Don't trust the 'Process' — lessons of Sixers' analytics

The 21st century has quickly become the Analytics Age, revolutionizing industry after industry. What can we learn from industries that were early adopters, such as professional sports?

Over the past decade, the National Basketball Association has followed Major League Baseball (a la Moneyball) in being managed by an increasingly sophisticated set of measurements and algorithms, rather than traditional limited metrics and "gut instincts."

This has led to a focus on "efficient" basketball, both in selecting players, coaching systems and player self-development. It has led to teams emphasizing long range three-point shots and layups, as midrange jump shots have been proven to be the least efficient use of a possession.

In many respects, this has led to a golden age of the NBA. Though top players today rarely have the benefit of extensive college coaching, they work with sophisticated coaches in the offseason to continuously improve their skills, in contrast to past decades where a player's development mostly took place before they joined the NBA.

But the NBA analytics revolution has magnified one of the league's historical problems, namely "tanking"; losing enough games to raise the chances of receiving a top pick in the NBA Draft. The poster child for tanking this decade are the Philadelphia 76ers. In 2013, the Sixers hired Sam Hinkie, one of the top young analytically driven executives in the NBA, as general manager. Hinkie installed a radical analytics-driven strategy, following this chain of logic:

1. Competing for championships is the only measure of success. A team that wins half its games and makes the playoffs is not a moderate success, it is perpetuating mediocrity, since it will be rewarded with mediocre draft picks.

2. Since the NBA is dominated by a handful of superstars, the optimal strategy to win a title is to lose as many games as possible for several years, to draft high and assemble a "portfolio" of superstars.

In September 2017, the NBA commissioner proposed changes to the draft lottery system that would lessen the incentive for tanking, though the problem has by no means disappeared.

Many Philly fans continue to glorify the "Process" and claim the talented players acquired will lead to championships. But even if the strategy succeeds, it is a case study for how not to leverage analytics for long-term advantage. What are the lessons here on how to avoid a warped Analytics strategy?

1. Who is your customer? The obvious answer is "the people who buy your product." The reality is that the interests of powerful stakeholders are often prioritized over customers — Wall Street executives vs. their investors; doctors vs. their patients; or in this case, the team owner vs. the team's fans.

An owner's priorities may be very different from a fan's. A billionaire owner of a sports team doesn't have to manage for profitability — the bulk of revenue comes from national TV contracts. If your goal is the prestige of a championship ring, anything less has little value, and breaking up a mediocre team is logical. It's not surprising that Hinkie's strategy appealed to his team's owner, who made his money managing hedge funds, another business model that has high upside and low risk for the hedge fund partners (as opposed to their investors).

In contrast, sports fans want to watch their team win games, and hopefully make the playoffs. A plucky team that wins more games than it loses is fun to watch, and is valued by fans, like the Timberwolves in the Kevin Garnett era. After all, many NBA teams have never won a championship, and only a handful have won more than one or two in their history.

Tanking is unsustainable on a larger scale. If most teams followed the 76ers' logic and tanked, the national TV contract enabling their deliberately poor performance would be worth far less.

Analytics gives you powerful binoculars. There is every reason to use this technology competitively. But two powerful lessons of "The Process" are:

1. Any business model predicated on others observing the rules while you don't is not sustainable.

2. Don't confuse your personal interests with those of your actual customers.