COVER STORY: Sport looks to the grassroots
Huge players' wages and falling corporate sponsorship are hitting not just football but all sports. An alternative model is to develop the stars of the future through youth academies and the Midlands is leading the way.
The need for professional sports clubs to develop sound financial strategies has never been more acute. Ian Halstead assesses the record of Midlands clubs and the growing links between the professional services sector and the sports industry
Football may have become a business, but the new focus often sits uneasily with players, fans and clubs alike.
Roy Keane's dislike of the prawn sandwich brigade blithely ignores the corporate sponsorships that fund his multi-million pound salary.
Although supporters demand activity in the transfer market, indignation floods the bulletin boards when the cost of season tickets rise. And although the biggest clubs have adopted plc structures, some chief executives still base financial strategies on nothing more substantial than wishful thinking.
For many clubs the battle is as much against the balance sheet as the opposition.
Leicester City is the most spectacular example of a club taking the administration route to success. The largest of its numerous creditors, Birse, is thought to have lost around £37m in unpaid bills from building the Walkers Stadium.
Meanwhile, the club has a new £335m stadium and all that lovely Premiership lucre awaiting in the coming season.
The occasional spectacular collapse underlines the need for professional sports clubs to develop corporate structures and evolve sound financial strategies.
However, David Hull, law firm Hammonds' Birmingham-based sports specialist, isn't wholly convinced that the message is being heeded.
His firm is Europe's largest adviser to the international sports industry, with clients ranging from major sponsors Carlsberg-Tetley and the Nationwide Building Society to Rugby World Cup Ltd, the International Tennis Federation and Ascot.
Fulham, Everton and Bolton Wanderers are among the Premiership clubs using Hammonds' services.
"Football clubs are certainly trying to develop income streams outside their core activity, but player costs are still outstripping growth in the business," suggests Hull.
"Fulham and Blackburn, for example, are paying around 130 per cent of their turnover out in wages, which is clearly unsustainable."
Hull also believes the decline in the transfer market is deceptive.
"Fees are down dramatically but the money is just going to the player and his agents, rather than the club. The biggest challenge remains controlling salaries."
Despite the reluctance of clubs to de-list, Hull is convinced that the quoted soccer sector has no future. "Flotation as a means of raising capital remains valid, but the second main reason was to increase liquidity in clubs' stock," he recalls.
"Now though, we have West Bromwich Albion, where one man speaks for 50 per cent of the shares, Birmingham City, effectively owned by three individuals, and Aston Villa where Doug Ellis and his family own some 40 per cent of the shares."
Meanwhile Hull sees rugby as trying to follow a football-style business model though without conviction.
"It has a kind-of transfer system, but it is very rudimentary. Rugby has a very loyal customer base, but massive problems in terms of infrastructure.
"There is still a huge emphasis on amateurism in rugby, and not just among the people running the game."
Equally Hull has major concerns about the way that cricket is evolving under the ever-widening TV spotlight.
"In terms of coverage, it probably gets as much exposure as football and rugby, but its financial model remains a pyramid.
"For most test matches and one-day internationals you can charge what you like and the stadiums can't cope with the demand, but for county matches the audiences simply aren't there."
Even established and well-run test venues such as Edgbaston are always at the mercy of the vagaries of the fixture list.
Warwickshire lost a record £3394,000 in 2002, its first deficit for almost two decades and following a record profit of £3476,000 a year earlier.
The key reason was corporate apathy last summer toward fixtures between England and India and Sri Lanka.
Hospitality revenue for international cricket crashed from more than £31m in 2001 to barely £3440,000 last year. Investment in the new Eric Hollies stand was an important contributory factor for the dismal results. However, clubs such as Warwickshire and Nottinghamshire must constantly improve their stadia to guarantee ECB support and retain their status.
Trent Bridge's ambitious investment programme has seen more than £310m spent during the last five years.
Its new 2,300-seat Fox Road Stand recently picked up a Civic Trust award for its spectacular cantilever design.
The £31.9m project - and the overall 10-year plan for the ground's regeneration - were both masterminded by Nottingham-based architects Maber Associates.
The same firm was also responsible for designing and managing the construction of the Youth Academies at Nottingham Forest and Derby County.
The firm's "sports nut" founder, Colin Maber, believes the collapse of the transfer market will see more clubs follow the same route of developing home-grown players.
"Establishing and running an academy isn't cheap, but the investment is probably equivalent to the cost of an average Nationwide centre-forward," he suggests. Maber's long-term relationship with both Trent Bridge and the two Nationwide clubs exemplifies the growing links between the professional services sector and the sports industry.
Derby-based accountancy firm Smith Cooper is another to follow the trend, advising both Derby Rugby Club and Derbyshire County Cricket Club.
The commercial relationship with the former even led the firm to become one of its official sponsors.
Tax partner Stuart Peck and his colleagues helped the rugby club through a five-year expansion, involving the sale of its old ground for more than £31m and its move to a new location.
Derbyshire CC is involved in even more ambitious ground development projects; including a hotel, and a multi-million pound sports complex for the club and the local community.
With significant support expected from Sport England and the government's New Deal programme, Peck is bullish about Derbyshire's prospects.
Elsewhere in the East Midlands though, KPMG partner Mel Egglenton has observed first-hand the enormous potential for downside in the new-look sports sector.
For the last two years, he's been an unpaid member of the board of the National Ice Centre in Nottingham.
The council-owned venue, built largely with Lottery money, includes an arena suitable for events such as pop concerts. The original strategy - that the latter would subsidise the former - failed dismally.
"The council hoped the centre would be self-financing, but the project over-ran its construction costs by £313m and then lost £31m in its first year," recalls Egglenton.
He subsequently volunteered to provide financial expertise for the centre's management board and its performance has improved markedly.
"Losses were about £3600,000 in the second year, and will be significantly lower in the current year, but to break even is very difficult," says Egglenton.
However, as he points out, if the annual losses ultimately settle at £3250,000 that represents the cost of running just an average public swimming bath.
Egglenton's sport of choice isn't ice-skating though, but football.
A lifelong season-ticket holder at Nottingham Forest, he was delighted when KPMG became involved with the team in its Premiership days. Forest only ceased to be a private members' club in 1982 and floated in 1997 under the impetus of millionaire property developer Nigel Wray.
KPMG was - and remains - Forest's firm of auditors, but Egglenton admits its balance sheet hasn't always made pleasant reading since its flotation.
"We became the first yo-yo club, too good for the Nationwide but not strong enough to remain in the Premiership."
David Platt's unproductive excursions into the transfer market also put a sizeable dent in Forest's finances.
However, new chairman Nigel Doughty's willingness to invest in the club and the transformation of its on-field fortunes by manager Paul Hart have revived Egglenton's optimism.
Like Maber, he believes that the success of the Forest Youth Academy should become an example for other clubs. "It is expensive to set up such an operation, and costs £31m a year or so to run, but when Newcastle paid £35m for Jermaine Jenas that made the investment worthwhile."
KPMG also advises and audits the books of Derby County, which has had significant financial problems since relegation.
Egglenton's love of the Rams' deadly rivals doesn't prevent him admitting significant sympathy for County and its embattled board.
"Whatever their financial problems, they have done their best to soldier on and honour their debts, as well as continuing with the development of their new £35m training facility and Academy."
Chairman Lionel Pickering recently announced that the club was on the verge of being sold. He confirmed that the club's total debt was in the region of £330m and he would be prepared to sell for £35-8m.
This contrasts with Leicester's decision to pump £335m into a new stadium, then seek administration upon relegation to the Nationwide.
"A lot of people in football think they have had an unfair advantage in retaining players to get back into the Premiership," says Egglenton - which is certainly the politest comment recorded on the subject.
Whilst administrations involving former Premership clubs often provoke outrage though, for those on the lower rungs of the Nationwide ladder the process may be the only route to survival.
The most unusual administration has been at Huddersfield Town, where the catalyst was a petition from its understandably aggrieved players, who hadn't seen a wage-slip for four months.
The Professional Footballers Association called Begbies Traynor partner David Acland in to crunch the numbers at the McAlpine Stadium.
"We had done some work for the PFA before. They needed input from someone with financial skills and also an understanding of insolvency procedures," he says.
Despite relegation from Division Two, it seems the Terriers' future will be secured through a company voluntary agreement.
Although many critics consider that clubs should not be able to virtually escape their debts via administration, Acland is opposed to the idea of imposing penalties.
"Sports clubs are simply not like normal businesses. Huddersfield, for example, is a well-supported team with an excellent stadium, but virtually no assets," he says.
"The essential philosophy of the Football League has been that all clubs are members, and that they abide by the basic rules of meeting debts to each other and meeting the contracts of their players.
"Once the system breaks down though, we have the rules relating to insolvency being laid over the traditional footballing background, and it may well be that the two structures are incompatible."
Acland believes that devising an equitable system of penalties would be far harder than accepting the principle that punishment was necessary. "Do we penalise a club for not foreseeing the demise of ITV Digital, or for not being able to survive the collapse of its major sponsor?
"If a club goes into administration and is then relegated, as Huddersfield has done, do we relegate them for a second time? The idea of penalties may be appealing to some, but in most instances it will simply be kicking someone when they are down."
Investment in stadia of course has long been the area where football clubs have proved particularly vulnerable to "wish and hope" strategies.
Cricket and rugby players can switch clubs with reasonable ease and for minimal expense, but not so in football.
The time-dishonoured route to relegation has been to pour money into your ground rather than your team, and Midland clubs have certainly suffered.
Notts County set the trend more than a decade ago - proceeding with plans for a spanking new stadium just as they departed the Premiership - and have been followed by Stoke City, Coventry City, Leicester City and Derby County.
Notts County subsequently set an unwanted record by staying in administration for a record period, though it now looks certain that the world's oldest football club has a future.
In early June, Kroll's Nottingham-based partner and joint administrator, Paul Finnity, accepted a £33m-plus bid from Frank Strang and Raj Bhatia.
However, it seems that clubs are finally starting to adopt more rational strategies on stadia improvements.
Although Birmingham City's boardroom contains three of Britain's richest entrepreneurs, they believe improving the quality of their squad is more important than giving St Andrew's a facelift.
Last month, Blues' chairman David Sullivan unveiled a sparkling set of interims, including pre-tax profits of £36.4 million, and admitted: "We are sure any diversion of funds in that direction would ultimately be detrimental to retaining our position within the Premiership."
Any caveats about sports clubs adopting long-term rational business plans become irrelevant though if a benefactor with an ever-open wallet hoves into view.
Fortunately for both his health and his bank balance, Sir Jack Hayward's willingness to pump some £360m into his beloved Wolverhampton Wanderers has finally been rewarded by Premiership status.
In rugby though, despite Cyril Duckworth's investment of around £315m, Worcester have missed out on promotion to the Allied Dunbar Premiership for four successive seasons.
Such a time-scale barely registers however on the planning of two national sports projects coming to the Midlands.
The country's most famous sports-based university, Loughborough, will soon be home to the first National Cricket Academy. The ECB, which has already agreed to use the site for the next 20 years, envisages the creation of the world's largest indoor cricket centre.
Six lanes will be inside the 70 metre-long building, which will cater for all England teams from the test match squad through to the ladies and disabled sides.
The academy's arrival will take recent investment on the Loughborough campus comfortably through the £335m mark.
The FA's first National Football Centre (NFC) is destined for Burton-on-Trent, though the opening date seems more likely to overshoot by a year to 2005. The £350m complex, spread over a 350-acre site, will ultimately provide training and support facilities for the country's players, trainees, coaches, administrators and referees, according to NFC chairman Peter Heard.
Both sites will have ultra-sophisticated sports science departments to which Loughborough will have significant input.
The head of the university's sports science unit, Professor Clyde Williams, says the cricket academy's syllabus will be designed to help the next generation of Premiership stars cope with both physical and mental pressures.
"At the top end, it's showbiz, so there will be a strong focus on such issues as psychology and lifestyle management."
The FA is also sponsoring research at Loughborough into physiology and football, assessing the links between diet, nutrition, skill and recovery.
It's ironic therefore that just as our cricket and football authorities are investing millions in futuristic training centres that they stand accused of caring more for generating TV and sponsorship income than protecting players' health.
However, Prof Williams believes that professional sports players will become increasingly vocal in defence of their rights against their own associations.
A Vale over the past
Port Vale would have struggled to survive the imposition of additional penalties during their period in administration.
However, the Potteries club did pull through and is now owned by a consortium of supporters, Valiant 2001.
A team from Black Country solicitors George Green advised the fans on the drawn-out purchase, led by corporate partner Paul Bennett.
The deal was a sharp contrast to the high-profile rescue of Leicester City under Gary Lineker and other millionaire backers.
"Very large numbers of supporters were involved and, because every decision had to be absolutely democratic, we often had to wait for the next home game to get them all together," recalls Bennett.
"It was knife-edge stuff on a number of occasions, but fortunately Vale managed to avoid relegation and the new owners now have as much time as possible to improve the running of the club before next season."
At least the unusual survival route should help eradicate Vale's previous claim to fame - as the only league club to use a secondhand stand because it couldn't afford a new one.
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