Shipping must focus on the value of investment rather than cost
We are a long way from fully understanding the total cost of vessel ownership and operation. However, maritime leaders are beginning to place greater emphasis on ‘total’ and shift the focus away from ‘cost’ and towards ‘value’, a Lloyd’s List Round table has heard.
Shipping executives gathered in London to debate the increased attention on quality of service, the need to drill down into the impact of indirect expenses, and the new opportunities to be gained from data analysis. While it was agreed the industry remains fragmented with several stakeholders stressing different cost elements, the executives concluded that much could be achieved across the industry if leaders recognised the benefit of sharing data more widely.
One of the major maritime cost drivers is crewing, which accounts for between 40% and 45% of expense. This is despite crew wages experiencing little change in recent years. Crew competence is far from uniform across maritime, and it’s not possible to provide a clear picture of skills and experiences just from cost totals. Moreover, competence impacts on investment in technology on board ship: better-trained crews gain more benefit from additional investment in ship-shore communications, making operations more efficient and the ship more employable.
This is the case whether vessels are run by owners’ in-house management teams or by third-party managers. Ship management companies are keen to understand the real cost of operation because not only do they have to compete against other managers – with management fees one of many bargaining tools – they are also keen to attract client ship owners to subcontract their vessels to third-party management. Asian managers have been particularly successful in winning business through lower fees and agreeing budgets that higher-priced managers, especially in Europe, cannot match.
European managers need to control costs at a level that remains profitable while justifying additional investment that might not see an immediate return. Some client owners recognise the benefits this extra expense will make in the medium term, however other owners are more focused on dollars and cents. For them, cost is the driver. This leaves some managers with no option other than to decline the management contract.
Technology is a cost that pays dividends over an extended period, aiding the crew in running their ship and helping a shore-side team in reducing expense. Even then, some cost-focused owners regard investment in next-generation technology as unnecessary. And there’s the question of categorising cost. A topical example might be: is investment in exhaust abatement technology an operational expense when there’s both a capital cost and an ongoing cost?
This is a key consideration as shipping moves closer to IMO 2020. There have already been regulatory changes, with cost involved, in ship design criteria under NOx Tier II and Tier III standards and EEDI (Energy Efficiency Design Index) requirements. Now the issue of compliance with the global 0.5% sulphur limit is focusing attention on the cost of compliant fuels, the cost of scrubber technology, the cost of training crews to handle compatibility issues, the cost of being fined for failing to comply, and the cost of going off-hire to flush out tanks, lines, and pumps.
While costs associated with not investing wisely aren’t always obvious, the benefits associated with investing strategically are often misunderstood. The exponential growth of satellite communications has given ships the opportunity to connect to shore quickly and cheaply. Getting data into the cloud would enable faster feedback where, for example, technology such as ExxonMobil’s Mobil Serv℠ Cylinder Condition Monitoring service measures sulphur content in vessel fuel. Experience shows that data analysis works best where transparency and partnership allow several stakeholders to benefit from these results.
“Total cost of operation has less to do with counting the dollars saved and more to do with quantifying value for the stakeholders”
The view that understanding total cost of operation has less to do with counting the dollars saved and more to do with quantifying value for the stakeholders involved received support from around the table. Some ship owners regard their vessel as an asset to be traded, with minimal cost incurred in daily running, but most owners – and most managers – recognise that the cheapest solution is not necessarily the best. Quality and value should be the driver of investment decisions, not cost. However, quantifying an unseen value such as a reduced risk of breakdowns or less time off-hire – let alone passing on the expense of investment to the client – is extremely challenging. It has to be done ship by ship and client by client.
“Quantifying an unseen value such as a reduced risk of breakdowns or less time off-hire – let alone passing on the expense of investment to the client – is extremely challenging”
For third-party managers, the answer lies in building partnerships with owners and charterers, fuel suppliers and equipment manufacturers. Winning management contracts by offering a low fee keeps a cost-focused owner happy but rarely satisfies a quality owner looking for additional support. In the procurement sector, suppliers and buyers are moving away from a purely transactional relationship in favour of identifying solutions that benefit both trusted parties.
The true cost of ownership and operation is hard to pin down as few stakeholders see the full picture. Often the immediate costs, such as the number of dollars spent on the crew, are quantifiable whereas the hidden benefits – including the effort the crew has to put in to deal with the cheaper fuels requested by an owner – are lost. The emphasis should be on what’s right for the ship: operational longevity, regulatory compliance, quality of service, care for the client. These elements do not come with dollars attached.
In concluding, the Round table executives observed that the fragmentation that has traditionally been the industry’s burden is slowly being resolved. The need for greater harmonisation and standardisation is forcing shipping to work in partnership, and the benefits of partnerships are seen to outweigh corporate individuality. Value is widely regarded as a better indication of quality than cost, although cost can be quantified while value cannot.
In brief, although the total cost of operation remains elusive, the benefit of understanding value moves the industry in the right direction.
Executives around the table:
Richard Greiner, Partner, Moore Stephens
Henrik Hyldahn, Chief Solutions Officer, ShipServ
Patrick Lawson-Earley, Marine Technical Consultant, Exponent International
Simon Broadhurst, General Manager, Bernhard Schulte Shipmanagement (Isle of Man)
Iain White, Field Engineering Services Manager, ExxonMobil Marine
Joseph Star, Global Field Marketing Advisor, ExxonMobil Marine
Richard Clayton, Chief Correspondent, Lloyd’s List
Ben Hall, Director of Financial Planning and Analysis, V.Group
Andreas Hadjipetrou, Managing Director, Columbia Shipmanagement