One of the fascinations of Formula 1, from a business strategy perspective, is how the same organisation suddenly shifts from being nowhere to a championship contender and equally how a championship contender suddenly ends up nowhere.

The obvious explanation for many is that it is simply all about money, the more money you have the better car you produce and the better driver you recruit so inevitably you will win more races. Not so. If it was all about money why didn’t Toyota’s huge investment in an F1 operation allow them to win a single race, even though today some of the top-teams are still making use of their wind tunnel in Cologne? If it was all about money then Renault would not have won their world championships in 2005 and 2006 and the team that was BAR and then Honda would surely have achieved more success on the track before they became Brawn in 2009?

Of course money is a key part of the equation. I remember former Jaguar Racing boss, Tony Purnell, describing Formula 1 as a ‘celebration of unfairness’, you can see his point, the richest teams have the most resource to get sponsors and performance on the track, and when they do well they get even more revenue from the distributed media royalties via Formula One Management, the more you have the more you can get. But that’s what makes it fascinating when the underdog does pull through. When Williams produced their FW07 car back in 1980 they were running on a shoestring and only could afford one week in the wind tunnel at Imperial College to try out Patrick Head’s ground-effect design, and yet they produced a better car than the all-dominant Lotus and went on to become world champions. When Dietrich Mateschitz bought Jaguar Racing for a ‘nominal sum’ (and all the debts as well – so in reality a bit more than £1) most could not see how he would turnaround a team that had showed potential as Stewart Grand Prix, but had become a corporate political football for various groups of Ford’s management to fight over and ultimately destroy, and yet today we all see them as the obvious favourites for the championship.

Today many argue that the technology is so tightly regulated and the focus so much on continuous improvement, rather than innovation, that we will not see the kind of turnarounds that we have seen in the past. I’m more optimistic, there is a huge wealth of engineering talent in F1 and it is not just about the superstars drawing the seven figure salaries, there’s a lot of creativity out there and maybe this year we could get a few surprises that show that at the end of the day performance in F1 isn’t just about money.

The Future of FOTA

December 7, 2011

The news that both Ferrari and Red Bull Racing are planning to withdraw from FOTA has led many to suggest that this is the end of the team’s association. Clearly it is better for the teams to act as one if they wish to get a bigger share of the FOM revenues, but as seems to always happen, self interest is the decider at the end of the day. They are all agreed that they want to reduce costs – doesn’t any organisation? The important question is therefore how do you do it? When you’ve got your own bespoke test track then a ban on testing means you can’t use one of your key assets to improve your performance, so you can see why Ferrari would feel that being in FOTA isn’t in their best interests, RBR are in a different situation where their business model is a very different one to the other teams, so, again it may make better sense for them to go their own way. Of course we also have HRT who were the first to leave FOTA back in January 2011. The other reason rumoured for the departure of Ferrari and Red Bull Racing is the issue of third (or fourth) cars where constructors are allowed to sell/loan their cars to other teams, a practice well used in the 1950 and 60s. Stirling Moss’s legendary victory for Lotus at Monaco in 1960 was not achieved for Lotus Racing, but for Rob Walker’s private team using a Lotus 18. This is an issue which FOTA has been divided on and it could be argued that building more cars would effectively reduce the costs of certain teams such as Ferrari and also for RBR, whose original concept was to provide cars for Scuderia Toro Rosso. It’s just a very different way of achieving the same objective.

However regardless of the reasons for Ferrari and RBR to leave the team’s association, does this spell the end of FOTA? As history has a habit of repeating itself, it is interesting to note that in the controversies around previous Concorde Agreements, there were three teams who were united in refusing to sign up to the fourth agreement which was due to run from 1997 to 2002. They were McLaren, Williams and Tyrrell. In many ways it was this stand that led to the financial demise of the Tyrrell organisation, a team who had dominated F1 in the late sixties/ early seventies. Eventually a revised, fifth, agreement was drawn up which included the three teams and was to run from 1998 to 2007. The current (sixth) agreement is to run until the end of 2012, and this is where the negotiations are focused. The point of history is that the three teams who resisted the fourth Concorde Agreement are very much at the heart of FOTA today, McLaren providing the chairman, Williams a committed participant and the team that was originally Tyrrell Racing has now morphed into Mercedes GP (sorry Mercedes AMG GP!), via spells as British American Racing and Honda, with senior management team Nick Fry and Ross Brawn very much committed to FOTA. So even if FOTA doesn’t represent all the F1 teams, it may represent a significantly powerful voice that can influence the terms of the seventh Concorde Agreement, if it holds together.

I did a slot on BBC Radio Oxford this morning commenting on the Brawn GP accounts for 2009. My esteemed colleague Dr Ruth Bender glanced over them and her assessment was ‘wow!’: they look fantastic whichever way you look at them, sales up from £170 to £234 million, profit up from £1.3 to £98.7m and costs down from £166.5 to £102.9m, an accountants dream! Of course there is a subtext to all of this with the support from Honda and FOTA, but it is undoubtedly a story of the success that is possible in F1 if things go your way, and you get a reasonable amount of luck. Who would have predicted the Mercedes buyout when the management team decided to take the risk of running 2009 on their own and looking for a long term backer in the middle of a recession?

I then saw the Autosport post on the financial results of the 2010 Australian Grand Prix and they certainly make an interesting contrast: a $46million loss, double the cost of the race in 2006. Of course you can argue (and many due) that the true revenue stream is impossible to define: how can you measure the impact on tourism and corporate relationships that the event generates? There are consultancies who get generate mutlipliers for you suggesting the economic impact of such events, but the true answer is we don’t really know, so it often comes down to considering the different ways you can create global exposure for your country or region and then making a judgement. Certainly when you compare it with the Olympics and World Cup Soccer you can argue that F1 is excellent value for money. The danger is of course that only those with deep pockets and global ambitions will host grand prix as they see it as a long term investment. For those who are part of the history and heritage of F1 if they simply start incurring ongoing losses, it becomes more and more difficult to justify. Add to that the power of the environmental lobby and it looks less and less sustainable unless F1 can really get its act together with clean technologies.

There was a time when the circuits were the ones that made most of the money in F1, they got the revenues from the spectators and the trackside advertising, if it was a well known race they could even sell the media rights. They paid the teams ‘start money’ for turning up and also some prize money if they did well, but that was it. Then along came FOCA led by Mr Ecclestone who, by bringing the teams together and getting them to work as one, shifted the balance of power from the circuits to the teams, in many ways he could be described as the most successful (and richest) shop steward of all time. Now the commercial rights holder: Mr Ecclestone’s FOG, controls all track side advertising and media and requires a hefty fee from the circuit for the privilege of holding a Grand Prix. The main revenue stream for the circuit is therefore the spectators and given we even had empty spaces in the grandstand at Monza that becomes a hard battle to win. With a new Concorde Agreement brewing from 2013 and the three parties of FIA, FOG and FOTA lining up for some tough negotiations, it is interesting that the circuits themselves have no collective voice in deciding on the distribution of the spoils.

Is Bernie Ecclestone the Nostradamus of Formula 1? Photo: Jenkins, Pasternak & West

Bernie Ecclestone seems to have a knack for predicting the future in F1 (although like other great forecasters of the future – he sometimes gets it very wrong – the British Grand Prix at Donnington, for example). He has been quoted in the Daily Telegraph as stating that he wouldn’t be surprised if ‘one or two’ of the current teams don’t make it till the end of the season. Given his prediction at last years’ Singapore Grand Prix that USF1 may not make it to the grid, Bernie’s views are normally very well informed and so are taken very seriously, given that he also made the point that he felt Lotus should remain this implies that the two teams to which he is referring are HRT and Virgin Racing. Given that HRT are having to destabilise their driver line-up in order to access sponsor’s cash, it certainly looks from the outside that the team are taking desperate measures to deal with desperate times, and therefore at some point the cash may run out for HRT. However, there does not seem to be an air of desperation coming from Virgin Racing, and Timo Glock, in particular, seems to be giving the Lotus drivers a run for their money in terms of establishing who is going to be the best of the new teams in 2010.

My preliminary analysis on race results so far is that the highest race position of the three new teams is Lotus having secured 13th place at the Austalian Grand Prix, still some way from scoring championship points and unlocking the additional funding that points scoring teams enjoy. If we score their relative results for each of the 11 races so far on the basis of 6 points for the first of the six new team cars having completed the race, 5 points for the second etc. Lotus have 56 points, Virgin 55 and HRT 51, so not much to chose between them on this basis. If we look at the starting grid positions, awarding points on the same basis, then Lotus have 115 points, Virgin 73 and HRT 43. So, at this point in the year we have a clear running order: Lotus, Virgin and HRT. Bernie appears to be suggesting that the financial longevity of the teams is in a similar order, with Lotus being financed for the long run by Tony Fernandes, Virgin Racing have a medium term business model which is dependent on the Virgin brand being used to attract new sponsors and partners and HRT appear to be currently underfinanced and are having to resort to race by race funding strategies to keep the cash flow positive. In the past Mr E has himself stepped in to support struggling teams such as Minardi, in his interview with the Telegraph he suggested that the new teams were already costing him (ie FOM) a lot of money, without much to show for it in terms of media interest and spectators, maybe he’s signalling that they need to be strengthening their balance sheets if they wish to stay in the game, or maybe he’s already privy to one or two exit strategies.

Red Bull Energy Station: Moving the Paddock towards the Paddock Club

Autosport’s Dieter Rencken is one of a number of business savy journalists working in the world of F1. He has posted an interesting story on the Autosport website which looks at the implications of Sauber’s recently launched ‘Club One’. One of the biggest success stories of the business side of F1 is the Paddock Club, normally located in a prime rooftop location at the Grand Prix, the Paddock Club is the venue where several thousand VIPs gather over the race weekend, these include the Presidents and Vice-Presidents of global companies who are wined and dined and talk business, and of course catch the odd moment of the race. A three day ticket to the Paddock Club for the recent Canadian Grand would cost over $5000. The Paddock Club is run by Allsport Management SA whose founder Paddy McNally started off as an Autosport journalist before moving into driver management, sponsorship consulting and then working for Bernie Ecclestone improving the trackside signage at races. He has become a millionaire many times over from the growth in corporate hospitality in F1.

But the world is now changing, in Rencken’s article he quotes a sponsorship agent that the Paddock Club is 60% down on the previous years levels. It also seems that many teams are currently struggling to generate longer term sponsorship contracts of three or five years. They need such deals to underpin their finances and ensure they can continue to recruit and invest. It is also interesting that the Paddock itself has changed. I noticed the change between doing the interviews for our book in 2004 and 2008. For the first edition of our book we went to Imola in 2004, here the team motorhomes were primarily for team personnel to get a bite to eat and have a break, we enjoyed great hospitality at the Minardi motorhome, but it was a relatively basic experience. In 2008 we were in the paddock again, this time to do interviews for the second edition in Barcelona, there was a major shift in the team facilities approach which had been prompted by the arrival of the Red Bull Energy Station. The Red Bull facility in the paddock is fantastic, particularly for those, like us, who were not team members or sponsors, it is open to anyone in the paddock to go and sit, watch the TV coverage enjoy high quality snacks and canapés and the odd glass or two of whatever, in there you find journalists, racing dads (David Coulthard’s father was in there back in 2008), and a whole range of people enjoying the ambience and facilities. The interesting point is that this marked a shift where the teams were now starting to open up their facilities for sponsors and others, moving the Paddock toward the Paddock Club without the price tag.

So the obvious development of these trends of less money from sponsors for the teams and less desire to spend the kind of money that the Paddock Club demands has led Peter Sauber to launch Sauber Club One. Rencken describes Club One as ‘timeshare for sponsors’. It means you can become part of the F1 club without committing to huge sums over many years, a kind of ‘pay as you go’ sponsorship which Minardi used to operate so effectively (and necessarily) with different sponsors at different races. The point is that with Club One sponsors can access the facilities at the Sauber motorhome to build relationships and make deals with other members, but without their name necessarily plastered all over the car, which can often create issues for companies, particularly when downsizing. So perhaps we are starting to see the start of different clubs being managed by the teams, whether or not this means the end of the Paddock Club remains to be seen, but it certainly heralds some innovative new business models so that teams can survive in the long term.

Joan Villadelprat is characterised in F1 terms as someone who knows his onions. In his journey from mechanic to team manager Joan has worked for McLaren, Ferrari, Tyrrell, Benetton and Prost. He is now hoping to make the final step on the ladder, first climbed by Ron Dennis, to become a team principal with his Spanish based organisation Epsilon Euskadi running an F1 team in the 2011 championship. In a recent interview with Autosprint, Joan expressed his concerns about the timing of the 13th team for 2011 – as an FIA announcement is not due until the end of August, by which time the new team will have precious little time to design and build their F1 car for 2011. What is also interesting is that Joan comments on the level of funding he feels is needed to run a competitive team.

Team operating budgets are an interesting topic,given that the teams do not generally publish such figures, or if they do heavily disguise them, estimates range wildly as to what these actually are. For example in 2009 the Black Book estimated Ferrari’s budget as USD404million and McLaren at USD377 million, with the smallest budget being Toro Ross at USD112million. In contrast Formula Money, estimated Ferrari at USD371million and McLaren at USD484million, with the smallest budget being Force India with USD120million. One thing that appears to be agreed, certainly among the teams themselves, is that these figures need to come down. In 1992 Williams employed 190 people, in 2008 it was 540, in 1992 they won the world championship, in 2008 they finished 8th.

When Virgin committed to Virgin Racing they did so when the FIA intention was to impose a budget cap of £40 million for all teams, excluding drivers salaries and a few other costs. This never happened and so Virgin decided to keep their own budget cap in place in the hope that other teams would have to come down to their level. The Formula One Teams Association (FOTA) agreed that costs should come down and that they should aim to be back to 1992 levels by the end of 2012, although how this would be measured and policed remained unclear.

Back in August 2009 Auto Motor und Sport published a piece claiming that the exact details of the cost cutting would remain a closely guarded secret, but that the number of staff travelling to Grand Prix was going to be capped at 45 people, which would have consequences for the drivers physio’s amongst others – it was interesting to see that at the start of 2010 the drivers were protesting about the absence of their physios on the grid (rather than at the Grand Prix) – so whether this was linked to some form of agreed reduction is open to question. The article also said that team expenditure, excluding driver and top management salaries and marketing costs, would not exceed Euro 100m in 2010 and Euro 50m in 2011. It is therefore interesting that in commenting on team budgets Joan suggested that if a team wanted to develop a competitive car then Euro 100m was needed to avoid the team ”..having to start over from zero every year.” This is bad news for Virgin as it implies that the 2011 budgets will not be down to Euro 50m as suggested by Auto Motor und Sport, although they may well be limited to Euro 100 million as suggested by Joan Villadelprat, who, whether or not he becomes a team principal, still knows an onion when he sees one.

Comparing Budget (horizontal axis) with Team Performance (vertical axis) in 2009

The latest edition of Autosport features some figures from FormulaMoney regarding how the budgets of the teams have been reducing. Estimates on the operating budgets of the teams for 2009 were listed. It is interesting to compare the budgets of the teams with their actual performance. Here we can see that, certainly for 2009, there is no clear relationship between the two. Certainly the teams with the smallest budgets – Toro Rosso, Force India and Williams did not perform particularly well, but similarly the biggest spenders: McLaren, Toyota and Ferrari did not have so much to show for their big budgets either. The chart is skewed by the performance of Brawn and Red Bull Racing who both had a very successful year. Of course the point to remember on Brawn is that, in their Honda guise, the year before they had a budget up there with the big operators. So although they had a small operating budget in 2009 they benefitted from a very big budget while developing their 2009 car in 2008.

The interesting thing about this chart is that money does not correlate with success in Formula 1, you could say that it’s not the size of the budget, it’s what you do with it that matters. In this regard Formula 1 is no different from any other organisation trying to get more out of less.