Mercedes financial numbers show 'painful' cost cap a boon to bottom line

The Mercedes F1 team has released its financial numbers for 2021, its first report under the sports' new cost cap regime.

Adapting to F1's spending limit was a "painful and difficult" process, according to co-team owner Toto Wolff, but the financial constraint also produced a remarkable boost to the Mercedes outfit's bottom line.

The reigning world championship outfit's revenue for 2021, originating mainly from sponsorship and prize money, grew from £355.3m to £383.3m, while spending - cost cap oblige - fell from £324.9m in 2020 to £297.4m, or by £27.4m.

Mercedes therefore clocked in with a £68.8m year-over-year profit, compared to £13m in 2020, a season marked heavily it must be said by the impact on F1 of the Covid pandemic.

Mercedes achieved its results while decreasing its overall headcount from 1063 in 2020 to 1004 last year. But all of the team's departments were not equal when it came to managing human resources.

For instance, the number of people employed in design and engineering - an area covered by the cost cap - fell from 906 to 831. But staff employed in administration, which is not restricted by the cap, grew from 157 to 173 in 2021.

The latter included the team's human resources, legal and accounting departments where the headcount increase was necessary to deal with the complex processes of managing and monitoring the team's budget cap.

Wolff offered an insight on the difficulties of scaling Mercedes' F1 enterprise to meet the complicated constraints imposed by the sport's cost cap.

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"What has happened in F1 is that by setting a spending limit on the largest part of the cost centres in the team, we had to restructure and change our processes, make people redundant, unfortunately also, to fit into the cost cap," Wolff told Motorsport.com.

"Which is particularly painful if you hear the discussions of teams not having done that.

"As an organisation that was spending on engineering, in order to achieve the best performance, and suddenly needing a structure that needs to analyse from the moment of purchase throughout the production, the logistics and then deployment on the car, and setting priorities of what you give to the car, that's super painful and difficult.

"The advantage is that, like the US [sports] franchises, we've set the spending limit, we've excluded support areas.

"So the support areas still needed to grow vastly in order to support the organisation with the cost cap. But the bottom line, if you've been successful on track with the TV money, sponsorship is basically going directly into your margins. And that has happened in the US.

"The bottom line pays for itself, because we can't spend more than that. We grow costs in the support areas.

"The cost cap has been restructuring-wise such a painful exercise, but financially it has changed the business model from to a lightly profitable company, or just profitable company, into a business with a 25% EBIT [earnings before interest and tax] margin."

Boosting the headcount in the team's administration departments hasn't slowed down for 2022 said Wolff.

"This is pre-empting '22 accounts, but we have 30 people more in finance, we have eight people more in legal, we have 50 heads more in marketing, communication, sponsorship, all of that, to administer the cost cap."

One very important effect of the cost cap has been the necessity for teams to optimize the productivity of those working in Mercedes' engineering and design departments.

Wolff offered a striking example of how an entirely new procedure was put in place to handle hirings. To maintain productivity, an engineer can no longer devote time to interviewing a potential job candidate. That process is now handled by HR.

"Imagine the hiring process. An engineer in the past would hire a candidate or would interview candidates. First of all, you can't afford it [in terms of using the engineer's time]," Wolff explained.

"But the other thing is, we don't know if we can afford it financially. So he needs to link back with HR, and HR needs to link back with finance, and say we need another head that's costing us £45,000 a year. Can we afford it?"

To dampen the impact on the company's employees of reducing headcount, Mercedes channeled many of its F1 personnel into non-racing projects.

"In applied science, we have America's Cup, and we have various other projects on performance engineering," Wolff added.

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