(The following was originally published at SB*Nation’s Pinstriped Bible)
The Yankees don’t do contract extensions. That policy is the consumer equivalent of buying airfare the day before you travel. It’s going to cost more when you book the flight, but you get to avoid an early commitment. When money is no object, the resultant flexibility is priceless. Since the advent of free agency, that has been the Yankees modus operandi. Until now.
According to Hal Steinbrenner, the Yankees are no longer shopping without a budget. The team’s new cost cutting approach, which is designed to trim its payroll beneath the luxury tax threshold in 2014, has already resulted in several free agent departures and forced the team to the sidelines on elite players like Josh Hamilton. In other words, it’s no longer business as usual in the Bronx. So, why then, in the same breath, did Steinbrenner reiterate the team’s aversion to negotiating contract extensions?
Cost certainty is a holy grail for all businesses, not just sports teams. However, in baseball, nothing leads more to cost uncertainty than free agency. So, in order to combat the rising salaries associated with free agents, teams use contract extensions to lock up players at an acceptable cost, thereby avoiding the inflated prices found on the open market. In exchange for cost certainty, teams are usually required to take a leap of faith with the players they choose to extend. Although there are some notable exceptions, such as Evan Longoria, the players who sign long-term extensions are often young standouts without a long track record. If things work out, the club will wind up with a favorable contract, but if the player fails to live up to his potential, the sunk cost is still significant enough to, well, sink the team. Clearly, contract extensions are not a panacea. They substitute one kind of risk for another, but represent a trade off that must be made by teams operating on a budget.
Until recently, the Yankees never seemed too concerned by the risks associated with free agency. Because the team could afford to carry older stars finishing up long-term deals, overpaying for past performance wasn’t a big concern; neither was rolling the dice on pricey veterans with skeletons in their professional closet. If a free agent turned out to be a bust, the Yankees could always spend more money to erase the mistake. Similarly, when it came to retaining free agents, it was almost as if the reserve clause still found refuge in the Bronx. Once a player put on pinstripes, he was pretty much staying put until the team no longer desired his services. However, that all changed this winter. By allowing Nick Swisher to depart for Cleveland, the Yankees said good bye to arguably the most productive free agent to leave the team because of their unwillingness to pay him.
Earlier in the week, the Texas Rangers signed 26-year old Matt Harrison to a five-year, $55 million deal, which looks like a bargain for a young lefty with an ERA+ of 134 over the past two seasons. How did the Rangers get such a steal? Harrison, who was two years removed from free agency, had an ERA+ of only 84 in his first three seasons. So, in exchange for security, Harrison sacrificed a bigger payday. Meanwhile, the Rangers committed to Harrison based on only two seasons, but did so at a much lower cost than what he would have commanded on the open market.
While the Rangers and Harrison were busy hammering out a long-term extension, the Yankees and Phil Hughes avoided arbitration by agreeing to a one-year deal worth approximately $7 million. What’s the connection between the two young hurlers? A quick glance at their careers reveals many similarities. Both are entering their age-27 season, have pitched over 600 innings to an ERA above 4.00, and can boast of an All Star appearance. From a sabermetric standpoint, each pitcher has a WAR around 9.0 and a nearly identical FIP. However, over the last two seasons, Harrison’s WAR is 8.2, while Hughes is only 2.6. And yet, despite this discrepancy, Hughes will be paid a premium, while Harrison’s services will come at a discount. What gives? The one key difference is service time.
The purpose of this comparison isn’t to suggest the Yankees should sign Hughes to an extension. It would have made more sense to buy low after his very poor 2011 campaign. Besides, now that the righty is only one year removed from free agency, his incentive for an extension is diminished. That’s exactly why the Rangers decided to strike a deal with Harrison now. It’s also why Hughes is headed for a big payday next winter, and the Yankees probably won’t be the team paying him.
If the Yankees truly intend to operate under a strict budget, they can no longer turn their noses up at the cost saving strategies used by other teams. Without an open wallet to compensate for mistakes, the franchise’s money men must now do a much better job of risk management, which includes contract extensions. Hughes, Robinson Cano (whose earlier contract extension is one of the exceptions to the Yankees’ rule, and evidence of the strategy’s potential benefits), Brett Gardner, and David Robertson are all players whom the Yankees should at least be considering as extension candidates. The team might even stand to benefit financially from offering an extension to Derek Jeter and, yes, under the right circumstances, even Alex Rodriguez. Careful planning is now a must and simply “not doing extensions” is no longer an option. Otherwise, the Bronx Bombers may find themselves unable to fly first class.