Soriano contract, as well as several other veteran contracts, while also paying out large rookie signing bonuses, resulting in $30.5 million in dead money.

Epstein was, for the most part, patient in free agency from 2011-2014, though there were times that he and his staff attempted to speed the rebuilding process by investing in premier free agents. They went hard after Anibal Sanchez, only to fall short and see him wind up in Detroit. This was one of the few times Epstein and company seemed to deviate from the plan and take a reckless chance. They signed free agent pitcher Edwin Jackson to a 4 year, $52 million deal in January 2013. There is no question that this deal was a mistake, and should not have been made. Though he is pitching well now from the bullpen, it is likely that Epstein is counting down the days until Jackson’s contract expires.

Epstein and his staff became major players in international free agency, signing Jorge Soler to a long-term deal that appears, at this point, to be nothing short of brilliant. They swung hard at Yu Darvish, Yoenis Cespedes, and Masahiro Tanaka, but fell short each time. Had they connected on one of these deals, it likely would have altered the efforts to pursue the others, but it isn’t certain that it would have changed the size or shape of the rebuild itself.

One of the keys to this rebuilding effort is the deals Epstein didn’t make. With fans clamoring for competitiveness, there were superstars available to the highest bidder—Prince Fielder, Albert Pujols, and Josh Hamilton, to name a few. Epstein stayed the course, and stayed away from aging superstars who sell tickets, but are past their prime. Looking at the contracts those players did sign, they are stones around the necks of their respective teams—oppressive salaries for players in decline. Epstein has the Cubs in a position where they are unburdened by such long-term, low-return deals.

Building the farm system takes time, as does reworking a major-league roster. Clearing the books of veteran players saves money, but costs wins. The Cubs won only 61 games in Epstein’s first full year, 2012, and only 66 wins in 2013. Many fans struggled to accept a large-market team not expecting to be contenders each season, and they pointed to other organizations, such as the White Sox, who refused to tear it down to the ground and instead insist on rebuilding on the fly. Where Epstein excelled, in my opinion, is that he refused to take his foot off the gas (or the brake, as it were). He refused to stop trading away successful players for prospects. He refused to stop building from the bottom, he refused to stop cutting payroll.

The goal in cutting payroll isn’t to increase profitability for ownership. In fact, during Epstein’s tenure, lost revenue from decreased attendance attributed to fans’ weariness with losing appears to have cost Cubs ownership between $32 million and $60 million per year. In reality, the goal behind cutting payroll expenses is to allow Epstein to invest in the future of this team with players that will be here for many years and have not yet reached their prime.

Investment made into a state of the art baseball academy in the Dominican Republic, an increase in the size and depth of the front office, and an overhaul of the scouting and development staff have resulted in an influx of young talent the likes of which the Cubs have never experienced. This resulted in a rapid increase in organizational talent while simultaneously decreasing the average age at the highest levels of the organization.

The average age of the major-league roster went from 29.5 in 2011 to 27.8 in 2012, 27.8 again in 2013, and 26.7 in 2014. As the roster is currently constructed, the average age is 26.7.

The team is not only younger and less expensive, but it is infinitely more talented than the roster Epstein inherited. The promotion of Kris Bryant and Addison Russell allows the Cubs to boast an around-the-horn infield of players with elite talent, none of whom is over 25 years old. They are very good and will likely get better.

With Kyle Schwarber, Javier Baez, Dan Vogelbach, Billy McKinney, Albert Almora, Gleyber Torres, Eloy Jimenez, and Arismendy Alcantara all in the minor-league system, there is still another wave of potentially elite position players who are young and inexpensive and will be available for call-ups in the near future or as trade chips at any point. This apparent depth will help the Cubs to keep their payroll expenses reasonable for the next six to eight years so that they can spend where needed on free agency.

All of this history brings us to where the team sits today, nearly a month into the 2015 season. Today, their total MLB payroll sits at $120 million—approximately $25 million less than five years ago.

Looking forward to 2016, the Cubs have just $80 million committed to guaranteed salaries. In 2017-2019, that number drops below $60 million annually. There will, of course, be substantial increases due to player options and arbitration-eligible players, but it is clear that the Cubs will have significant financial flexibility with which to maneuver in free agency in coming years. How much flexibility? Well, if we utilize Baseball Prospectus’ total payroll estimates including options and arbitration estimates, we see that the Cubs are estimated to be committed to pay out $313 million from 2015-2018 to players currently under contract. That figure is slightly higher than the MLB average of $305 million in future commitments, and should be considered in light of a growing top line revenue number over the coming years.

With the expense situation firmly in control, Epstein and company set about to develop ancillary and additional revenue sources to supplement the top line. The future on this front looks similarly exciting with the video board already drawing an estimated $15-25 million per year in new revenue and additional major signage projects on the way. The renovations, neighborhood additions, and increased local broadcast revenues (estimated to have brought $50 million this year) should push the top line to new heights.

When the current television contract expires after the 2018 season, there is likely to be a massive cash infusion that will allow for significant increases to the baseball budget, if so desired, without negatively impacting the bottom line.

Why should the fans care about the business side of baseball? It’s not because we should be worried about the Ricketts family making a healthy profit, but rather to be able to gauge the amount of resources available for adding personnel to the team in an effort to win a World Series.

If we assume that adding in the previously discussed new income streams will make the Cubs comfortable with increasing payroll at least to 2010 levels, it is safe to count on significant free agent additions in the near future, whether near the trade deadline or during the off-season.

Additionally, since this front office has acquired so many elite hitting prospects, having payroll flexibility gives Epstein the ability to trade prospects for stars, while taking back negative contractual value.

In conclusion, it is clear to me that Epstein took over a franchise that appeared to be in complete disrepair—both on the field and the account ledgers. He and his staff have done a masterful job in reworking the entirety of the organizational roster to exponentially increase the talent level from where it was five years ago. However, the most impressive part of what they have done is to build the current organization while slashing expenses and apparently growing the top line revenue.

Where does it end? It is my strong suspicion that there are two goals at play among the Cubs organization. The first is simple and stated publicly—to build an organization that is perennially competing for a playoff spot, and thus a World Series.

The second is to align the timing of the team’s dominance with the expiration of the current television contract, leading to potentially one of the largest television rights deals in history, or the creation of a Cubs-owned television network.

Epstein, Jed Hoyer, Tom Ricketts, and Crane Kenny have done all they can to this point to set the organization on a path to simultaneously achieving both goals. They now largely hand over control to Joe Maddon, Bryant, Soler, Rizzo, Castro, and Russell. Neither goal can be achieved if these men can’t perform to expectations on the field. It feels like the go-ahead run is on third with one out.

I like their chances.