Case Study Hala Madrid: Managing Real Madrid Club de Ftbol, the Team of the Century

1) What do you think of the public nature of budget discussions at Real Madrid? What would be the consequences of doing this in a publicly traded company, say GE or IBM? How would it affect what you put in the budget?

2) Should it be used to evaluate Jos ngel Snchezs performance? How would you judge his performance? Should Snchezs targets be stretched? What are the benefits and costs of stretch targets?

3) There is a stream of thought in business literature that recommends abandoning budgets. Do you think Real Madrid could or should abandon budgets?

4) What is the level of uncertainty in the budget? If this is high, would you recommend producing a budget?

5) Would you want to produce an activity-based budget for Real Madrid? If so, how would you do it?

The Budgetary Process The corporate manager coordinated the development of the annual plan, which began when the team directors and executives defined the objectives for the coming season in early May (see Exhibit 7). These objectives, in turn, were used to produce the annual budget for the coming fiscal year as well as a midterm plan for the following three years. Although the budget had to be approved by the socios in the annual meeting, the midterm plan did not because it was used solely as an internal control tool. With the guidance of the strategic objectives and the assumptions provided by the corporate manager (see Exhibit 8), each operating unit prepared a preliminary budget. Despite its name, this document was, in reality, an action plan that included a description of all the initiatives the unit intended to undertake during the following period and the set of Key Performance Indicators (KPIs) against which the management performance would be evaluated. (See Exhibit 3 for examples of KPI lists.) The preliminary budget was accompanied by a list of resources needed by each unit to meet its objectives. The resources requested in the preliminary budget were then assessed by the respective corporate units (Human Resources, Insurance, Infrastructure, etc.). Resources were preliminarily assigned to those initiatives with higher priority, and operating units then revised budgets accordingly. The resulting plans were then consolidated across the four different management areas before being sent for approval to the management committee, the board, and the socios. During the economic assessment and consolidation phase, the corporate manager held numerous informal discussions with the different operating units, in addition to participating in the formal budget meetings. The board of directors usually voted on the budget during the weekend of the first official home game of the season (late August or early September). Once approved by the board, the budget was submitted to the Liga de Ftbol Profesional (LFP) and the Consejo Superior de Deportes (CSD).28 Failure to submit acceptable budgets to these organizations would exclude the team from official competitions. Later, in early October, the general assembly of the socios approved both the financial statements for the previous fiscal year and the budget for the current season. Budget tracking and followup was carried out monthly by each area and department according to its Balanced Scorecard, which included both financial and nonfinancial KPIs. In addition, two other internal documents were used to implement the budget: the UPA (ltima Previsin Anualizada),29 which was developed every three months as the most up-to-date forecast of annual performance, and the monthly Executive Synthesis of Economic Information, which analyzed the risks and opportunities of every area for the management committee. Preparing the Budget It had been a long day in the Santiago Bernabu Stadium offices. Even though the 200304 season was over, Real Madrid's executive team could not afford a much-needed break. The year had been a disappointment on the sports side. Even though the team strove to win three major tournaments, April and May's losses left them empty-handed. However, despite the sport mishaps, the season had been a total success from an economic perspective, generating record revenues (see Exhibit 9) and continuing the turnaround that had begun in 2000 when Florentino won the election (see Exhibit 10). The disappointing sports results, together with the Club's upcoming presidential elections on July 11, made the 200405 budget process particularly complex. Valdano, the sports general manager, summarized precisely the importance of the budget: "Nobody has ever seen a concentration (of fans and players) at Cibeles30 to celebrate a balance sheetbut a healthy balance sheet is necessary if we're going to make it to Cibeles to celebrate." The budget needed to be in reasonably good shape for the upcoming press conference and for the meeting of the management committee immediately before, where important decisions could be made. The committee and journalists alike would analyze all of the main budgetary lines and would question underlying assumptions to gauge the prudence of the plan. In that respect, understanding 200304 budget deviations would be important to improving the accuracy of the new budget (see Exhibit 11). Revenues Club members and stadium Santiago Bernabu Stadium had a capacity of approximately 80,000 regular seats and 200 private boxes. Real Madrid had sold 70% of its stadium capacity to season ticket holders. Season ticket prices commanded a discount of approximately 60% over single- game tickets at face value, and ranged from 120 to 1,100 for 19 home games. Although Real Madrid could sell out the whole stadium to season ticket holders, the Club preferred to leave 30% of the seats open to guarantee the extension and renovation of its fan base by allowing more people to attend. Manuel Redondo, the presidency general manager, pointed out that this policy did not have any cost for Real Madrid as they sell out most of the games." Historically the 200 boxes were rented out each year, and their prices, which depended on the number of seats, reached five times the level of regular seats in similar locations. The waiting list for boxes was very long (over 300 companies). The Club's efforts to serve this valuable demand faced the architectural limitations of the stadium (although for the 200405 season, the Club managed to expand its capacity by another 20 boxes). Given the physical impossibility of satisfying this demand, Real Madrid transformed some areas of the stadium into VIP sections, with upscale catering areas and restricted access. The VIP seating sections, which commanded a 300% price premium, were introduced in 2002, and for the 200405 season their capacity increased from 670 to 1920 seats. Following these improvements, the revenues from boxes and premium seating for the upcoming season increased from 12.5 million to 15.3 million. The 200304 results that Redondo presented showed that the Club had just met its budget in this area, even though actual results had historically exceeded forecast. Redondo thought that the box- office revenues could not grow substantially going forward because: 1. His assumptions had already included sellouts for most of the official games, in line with past performances (see Exhibit 12). 2. Previous years' deviations had occurred because of the team's strong performance in the Champions League. For budgeting purposes, the executives had assumed that the Club would reach the quarter finals (Exhibit 8), even though Real Madrid had advanced to semi- finals in five of the last six years. For the upcoming budget, Redondo defended a 5% increase in stadium revenues from the seats added with a newly built balcony and the improvements described for the premium seating areas to reach a total of 68 million. Preseason, international and exhibition games This revenue line included progress bonuses, bonuses paid by UEFA, the summer tour, and exhibition games. For the UEFA championship, Butragueo, the deputy sports manager, had once again assumed in the budget that the team would advance only to the quarterfinals of the Champions League. For the preseason games, the Club was under pressure because its participation in the preliminary round of the 2004-05 Champions League in mid-August would inevitably reduce the number of games that could be played in the summer Asia tour. However, after negotiating with the Club's Asian partners, Martnez de Albornoz and Butragueo managed to fit the Asia tour into the shortened schedule. Thus, Butragueo expected to continue the growth of this revenue line and obtain 25 million from preseason games and Champions League bonuses. 31 TV rights/broadcasting This budget line included Real Madrid's share of Spanish- and European-league TV revenues, "pay-per-view" broadcasts, and RealMadridTV, a pay-TV channel with Real Madrid-related content. TV revenues had been flat from the start of Florentino's mandate until the 200304 season, when revenues increased from approximately 46 million to 69 million (see Exhibit 13). Revenues were expected to remain in the 70 million range for the next few years until existing contracts expired in 2008. Marketing revenues Because revenues from ticket sales and TV rights were expected to remain virtually stagnant, the Club focused on marketing to increase its recurring revenue. Snchez (the marketing general manager) had successfully steered the Club through spectacular growth in marketing revenues in previous yearsbut it was a growth pace that he was finding more difficult to maintain. He sensed that increasing merchandise sales and advertising revenues would be a huge challenge in the future. Although it was not clear how the recent sport results would affect distribution revenues and worldwide sports-gear sales over the coming year, the Club expected to open three new retail stores in the Madrid metropolitan area, expand product licensing, and renegotiate existing licensing agreements that were up for renewal. The Club also hoped to sign more distribution agreements abroad, like their new agreement with Japan-based Platia. Reported advertising revenues, on the other hand, were expected to grow by 43% due to legal changes in the partnership that managed the Club's image rights,32 which now required Real Madrid to consolidate the partnerships revenues and expenses into its own financial statements. The only other way to expand marketing revenues would be to attract additional sponsorship or player-endorsement deals, much like the sponsorship-contract extension that the Club had just negotiated with Adidas. The difficulty would be finding suitable candidates in new industries that did not conflict with existing partners and that formed a good fit with Real Madrid. Given the Club's marketing plans described earlier, Snchez's unit expected to see growth of at least 40 million up to 125 million in the coming yeareven more if it could unearth new sponsors. This number did not include increased promotional activity that would result from new player acquisitions. Extraordinary results Nonrecurring revenues for the 200304 season were heavily affected by the sale of the training grounds. This transaction would have no impact on the 200405 financial statements; therefore, no extraordinary revenue was included in the budget except for the transfer of cantera players which could take place until August 31. Expenses Payroll The payroll was the single most important expense line and had been growing steadily over the past few years as new megastars joined the team. The increases were slightly mitigated during the 200304 season (see Exhibit 14). This budget line was at the core of managerial decisions about which players to hire and renew for the next season. Butragueo, Snchez, and the newly appointed coach, Jos Antonio Camacho, were key contributors to this discussion. Nevertheless, the board of directors always had the last word about player acquisitions, and it had always stood by Florentino's decisions. For 200405, Florentino insisted on signing a world-class star who would help the team win more tournaments and whose worldwide popularity would support sustained revenue growth. At a gross salary of 10 million per year, recent history suggested that such a player would cost between 30 and 50 million, depending on his age and the number of years remaining in his current contract.33 Also, the management team had to decide which cantera players were ready to join the team and which should be transferred. Players promoted from within would command between 400,000 and 1 million. However, many argued that the team also needed less spectacular reinforcements in various positions to give depth to the bench. This would be a significant change from the previous Zidanes & Pavones strategy. Transfer fees for these players ranged between 15 and 25 million and their salaries between 2 million and 4 million per year. The sports managers wanted to exercise most, if not all, of these options; however, each new signing further swelled the expense line and approached the limit set by Real Madrid for salary expenses50% of ordinary revenues. Moreover, as the typical contract had a four-year length, hiring decisions would influence financial flexibility in future periods. All these considerations made the budgeting process a difficult juggling exercise. Before the new hiring decisions, the personnel expenses (including the basketball section and the management team) were budgeted to be around 130 million. Operating expenses All of the remaining operating expenses including stadium operations, marketing, Real Madrid TV production, technology, and infrastructure still had to be budgeted. The operating expenses line would also increase for the 200405 season following the changes in consolidation criteria for Real Madrid Gestin de Derechos.34 The net effect of all these trends was that the operating expenses budgeted for the 200405 season would be 90 million. Ordinary depreciation Depreciation of the property and equipment was budgeted to increase 20% to 16 million as the Club capitalized improvements to the stadium and the construction costs of "Ciudad del Real Madrid." Accelerated amortization The amortization line captured the cost of the transfer fees. Despite the fact that Spanish accounting rules favored the amortization of transfer fees over the duration of the contract, Real Madrid chose to amortize the full value of the transfer fees in the year of the player's acquisition. In prior years the acquisition of the annual star player dominated this account (Zidane 200102, Ronaldo 200203, and Beckham and Samuel 200304). Real Madrid did not budget this line of the income statement and would decide on it by the end of the season, when the Club had a better understanding of the net income for the year. * * As Martnez de Albornoz revised the preliminary annual plan once more, he thought of the decisions ahead. In the few years since Florentino's arrival, Real Madrid had become the most economically powerful soccer team in the world. A lot had been achieved, but maintaining this level of success would not be easy. Every move, be it the hiring of a new player or the signing of a new sponsorship contract, had to contribute to one single objectivemaking Real Madrid the Team of the XXI Century. In this spirit the team was considering the acquisition of several players. Doing so could definitely contribute to the success of the team; however, overspending on the roster might jeopardize the future financial wealth of the team. The Budgetary Process The corporate manager coordinated the development of the annual plan, which began when the team directors and executives defined the objectives for the coming season in early May (see Exhibit 7). These objectives, in turn, were used to produce the annual budget for the coming fiscal year as well as a midterm plan for the following three years. Although the budget had to be approved by the socios in the annual meeting, the midterm plan did not because it was used solely as an internal control tool. With the guidance of the strategic objectives and the assumptions provided by the corporate manager (see Exhibit 8), each operating unit prepared a preliminary budget. Despite its name, this document was, in reality, an action plan that included a description of all the initiatives the unit intended to undertake during the following period and the set of Key Performance Indicators (KPIs) against which the management performance would be evaluated. (See Exhibit 3 for examples of KPI lists.) The preliminary budget was accompanied by a list of resources needed by each unit to meet its objectives. The resources requested in the preliminary budget were then assessed by the respective corporate units (Human Resources, Insurance, Infrastructure, etc.). Resources were preliminarily assigned to those initiatives with higher priority, and operating units then revised budgets accordingly. The resulting plans were then consolidated across the four different management areas before being sent for approval to the management committee, the board, and the socios. During the economic assessment and consolidation phase, the corporate manager held numerous informal discussions with the different operating units, in addition to participating in the formal budget meetings. The board of directors usually voted on the budget during the weekend of the first official home game of the season (late August or early September). Once approved by the board, the budget was submitted to the Liga de Ftbol Profesional (LFP) and the Consejo Superior de Deportes (CSD).28 Failure to submit acceptable budgets to these organizations would exclude the team from official competitions. Later, in early October, the general assembly of the socios approved both the financial statements for the previous fiscal year and the budget for the current season. Budget tracking and followup was carried out monthly by each area and department according to its Balanced Scorecard, which included both financial and nonfinancial KPIs. In addition, two other internal documents were used to implement the budget: the UPA (ltima Previsin Anualizada),29 which was developed every three months as the most up-to-date forecast of annual performance, and the monthly Executive Synthesis of Economic Information, which analyzed the risks and opportunities of every area for the management committee. Preparing the Budget It had been a long day in the Santiago Bernabu Stadium offices. Even though the 200304 season was over, Real Madrid's executive team could not afford a much-needed break. The year had been a disappointment on the sports side. Even though the team strove to win three major tournaments, April and May's losses left them empty-handed. However, despite the sport mishaps, the season had been a total success from an economic perspective, generating record revenues (see Exhibit 9) and continuing the turnaround that had begun in 2000 when Florentino won the election (see Exhibit 10). The disappointing sports results, together with the Club's upcoming presidential elections on July 11, made the 200405 budget process particularly complex. Valdano, the sports general manager, summarized precisely the importance of the budget: "Nobody has ever seen a concentration (of fans and players) at Cibeles30 to celebrate a balance sheetbut a healthy balance sheet is necessary if we're going to make it to Cibeles to celebrate." The budget needed to be in reasonably good shape for the upcoming press conference and for the meeting of the management committee immediately before, where important decisions could be made. The committee and journalists alike would analyze all of the main budgetary lines and would question underlying assumptions to gauge the prudence of the plan. In that respect, understanding 200304 budget deviations would be important to improving the accuracy of the new budget (see Exhibit 11). Revenues Club members and stadium Santiago Bernabu Stadium had a capacity of approximately 80,000 regular seats and 200 private boxes. Real Madrid had sold 70% of its stadium capacity to season ticket holders. Season ticket prices commanded a discount of approximately 60% over single- game tickets at face value, and ranged from 120 to 1,100 for 19 home games. Although Real Madrid could sell out the whole stadium to season ticket holders, the Club preferred to leave 30% of the seats open to guarantee the extension and renovation of its fan base by allowing more people to attend. Manuel Redondo, the presidency general manager, pointed out that this policy did not have any cost for Real Madrid as they sell out most of the games." Historically the 200 boxes were rented out each year, and their prices, which depended on the number of seats, reached five times the level of regular seats in similar locations. The waiting list for boxes was very long (over 300 companies). The Club's efforts to serve this valuable demand faced the architectural limitations of the stadium (although for the 200405 season, the Club managed to expand its capacity by another 20 boxes). Given the physical impossibility of satisfying this demand, Real Madrid transformed some areas of the stadium into VIP sections, with upscale catering areas and restricted access. The VIP seating sections, which commanded a 300% price premium, were introduced in 2002, and for the 200405 season their capacity increased from 670 to 1920 seats. Following these improvements, the revenues from boxes and premium seating for the upcoming season increased from 12.5 million to 15.3 million. The 200304 results that Redondo presented showed that the Club had just met its budget in this area, even though actual results had historically exceeded forecast. Redondo thought that the box- office revenues could not grow substantially going forward because: 1. His assumptions had already included sellouts for most of the official games, in line with past performances (see Exhibit 12). 2. Previous years' deviations had occurred because of the team's strong performance in the Champions League. For budgeting purposes, the executives had assumed that the Club would reach the quarter finals (Exhibit 8), even though Real Madrid had advanced to semi- finals in five of the last six years. For the upcoming budget, Redondo defended a 5% increase in stadium revenues from the seats added with a newly built balcony and the improvements described for the premium seating areas to reach a total of 68 million. Preseason, international and exhibition games This revenue line included progress bonuses, bonuses paid by UEFA, the summer tour, and exhibition games. For the UEFA championship, Butragueo, the deputy sports manager, had once again assumed in the budget that the team would advance only to the quarterfinals of the Champions League. For the preseason games, the Club was under pressure because its participation in the preliminary round of the 2004-05 Champions League in mid-August would inevitably reduce the number of games that could be played in the summer Asia tour. However, after negotiating with the Club's Asian partners, Martnez de Albornoz and Butragueo managed to fit the Asia tour into the shortened schedule. Thus, Butragueo expected to continue the growth of this revenue line and obtain 25 million from preseason games and Champions League bonuses. 31 TV rights/broadcasting This budget line included Real Madrid's share of Spanish- and European-league TV revenues, "pay-per-view" broadcasts, and RealMadridTV, a pay-TV channel with Real Madrid-related content. TV revenues had been flat from the start of Florentino's mandate until the 200304 season, when revenues increased from approximately 46 million to 69 million (see Exhibit 13). Revenues were expected to remain in the 70 million range for the next few years until existing contracts expired in 2008. Marketing revenues Because revenues from ticket sales and TV rights were expected to remain virtually stagnant, the Club focused on marketing to increase its recurring revenue. Snchez (the marketing general manager) had successfully steered the Club through spectacular growth in marketing revenues in previous yearsbut it was a growth pace that he was finding more difficult to maintain. He sensed that increasing merchandise sales and advertising revenues would be a huge challenge in the future. Although it was not clear how the recent sport results would affect distribution revenues and worldwide sports-gear sales over the coming year, the Club expected to open three new retail stores in the Madrid metropolitan area, expand product licensing, and renegotiate existing licensing agreements that were up for renewal. The Club also hoped to sign more distribution agreements abroad, like their new agreement with Japan-based Platia. Reported advertising revenues, on the other hand, were expected to grow by 43% due to legal changes in the partnership that managed the Club's image rights,32 which now required Real Madrid to consolidate the partnerships revenues and expenses into its own financial statements. The only other way to expand marketing revenues would be to attract additional sponsorship or player-endorsement deals, much like the sponsorship-contract extension that the Club had just negotiated with Adidas. The difficulty would be finding suitable candidates in new industries that did not conflict with existing partners and that formed a good fit with Real Madrid. Given the Club's marketing plans described earlier, Snchez's unit expected to see growth of at least 40 million up to 125 million in the coming yeareven more if it could unearth new sponsors. This number did not include increased promotional activity that would result from new player acquisitions. Extraordinary results Nonrecurring revenues for the 200304 season were heavily affected by the sale of the training grounds. This transaction would have no impact on the 200405 financial statements; therefore, no extraordinary revenue was included in the budget except for the transfer of cantera players which could take place until August 31. Expenses Payroll The payroll was the single most important expense line and had been growing steadily over the past few years as new megastars joined the team. The increases were slightly mitigated during the 200304 season (see Exhibit 14). This budget line was at the core of managerial decisions about which players to hire and renew for the next season. Butragueo, Snchez, and the newly appointed coach, Jos Antonio Camacho, were key contributors to this discussion. Nevertheless, the board of directors always had the last word about player acquisitions, and it had always stood by Florentino's decisions. For 200405, Florentino insisted on signing a world-class star who would help the team win more tournaments and whose worldwide popularity would support sustained revenue growth. At a gross salary of 10 million per year, recent history suggested that such a player would cost between 30 and 50 million, depending on his age and the number of years remaining in his current contract.33 Also, the management team had to decide which cantera players were ready to join the team and which should be transferred. Players promoted from within would command between 400,000 and 1 million. However, many argued that the team also needed less spectacular reinforcements in various positions to give depth to the bench. This would be a significant change from the previous Zidanes & Pavones strategy. Transfer fees for these players ranged between 15 and 25 million and their salaries between 2 million and 4 million per year. The sports managers wanted to exercise most, if not all, of these options; however, each new signing further swelled the expense line and approached the limit set by Real Madrid for salary expenses50% of ordinary revenues. Moreover, as the typical contract had a four-year length, hiring decisions would influence financial flexibility in future periods. All these considerations made the budgeting process a difficult juggling exercise. Before the new hiring decisions, the personnel expenses (including the basketball section and the management team) were budgeted to be around 130 million. Operating expenses All of the remaining operating expenses including stadium operations, marketing, Real Madrid TV production, technology, and infrastructure still had to be budgeted. The operating expenses line would also increase for the 200405 season following the changes in consolidation criteria for Real Madrid Gestin de Derechos.34 The net effect of all these trends was that the operating expenses budgeted for the 200405 season would be 90 million. Ordinary depreciation Depreciation of the property and equipment was budgeted to increase 20% to 16 million as the Club capitalized improvements to the stadium and the construction costs of "Ciudad del Real Madrid." Accelerated amortization The amortization line captured the cost of the transfer fees. Despite the fact that Spanish accounting rules favored the amortization of transfer fees over the duration of the contract, Real Madrid chose to amortize the full value of the transfer fees in the year of the player's acquisition. In prior years the acquisition of the annual star player dominated this account (Zidane 200102, Ronaldo 200203, and Beckham and Samuel 200304). Real Madrid did not budget this line of the income statement and would decide on it by the end of the season, when the Club had a better understanding of the net income for the year. * * As Martnez de Albornoz revised the preliminary annual plan once more, he thought of the decisions ahead. In the few years since Florentino's arrival, Real Madrid had become the most economically powerful soccer team in the world. A lot had been achieved, but maintaining this level of success would not be easy. Every move, be it the hiring of a new player or the signing of a new sponsorship contract, had to contribute to one single objectivemaking Real Madrid the Team of the XXI Century. In this spirit the team was considering the acquisition of several players. Doing so could definitely contribute to the success of the team; however, overspending on the roster might jeopardize the future financial wealth of the team