Hala Madrid: Managing Real Madrid Club de Futbol, the Team of the Century Introduction In June 2004, Carlos Martinez de Albornoz, corporate general manager for Real Madrid, a leading Spanish soccer team, was reviewing the Club's 2004-05 budget in preparation for a press conference scheduled by its president, Florentino Perez. In the two previous years, members of the Spanish press had predicted a financial catastrophe for Real Madrid after the Club signed Brazilian striker Ronaldo and British megastar Beckham. However, after Florentino's' election as president in 2000 the team won seven official titles, including two Spanish "Ligas" and one European Champions League, and Real Madrid had become one of the wealthiest soccer clubs in the world. Despite these successes, poor team results during the last two months of the 2003-04 season2 (including being eliminated from the European Champions League and losing a record five games in a row during the national competition) had left executives, players, and fans alike with a bitter feeling, just when Florentino was up for reelection. The 2004-05 budget challenge was to include the cost of acquiring new players who could recapture the support of the team's fans while avoiding the excesses that had nearly bankrupted the team before Florentino's arrival. Martinez de Albornoz thought of the decisions to be made during the planning process, knowing that Florentino would be probed on those decisions during his face-to-face with the press. Journalists enjoyed speculating on how many more player acquisitions the team would make and who would be the next star to join the Real Madrid "galaxy." Although the media touted Real Madrid as an organization with limitless resources, its management team knew that overspending would bring certain failure.Exhibit 3 Evaluation Sheets SOCCER DIVISION SUCCESS KEY PERFORMANCE INDICATORS Optimize costs Area costs Optimize profitability of investment in players Revenues from sale/transfer players Financial Deviation over budget in players' salaries Maximize revenues Area Revenues Customer Quality received by internal/external client Perceived quality Rookies of the first team who become team members next season Optimize area effectiveness Number of games played per rookie in official competitions Internal Processes Percent of players promoted to upper category teams Maximize sport profitability Sport achievements Learning and Growth Innovation and improvement plans Percent fulfillment of the plan (speed/quality) CAPACITY AND FACILITIES MANAGEMENT DIVISION SUCCESS KEY PERFORMANCE INDICATORS Optimize costs Area costs Financial Maximize revenues Area revenues Customer Quality received by internal/external client Perceived quality Average percent of the capacity sold Optimize capacity management Tickets sold to non-SOCIOS Maximize ticket sales of VIP areas Number of VIP season tickets Minimize tickets sold at ticket boxes Ticket box sales/total sales Internal Processes Minimize waiting periods Waiting periods to buy tickets Optimize season ticket receivables Season ticket holders' uncollectibles ratio Percent of season ticket holders with direct debit Minimize incidents at counters, boxes and VIP areas Number of incidents Learning and Growth nnovation and improvement plans Percent fulfillment of the plan (speed/quality) Source: Club records.May June July/August September Socios Annual meeting Vote Board Electoral program Approval Top Strategic Management Objectives: Approval Short & medium term Corporate Units Planning assumptions: Coordination Planning & Control Economic and of unit budgets sport Economic Support Units assessment (Human Resources, of needs Infrastructure, Insurance, etc) Business Units Budget of needs: -Personnel -Investment Economic Budget Current ExpensesExhibit 11 Real Madrid Budget and Actual 2003-04 Thousands E Budget Actual Variance 2003-04 2003-04 2003-04 Club Members & Stadium Revenues 61,604 62,575 971 Preseason, International, and Exhibition Games 20,487 18,604 -1,883 Broadcasting Revenues 70,409 69,517 -892 Marketing Revenues 80,060 85,305 5,245 TOTAL ORDINARY REVENUES 232,560 236,001 3,441 Sport & Non-Sport Personnel Expenses -133,236 -123,646 9,590 Operating Expenses -61,503 -61,166 337 EBITDA 37,821 51,189 13,368 Ordinary Depreciation -16,226 -13,204 3,022 EBIT 21,595 37,985 16,390 Financial Result -1,318 104 1,422 INCOME BEFORE EXTRAORDINARY ITEMS 20,277 38,089 17,812 Extraordinary Results 38,552 33,515 -5,037 Accelerated Amortization 0 -63,491 -63,491 INCOME BEFORE TAXES 58,829 8,113 -50,716 Taxes (25%) -14,707 -2,048 12,659 INCOME AFTER TAXES 44,122 6,065 -38,057 MAIN MANAGEMENT INDICATORS Revenues Mix Members and Stadium 27% 27% 0% Exhibition and International 9% 8% -1% Broadcasting 30% 29% -1% Marketing 34% 36% 2% Personnel Expenses/Ordinary Revenues Ratio 57% 52% -5%Exhibit 8 Real Madrid Club de Ftbol Budget for 2004-05. 20(15-06, and 2006-07 Assumptions R A PT] In order to budget for revenues and expenses. the following macroeconomic variables will be considered wherever necessary. W To be considered in revenues and expenses that contractually move in tandem with the CPI and in the personnel expenses as agreed in the General wages agreement. I Spain: 3.0% I USA: 1.5% I TERE T RATE To be considered in the revenues and expenses Financial budget a EURIBOR 1 YEAR: 2.5% W . 1.13 We a 1.55 CHF/ (UEFA revenues) I 068 He W Regardless of the objective of victory in every competition. the Following targets are set in order to budget for revenues and expenses. W LA LIGA: Reach the third position. This means playing 19 games in Santiago Bernabeu Stadium (E53) and 19 games away. COPA DEL REY: Reach quarter finals. This means playing 2 games in ESE and 4 away. CHAMPIONS LEAGUE: Reach quarter finals. This means playing 5 games in ES]! and 5 away. W ACB LEAGUE: Reach the fourth position. This means playing a minimum of 19 and a maximum of 23 games at home and a minimum of 19 and a maximum of 23 games away. COPA DEL REY: EUROLIGA: At the moment wanting to know if they will participate in the 2004-05 season. 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 2003-04 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, Sanchez, and the newly appointed coach, Jose 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 2004-05, Florentine 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.\" 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 'l 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 ti: 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 exibility 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 2004-05 season following the changes in consolidation criteria for Real Madrid Gestion de Derechos.\" The net effect of all these trends was that the operating expenses budgeted for the 2004-05 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 2001-02, Ronaldo 2002-03, and Bech and Samuel 2003-04). 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. The Budgetary Process The corporate manager coordinated the development of the annual plan, which began when the team directors and executives dened 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 scal 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 rst 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 (C5D).28 Failure to submit acceptable budgets to these organizations would exclude the team from ofcial competitions. Later, in early October, the general assembly of the socios approved both the nancial statements for the previous scal 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 nonnancial KPIs. In addition, two other internal documents were used to implement the budget: the UPA (Ultima Previsin Anualizada},2 which was developed every three months as the most up-todate 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 ofces. Even though the 2003-04 season was over, Real Madrid's executive team could not afford a muchneeded break. The year had been a disappointment on the sports side. Even though the team strove to win three major tournaments