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Volume 27, Issue 4

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Monday Morning Quarterback Review of the Indianapolis Colts and Risk Management

Written by  Nick Ferraro Wednesday, 09 November 2011 14:12

While a debate regarding who is the best quarterback in the National Football League would certainly include multiple viewpoints, there is little disagreement among those close to the sport about which team can best do without its top passer. Over the last several years it has become generally accepted that the team least capable of succeeding without its starting quarterback is the Indianapolis Colts. The Indianapolis Colts have enjoyed tremendous success since they drafted quarterback Peyton Manning first overall in the 1998 NFL draft. Manning started at quarterback immediately, and the team has failed to qualify for the NFL playoffs only once since his rookie year, averaging 11.5 wins per season since 1998. Over that period Manning has amassed four Most Valuable Player awards, and he has led the Colts to two Super Bowl appearances, winning against the Chicago Bears in 2007. Having come to expect such a high-level of play, the 2011 version of Colts must be difficult to bear for fans. Manning has been sidelined all year due to off-season surgery. In his absence the team has posted a record of 0-8, while being outscored by an average of 32-15.

So what went wrong? The Colts, like many organizations both in and outside professional sports, were not adequately measuring and thus mitigating risk. Risk is calculated by multiplying the probability that an event may occur by the expected loss that would result (probability x expected loss). The Colts have had very little experience without Manning in the lineup. He had started every game over the course of his career, and was a threat to break the record set by Brett Favre for most consecutive games played. On the other hand, both experts and casual fans alike were aware of the impact that Manning’s absence would have on the team and the fact that he had off-season surgery in May with aggressive estimates for recovery at two to three months. In addition, it can be argued that with Manning now 35 years-old the team should have been planning for a successor regardless of his health. Since the expected loss was clearly extreme, the Colts likely made their mistake in judging the probability of Manning missing significant time. In calculating probability the team needed to factor Manning’s consecutive games played streak along with his surgery and the fact that he is at an advanced age for a professional football player.

Having miscalculated the risk that their All-Pro starting quarterback would miss significant time, the Colts failed to adequately mitigate their risk. An easy way to remember mitigation options is to categorize them into the Four T’s: Terminate, Transfer, Treat, and Tolerate. Terminating risk involves not taking a specific course of action or the elimination of the activity causing the risk. For most organizations this might mean passing on an investment or expansion opportunity or ceasing to operate in an area that is prone to a natural disaster like a flood. In the Colts' case termination was not an option. The team couldn’t refuse to play until Manning returned, nor could they simply stop the regular season from beginning on the scheduled date.

The Colts were also largely unable to transfer their risk. Transferring risk involves shifting the responsibility for loss away to a third party. A transfer of risk can be executed through arranging for insurance through an insurance provider or through other types of contractual agreements. The nature of professional sports does not allow for the transfer of risk related to player availability. Teams carry multiple players at each position. The expectation is that an injured player will be replaced by another player from the team’s bench. The Colts did have the ability to transfer their risk of financial loss related to Peyton Manning’s health. Teams will often take out insurance on highly-paid players to cover losses in the event that the player is injured and unable to play out the term of their contract. The Colts have a large investment in Peyton Manning and would be liable to pay the guaranteed portion of his salary regardless of whether he ever plays another game for the team. Teams may also include injury payout terms in player contracts. These clauses define the amount to be paid to player in the event of an injury. Injury payments are usually much lower than the value of the contract providing significant financial protection for the organization.

Treating the risk that Peyton Manning would not be able to play was the Colts best option. The Colts allowed several opportunities to treating their risk slip away. Their first chance was through the NFL Draft. The draft allows NFL teams to select new players from college or elsewhere while providing the team with exclusive negotiating rights to the player. The Colts had five selections in the 2011 draft and did not use any of their picks to select a quarterback. How much the team knew about Manning’s health at the time of the draft is unknown, and the draft took place in April ahead of Manning’s first surgery in May. Regardless of the timing of the draft and the surgery, the Colts should have been planning for a successor to Manning by drafting a quarterback in this or a previous year’s draft. None of the players would have been a true replacement for Manning, but the team would have been in a better position to compete in 2011 had they selected a young quarterback.

The Colts had an additional opportunity to treat their risk during the NFL free agent signing period. Free agents are players who have played out their contracts and are free to negotiate with any team. In the Colts' defense, there are complications with signing free agents. Depending on their current status, signing a player may require that future draft picks be provided to the player’s former team as compensation. In addition, all player contracts have implications with regard to the league’s salary cap. Better players command higher salaries requiring teams to use more of their cap space. The Colts were mostly inactive during free agency. The free-agent signing period began on July 29th. On August 25th the Colts signed Kerry Collins. Collins was signed too late to participate in a full training camp and had just over two weeks to prepare for the regular season. Collins had been a very good player in the league, but he was 38 years-old when the season started, was headed for retirement, and had not played a full NFL season since 2008. Despite the challenges, Collins entered the regular season as the starter. He has since been injured and has not played since the third week of the season.

Signing Collins was a desperate attempt to address the risk that the Colts had failed to accurately assess and treat prior to the start of the 2011 NFL season. Properly treating risk involves taking definitive steps to minimize the likelihood and/or impact of the risk. For most organizations this can mean reengineering the processes or activities where risk is identified or leveraging the organization against financial losses. Regardless of the steps taken to treat the risk, a plan for monitoring and measuring risk needs to be established as conditions will change impacting the likelihood and impact of risks and thus changing the implications for the organization.

In some cases the options for treating risk are more costly to implement than the potential impact of the risk itself. The impact of a risk may also be deemed to be at an acceptable level, while in certain circumstances a risk may be considered unavoidable. In these cases risk will be tolerated. For the Colts tolerating the risk of Peyton Manning’s injury is all that remains. Having miscalculated their risk, failing to successfully treat it, and being left without the option to transfer or terminate it, the Colts are left with Curtis Painter as their starting quarterback. Painter was a sixth-round draft pick in 2009. Prior to this season, he had only thrown 28 passes in the NFL. The Colts management may publicly state that they have confidence in Painter; however, the late move to sign and consequently name Kerry Collins as their starter indicates otherwise. So it would seem that for 2011 both Colts fans and football fans in general are left to tolerate their performance on the field. We hope that your organization doesn’t fall into a similar situation.

Nick Ferraro is a graduate of Colorado State University. He worked with Risk Management Information Systems (RMIS) for the Chubb Group of Insurance Companies and was a senior consultant for Strohl Systems and SunGard Availability Services. He has provided consulting services for clients across the United States, Canada, and Europe. Farraro is currently a consulting manager for Fairchild Consulting, a full-service business continuity consulting firm. For more information visit www.fairchildconsult.com or call (484) 433-9441.