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Ken Holland and ELC Asset Management: Creating Rather than Exploiting Market Inefficiencies

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Rick Osentoski-USA TODAY Sports

Here we are again. On Sunday, it was reported that the Detroit Red Wings had lost forward Martin Frk on waivers to the Carolina Hurricanes. Bob McKenzie of TSN reported that as many as three teams may have put in a claim for the 23-year-old forward. This follows the loss of Andrej Nestrasil on waivers, and Calle Jarnkrok, Mattias Backman, and Mattias Janmark in various trades, all within the last three seasons. The Red Wings have long prided themselves on not rushing their prospects. It's the "Red Wings Way." However, this practice has cost them several prospects over the last few years and has generated a level of frustration among the fanbase not seen since the mid-1980's. It's time to set the record straight - the "Red Wings Way" is dismantling their ability to rebuild on the fly.

Maximizing Market Efficiencies

I'll start with the disclaimer that this could be an 8,000 word doctoral thesis with a much heavier statistical analysis. For your sake (and mine), this is not going to be that although the general premise still holds true.

Hockey's a business. Within this business, there are market efficiencies and inefficiencies. If you're able to find a player that can do what your current player can but for cheaper, take advantage of that. The area where this is most pronounced is with using players who are on entry-level contracts (ELC's). Due to the NHL's collective bargaining agreement (CBA), the first contract a player signs after they are drafted has a maximum salary and length. The maximum allowable cap hit (not including performance bonuses) is $925,000 and the maximum length is age dependent but is at most 3 years. Connor McDavid makes $925,000 and he will for the 2016-2017 and 2017-2018 season. The Edmonton Oilers are getting ridiculous value for that contract.

However, the ability to take advantage of ELC's extends far beyond just superstar players. The real value comes in maximizing use of ELC's on a team's 3rd and 4th lines. Take the Detroit Red Wings projected 3rd and 4th lines for opening night. (Note: I am not advocating that the switch happens exactly like this, just demonstrating a theoretical example.)

Left Wing Center Right Wing
Riley Sheahan Darren Helm Thomas Vanek
Steve Ott Luke Glendening Drew Miller

The combined cap hit for that group? Just under $11 million, or 15% of the salary cap. Now consider the following bottom-six

Left Wing Center Right Wing
Evgeny Svechnikov Andreas Athanasiou Anthony Mantha
Tyler Bertuzzi Tomas Nosek Mitch Callahan

The combined cap hit for that group? $4.26 million, or 5.8% of the salary cap. Now you have to ask yourself...how different is the level of production between those two units? Is it worth justifying an extra 9.2% of salary cap space? These are areas where you have to weigh the benefit of spending the extra money against the perceived difference in performance between the two groups. Is the production between Group A and Group B so vast that it's worth an extra $6.71 million in cap hits this season? Let's see how the average forward's 5v5 point production changes as they age.

The benefit of using these players on ELC's extends beyond just their low cap hits. Work over the last decade has demonstrated that NHL forwards peak between the age of 25 and 26 and they are able to retain roughly 90% of that production through their age-29 season.

Eric Tulsky "How NHL scoring rates change with age"

Eric Tulsky "How NHL scoring rates change with age"

Given this information, let's re-evaluate those two groups again.

Left Wing Center Right Wing
Riley Sheahan Darren Helm Thomas Vanek
Steve Ott Luke Glendening Drew Miller

The mean age of that group? 30.6 years old.

Left Wing Center Right Wing
Evgeny Svechnikov Andreas Athanasiou Anthony Mantha
Tyler Bertuzzi Tomas Nosek Mitch Callahan

The mean age of this group? 22.5 years old. Which begs the question - if Group B is able to match the performance of Group A AND is likely still improving...why aren't we funding this?

Of course, there's an associated risk with having a number of players on ELC's. First, if an 18- or 19-year-old plays fewer than 10 games in their first season, their contract is eligible to be slid to the next season. What this means is that the contract is effectively "extended" by a year. For 18-year-old players, they can have their ELC slid a second time! That means a team could essentially have that player on the ELC for five years so long as they don't play 10 or more games in each of the first or second year of that deal. Playing these players takes away the ability to slide the contract.

The second risk is that if a player plays well during their ELC, they drive up the value of their next contract. For example, because Tomas Tatar had limited playing time on his ELC, the Wings were able to sign him to a 2-year "bridge" deal at $2.75 million per season. However, if you're like the 2009-2010 Chicago Blackhawks who had Jonathan Toews, Patrick Kane, Antti Niemi, Kris Versteeg, and Niklas Hjalmarsson all on ELC's, you run into a problem when you have to pay all of them. Granted, this is a good problem to have because it likely means your team was successful as they benefitted from great play at exceptional value. The Hawks having the problem of which guys you have to painfully cut and trade away is a better problem to have than which fringe players you have to lose for nothing before you have an idea of how close to the fringe they really ought to be.

Ultimately, the Red Wings have written off the impact that young players can have for a number of years. It did not hurt the Wings when they had guys such as Nicklas Lidstrom and Pavel Datsyuk who were able to defy age and be effective players into their late-30's. Unfortunately, the Wings are not blessed with that right now. If you're expecting guys like Henrik Zetterberg, Thomas Vanek, Steve Ott, or Drew Miller to rebound in a big way, I'd challenge you to reconsider. If you tell me that "half of those guys aren't here to score", that's an entirely separate and equally perplexing issue that should be tackled in a separate piece.

Prospects are exceptionally valuable while on their ELC's given their likelihood of increasing performance as they approach that peak forward scoring age of 25-26. Additionally, and perhaps the part of this that's been most perplexing, a team has an opportunity to evaluate how a prospect plays against NHL competition over a low-cost contract with no real risk. The player doesn't play well? Send them to the minors if they are still eligible. But if the player plays well? Well you've just found yourself a player who gives you great value on that contract. We are already seeing teams with sound analytics input following this path. The Carolina Hurricanes have 8 players on ELC's on their current 24-man roster. They have the lowest cap hit in the NHL at $57.3 million and I'll remind you that they finished a mere seven points behind the Wings last season. Who's in a better position both this year and each of the next five years?

Ultimately, the loss of prospects on ELC's who have never played a single NHL game is mind-boggling and inexcusable. You can say that "oh they weren't better than some of our other prospects", but that's not the point. The point is that for even a single season, a prospect on an ELC saves your team money often without any sacrifice in performance. The Red Wings have fallen behind the curve when it comes to taking advantage of this and it will eventually cost them as their older players follow the normal aging curve.