FOOTBALL PAYS THE PENALTY - Man United CEO Peter Kenyon has predicted that fewer than half the 92 soccer league clubs will survive the financial crisis besetting English football - a predicament manifested by the sorry state of grounds such as Saltergate (pictured), home of third division Chesterfield. The clubs' problems have been blamed on the ill-fated ITV Digital deal, but they have more to do with naive cost control by managements living impossible dreams. Jim White reports.

Last Updated: 31 Aug 2010

Man United CEO Peter Kenyon has predicted that fewer than half the 92 soccer league clubs will survive the financial crisis besetting English football - a predicament manifested by the sorry state of grounds such as Saltergate (pictured), home of third division Chesterfield. The clubs' problems have been blamed on the ill-fated ITV Digital deal, but they have more to do with naive cost control by managements living impossible dreams. Jim White reports.

Back in October, Emile Heskey, the Liverpool and England forward, did something unusual for a professional footballer. He made a sizable donation to a good cause. Never mind that it represented only three weeks' labour, it was big-hearted of him to give a six-figure sum to the fighting fund set up to save his old club, Leicester City. At the time, Leicester had just entered administration, saddled with debts big enough to overwhelm a small African state.

Heskey's was a decent gesture by a decent man. But the cynic might have added that it also marked a final turn in the history of the game: football has become a comical business indeed when the employees are obliged to bail out the employers. Not that everyone can see the funny side.

'You must be joking,' says Willie Carson, the former jockey who is now chairman of second-division Swindon Town, when asked if it is possible to make a profit from football these days. 'The only people making money are the guys who wear the kits every week. As a business, it is completely unsustainable and it just cannot last.'

From a distance, it might be thought that British football was awash with cash, floating in the stuff. After the most lucrative world cup in history, our national game's presence is established throughout the globe; commercially it has never seemed stronger, its most visible asset - David Beckham - is now a worldwide brand. More people are watching the game on television, more people are clacking through the turnstiles to experience it live, more people are going to sleep under a duvet emblazoned with their favourite player's scowling image. Yet the money that is being made is becoming ever more centralised, bloating the coffers of a small pool of immensely wealthy clubs such as Manchester United, Liverpool and Arsenal, as well as the England national team.

For the rest ... well, a glance at the financial predicament that is football suggests that Carson's vision is closer to the truth. At the time of writing, Barnsley, Leicester and Notts County are in administration, a depressing fiscal experience from which Bournemouth, Bradford, Carlisle, Chesterfield, Crystal Palace, Lincoln, Luton, Millwall, Oxford, QPR and Swansea have only recently emerged. Carson's Swindon, meanwhile, has distinguished itself by seeking outside protection from its creditors twice in the past five years. And that is not the end of it. Although not in administration, outfits like Fulham, Chelsea, Coventry City, Sheffield Wednesday and Derby carry debt on a scale that would make an Enron executive blush.

Indeed, when the chairmen of the first division clubs were recently asked if they could guarantee that their teams would survive to fulfil all their fixtures this season, only three - at Wolves, Norwich and Portsmouth - reckoned they could.

'If football were a proper business,' says Carson, 'you'd shut it down and walk away. Course you would.'

And it's no good looking to the game's governing body for leadership in this crisis. With no chief executive and no technical director, the Football Association has troubles of its own. Chief exec Adam Crozier was shown the red card last October for his opposition to the formation of a new super league, and technical director Howard Wilkinson left to manage Sunderland at the same time. Now even the future of the FA's much-vaunted Centre of Excellence - on which pounds 60 million has been spent - looks doubtful.

How did it come to this? How did the most fashionable sport in history turn into a financial disaster zone matched only by the implosion?

In a crisis, it is always convenient to identify an enemy. Right now, it would be unwise to wander into the boardroom of a struggling club and announce that you are a former executive of ITV Digital. The ill-fated broadcasting venture funded by Granada and Carlton was launched in 2000, hoping to cash in on the multi-channel future of television. In 2001, recognising that the expensive purchase of the rights to live Premiership football had been a major reason for the extensive uptake in Sky's subscription-based service, ITV Digital signed a deal with the Football League to show live matches and highlights packages of games in the first, second and third divisions. The company was to pay pounds 315 million for a three-year deal. In the boardrooms of our smaller clubs, Christmas had arrived. Unfortunately, as many a media economist was keen to tell them at the time, football is an attractive television entity only at the very top end of the market.

Manchester United in the Champions League final will draw 18 million viewers and hours of pricy commercials between the action; Grimsby against Wimbledon is a less attractive broadcasting proposition.

'There was a general feeling at the time that they had paid way too much,' says Jonathan Michie, professor of management at Birkbeck College, London.

'But within the company it was felt it was necessary to do it because that was what BskyB had done, and look how successful they had been on the back of football.'

Unlike Sky, ITV Digital and its deal quickly became a laughing stock.

When fewer than 850 paying customers tuned in for one live game between Sheffield Wednesday and Rotherham, it was quipped that, given the cost of coverage, it would have been cheaper to buy a ticket to the game for each of the viewers, and ferry them there in stretch limos, with unlimited champagne on tap. The figures made no sense, particularly in the boardrooms of Granada and Carlton. Less than a year into the deal, ITV Digital folded, and the money many a club had budgeted for never arrived.

'The problem was, the deal coincided with the Bosman ruling, which meant players had much greater freedom of movement,' says Michie. 'This encouraged the clubs to use the promised money to tie expensive players down to long contracts.'

Gloom descended immediately. It was announced that the football bubble had burst. Yet there is a slight flaw in the argument that the directors of ITV Digital are to blame for all football's ills: the figures. For instance, three of the most indebted clubs - Coventry City (owing about pounds 60 million and rising), Derby County (pounds 30 million) and Leicester (pounds 30 million) - were in the Premiership when the deal was signed, and were not party to it. Moreover, in 2001, before the collapse of the broadcaster, 80% of English league clubs were recording losses totting up to pounds 134 million.

Yet in 1994, when broadcasting rights were significantly less valuable, the English league clubs had collective operating profits of pounds 15 million, and far fewer clubs were in the red. So when revenue was at its peak, clubs were already haemorrhaging money.

'There is no doubt in my mind clubs were in trouble before ITV Digital,' says David Gold, chairman of Birmingham City. 'They suddenly got this extra money and they almost without exception went out and spent it. Take it away and adjust and we're all back to exactly where we were before the deal, so you have some clubs being run well, some clubs being run badly. It's there to be seen.'

Gold bought Birmingham in 1993, just as football was taking off in the wider public consciousness. In that time, he has seen the business become trapped in the most unlikely financial cycle: rising revenue and declining profitability.

Gold runs 12 companies, from an airline to a publishing empire, from the Anne Summers chain of saucy undergarment shops to the top-shelf newspaper The Sport. All of them run at a profit healthy enough to make him the 72nd richest man in Britain, according to the latest Sunday Times Rich List. And none of his other businesses, he says, operates on the same principles as football.

'With any other business, success is measured by profitability and profitability alone,' he says. 'In football, there is another, higher indicator of success: where you finish in the league table.'

And this, fundamentally, is the reason why football is in such a mess.

It is not the ITV Digital deal, it is not spiralling wages, it is not simply bad management practices. It is the cost of ambition - a cost hugely added to by the structural deficiencies of the game.

'In the past,' says Professor Michie, 'football was much more democratic at sharing what money it had around. As the game became more marketable, those at the top wanted to keep more and more of the money coming in, money they felt they had earned and which they saw no reason they should share. The formation of the Premier League and the Champions League led to far less revenue-sharing, which in turn has created an incentive system that encourages clubs to gamble on success.'

Put simply, chairmen have spent money they don't have paying players they can't afford in the hope that they'll be able to guide the club to the sunlit uplands of the Premiership, where the real money can be made.

And once they are there, they spend even more money they can't afford in order to keep their noses in proximity to the trough. Hence the biggest losers - Coventry, Derby and Leicester - are the most recent visitors to the top table.

'Investing to win is a gamble,' says Christine Oughton of the Football Governance Research Centre, Birkbeck College. 'And it is a gamble that most clubs will lose.'

Which is what happened to Watford. Traditionally a well-run club, Elton John's favourites slipped from recording pre-tax profits of pounds 3.75 million in 2000 to a loss of pounds 5.4 million in 2001. The reason was simple. After a season in the Premiership, earning the big money available there, the club was relegated. The directors decided to embark on the high-risk strategy of investing for a swift return. An expensive manager - Gianluca Vialli - was recruited to bring in the players to implement the strategy.

It failed. Vialli was sacked, leaving the club saddled with the huge costs of the pricy squad he had assembled. The club was going nowhere, except possibly to a new home: in order to offset debts, the directors were obliged to sell their major asset, the Vicarage Road stadium.

'I have some sympathy with the guys running clubs,' says John Williams, professor of football studies at Leicester University, who has been following the demise of his local team with interest.

'They have to do what no business can afford to do, but which the structure of football pressures you into doing: go for broke, budgeting on the best-case scenario.'

Like Watford, Williams points out, Leicester always used to be reckoned one of the better-run football clubs. When Martin O'Neill was manager, they enjoyed a sustained run of success in the Premier League, winning the Worthington Cup, qualifying for Europe. The board then realised that, with a 21,000-capacity stadium at their home ground, Filbert Street, they were never going to generate enough income to take them on to the next level of challenging for the Champions League and a slice of the real money in the game. So a 36,000-seat stadium was sanctioned - the banks were happy to finance this in the belief that it was a well-founded, business proposition. No supporter at the time did not believe that the directors were right. And then O'Neill left for Celtic.

Even then, the club seemed to do the right thing. It employed as his replacement Peter Taylor, who had a reputation as one of the best young coaches in the land. Several newspapers lauded his appointment as typical Leicester: shrewd, forward-thinking. Taylor, though, proved a disaster. He squandered the money brought in by the sales of genuine talent like Emile Heskey and Neil Lennon on over-priced under-achievers. Leicester was relegated, saddled with a squad full of players on long, highly lucrative contracts.

'Now you could say that was rank bad management, entrusting your entire future to someone who proved not up to the job,' says Professor Williams. 'But nobody could predict he wouldn't be.'

Even then, the Leicester board thought it wasn't the end of the world.

They believe that in the worst case they could raise at least pounds 20 million in player sales. Unfortunately for them, relegation coincided with the collapse of the transfer market. Rather than an asset, Leicester's players looked a liability: overpaid and not good enough to keep their employer in the Premiership. From being a contender, Leicester had become, in Williams' words, 'a basket case', obliged to fund a huge new stadium and a big squad out of vastly reduced revenue. No wonder its shares were suspended from the stock exchange, having fallen from pounds 1.10 on flotation to 7p.

Leicester were squeezed by the twin forces of ambition and failure. Willie Carson lives with the nightmare strains those two pressures impose on football finance every day of the week.

'There's plenty of money round here,' he says of Swindon, a town that registered the lowest unemployment in the country at the last count. 'The trouble is, everyone's so bloody wealthy they all get in their cars at the weekend and drive to Arsenal, Chelsea, up the motorway to Liverpool and Manchester. And worse, take their kids with them.'

This is the conundrum that clubs like Swindon face. In order to attract a fickle local audience they have to be successful. But success can be bought only at a price that cannot be afforded.

'Swindon Town could survive if we charged pounds 50 to come and watch matches,' Carson says. 'But nobody is going to watch the football we are producing at the moment for that sort of money. We're a pounds 50-a-ticket business charging pounds 15, because otherwise no-one would come. As chairman, what would you do? I'm asking you that question. What the bloody hell do you do?'

There is a sense, though, that things are changing in boardrooms. In November, football league club chairmen meeting in Oxford voted to instal a salary cap. From now on, clubs in the league will be able to spend only 60% of turnover on wages. This will involve significant change in practice, since at the last count the average spend on wages was a telling 101% of turnover.

Moreover, researchers at the Birkbeck football centre have discovered that during the mad dash from promotion over the past three or four years of the football bubble, few clubs engaged the necessary internal control systems to carry out proper risk assessment. Astonishingly, almost nobody had worked out what would happen if the revenue stream dried up. It was simply assumed it never would: everyone just spent and hoped for the best.

Now, some 75% of chairmen polled by researchers said they would appreciate some help in formulating the necessary systems to budget for disaster.

David Gold already has them in place at Birmingham and believes his fellow promoted team, West Bromwich Albion, has done the same.

'If we don't learn from the past, we're in trouble,' he says. 'There's been 10 years of warning since the Premiership began of clubs promoted that have then subsequently found themselves in administration.' Birmingham, he says, will not be like that. 'We sat down when we were promoted to the Premiership and said: Look chaps, let's look at the worst-case scenario - relegation. What do we want from that? We want to be in excellent shape to re-challenge. We want Birmingham to be the model.'

Sensible talk, perhaps, but not the stuff to fire the fans' imagination.

Fans will always want glory. They demand it from their chairman in the form of that catch-all terrace euphemism: ambition.

'But do they?' Gold says. 'For years the fans have said: 'Where's your commitment, we've waited 125 years for glory, get your money out of your pocket.' But I think there's a change. I think this is a watershed. What has happened at clubs like Leicester has woken people up. Fans are now saying: 'Do your best chairman, but whatever you do don't put my club in administration. It's my club and I'm not having you putting it in jeopardy.' A fool is the person who puts his taxi money home on a last throw of the dice in the casino and loses the lot. At Birmingham we are not fools.'

Perhaps the most intriguing turnaround of a football club has been by the hosts of that football league salary-capping meeting, Oxford United. Three years ago, Oxford was one of Professor Williams' basket cases, with the usual symptoms - massive debt, a hopeless old ground, a costly squad that had just failed in its task to keep the club in the first division - overlaid with the legacy of former chairman Robert Maxwell's criminal accounting. In administration, it looked as though it was in terminal decline. Three years on, it has a new ground, is debt-free and is operating close to profit, breaking its own records for match receipts twice this season with home cup ties against Aston Villa and Carson's Swindon.

The only thing is, it is marooned mid-table in the third division; its squad of teenagers and journeymen may be much cheaper to run than any previous bunch of employees, but they are going nowhere. The club is living by the new rule of football governance: promotion, success and glory have all been sacrificed for the pragmatic pursuit of financial sustainability.

What has happened over the past year of fiscal shame is that ambition has come to be seen in football as the inevitable harbinger of disaster.

It sounds familiar: if Shakespeare were alive today, he would be getting his plots from the boardroom of your local league club.


Chelsea - Premiership profligates

Chairman Ken Bates Manager Claudio Ranieri Turnover pounds 67.2m Salaries pounds 50.2m Debt Chelsea Village plc owes pounds 99m Average gate 34,698 Nickname The Blues In the bank Chelsea is probably the most indebted club in the country, thanks to the liabilities of its parent company and the biggest wages bill in the Premiership - seven players earn more than pounds 2m a year. On the pitch They haven't won a big contest since the 2000 FA Cup, but The Blues could be in with a shot at the Premiership title this season.

Bradford City - Division One disaster area

Chairman Gordon Gibb Manager Nicky Law Turnover pounds 15.6m Salaries pounds 14.4m Debt pounds 36m (pre-administration) Average Gate 18,511 Nickname The Bantams In the bank Ex-chairman Geoffrey Richmond - who hired pounds 40,000-a-week striker Benito Carbone - put The Bantams in administration last year. New boss Gibb, 26, has bailed out the club and imposed an pounds 80,000 salary cap, but the outlook remains bleak. On the pitch City's sporting fortunes are as bad as its finances. Relegated last year, the club is having a dismal season and may go down again.

Oxford United - In the Third Division doldrums

Chairman Firoz Kassam Manager Ian Atkins Turnover pounds 2.4m Salaries pounds 2.1m Debt zero Average gate 5,148 Nickname The U's In the bank Flamboyant hotelier Kassam saved Oxford from bankruptcy three years ago by selling their old ground in a complex pounds 12m deal. Their most expensive player earns a modest pounds 75,000 and the club is in the black, despite losing pounds 119,000 in the ITV Digital fiasco. On the pitch Having dropped two divisions in as many years, The U's books are a lot healthier than its league position. Kassam flatly denies rumours that the club avoids promotion to keep costs down.

All figures quoted are for the 2000-01 season.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Is it favouritism to protect an employee no one likes?

The Dominic Cummings affair shows the dangers of double standards, but it’s also true that...

Masterclass: Communicating in a crisis

In this video, Moneypenny CEO Joanna Swash and Hill+Knowlton Strategies UK CEO Simon Whitehead discuss...

Remote working forever? No thanks

EKM's CEO Antony Chesworth has had no problems working from home, but he has no...

5 rules for work-at-home productivity

And how to focus when focusing feels impossible.

Scandal management lessons from Dominic Cummings

The PR industry offers its take on the PM’s svengali.

Why emails cause conflict

And what you can do about it.