By Foluke Akinmoladun, Managing Director, Trizon Law Chambers
Third party ship managers are managers of commercial shipping activities that fall into any of the categories of ship management, but is not the owner of the ship being managed. A third-party ship manager may handle crewing, storing, technical, insurance, operations and commercial alone or in combination depending on its own expertise and the needs of the ship owner. The decision of whether or not to use third party ship managers for any of ship management activity depends on a number of factors that as is briefly examined below.
Factors that ship owners would consider relate to the advantage or disadvantage of outsourcing, the cost benefit analysis of such out sourced activity and the amount of time it gives to the Ship owner company to face other aspects of the shipping business that it is engaged in.
Whether a ship is being managed in-house or externally, each ship management function requires a particular level of expertise. Functions like operations and commercial, require a good understanding of the markets for the activities that the ship is engaged in. Other functions like, insurance requires an in-depth understanding of the type of insurance required, the insurance providers best suited to provide such insurance and competitive premiums as any slight reduction in insurance can have a significant impact on the running cots of the ship.
This is because insurance is the second biggest item of cost for the ship owning company. However, it is important that the premium is not negotiated too low to the point that it no longer covers the essentials, be it for the ship (hull and machinery) or third-party claims (protection and indemnity).
Third party ship management is in essence outsourcing and ship management in itself is a complex business. Owing to the complexities of ship management, outsourcing can be a way for a ship owner to improve efficiencies and bolster its company’s profits. Ship-owners may acquire ships as a form of investment, tax write-off or for some other financial reason. Small shipping companies with few ships may find it difficult to put up such the big and complex setup to manage ships. In such situations, a ship owner might be ill equipped to deal with the complexities of ship management, with its round the clock operations, worldwide schedules and crews from different parts of the world. This is further complicated by the different laws and regulations that apply to the various activities of the ship itself, the crew, voyages, port states, flag states, territorial waters, domestic and international laws to mention a few.
With the large number of expert areas involved in ship management such as human resources, marine engineering, vessel operations (cargo, navigation, legal, etc.), naval architecture, insurance and finance, the need to hire the experts is imperative.
A ship owner with a large number of ships under management can reduce costs and increase return on investment. By outsourcing all or some of the management functions (crewing is a prime target) to a firm, shipping companies in countries where operating costs are high, like in countries in Europe, may outsource the job to ship managers outside Europe like those located in Asia to save money.
Shipping companies in Gulf States tend to outsource ship management to companies in India and are able to substantially improve performance by drawing on the niche skills of experts in the field. Ship owners are also able to share out some risk as one of the most important factors in any project is risk assessment and analysis. By outsourcing certain campaigns or processes to experts in their respective fields, the ship owner will benefit from the ship manager’s enhanced ability to plan and mitigate potential risks. Major locations where third-party ship management activities are carried out from include Limassol in Cyprus, Singapore, Hong Kong and Malta.
However, outsourcing has its challenges and its disadvantages. It may also not be right for every situation. With only one or even a few ships, engaging many experts externally may not be practical. Many most vessels are still managed in-house by their owners as many owners still feel the need to manage their business operations by themselves.
The other disadvantage of outsourcing is possible loss of control over the data that ship owners have to share with ship managers. In this day and age of data protection, it is essential to exercise caution whenever using customer data. If a ship owner plans to outsource processes that require shipper or charterer’s data, the shipping company could be placing the privacy of others or security of its business at risk by passing that data on to other people.
So, there must be watertight non-disclosure/confidentiality agreements and company policy to mitigate and avert such risks of compromising shippers’ or charterer’s data. In addition, there is the possibility of hidden costs. Big ship management firms may ask small ship owner companies to sign lengthy contractual agreements, which may include plenty of fine print. If the terms are not read carefully, there could be some hidden costs to be incurred by the ship owner.
Finally ensuring quality control is essential regardless of the ship management service outsourced. Where a shipping company used to handle crewing for instance in house then decides that for cost efficiency it would outsource the crewing service, it is important that the quality of crew engaged thereafter do not compromise the quality that the ship owners are used to operating with.
In choosing any particular ship management company, the ship owner has to first decide which ship management activities it wants to outsource and the advantages and disadvantages of both outsourcing and outsourcing to a particular ship management company. The advantages and disadvantages as to the ship management is not uniform and so also the standard of the ships. Therefore, any ship-owner deciding to outsource its ship management functions takes a calculated risk.