Adding Value with 2020 UDFA's

The news has become official that the 2020 MLB Draft will be just 5 rounds. Undrafted free agents will be allowed to sign with any team of their choice, but only for a max signing bonus of $20,000. Not only is this a huge deal in the present for pro, college and high school players, I think it will only create a bigger gap between the best and worse teams.

While all college baseball players have been granted another year of eligibility, giving them the option of returning to school, that is an unrealistic/less than ideal option for many players for various reasons. I do think it's true that college rosters will be packed with talent next season, but I believe that point is getting overemphasized. What I think people are underestimating is how many players will be willing to sign now for $20,000 or less as free agents. Whether it's because players do not want to return to school, or because they do not want to miss out on the chance to play professional baseball, there will be legitimate prospects available to sign after round 5.

And the smart teams will take advantage of this prospect clearance sale.

Even with the likelihood that a large chunk of minor league teams will be abolished in the near-term, and subsequently less players will be needed, teams should highly consider signing any and all undrafted free agents (UDFA's) that they believe to be better than the current landscape of players in their system. This includes the small market teams who are financially strapped right now, especially them.

Financial Impact

This is no doubt the biggest hurdle that teams face. With basically the only income being TV revenue, all teams are figuring out where to cut back, and the owners are supposedly trying to get the players to reduce their salaries even further.

So how could anyone justify signing additional UDFA's? To start, they are only going for $20,000 a pop. In 2019, the slot value for the first pick in the 6th round was $301,600. In 2020, you can get 15 players for the price of 1.

It's tough to determine how many UDFA's teams currently plan on signing, but I say whatever that number--double it. Take on debt. Maybe that's an unpopular idea, but it is legal (up to 10x annual earnings) and I will outline why I believe it would make a lot of "cents" for teams who cannot afford to do so without raising money. If low market teams miss out on this opportunity to "buy low," the talent gap will only widen.

A draft study by Richard Karcher in 2017 found that in rounds 6-20 in drafts spanning from 1996 through 2011, 13% of players made it to the majors and 6% played for 3 years or more. So if a team were to go out and sign 20 players who their scouts had round 20 grades or higher than, they could expect 2.6 players to make it to the show, and 1.2 to build up at least 3 years of service time. Obviously you can't have .6 of a player, but you get the point.

I had a few different ideas in mind on the pool of players I should pull from to determine their value. I ended up taking all of the MLB players in 2019 who had 3.0-4.0 years of service time. I wanted to set a floor to show the added value for players drafted in rounds 6-20, rather than include players with more time than 4 years of service who could skew the data due to being more established. I removed three outliers for their 2019 WAR: Alex Bregman, Ketel Marte and Trevor Story.

Of the remaining 119 players from 2019 with service time between 3 and 4 years, the average WAR was .98. This falls in line with Kiley McDaniel's scouting scale, where he assigns a WAR of 1 to a 40-grade player. It would be difficult to imagine a player who lasts 3+ years in the MLB that is not producing at least 40-grade talent. Driveline has an article about prospect valuation and I used a lot of the same resources they did, where they found the net present value (NPV) of a 40-grade player to be worth $6,387,238, at $10.4 million per WAR. At a way more conservative per WAR figure of $7 million and using McDaniel's scale, I assigned a 40-grade player a WAR of 1, equivalent to $7 million.

Circling back to the 6% probability of a 6-20th rounder lasting 3+ years in the big leagues... A team that manages to sign an UDFA who ends up playing 3+ years in the MLB will recoup their investment from the entire UDFA class after just one season. How do I come to this conclusion? It's highly unlikely that the player in this year's UDFA class who makes it would be anything less than 40-grade talent, which like I stated in the previous paragraph, is worth a WAR of 1. MLB minimum salary is going to be close to $600,000 in 2023. The surplus value is what really matters here, which is the difference between what the player would be worth on the open market (think his WAR times market value of $/WAR) compared to what he is actually making. In this case, the surplus value would be $7 million-$600,000(2023 min. salary)=$6.4 million. The NPV of that with a discount rate of 10% is just over $4.8 million, which tells us that the value of a 1 WAR rookie on league minimum salary is worth $4.8 million as soon as the first five rounds of the draft conclude on June 10th (at the very least with the conservative $/WAR I used).

So imagine if a team were to theoretically spend the 2023 MLB minimum salary of $600,000 on 30 UDFA's this year. We could expect 3.9 to make the MLB, and 1.8 to last 3+ years. Two players making it would be worth a bare minimum of $9.6 million, and after June 10th they can be signed for $20,000 each. Imagine what that is worth is trade bait, too.

How Will UDFA's Decide What Team to Sign With?

Assuming a player were to have an offer on the table from all 30 teams for $20,000, how would he decide which one to choose? A few ways...

I believe a scout's legwork and time spent building a rapport with a player and their family is going to finally yield some dividends here. A player who is familiar with a certain scout may be more likely to sign with his employer for $20,000, as opposed to that same $20,000 from another who just came onto the scene.

What probably should be the biggest consideration for a player is how well that organization develops their players. Identifying those organizations may be difficult for some players and their families who may not be as in-touch with that aspect of the game. For the players who do their homework, they should be able to reel off a top 10 and bottom 10 list fairly easily.

Other factors could include the organizational depth chart, location, income tax, among others I'm sure I'm not thinking of.

More Considerations and Why This is Unlikely to Happen

With spring training getting cut short and a minimal amount of players being released, the influx of players entering the organization under this plan have nowhere to go. This is where an organization would have to make the difficult decision of releasing players who may not have gotten a real opportunity to fully prove themselves. Most of the prospects in a system are composed of players who are roster-fillers, they're only there so the top dogs can play games. A team that were to go out and sign twenty players with a top-20 round grade on them could essentially cut 20 non-prospects. This would create less deadweight in a system and lower the average age, which could actually end up being a problem in some ways (improper level placement of players, less players to cut in the future to pave way for new draftees/int'l signees). I would rather worry about too much talent and where to allocate it than carrying too much deadweight.

Something else to consider is that the financial figures I used are not necessarily tangible. What I mean is while we can say a player carries a surplus value of $4.8 million, an organization is not being handed that money. It is just representative of the money they are saving by not paying that to a player on the open market.

This plan would also only work if 1) teams evaluate amateurs well, 2) players are actually willing to sign for just $20,000, 3) if all teams adopted this strategy there wouldn't be enough players worth signing, and 4) owners willingly shovel out this money which could be a tough sell if MLB player salaries get reduced.

But maybe if they rack up the value buys right now, they won't have to ask the players to reduce their salaries the next time a global pandemic strikes because they'll already be swimming in surplus value.