14 November 2013
As I wrote a few months ago, the deadline-day deal in the world of football is typified by a time-poor purchaser, who is often cash-rich from having made a sale on the last day and is now trying to make a deal quickly.
Our ‘Levy-nomics’ example in this case is Liverpool’s purchase of Andy Carroll in January 2011. On the last day of the transfer window, Liverpool sold their disaffected star striker Fernando Torres for £50 million and needed to replace him. Andy Carroll’s previous club, Newcastle, was in the perfect position; in Liverpool they had a desperate club who’d just sold their star asset and were now cash rich and time poor.
Liverpool paid Newcastle £35 million on the last day of the window, widely seen as a huge overpayment. Fast forward two years and Andy Carroll has now joined West Ham for £15 million having scored six goals in his two years at Liverpool – a net loss of about £20 million, or £3.3 million per goal if you prefer.
While we will never know what pre-contract discussions took place, it would appear Liverpool had not prepared adequately for the possibility that they would have a public influx of cash combined with a need to enter the market.
The lessons that we can take from this apply just as easily to procurement as they do to football transfers. The key principles of Levy-nomics in this instance are as follows:
Don’t bury your head in the sand. An upcoming tender can be intimidating as it requires mobilising a lot of resources and spending money for something that might not happen. But if you develop a plan and stick to it, you’ll be better prepared when the likely scenario comes around.
Buy for value, not for price. If you consider the price you’re paying only in the context of the tender, you can lose sight of the value. Paying £35 million for one player when you’ve just sold another for £50 million can look like a £15 million profit. If looked at objectively though, is £35 million good value?
Use the right contract. If you know a tender is coming, it is perfectly acceptable to enter into pre-contract agreements with suppliers. Or alternatively, consider tools such as framework contracts or volume-based price bands.
Justin Hughes is a supply chain expert at PA Consulting Group