Cash crisis: NZR must justify spending

External help such as consultants, professional services not cheap

In late January, the revealed New Zealand Rugby’s accounts were under duress, with less money coming in and more going out than had been forecast. That revenue growth was underwhelming didn’t come as a surprise. The idea Silver Lake, the US fund manager brought on as an equity partner in 2022, was going to discover new and innovative ways to make money never appealed as likely.

Like all private equity investors in sport, Silver Lake essentially offers one trick — which is to try to up the value of existing broadcast deals.

But the news that expenditure was on the rise and the costs of running the business were proving difficult to contain came as news to provincial unions and other stakeholders.

Keeping a tight handle on costs had been a hallmark of former chief executive Steve Tew during 2008-19.

It wouldn’t be fair to characterise his tenure as austere but spending was focused on maximising core investments, while peripheral spending was tightly managed.

Whether this is still happening seems worthy of further investigation, as NZR, which posted a $47 million loss last year, prepares to reveal the accounts for 2023 in a couple of weeks.

More specifically, it needs to be asked how much NZR is paying for external help such as consultants, professional services, or new bodies and their respective executive teams and directors. Does there need to be greater scrutiny on how all these additional services are impacting senior NZR staff workloads?

Spoiler alert — any investigation into this is going to discover NZR now has 25 board directors on the payroll and is paying, directly or in partnership with other national unions, for four chief executives and four executive teams.

The total annual cost to NZR in salaries and fees for this is likely to be between $10m and $12m.

It has also spent an estimated $10m in the past four years on external professional services — be it on Silver Lake transaction costs or specific reviews.

In the past four years, NZR has become like a wedding cake, with layer upon layer of new entities added, and yet there remains a strong appetite to outsource work to external experts and consultants.

Perhaps the beginning of this process of paying for external help began in 2019, when the world’s biggest consultancy firm, McKinsey, was commissioned to review how the professional landscape could be restructured to save money and improve efficiency.

A comprehensive report identified ways NZR could be $46m a year better off through a combination of cutting costs and advancing revenue projects.

It is believed NZR paid $1m for the report — fair value given its thoroughness and the potential savings identified — but it was effectively put in cold storage, as it was filed in March 2020, just days before the country shut down due to the Covid pandemic.

In 2021, NZR paid PWC to conduct an independent review of the proposed equity deal with Silver Lake. It is estimated that work cost $250,000, and then another $250,000 was again paid to PWC a year later to conduct a second report when the Silver Lake deal was revised.

Both reports recommended doing a deal, although they were significantly different, and the first, in the opinion of most financial analysts, would have seen NZR teetering on the brink of insolvency had it been approved.

In the second PWC report, it was also revealed $8m would be paid out in Silver Lake transaction fees — $4.5m to investment bank Jefferies, with the rest presumably going on legal and other costs, with unidentified NZR staff receiving annual bonuses of between 9 and 12 per cent of their salaries.

As part of the Silver Lake transaction, of the initial $200m invested, $38m was ring-fenced to set up New Zealand Rugby Commercial (NZRC) — the company created to house and manage the game’s revenue-generating assets such as broadcast and sponsorship contracts.

NZRC has a chief executive — Craig Fenton — and five other executive staff, plus a nine-strong board.

The total costs of the executive salaries and directors’ fees is not known, but to help estimate, it’s fair to compare with the published costs of running NZR’s executive and board.

The 2022 NZR annual report shows $881,000 was paid in directors’ fees, with the 10-strong executive team paid a total of $4.8m.

In early 2023, an external review — estimated to cost $300,000 — was commissioned into NZR’s governance structure.

The money was not excessive and the project was vital. But eight months on since the four-strong panel led by experienced director David Pilkington produced its findings, NZR and the provincial unions are still trying to come up with their own compromised recommendations, somewhat rendering the expenditure worthless.

Next week, a new Super Rugby chief executive will be unveiled and asked to lead a newly-formed commission that has seven directors.

This commission, despite having a chief executive and board, will have no responsibility for managing Super Rugby Pacific’s “major matters” — which include the number of teams, broadcast negotiations and initiatives such as player drafts. Nor does this

body handle the logistics of Super Rugby — as this is done by Sanzaar — to whom NZR pays an annual fee so it can pay its chief executive — and effectively the commission is there to turbocharge marketing.

NZR has begun a review into men’s competitions and high-performance pathways.

It is understood this has also been outsourced, with the reviewer asked to report back to a steering group made up almost entirely of NZR staff.

The terms of reference for the review identify that the McKinsey report will be heavily relied on to help form the findings.

And last month, the provincial unions announced they had independently secured a sponsorship with Gallagher Insurance.

Adding it all up, it seems that in the past four years, a new company has been formed to manage the commercial side of the game and handle the money.

Throw in that Silver Lake is due a $10.5m interest payment this year and that $8m has been given to Rugby Australia in lieu of a broadcast sharing agreement, and there is no secret about why costs have been hard to contain.

But there is a need for someone to justify how all this additional expenditure is helping grow and develop the game.