Operational transparency: The dark side of shipping

Operational transparency: The dark side of shipping

Thomas Timlen gets the thoughts of Union Marine’s Vinay Gupta and Colin Ip from CaledonDenny explain how owners are missing so much when it comes to day-to-day savings among their fleets.

Has your bank ever considered operational transparency when evaluating company performance? Perhaps they should.

Before we get to the banks, let’s first consider the operators.

Like all businesses, shipowners, operators and managers have traditionally focused on costs. For shipping, whilst freight rates plummeted, opex reductions and cost controls became critical for survival.

Union Marine Management Services’ Vinay Gupta sees it like this, “There is very little control that an operator has over the market situation or indirectly over the revenue that a vessel would earn and therefore, the only way one can influence the bottom line is by the virtue of controlling the expenses. Ship management cost or the daily opex is indeed a small percentage when it comes to the overall expenditure; cost of money, bunkers, etc., but the mismanagement of these funds and the fallout from this can have a huge impact on the total hire period and reputation in the market and this is much more disparaging than the total opex in many cases.”

As cost control and reduction became king (no, it’s not always cash) the industry saw an invasion of performance monitoring tools.

CaledonDenny’s Colin Ip puts it this way, “Throughout the maritime industry, there has been gradual adoption of sophisticated management systems and tools to assess technical and operational performance. We have seen comprehensive monitoring and reporting systems and transparent processes to ensure technical and operations capture critical data of high risk issues that lead to a reduction in cost of risk element as well as the daily operating costs. This has led to better decision making and ensured initiatives to mitigate high risk issues are assessed properly on a holistic risk basis.”

Move over devil, the angel is in the detail.

Meanwhile, as far as the banks are concerned, the benchmarking preferences have not changed significantly. The assessment of performance is almost always determined via evaluation of owners’ balance sheets and fleet KPIs, both compared to the competition within similar sectors.

Certainly such benchmarks provide a snapshot indication, however they fail to illustrate how the metrics being scrutinised were achieved.

Cost reductions are not always the result of responsible measures as they can be achieved by reducing manning below safe levels, postponing needed maintenance and purchasing cheap substandard fuel and spares. Doing so will make the balance sheet look good in the short-term, however, with the potential for eventual costly delays and liabilities should casualties and equipment failures occur as a result down the road.

Today’s internet of things and improved ship-to-shore connectivity has set the stage for complete operational transparency for companies ready to embrace its implementation and advantages.

With cloud data systems and apps that function across smartphones, tablets and desktop computers, essentially all shipboard and shore based procedures can be digitised, to ensure that no step of any procedure is missed before an operation is accepted as being complete.

Having so much information captured within a fleet management system, the status and performance for any singular ship can be analysed, down to any level of detail desired, as can the aggregate fleet performance at any given time.

While the technology exists, it is the mandate and the intent of the operator to either be transparent or keep blind sectors for their own motives. Having a transparent post box obliterates the need for an opening through which the owner tries to gauge the entire performance of the ship or her operator.

And banks should care?

Yes they should! As illustrated, cost savings can be achieved either in responsible ways or irresponsible ways. A number by itself on a balance sheet or KPI report says nothing in respect to how it was achieved.

In contrast, a company applying operational transparency can quickly show not only the numbers but also the underlying actions that achieved them. This should serve well to enhance the confidence of potential lenders, whose due diligence efforts would benefit from the inherent advantages of a transparent operational environment covering every aspect of the applicant’s business.

While Gupta feels that such systems have become essential tools required just to survive in tough market conditions, Ip takes it a step further.

“Robust assessment of commercial management, performance and long term revenue stability is one thing, but there also needs to be equally robust assessments of technical and operational management, performance and long term costs stability to provide a more holistic assessment on profitability, financial performance and ultimately the creditworthiness of a shipping company.”

“As ship managers develop and adopt sophisticated and comprehensive management systems to reduce technical and operating risk and costs, including improved collaboration with the finance departments, this must help CFOs of shipping companies improve their dialogue with financial institutions, whereby the demonstration of superior technical and operating performances has a positive impact in financial performance.”

Ip concludes, “By doing so, these shipping companies should be rewarded by more keenly priced financing, thereby adding an upward spiral of potential savings in financing costs for the company, ultimately the difference between the ability to endure the current challenging market conditions or to succumb to them and disappear.”

Thus the case is made, but are any banks listening?

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3 Comments

  1. Anthony Odegbaro
    February 21, 2017 at 9:26 am

    CFOs themselves are missing an opportunity in not using such data proactively with the banks when seeking financing. Even affordable new generation cloud integrated fleet management platforms such as that provided by SDSD offer CFOs powerful data to demonstrate that their operational cost reduction strategies are being responsibly targeted.

  2. Colin Ip
    February 27, 2017 at 2:21 am

    Anthony, thanks for your comment.

    CFOs come in all sorts of shapes and sizes, so to speak. You have those who are “accountant/audit/compliance” driven focusing on the reporting of the numbers; you have those who are “financing/deal” driven focusing on relationship with investors and financial institutions and conjuring up transactions and then you have those who are “analytical’ driven focus.

    It really takes all senior leading management executives, and their teams, to tie-in the connections across the various functions of a shipping company – commercial, technical, operational, regulatory and finance to find the margin gains in each function and aggregate those gains. This requires strong collaboration and team work, but it needs a top down culture approach to team work.

  3. Thomas Timlen
    March 1, 2017 at 5:10 am

    Over on LinkedIn where Sam posted a link to his article ‘Trainwrecks, shipping and transparency’, published only 4 days after this ‘Operational transparency: The dark side of shipping’ contribution, I was compelled to ask if “transparency” had become the flavour of the month.
    It did not take long before I was reminded that transparency “is, and always has been, the backbone of decent professionals everywhere.”
    True, but what exactly does ‘transparency’ mean in the context of maritime transport?
    Not only do the comments above by Anthony and Colin (together with several more over on LinkedIn) demonstrate that the answer depends greatly on the priorities and experience of the person asked, the comments also reveal that whilst the concept of transparency has shed light into much of the dark side of shipping, several blind spots remain.
    In our competitive business, where owners and operators can face incredible liabilities when things go wrong, the concept of transparency has never really been our mantra.
    Long before Corporate Social Responsibility gained traction in our trade, the IMO made an effort to bolster transparency with another CSR: the Continuous Synopsis Record. Raising the corporate veil was no easy task.
    In 2000 we saw Equasis launched making PSC records available to anyone who cared to have a look, whilst today paying customers can buy a RightShip evaluation of vessel performance.
    All of those transparency related developments had something in common; None of them were owner/operator driven.
    What could become a driver regarding owner/operator motivation to implement mechanisms that enhance operational transparency is the nascent appreciation of the value-added benefits.
    What might they be?
    That’s a bigger discussion for another time, but amongst others, some potential benefits from operational transparency include; enhanced corporate reputation (a.k.a.; branding), improved ISM compliance, enhanced ship resale values, verifiable corporate social responsibility status, and preferential financing terms.
    And yes, day-to-day savings.
    That’s a start. Who knows what other benefits can be discovered by poking around in the dark?