Monday, February 25, 2013

Interview with the CFO of the Boston Red Sox – Steve Fitch

On February 19, 2013 I had the pleasure of interviewing Steve Fitch who is the Chief Financial Officer of the Boston Red Sox. I want to thank Steve for taking the time and giving me the opportunity to interview him.

Steve actually began his baseball executive career as the CFO of the San Diego Padres. The opportunity came about right after the baseball strike in 1994. During the strike there were a lot of layoffs in the various executive offices of Major League Baseball (MLB) and when the strike was over, there were new opportunities. Steve answered a blind ad and interviewed with Larry Lucchino and got the job. When Larry Lucchino came to the Boston Red Sox through the Red Sox ownership change that occurred in 2002-2003, he brought with him many of the executives who worked for him in San Diego and Steve was one of them.

Steve's succinct definition of a CFO is to ensure a company is financially viable to move forward. However he does admit that the motivation of the Boston Red Sox is more about team performance than it is about making a profit, but was quick to point out that making a profit is still very important.

What he loves about his job is the product (baseball) is much more interesting to him than any product of any other company he ever worked for as he is a baseball fan as well as a CFO.

Payroll (player compensation and benefits) is the critical and largest expense for any sports franchise. As a key member of the budget committee Steve points out that his main job on that committee is to provide not only an overall expense number to hit but especially a payroll number to hit and then it is the job of ownership and baseball operations to develop the best team within that budget. Of course if there are any decisions to go over that budget or make any kind of course correction those decisions rest with the ownership. Steve shared a story where this ownership course correction was exemplified most vividly in December of 2006. Steve had just finished the budget process for the 2006 season. The very next day, ownership told him to redo the entire budget because ownership was in the process to pay a $50 million dollar posting fee for the rights to just talk to Daisuke (Dice-k) Matsuzaka. This posting fee only gave the Red Sox the rights to talk to Matsuzaka if they could eventually sign him to a contract that would be additional. The Red Sox ended up paying over $100 million dollars to get Daisuke. Daisuke recently signed a minor league contract with the Cleveland Indians. Steve also had to redo his long term forecasts recently when the Red Sox traded Adrian Gonzalez, Josh Beckett and Carl Crawford where over $200 Million dollars of payroll came off the books last August. By the way, after payroll the next largest expenses are facilities costs and travel costs, but these other costs are dwarfed by payroll.

Besides the Sabermetrics which are calculated by the baseball operations, I asked Steve what are the most important financial metrics in the business of baseball. He said that he asks a lot of CFO's the same question and he always gets back the same answer and in his business it is no different. It is either an EBITDA (Earnings Before Interest, Taxes Depreciation and Amortization) number or a cash flow number. Steve indicated that he actually calculates and reports multiple EBITDA numbers in many different ways because MLB requires it in order for them to make consistent comparisons on a number of parameters from team to team. Steve said there are various nuances to the way the various EBITDA numbers are calculated for MLB. From a cash flow standpoint, you can just imagine how fleet of foot Steve had to be with the Daisuke situation and as he points out there are situations similar to the Daisuke situation that can happen at any moment. It is an ever-changing and always evolving business!

In my business as a Contracted CFO performing CFO services the biggest challenge in forecasting is forecasting revenue. With Steve and the Boston Red Sox the biggest challenge is forecasting expenses. At least in the last 10 years, it is the expenses that are the most volatile and the revenues are the most predictable. The biggest revenue generators in order of size are the team's share of the national television contract, ticket sales, local broadcasting, advertising, concessions and licensing. I originally thought that licensing and advertising were higher in revenue significance but Steve let me know that was not the case. There goes my shot at being a CFO for a professional sports franchise!! Steve did cite that the revenue side could be a little more challenging to forecast as they move forward as in the last10 years you could pretty much bet that they would completely sell out every game, but he admits going into the 2013 season selling out every game with the significant changes made to the team is certainly not as predictable.

As CFO of The Boston Red Sox, Steve's biggest challenge is adhering to the plan that they set. Change in the sports business is the nature of the game. Steve takes on the responsibility of adhering to the plan even though there are a lot of things on the baseball operations and ownership side that he cannot control. But that is the challenge that he takes on passionately. He gets creative and works on other revenue streams as well as new revenue streams and works to eliminate any waste within the operation so that even if baseball operations has to make changes that defy the plan he is creating new revenue streams and eliminating waste to compensate for those changes.

Just like baseball is a team game, Steve gets the most satisfaction from his job in working with the whole team of executives and staff. He says "it is truly a team working environment"! As an example of that teamwork, one thing that Steve gets a lot of satisfaction out of which I am totally envious of is he received championship rings in both 2004 and 2007 when the Red Sox won the World Series.

From an IT standpoint the Red Sox use basic off the shelf software except they do have proprietary baseball information software which was developed internally.

I asked Steve if he would rather be a CFO in a sport with a salary cap as baseball is one of the few major sports that do not have a salary cap. He laughed and said that was a loaded question. I admitted to him that it was and we both shared a laugh.

Overall it was a great experience and once again would like to thank Steve Fitch, CFO of the Boston Red Sox for the opportunity to speak with him.