The Best Way To Allocate $57 Million: Lessons from the Detroit Red Wings

The mighty Detroit Red Wings, the greatest hockey team on Earth, have now won the first two games of the Stanley Cup finals against the Pittsburgh Penguins.  They need two more wins (in the next five games) to win the Stanley Cup for the second straight year.  That will make them the first team to repeat since…the Detroit Red Wings (in ’97 and ’98).   Lest any of you think I’m merely writing this because I am a fan (and I am indeed a fan), let me disabuse of that notion.  I’m writing because the Red Wings have set the standard of excellence in the NHL for well over a decade and a half now.  Their ongoing success makes them the envy of front offices throughout professional sports, and that makes them worthy of study, fan or not.

Many sportswriters have weighed in on the secrets of their success.  This blog (sadly) is not titled “How to Find European Gems in the Later Rounds of the NHL Entry Draft” so I can’t cover that particular success component.  The blog is called “Well Worth It” so let’s talk about what’s worth what for the Red Wings with regard to the Red Wings payroll.

First a brief history lesson: in the years before the NHL lockout (which eliminated the 2004-2005 season), the Red Wings were very successful, but many attributed their success to the Red Wings’ free-spending ways.  In the final year before the lockout, the Red Wings payroll reached over $78 million.  After the lockout, teams were put on roughly equal footing with each other via the institution of a salary cap.  Many assumed that once the Red Wings couldn’t simply buy talent at will, their overwhelming success would be a thing of the past.  Instead, they’ve had one first-round exit (2006), one trip to the conference finals (2007), one Stanley Cup (2008), and one Stanley Cup finals where a Stanley Cup looks quite plausible (2009).

So why were the Red Wings still able to succeed?  I believe part of their success is rooted in appropriate salary allocation.  Just as all businesses strive to allocate their assets, their capital, their productive capacity optimally, so it is for hockey teams operating within the salary cap.  Let us start with the goalie.  If hockey is the ultimate team sport, the goalie is perhaps the one guy on the ice who has the potential to single-handedly win (or lose) a game for the team.  As a result, many teams spend heavily at this position.  The Red Wings have, at times, gone this route.  This year, a mere $2.2 million (or 3.8% of payroll) is devoted to goalies, and only $1.4 million or 2.4% of payroll) goes to the starter, Chris Osgood.  That’s second least in the league devoted to that position. 9.6% is the average devoted to goalies.  This gives the Red Wings that much more to devote to skilled position players.  How much more?  9.6% -3.8% = 5.8% of payroll more going to skaters.  The average team payroll is $53.7 million.  5.8% of 53.7 million = $3.11 million.  For $3.11 million, you can get yourself an extra 20-30 goal scorer!  So if all goes well and the Wings win the Cup again, part of me thinks Osgood should get the Conn Smythe trophy as playoff MVP (partly because he deserves it for outstanding play, but also) for his contributions within the framework of the salary cap. 

Here’s another interesting asset allocation tidbit.  The Red Wings only have 23 players signed to one-way contracts.  Only two teams had fewer.  What’s a one-way contract vs. a two way contract?  For players who will play a sizeable number of games at the minor-league farm club, a two-way contract is in order.  In a two-way contract, payers are paid different rates depending on whether they’re playing for their NHL club or for the minor league club.  The Red Wings have been stockpiling talent for years through effective drafts and excellent player development.  The result is that they have a number of NHL-caliber players who are patiently waiting their turns while playing on two-way contracts.  Knowing this, the Red Wings could pay their top 23 players higher per-person salaries than other teams requiring 25 one-way contract players for the same talent level.  It may be coincidence but among the final four contenders for this year’s cup, Pittsburgh was average with 25 one-way players.  Carolina and Detroit had 23 each.  Chicago had only 22. 

Two final points.  The first is that success breeds success.  Guys want to come to Detroit because they know they’ll have a great chance at the Cup.  In many cases, they’ll accept less than they’d have gotten in the open market because they want to win.  Case-in-point:  Marian Hossa.  Last year at this time, Hossa was playing for the Pittsburgh Penguins.  In the off-season, he was offered a 5 year, $35 million contract to stay with the Penguins.  Instead, he chose Detroit on a 1 year, $7.45 million deal.  Don’t get me wrong: $7.45 million is good coin.  But issues like injuries and skill erosion sometimes just happen, and giving up $27.55 million guaranteed is a lot.  But he wants to win.  And we’ve seen that with the Red Wings before.  The second of my two final points: the consistent way the Red Wings have built their present success has laid the groundwork for future success.  How?  It’s given the Wings the luxury of bringing their crop of young talent along slowly, letting them gain experience and playing time in Grand Rapids before being pushed into high-profile roles in the NHL.  The result: when their time comes, they are ready.  That’s shown in this playoff season when young players Jonathan Ericsson, Justin Abdelkader, Darren Helm, and Ville Leino have looked absolutely fabulous filling in for injured regulars like Kris Draper, Pavel Datsyuk, Andreas Lilja, and Tomas Kopecky.  It’s kind of like companies that use long-time successful products to fund innovation and development of new ones.  That kind of effective allocation becomes a self-sustaining cycle, and no one’s done it any better than the Red Wings.