The importance of value

The importance of value

"Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out and proclaiming, 'Wow, what a ride!' "

The unknown author of the above perhaps knows the philosophy of those dedicated to the robust profession of container ship management.

Container ships are durable assets, and the business is asset-intensive. Ships can remain viable for 30 years, more likely to become redundant from technology than wear. When a shipowner calculates whether to buy a new fleet, the financial simulation includes presumption of periodic downturns and robust recoveries. The long-term and cyclical nature of the business is factored into the investment decision.

Managing long-term assets in today's short-term, quarterly result-oriented environment is a test of helmsmanship. Gone are the days when the manager may say, "Steady as she goes, eyes on the horizon." Computers continuously and globally collect data and calculate results. The manager no longer wonders how the quarter will end, and only learns weeks later after closing the books. Today his nose is rubbed in yesterday's results. How's today shaping up?

Immediate data streams are powerful tools. A downside is the focus on short term in a long-term business and an incentive for quick fixes.

Two "assets" necessary for long-term success are integrity of reputation and employee relationship with the customer, both built over time by customer-focused organizations. These flesh-and-blood "assets" differentiate the carrier's service in the eye of the customer and, if positive, add perceived value. Positive differentiation moves the pricing focus and booking decision from the freight rate to the value of the total relationship. The goal is to be the customer's clear choice when the price is similar or, sometimes, when it's higher.

The "assets" of reputation and relationship, unlike ships, are not counted as positives on the balance sheet. Instead they are only counted as negatives (costs) on the P&L. Cutting these costs boosts the bottom line quickly. The risk is that the line's service becomes less differentiated and loses some pricing power over and above mediocre competitors.

No MBA is needed to figure out how to cut these costs. Why not save money by deciding to focus costly personnel attention on the 20 percent of customers who move 80 percent of the cargo? Then offices in smaller regions can be closed, the sales force trimmed back. Non-elite customers are directed to cost-efficient, and impersonal, remote call centers. The non-elite sooner or later vote with their feet, seek out a carrier that recognizes them and knows that their cargo is their lifeblood.

The 20 percent "elite" customer base is expert at hammering out the lowest price imaginable on service contracts, sometimes without an escape clause for the carrier in case of important cost change. Carriers end up fixing long-term contracts priced at a small increment over variable cost and accepting cost risk. The loss of an "elite" customer's volume is not an easy option for the manager. The impact on next quarter's figures would be visible. Saying "no" is hard.

The crux of this scenario is actually about pricing. Pricing is not a job to be relegated to a pricing department; rather, it is an organization's total focus to create value for customers and charge a fair price for it.

One may wonder how it is possible for one container carrier on a parallel route with another to charge a premium. In other industries, individual companies with apparently homogeneous product offer, and charge for, value.

A container shipping company can have the best ships, terminals and other physical assets, but if it does not have unwavering focus on the customer - i.e., infrastructure to retain customer loyalty, especially when problems occur - the physical assets may not yield full potential. It's a mistake to believe that when a customer says, "Just give me a lower price," it means loyalty will be maintained by that single factor.

Container shipping is an essential business service for those who rely on it. When a shipment goes wrong, which is inevitable, importers and exporters have much at risk, sometimes even viability. They select a carrier based on value, a fair price for the service offered, combined with knowing that their business is recognized, that their "man inside" will do what is necessary at critical times.