This paper provides a comprehensive examination of outsourcing in the shipping industry, with particular focus on the criteria ship owners use when selecting external parties to manage their shipping operations. It begins by establishing the importance of outsourcing as a cost-saving and competency-focusing strategy, then outlines the key selection factors — including business environment analysis, financial stability, CMMI certification, management team composition, cultural fit, and methodology match. The paper also presents a step-by-step outsourcing selection process and argues that separating shipping management from ownership improves operational focus, stakeholder confidence, and risk management. All discussion is grounded in academic sources and industry literature from the shipping and logistics management field.
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Outsourcing is a process by which an organization engages an external party to perform some of its operations or functions. Outsourcing is practiced by shipping firms all over the globe (Outsource Freight, 2012). Ship owners generally outsource their operations and management functions to external parties for a particular period of time and against a specific sum of money (Lorange, 2009). Outsourcing shipping management enables ship owners to focus on their core competencies and hand over strategic decision-making and policy execution to the outsourcing parties (AB Crewing, 2012).
Ship owners select outsourcing parties by analyzing different aspects of their operations and business environment (Outsource Freight, 2012). There is a well-developed selection criteria framework that guides ship owners throughout the outsourcing party selection process (National Freight Management, 2012). The process begins with analyzing the business environment of both the shipping firm and the outsourcing party in order to evaluate the environmental forces that may impact the outsourcing arrangement (Logistic Cluster, 2012). The business model, methodology, and track record of the outsourcing party must align with the shipping firm's business strategies (Taylor, 2012).
This paper provides a comprehensive description of the key selection criteria that ship owners use when outsourcing their shipping management to external parties. The second part of the paper explains why shipping management should be separated from ship ownership. All discussion is grounded in recent research studies and reliable sources from the relevant field.
Outsourcing refers to any function, process, or task that an organization could perform itself but instead assigns to an external party in exchange for payment (Hitt, Ireland, & Hoskisson, 2009). Outsourcing has become a common practice among business organizations worldwide (Lorange, 2009). Companies generally outsource some of their operations to external parties operating in regions or geographical areas other than their home country. However, outsourcing can also be performed by external parties located within the same country as the company (AB Crewing, 2012).
Outsourcing is sometimes referred to as off-shoring, which involves contracting functions, services, or jobs to companies in other countries. Outsourcing brings a number of benefits to an organization; the most significant is the saving of time and expenses. Business organizations believe that outsourcing provides an opportunity to focus on their core strengths and competencies while delegating less critical projects to outside specialists (Lorange, 2009).
Shipping firms have engaged in outsourcing practices since the rise of globalization and the internationalization of business. They are increasingly outsourcing logistics services, supply chains, and materials management to external parties. Vessel management is also outsourced by a large number of shipping firms around the globe. Outsourcing is not a simple process; it requires careful analysis of all key factors in the business environment that may directly or indirectly affect the ship owner's business operations and profitability (Lin, Wen, & Ting, 2012).
The success of outsourcing in any business depends entirely on the assessment of all key factors before the decision to outsource a particular service or job is made (Hitt, Ireland, & Hoskisson, 2009). Outsourcing may benefit ship owners in a variety of ways. For example, it enables them to reduce costs incurred on multiple shipping operations and redirect attention to the most profitable and strategically important activities (Lorange, 2009). It also allows them to focus on improving core strengths, addressing weaknesses, and capitalizing on potential opportunities. Given these major benefits, ship owners can outsource their shipping operations or shipping management to outside parties so that they may concentrate on specific aspects of their business (Zaeri et al., 2011).
Outsourcing shipping management requires careful analysis of the shipping firm's internal environment as well as the current market standing of the vendor or outsourcing firm. A shipping firm can approach the outsourcing decision in three different ways:
Among these three options, outsourcing shipping management is considered the most critical decision for a ship owner. The reason is that all financial capital and shipping services are utilized and directed under the supervision of a third party that holds no shareholding or stake in the shipping firm. Therefore, a ship owner must approach this decision with full scrutiny and care. Shipping management outsourcing is a complex process with respect to the phases of analysis involved and the time constraints a ship owner may face.
The shipping management outsourcing process begins with a thorough analysis of the shipping firm's business environment, covering both internal and external dimensions. This analysis is performed to assess the firm's current position in the industry, the key business requirements of its day-to-day operations, and any shortcomings in its functions (Zaeri et al., 2011). The internal environment encompasses the strengths and weaknesses of the shipping business, while the external environment covers potential threats and available opportunities in the shipping industry. Both analyses provide deep insights into what the firm has already achieved and what it aims to achieve in the short and long run (Hitt, Ireland, & Hoskisson, 2009).
When outsourcing shipping management, a ship owner should first examine the financial position of the firm through its financial statements. Since shipping management outsourcing is a critical decision, the ship owner must maintain a regular check on the firm's financial position. This analysis can be conducted by comparing the firm's assets and liabilities and reviewing its long-term borrowings in recent years. This will help the ship owner determine whether the firm is in a position to bear the financial burden of outsourcing costs.
The analysis of business needs is not carried out by the ship owner alone; rather, a team of managers must be assembled to analyze different aspects of the business operations and present their views on the shipping management outsourcing decision. The ship owner must first formulate a team drawn from all relevant departments and units of the shipping business. The team may consist of 7–10 members so that the scope of thinking and idea generation is sufficiently broad (Lorange, 2009).
After forming the team, the ship owner must communicate the main objectives and policies of the outsourcing project in a well-documented form to all team members. This helps team members understand the significance of the outsourcing project and the policies to be followed throughout the process (Zaeri et al., 2011).
The project management and evaluation team is formed primarily to present a comprehensive yet concise report to the ship owner regarding all the facts and figures that need to be considered when selecting the most suitable outsourcing party for shipping management. The report produced by the team is generally referred to as an "evaluation report" and contains all the key selection criteria the ship owner should apply when choosing the best party for the project.
In addition to the components of the selection criteria described above, there are several specific factors that must be considered when outsourcing the management functions of a shipping business.
The macro environment of a shipping firm is composed of political, legal, socio-cultural, demographic, economic, and technological forces. These forces must be analyzed to determine whether the shipping firm has a sustainable future in its industry. If the project management and evaluation team assesses these key forces and finds a high level of feasibility for the firm, it can recommend that the ship owner proceed with the outsourcing project (Hitt, Ireland, & Hoskisson, 2009).
In addition to analyzing the macro environment of the shipping firm, the team must also analyze the same environment for the outsourcing firm. The macro environment of the shipping firm encompasses the following components:
The political environment consists of all factors directly or indirectly related to the governmental behavior of the country in which the shipping firm operates. Political factors are generally considered among the most critical forces in any business environment. Government behavior may change at any time — either in favor of or against the shipping firm — depending on the economic situation of the country. Thus, the political environment may turn favorable if the government grants relaxations to the shipping industry.
On the other hand, the political environment may become adverse if the government decides to curtail certain shipping functions or impose heavy taxes on the industry's profitability. The political environment must be analyzed to assess the sustainability of the shipping firm in both the short and long run (Zaeri et al., 2011). Based on this sustainability analysis, the ship owner may decide whether to outsource some operations or management functions.
A ship owner will only decide to outsource management functions if the sustainability analysis indicates that the government will maintain a positive attitude toward the shipping business. Conversely, the ship owner may retrench some business operations to save costs and focus on core competencies.
In addition to analyzing the political environment for its own business, the ship owner must assess the same for the outsourcing party to be contracted. This analysis is arguably more important for the ship owner than the analysis of his own firm's political environment. Entrusting the control of one's business to an outside party is inherently risky; therefore, a ship owner must carefully assess whether the political environment of the outsourcing party's country will be favorable to his business (Hitt, Ireland, & Hoskisson, 2009).
If the political environment appears unfavorable, the ship owner may look for an alternative outsourcing party operating in a more politically stable country. This analysis continues until the ship owner identifies the best outsourcing party with respect to political stability and governmental behavior.
The second most important factor in this analysis is the firm's own size of operations and organizational structure. The decision to outsource shipping management depends heavily on the size and complexity of the shipping firm's organizational structure. A large shipping firm has a more complex structure than a small one, and therefore its owner will need to find an outsourcing party capable of handling and controlling the business operations and management functions of a large organization (Taylor, 2012).
Ship owners may screen outsourcing parties based on their size of operations and organizational structures. The most effective way to screen these parties is to conduct a market survey through the project management and evaluation team. The team will compile a list of all outsourcing parties operating in a particular region and identify the best party that matches the shipping firm's exact business requirements.
The project management and evaluation team next assesses the business model adopted by the shipping firm and the business environment in which it operates. The business model encompasses the firm's track record, execution practices, corporate business principles, and sustainability efforts. These factors are analyzed to determine whether the shipping firm has the potential to grow in the industry and compete with top-tier competitors (Taylor, 2012).
The assessment of the shipping firm's business model is incomplete without a corresponding assessment of the outsourcing party's business model. There should be a business model match between the two firms so that the ship owner can identify an outsourcing party with a comparable track record and policy execution approach. A strong business model match leads to a successful business relationship in terms of both operational growth and financial strength (Taylor, 2012).
The financial stability of the shipping firm can be gauged by examining its cash reserves and revenues over the past few years. Financial stability can also be projected through an analysis of financial performance, though ship owners typically place greater emphasis on cash reserves and revenues over the last five years. This analysis also helps the ship owner assess the firm's potential for future expansion and growth strategies.
The financial stability of the outsourcing party is equally important, particularly when management functions are being handed over. The ship owner entrusts management to an external party when confident that the new management will be able to maintain the same level of control and performance as before the outsourcing arrangement began.
CMMI certification provides the ship owner with a guarantee regarding the feasibility of the outsourcing project. It helps determine whether the project will be profitable over the long term and also provides assurance of a sustained relationship between the ship owner and the outsourcing party. As a result, it has become common practice for organizations to obtain CMMI certification in addition to conducting macro-environment analyses (Ship Management International, 2012).
Outsourcing the management functions of a shipping business is a risky and complex decision. Ship owners look for outsourcing parties with strong track records and solid market standing amid numerous competitors and strict regulatory requirements. Since the ship owner's financial capital remains at stake throughout the outsourcing process, it is advisable to select outsourcing companies that are ranked at the top of the shipping outsourcing services industry. This minimizes the risk of project failure (Taylor, 2012).
When a ship owner outsources management functions to an external party from a different geographical region, significant cultural diversity may emerge in the workplace. This diversity is observable at all organizational levels, from lower-level employees to top management in both firms. In outsourcing management functions, the ship owner and the project management and evaluation team must manage differences in communication patterns and channels between the two organizational setups.
A methodology match refers to the degree to which both firms employ the same management practices and organization-wide policies. In the shipping context, this means the degree to which shipping operations can be customized to meet the firm's business needs and requirements (Taylor, 2012). The shipping firm should seek an outsourcing party that can readily execute the organization-wide policies that the firm has been following since its inception.
The composition of the outsourcing party's management team must be analyzed to determine whether it includes professionals with the expertise, qualifications, skills, and competencies required for the shipping firm's management functions.
Even if the management team includes business professionals from diverse fields, the ship owner must verify that they have expertise in shipping management. Ideally, the management team should include professionals from the following areas:
The outsourcing project management and evaluation team will be responsible for assessing the skills and competencies of all management team professionals in the outsourcing company (Taylor, 2012).
In a management outsourcing project, the newly contracted management team will not initially be familiar with the organizational policies, practices, and cultural values of the shipping firm. Team members must therefore undergo a training and development program before being given full control of the management functions. This program may consist of workshops, lectures, and on-site company visits for all management team members of the outsourcing party.
Workshop sessions: In workshop sessions, management team members will learn the corporate-wide policies and practices of the shipping firm — including its mission and vision statements, long-term organizational objectives, business methodology, business model, and current financial standing in the industry (Taylor, 2012).
Lecture sessions and short classes: The management team will also attend lecture sessions and short classes on the business process management of the shipping firm, acquainting them with the day-to-day operational practices of the organization.
On-site company visits: On-site visits are arranged for management team professionals so that they can personally observe the efficiency and structure of the firm's business units at different locations.
Ship owners outsource shipping management to external parties with the expectation that the management team will keep the firm's informational resources safe and secure from misrepresentation, theft, or misuse. During training and development sessions, the management team is also briefed on the expectation that they will assume management control with integrity and honesty.
This represents another component of the key selection criteria. A ship owner must select a management team from an outsourcing party that has no history of fraudulent activities or misrepresentation of financial information during the course of its services in any industry (Taylor, 2012).
In addition to the political and organizational factors discussed above, the ship owner should also analyze the socio-cultural, demographic, and economic forces present in the macro environment of the outsourcing party.
The ship owner should examine the economic forces in the outsourcing party's country that may affect the business operations of the shipping firm. Economic forces generally influence the profitability and financial position of a firm and must therefore be managed effectively to minimize adverse impacts (Panayides & Cullinane, 2002). These forces include inflationary pressures, unemployment levels, industrial growth rates, exchange rate stability, and trade barriers. A successful outsourcing project is more likely when most economic forces are favorable to the shipping firm's business. Organizations generally outsource to parties in developed or developing countries because these tend to offer more favorable economic conditions than underdeveloped countries.
Similarly, socio-cultural and demographic forces influence how management teams make decisions and execute strategies within a given business environment. Customers' attitudes, lifestyles, and income levels all affect how management operates in a particular business landscape.
"Step-by-step sixteen-stage selection workflow"
"Benefits of separating management control from ship ownership"
A ship owner needs to analyze the business environment of his shipping firm as well as that of the outsourcing party when pursuing shipping management outsourcing. Before making this decision, the ship owner must assess whether the shipping firm has a sustainable future in the industry. This assessment is based on an analysis of both the internal and external environments and helps ship owners select the best outsourcing party from among a number of bidding firms (Lun, Lai, & Cheng, 2010).
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