Everyone has a friend who is consistently broke. They make the same amount of money the rest of us do, but blow it on new cars, nights out at the bar, and overpriced dinners. When it comes time to talk about mortgages, money for vacations, or retirement funds, they're astounded at how much more green their buddies have in the bank. NHL general managers are the same as our group of friends. Some spend lavishly while others count every penny and work to make each dollar as useful to their team as possible.
In most fan circles, salary cap efficiency is not well understood. The fundamental issue is that most people don't understand the idea of opportunity cost.
Opportunity cost is an economic theory that essentially comes down to choices. By choosing one option, the other options available cannot be chosen. Opportunity cost is the sacrifice made by not choosing the other option. For general managers, this means that a $5 million contract handed out to a new number one center is money he no longer has to spend on a defenseman. For our high-spending friend mentioned earlier, the money he spends on new cars is a choice to not save for a vacation or retirement.
When we look at player contracts, it's not enough to just ask if a player's performance is worth the money. We need to evaluate the other options a team could have explored with the same money. There is no single correct way to build an NHL team, but there are always options on the table for every trade or signing made.
One reason this discussion is so timely is that one of league's best opportunity cost practitioners has recently made a colossal shift in philosophy.
Nashville Predators GM David Poile has been one of the best cap managers in the NHL since the Lockout. According to Derek Zona's Marginal Cap Efficiency, the Predators were the most efficient team in the NHL with their cap money, with the sixth-most points while paying only the 29th highest salary figure. In Zona's rolling three-year windows, they finished first, first, sixth, and seventh, which is outstanding. Frankly, Poile was the Billy Beane of the NHL in the post-Lockout era, consistently building a playoff team on a shoestring budget.
Poile had a knack for turning goaltenders loose when they became expensive, using his draft picks extremely well, and finding efficient signings with undervalued forwards. However, since last year's trade deadline, he seems to have switched gears.
While many analysts have been focused on the deal given to Pekka Rinne (myself included), the first sign that Poile had changed priorities was when he acquired Mike Fisher at the trade deadline last year. The Predators picked up a 30-year-old forward averaging 6.0 GVT per season in exchange for a first round pick in the 2011 draft and what ended up being a third round pick in the 2012 draft. With that move, Poile essentially switched his focus from long-term competitiveness to short-term results. In and of itself, the deal isn't necessarily a bad one for a team on the cusp of a deep playoff run, but it definitely signifies a change in the way Poile is approaching his team.
However, the Fisher trade could have been dismissed as a small departure from plan until the Predators signed Rinne to the $7 million-per-year contract that could be doomed as a cap anchor. By eschewing the principles that made the Predators one of the most cap-efficient teams in the league since the Lockout, Poile and ownership have turned a very expensive and risky page.
The Rinne deal represents an excellent case to study opportunity cost. In this instance, the Predators chose to spend $7 million per year for a (damn good) goalie, but no longer can choose other options like trading him or using the cap money for other players.
Had the Predators merely tried to trade Rinne last summer, they likely could have wrestled a few high draft picks and/or prospects out of potential suitors. They would then have had to turn over the goaltending job to top prospect Anders Lindback.
What could the Predators have done with $7 million had they not spent it on Rinne?
One way we can evaluate that is to look at some of the better free agents signed last summer and the contract values they achieved.
Here are some of the top free agents in the summer of 2011 that may have had value to the Predators. The cap hits of their contracts are listed as well.
Brad Richards: $7.8 million
Tomas Vokoun: $1.5 million
Ilya Bryzgalov: $5.7 million
Tomas Fleischmann: $4.5 million
Scott Upshall: $3.5 million
Alex Tanguay: $3.5 million
Chris Higgins: $1.9 million
Josh Harding: $0.75 million
Marcel Goc: $1.7 million
Sean Bergenheim: $2.8 million
Kyle Wellwood: $0.7 million
The combination of a proven backup goalie like Harding along with a line of Wellwood, Bergenheim and Upshall would be a nice addition if the money wasn't put in Rinne's bank account. Had Nashville traded Rinne in the offseason, they might also be sitting on a top-10 draft pick and entire second line and a backup goalie with the upside to challenge Lindback for the starter's role. That's an option that Poile chose not to exercise.
In addition, we can take a look at the players who will be free agents this summer. By signing Rinne to $7 million per year, the Predators are making a choice not to pursue any of these potential free agents unless they lose one of Ryan Suter or Shea Weber. Rinne is as good as any of those available, but would the Predators rather have Parise with Lindback in net or Rinne in net with no new additions at forward? I'm not saying they are a guarantee to sign Parise or the other players I listed above, just that a choice was made, even if it was subconsciously.
One of the common narratives around the league is that the Rinne signing will help the Predators show Shea Weber and Ryan Suter that they're serious about building a contender. However, if the Predators succeed in signing both defensemen to market-level deals ($13 million for the two of them), they may be more cap-strapped than they've ever been. Making those inferences, the Predators would have $42 million tied up in 12 players. For a team that has spent only $50 million per year, the dream of the "Big Three" is either unrealistic or involves filling out a roster with replacement-level players.
It's not easy evaluating talent or exploring the other options available on the free agent or trade markets. Nothing is certain. However, the Predators had more options than to just sign Rinne to a big money deal and hope they can lock up their star defensemen as well. Much like I noted the Florida Panthers attempt to buy their way to respectability this summer was worth watching, so is the colossal shift in Nashville's cap management strategy.
Ryan Popilchak is an author of Hockey Prospectus.
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