22 Feb 2007
By David Rae
If you thought that the battles taking place on the hallowed turf of Twickenham these past few weeks have been bruising, take a moment to look across the road at the offices of the game’s governing body, the Rugby Football Union.
With revenues and profits plummeting in the last financial year; a club-versus-country debate reaching epic proportions; a chief executive in Francis Baron who seems constantly under fire; a rampant press which smells blood; and a badly performing national side, times have certainly been better. Finance director Nick Eastwood, however, seems unfazed. If truth be told, he seems positively serene.
Johnny Wilkinson’s match-winning return to the England starting line up no doubt helped, but even Wilkinson’s famous left boot cannot kick the RFU’s other myriad problems into touch. Chief among these, it appears, are the finances. In November, the RFU announced a 2006 pre-tax loss of £1.7m against revenues of £82.7m. Revenues were down £3.9m on 2005; pre-tax earnings down a massive £8.1m.
But, again, Eastwood is buoyant. “It’s very healthy,” he says. “We’re probably three times the size of any other union in the world. We have a balance sheet of £120m and it’s all going into a revenue-generating asset [the redevelopment of Twickenham’s south stand]. They’re very, very solid foundations.”
But there’s no doubt those foundations have been rocked over the past two or three years. Ever since England’s 2003 World Cup triumph, the national side has been in interminable decline. And on-field failure directly equates to off-field financial misery – if the team is performing badly, nobody wants to watch them and if nobody wants to watch England play, revenues collapse.
So, being finance director of the RFU doesn’t come without its difficulties – revenues are bunched around the few home internationals that England play and fortunes are, to a great degree, determined by how successful the team is in those games. It is also a very public organisation: everyone has an opinion on how England are performing and many have an opinion on the underlying financial situation.
“I think the single thing that’s most different about the RFU [from ordinary businesses] is that you’ve effectively got twin bottom lines, or you’ve got a twin set of objectives,” says Eastwood. “The primary objective is playing… and then you’ve got the twin effect which is an economic one, i.e. trying to make significant returns from the commercial operation so you can invest back in.”
The problem is that both are inextricably linked: in November last year, Francis Baron said that the poor on-field performances of England had directly cost the RFU £3.6m. Acknowledging this, the RFU had by that time introduced several cost-cutting measures – budgets were slashed and positions made redundant. And if the 2006 results were anything to go by, it’s a good job that they were. Eastwood “trimmed” all of the RFU’s main overhead areas and reduced budgets by 2.5%, with the combined result being a planned £4m saving. “It’s a one-off,” he says. “We’re just trying to trim it down.”
The reality is that the RFU, as with the vast majority of the country, got it badly wrong following the 2003 World Cup. Then, the RFU was riding a huge financial high. But following the dips in performance, the governing body failed to read the signs; rather than see the dips as a permanent slide, and adjust forecasts and budgets accordingly, they saw it as a temporary blip – a World Cup hangover, if you like. As a result, the RFU was being run on the assumption that England was among the top three teams in the world.
“Early in the year we said we can’t continue to base our financial planning on that assumption,” says Eastwood. “It just doesn’t stack up. So we really turned it on its head and said we’ll base our cost levels on a relatively mediocre [on-field] performance until we see evidence of a real upturn. We d idn’t feel like we could sit and wait around much longer on the basis that we’d return to winning ways.”
The situation highlights the delicate balance that the RFU must operate under and clearly demonstrates how reliant it is on the fortunes of the national team – an arbitrary asset, the success of which is difficult to predict.
Eastwood often refers to the RFU as being similar to a pharmaceutical company – huge amounts of investment may take years to come to fruition – if, indeed, it ever does. Investiture in grass roots rugby, which accounts for about a quarter of RFU costs (£14.1m in 2006), may have no payback. And if there is a return on that investment, it is unlikely to be realised for several years.
“The way we look at it is, if you look at mini rugby, which we invest in – not necessarily directly but through the clubs – those kids are either players of the future, they’re spectators of the future, they’re the television watchers of the future or they’re the people who end up in companies in marketing positions,” says Eastwood. “I think if we turn off that tap, the game will start to wither just like if a drugs company cut out its R&D budget; it would make massive profits in the short term, but would be bust after 10 years.”
Eastwood is particularly philosophical about the quest for profits – probably born out of his previous role as head of corporate services at Anita Roddick’s socially-responsible cosmetics company, The Body Shop. “Profit is a bit like breathing – you have to breathe to live but you don’t live to breathe,” he says. “The businesses which have been the most successful have always seen themselves as primarily there to satisfy the customers. And profit will come from that.”
The Union’s problem, however, comes not from a lack of profit but from a slide in revenues. It’s impossible to invest in grass roots rugby or, indeed, elite rugby if there’s no money to invest with, and a poorly performing national side equates to much less money.
The recognition that the RFU was over-reliant on the fortunes of the national team for its income was at the heart of the decision to diversify and redevelop the south stand of Twickenham – a £100m commitment, of which just £20m was financed through debt. “One of the key financial strategies that we’ve pursued over the past eight years or so is diversification… to try and broaden the revenue stream so, frankly, all our eggs aren’t in one basket. We’ve started to run a number of concerts – it’s minor in the scheme of things, but two or three concerts a year could be worth £1m. So it’s material,” says Eastwood.
More important are the hotel, conference centre and health club developments in the south stand. “When the hotel is fully up to speed, probably non-rugby revenues might be 20%,” he says. “So it’s not going to protect us if the whole pack of cards collapses, but certainly it’s starting to build some sort of solidarity and protection into the bottom end of the revenues.” This is much needed.
Eastwood has also employed the tactic of building up balance sheet reserves to guard against any financial eventuality and has put together a detailed financial strategy document to illustrate the Union’s financial situation more clearly. The RFU’s income can be mapped on a four-year cycle, which coincides with the sporting calendar and the number of home internationals played. “There are years where you only have four big games, and the next year you could have six. And every fourth year you have the Rugby World Cup,” he says, explaining that in World Cup year (of which 2007 is one) revenues take a dive because the three autumn internationals, normally hosted at Twickenham, will not be played, with millions of pounds worth of income lost as a result. “We’ve got to manage the business over the long term and we look at the financial window as a four-year cycle,” says Eastwood, which roughly equates to “up, down, up and then right down”.
In each four-year cycle, balance sheet reserves must be increased by £2.5m, with a minimum level of £7.5m being set – this should provide enough leeway for the loss of a major home international or one or two significant sponsorship deals.
For an organisation which is often criticised for being rather guarded and stuck in the past, Eastwood runs a modern and forward-looking finance team. “We’re fairly involved in the business and tend to look at numbers only as a means to an end,” he says. “FDs must master the numbers but, at the end of the day, the numbers only tell you certain things. I think the way most people make decisions, certainly how I make decisions, is you have a gut feel of what’s right.”
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