COMMENTARY: Managing talent risk like a pro

Managing your talent risk like a pro

To my mind, there are few things better than the intersection of risk management and baseball, at least when I have a column to write.

So, with the start of another baseball season upon us, I was pleased last week to find such an intersection in two seemingly diverse articles. The common element is talent risk.

The first was a piece published on the Wharton School of the University of Pennsylvania's Knowledge@Wharton site under the headline “Why External Hires Get Paid More, and Perform Worse, than Internal Staff.”

The article examines the research of Wharton management professor Matthew Bidwell, whose work suggests reasons external hires are paid substantially more than employees promoted into the same job, even though they come with a significant risk of failure. Seeing a strong resume, some managers “get excited about playing "Let's Make a Deal,' even when it's hard to know what weaknesses the external hires bring with them,” Mr. Bidwell said in the article.

The second article at last week's intersection was from Major League Baseball's mlb.com website. Headlined “Early commitment a worthwhile risk if it pays off,” the piece examined the phenomenon of baseball teams who sign talented young players to long-term contracts early in their careers. By signing those players before they become eligible for salary arbitration, the teams take the risk that they'll produce as hoped, but look to retain their services as they move into their most productive years.

The 1990s Cleveland Indians, who used such an approach with players like a young Jim Thome, among others, are an example of that strategy.

As in other businesses, in baseball it's probably easy for some managers to succumb to the desire to build around the flashy free agent, despite the cost and the potential that the outsider might fail to produce at historic levels, won't mesh with the team's style of play, or might disrupt clubhouse chemistry.

Unlike most other lines of business, though, one thing baseball has every year is an off season and a subsequent opening day. And, on opening day, hope springs eternal.

This year, opening day at Wrigley Field brings with it a host of changes in the Chicago Cubs organization, not least of which is a change from the organizational philosophy of recent years with the team apparently looking more at a homegrown-talent approach and less at crossed fingers and big-money free agent signings. The result is that this year is likely to be a struggle, but with hope for consistent success going forward.

So, come Thursday afternoon, my wife, Kathy, and I will be in our customary opening day spot—Section 430, Row 3, Seats 5 and 6 at Wrigley Field—our opening day hopes requiring a bit more of a long-term view this year, as well as faith that those plotting the organization's strategy are taking the right approach to managing talent risk.