18th February 2018

Blog – 12 September 2017













12th September 2017

The ‘right fit’ is a commonly-used term in the recruitment industry. It denotes a mutual understanding of expectations, culture, abilities, demands and ambition. It points to a shared view, a meeting of minds and a pact of direction. It also builds upon the vision of success. The ‘right fit’ is the individual tasked with delivering the payload of success.

Presumably, the board at Crystal Palace deliberated long and hard before appointing Frank De Boer earlier this year. Previously linked with Everton before his former team mate Ronald Koeman took the role as well as with Southampton as Koeman’s replacement, the ex-Inter Milan manager’s reputation was still flying relatively high given his successful tenure at Ajax. It is easy to see how the seduction of passing football can potentially sway those all-important executive decisions.

A change in emphasis, style, and culture – all things that the leadership apparently bought into. Furthermore, one might quite reasonably expect that the board must have expected and planned for a period of transition: a period of potentially below-par performance whilst the team and the players absorb and adapt to the new playing philosophy. Such a phase might see the club in the lower reaches of the Premier League before performances improve and longer-term success became more apparent.

Unfortunately, it only took the board 77 days to lose its nerve and curtail the journey towards the promised, cultured land of total football despite the team playing well on Sunday.

That’s not to say that De Boer was indeed the answer. It depends on what the board had in mind as the question in the first place. A tiring of relegation scraps? A desire for something other than route one? A hankering for a ‘big name’ to enhance the club’s reputation? Who knows….

We suspect that the decision to jettison the Dutchman was driven by a sharp realisation that change brings with it a range of costs and risk, the biggest being the economic fallout arising from a potential relegation.  As we will reveal in more detail in our new report ‘Over the Line’ (released 10th October), despite the cushion of parachute payments, the cost of relegation is significant and highly damaging under certain circumstances.

Crystal Palace is currently in its 5th season in the Premier League since promotion in 2013. As almost two thirds of promoted clubs are relegated by the third season, the club has done well to last the course so far. However, we believe that the club is in danger of becoming ‘economically exhausted’. What do we mean by this? Since the promotion season, the club’s efficiency in generating economic profits has declined year-on-year, from an economic profit in 2013 of £19.01m to an economic loss of £8.98m in 2016. Therefore, each successive season in the Premier League is becoming more of a financial burden as value creation is challenged.

It is also notable that Crystal Palace is the only club to have gained promotion into the Premier League and achieved an economic profit in the same season since 2009 so the financial expertise is certainly present in-house.

From the latest set of Premier League club accounts (2016), the club runs the second-highest wage bill-to-revenue ratio in the division – 79% of a revenue total of £101.82m is spent on wages and associated costs. For comparison, Leicester City spent 62% of a revenue total of £128.72m on wages, won the title and still spent £210k less than Crystal Palace on staff costs (£80.35m vs £80.56m).

From our perspective, the high wage-to-revenue ratio, the high reliance on TV money – approx. 78% of revenue – and the level of activity in the transfer market (net summer spend of £7.51m in 2016 and £32.3m in 2017) suggests that the pressure is certainly on financially given the latest transfer outlay. The revenue uplift anticipated in the forthcoming 2017 Premier League club accounts may not be enough, though, to bring about the financial transformation that many expect.

The last major revenue uplift for the Premier League in 2013 when the domestic TV revenue values rose 70% to £1.006bn per year did not produce a “profits bonanza.” Half the clubs produced an economic profit although only Tottenham Hotspur and Everton, from the top 7, were in the black. The division was a whisker away from a rare economic breakeven:  a good economic performance, but not quite enough. Close, but no cigar etc. The challenged economic profit trend for the division has persisted since 2009.

We are not expecting a seismic shift by the Premier League clubs into the black for the 2016-17 season either on the back of the latest TV deals. The overall net summer transfer outlay increased by 47% from 2015-16 to £635.6m. Add in wages and agent-related fees and the picture in our view becomes much less rosy.

Relegation for Crystal Palace could precipitate a fall in TV revenue and performance/merit payments from an anticipated £100m in the current season down to circa £7-8m (even after today’s EFL announcement regarding the new 5-year deal with Sky) without a cup run. The parachute payment gives back £40m in the first year so the shortfall is approx. £52m from the Premier League revenue level although this does not consider potential changes in matchday revenue, sponsorship monies and other commercial activities. Nevertheless, the board would be forced to drastically reduce the wage bill to a more manageable level. Bearing in mind that the average economic loss in the first season back in the Championship is £26.74 per £100 of revenue according to our Football Profitability Index calculations and you get a sense of the potential financial carnage that awaits.

Therefore, the board has backtracked very quickly. It may well have been close to a total meltdown rather than total football although four games played, four games lost and no goals scored is poor by anyone’s standards. Even Derby County’s miserable 2007-8 season started with two goals and a point. They eventually ended up scoring 20 for the season and accumulating 11 hard-fought but futile points.

There are 18 games to go between now and the opening of the January transfer window. Autumn will blend into winter and the struggles will intensify. ‘Six pointers’ will shape the membership of the bottom three and fates will start to be sealed. Cash balances will drain and finance directors will start to sweat and plan for a not-so-prosperous Championship future.

Clubs outside of the top 7 that continually spend beyond their means to try and stay in the Premier League are found out sooner or later (Blackburn, Bolton, QPR, Aston Villa, Sunderland et al). As Burnley, Norwich City and Hull City will tell you, there is a much better chance of going back up if the balance sheet is in good shape on the way down.

However, 5 seasons of Premier League competition with decreasing financial width suggests that Crystal Palace may be operating at its financial limit. Even if the club were to survive this season in the Premier League, the anticipated damage to the balance sheet might be a step too far with further limitations for next season, all depending of course on the benevolence of the owners.

In our view, the big mistake is trying to change the footballing philosophy of the club at precisely the wrong time. There are 13 clubs fighting for survival every season in the Premier League. The pressure is as much financially-orientated as it is about the football. Our findings show that the poorer the state of the balance sheet, the more likely is relegation. The board should have evaluated its current and future economic risk first before taking the decision to embark on a new course.

Should relegation occur, the Championship may provide the perfect laboratory and the ‘right fit’ to try and test new footballing methods and cultures. Silver linings and all that….