mba -reasearch -pbc ship management-hammad khawaja glasgow (1) (2)

“WILL PERFORMANCE-BASED CONTRACTS PLAY A MAJOR

ROLE IN THIRD PARTY SHIP MANAGEMENT AS THE

SHIPPING INDUSTRY MOVES TOWARDS THE ADOPTION OF

KPI’S?”

by

HAMMAD ZAHIR KHAWAJA

A dissertation submitted in part requirement for the

Master of Business Administration

University of Glasgow

Department of Management

September 2010

DECLARATION

I have read and understood the University of Glasgow guidelines on plagiarism and declare that all assignment submissions are entirely my own work, that all sources have been acknowledged in the text and included in the bibliography, and that all quotations from other authors are marked as such in the text. I understand that the Department/Business School will check any of my work they suspect to be plagiarised including the use of plagiarism detection software.

Please complete in block capitals:

Name: HAMMAD ZAHIR KHAWAJA Signature: ______________________

Matric No: 0802434 Degree/Programme: MBA

Date: September 6th 2010. Office Use Only:

Acknowledgements

I owe eternal gratitude to many people who gladly supported me

in carrying out this Dissertation.

First and foremost I would like to convey my heartfelt thanks

and appreciation to my supervisor Mr. Luiz Moutinho, for the

support and guidance he showed me throughout the dissertation.

I am sure it would not have been possible without his help.

To My Dear Mother & Father & My Brothers.

To My Beautiful Wife Aisha for Her Support & Love.

It is a Great Pleasure to Thank My Colleagues Tariq,

Muzammil, Ray, Masood, Leo, Sajawal, Stephen, Sarwar,

Moshiur, Willingale & Andy.

I owe my deepest gratitude to Kuba, Joeron, Jan, Tracy, Robbie,

Pam, Omar & Sameer who showed confidence in my ability to

generate results.

Hammad Khawaja

September 2010

Abstract

This research investigates the enhancement of third party ship management

outsourcing in the shipping industry through the implementation of performance based

contracts. A literature review is presented to explore power and relationships

interconnected with theoretical underpinnings. Ship owners and ship managers’

behaviors and perception of business to business approach in evaluating their

companies’ performance through KPI’s and establishing Performance Based Contracts

have been investigated. It is important to understand their approaches towards these

contracts to see what changes these companies are outing into practice in an effort to

adopt these new trends in shipping industry. The device used to determine the answers

to the question at hand includes the use of structured open ended interviews with ship

owners and ship managers around the world. The nature of this research is both

exploratory and descriptive. The purpose of interviewing is to allow one to enter into

the other person’s perspective (Patton, 2002). Results from this will provide insight into

the minds of participants towards certain type of risks they are willing to take.

From the results of these different findings, it is learned that implementation of

Performance based Contracts in shipping industry is a very wide concept and will

require a lot of academic and industry work to be done. The research suggests that

attractiveness of outsourcing can be increased through the use of performance based

contracts with mutual understanding and further input from ship owners, ship

managers, maritime community and organizations.

To conclude, the research reveals that performance based contracts will play a major

role in third party ship management companies while shipping moves towards adoption

of KPIs. However a combined effort is required to raise third party ship management

companies’ efforts, views and influence legislation respectively.

Table of Contents

List of Abbreviations ...........................................................................................................8

Introduction ..........................................................................................................................9

Ship Management ................................................................................................................ 14

Chapter 1 - Literature Review ............................................................................................... 19

1.1 Introduction: ............................................................................................................ 20

1.2 Separation of Ownership and Control in Family Oriented Businesses: ........................ 20

1.3 Separation of Ownership and Management in Shipping: ........................................... 23

1.4 Agency Theory and Outsourcing:............................................................................... 24

1.4.1 Agency Theory: A Double Edged Sword: ........................................................... 27

1.4.2 Agency Theory and Stewardship Theory: .......................................................... 31

1.4.3 Principal –Manager Choice Model: ................................................................... 32

1.5 Outsourcing and Its Major Issues: ............................................................................. 35

1.5.1 Advantages and Disadvantages of Outsourcing: ............................................... 36

1.5.2 Outsourcing and Competitive Advantage in Ship Management Industry: .......... 41

1.6 Performance Based Contracts and Key Performance Indicators: ................................ 43

1.6.1 Development of a Performance –Based Service Strategy- A Frame Work:.......... 47

1.6.2 Application of Performance Based contracts in other industries: ....................... 48

1.7 The Shipping KPI Project: .......................................................................................... 51

Chapter 2 - Methodology ..................................................................................................... 55

2.1 Introduction: ............................................................................................................ 56

2.2 Aims of the Research: ............................................................................................... 56

2.3 Research Design: ...................................................................................................... 58

2.4 Recruiting Subjects: .................................................................................................. 61

2.5 Sample Characteristics: ............................................................................................. 62

2.6 Research Limitations: ............................................................................................... 62

Chapter 3 - Overview of Significant Findings, Analysis of Results & Discussion: ...................... 64

3.1 Introduction: ............................................................................................................ 65

3.2 Overview of Significant Findings: .............................................................................. 65

3.2.1 Ship Owners: ................................................................................................... 65

3.2.2 Ship Mangers: ................................................................................................. 78

3.3 Analysis of Results and Discussion: ........................................................................... 94

3.3.1 Ship Owners .................................................................................................... 94

3.3.2 Ship Managers ............................................................................................... 102

Chapter 4 - Conclusion, Managerial Implications, Recommendations and Limitations ......... 108

4.1 Introduction: .......................................................................................................... 109

4.2 Conclusion , Managerial Implications, Recommendations and Limitations ............... 110

Bibliography ...................................................................................................................... 115

Appendices ........................................................................................................................ 123

Appendix – A ….. (Key Business Areas & Key Benefits of KPIs Implementation) .............. 123

Appendix B.....(PI’s List/Shipping KPI Hierarchy/Matching Matrix of KPIs and SPIs) ........ 124

Appendix B.....(From PI, through KPI to SPI, A Calculation Example) ...............................127

Appendix C.....(Interview Questionnaires to Ship Owners & Ship Managers).................. 131

List of Abbreviations

KPIs Key Performance Indicators.

PBC Performance Based Contracts.

OPEC The Organization of the Petroleum Exporting Countries

SDS Service Delivery Strategy.

SRS Service Reception Strategy.

ICS Intellectual Capital Ltd.

IMO International Maritime Organization.

ISPS International Ship and Port Facility.

Introduction

This dissertation explores the concept and importance of performance based

contracts and to evaluate if they play a bigger role in improving business to business

relationships in the shipping industry. It investigates the concept of contracts between

ship owners and third party ship management companies. The approach towards

performance based contracts is through secondary research and review of the related

literature. The paper will be analyzing the data as retrieved through primary research in

the form of structured interviews of ship owners and senior ship managers. This will also

look at the previous research which has already been completed in terms of

outsourcing, KPIs and performance based contracts in various contexts in general and

towards the shipping industry in specific. The purpose of this research is to clarify the

implementation of performance based contracts and to investigate if they lead ship

management companies to attain competitive advantage over its competitors. The

paper will investigate the ship owners’ behavior, their perception and approach towards

outsourcing services.

The study will attempt to evaluate the approach of performance based contracts

and development of KPIs towards measuring performance and benchmarking. The

research will further seek to justify the importance of performance based contracts and

the strategy various businesses use to follow the path to progression while using KPIs

and measuring performance. It will further discuss the understanding of strategies that

may help in sustaining competitive advantage through KPIs within the wider business

environment.

With little empirical study found specifically in relation to the topic, and

therefore able to base findings upon, the research attempts to break down the subject

into key words and phrases which are more readily able to be defined and analyzed.

From this analysis it will then determine the body of evidence to support the objectives

of the study. It is clearly evident that there has been much written in terms of KPIs,

however it has been the basis of this research to define the relevance of such work in

the context of performance based contracts in the shipping industry.

The study will then narrow down to ship owners and ship managers’ behaviors’

towards performance, its measurements and their relationships on various stages of

decision making. For this purpose, Agency theory has been used to develop the

relationships between business to business establishments, however this has been

central to much subjective debate, and performance now is much more conclusively

determined and monitored.

The researcher has some experience in the shipping industry, with more than

five years in the technical ship management business; With recent experience of

operating at a broad level and the knowledge of successful management procedures

learnt in-house. The researcher is passionate with respect to the ship management

business and in dealing with ship owners for the safe operation of ships and the

continued strategic development during this process, and firmly believes that the results

of this research can be of benefit in terms of understanding the importance of

performance based contracts for growth, sustainability and changing future trends in

the shipping industry. Hence the shipping industry plays a vital role in today’s economy.

This dissertation will focus on the theoretical foundations of dimensions of the

family oriented businesses like ship owners and the strategic relevance of their behavior

towards changing business environment, and will discuss many accepted and well

understood models of business to business relationships. It will make use of selected

published research articles to demonstrate the importance of the topic.

The dissertation is structured with an introduction to Ship Management which

provides a comprehensive over view of ship management followed by various chapters

as follows:

Chapter 1 relates to the academic literature relating to separation of ownership

and control in family oriented businesses. Then it highlights the separation of ownership

and management in the maritime industry. Agency Theory (Fama and Jensen, 1983) and

Stewardship Theory (Donaldson and Davis, 1989, 1991) are analyzed in context of

principal-agent relationship and same is implemented on ship owners and third party

ship management companies. Principal-manager choice model (Davis, Schoorman, and

Donaldson, 1997) has been used to evaluate these relationships and how these

relationships affect the outsourcing decisions. The development of performance based

service strategy frame work is used to examine the business growth while improving

performance. The relevant aspects of performance based contracts in various industries

and the enhancement of ship management outsourcing through the implementation of

performance based contracts is investigated. The research is made to determine the

role of KPIs to measure performance and to determine the possible evolution of

outsourcing of ship management services. The future of outsourcing and competitive

advantage in the ship management industry has been evaluated from previous research

over the years.

Chapter 2 relates to a detailed outline of the methodology employed, to include

an evaluation and sound reasoning of the techniques utilized and the methods adopted

in conducting this research. The paper makes use of primary qualitative research

methods. This chapter talks about how this research made use of structured, open

ended written interviews with ship owners and senior ship managers from third party

ship management companies. This section of the dissertation will talk about the

methods adopted in conducting this research. The thesis makes use of primary

qualitative research methods.

Chapter 3 relates to the findings of this research, these findings and results from

the primary research will be presented. From this, the paper will discuss the relationship

between these results and the literature reviewed and then seek to derive

recommendations that will determine if performance based contracts are important and

play a major role in outsourcing ship management services.

Chapter 4 relates to the limitations of findings, a conclusion and

recommendations. This chapter will attempt to answer the original question posed,

make recommendations for future strategies and analyze the comparative position of

the various ship owners and third party ship managers. This chapter will also

recommend these businesses for future strategic approach towards growth and

sustainability.

Ship Management

This section of dissertation provides a comprehensive overview of the ship

management industry along with an overview of macro-environment around ship

management.

In the early 19th century the ownership and operation of shipping in Europe and

Britain has relied upon family and partnership finance. Most of the ships were either

owned by one person or a family and in some cases they were owned by two or more

than two partners (Tsunehiko and Nakagawa, 1985). After the first steam ship “comet”

was launched, owners still preferred the traditional way of small partnerships in which

the members of these partnerships were well-known to each other. For example, in

1786 and 1804 at Liverpool, a quarter of the registered ships were solely owned and the

remainder were registered under various partnerships (Cottrell, 1981). Since the 1950s,

there has been a rise of third party ship management and it has developed into an

industry of its own.

“Up to 25% of the world’s fleet is under some sort of ship management today

and this number is expected to grow to about 35% of the world fleet in the next five

years”.[1]

http://www.google.com/search?tbs=bks:1&tbo=p&q=+inauthor:%22Keiichir%C5%8D+Nakagawa%22

This research has been made in order to evaluate the outsourcing of ship

management services in the maritime industry. The establishment of function of ship

management in the maritime industry exists since vessels have been created but in early

1970s, outsourcing operations instigated as companies were focused to outsource non-

core services. The ship management companies developed overtime the need to clarify

their position as a specialist provider of a wide range of support services. Over time ship

management services improved and in today’s shipping world these services include

various management expertise including crew management, technical management,

insurance, chartering, operations, leisure, and hotel management. The ship

management companies were able to offer a broad range of skills and experience. The

ship owners are motivated to outsource to third party ship management companies

including an access to manager’s experience, manager’s economies of scale and

purchasing power. This improved efficiency and increased flexibility in the shipping

business across the globe. In particular, these companies specialized and signified their

ability to work in a different way to larger competitors in various sectors of shipping.

They focused to the specific needs of its customers.

InterManager, the association acting on behalf of the ship management sector is

creating a set of commonly shared indicators to measure operational performance that

should become the standard all managers aspire to achieve. This is a new concept in

industrial management. The idea is for all the parties which are involved in ship

management to understand good practice and align their companies because in the end

everyone will benefit from it. By 2012 it is planned to adopt the standard KPI strategy,

create a monitoring system and by the end of 2012 open the database to the public. [2]

“The European Commission has heeded industry concerns about the poor image of

shipping and launched a €3 million programme it hopes will boost seafarer

recruitment and open up awareness about the industry to the general public.

InterManager supported Key Performance Indicator initiative in London, the

framework would be a joint initiative between Brussels and the shipping industry

and would concentrate on the image of shipping as well as spreading the knowledge

base about the maritime sector.” [3]

By doing an overview of the macro-environment around ship management

industry, especially identifying the external influences that affects it, referring to PESTLE

analysis (Carroll, 1999) for the environmental scanning of shipping industry. The factors

that can effect the operations can be political, economical, socio-cultural, technological,

legal and environmental. Politically, there is an increase in the rules and regulations in

the maritime sector. It is argued that the increased legislation requirement leaves

third party ship management companies to cope with the burden of vast amount of

regulations (Gunton, 1997).

Similarly economically, the growing strength of Euro against USD plays a major

role and affects the ship management and maritime industry. Technologically, it has

been argued that most innovations and improvements in technology have influenced

every business in the world and the ship management and maritime sector has been

affected by the same. Environmental issues are very important and becoming stricter on

a daily basis. Regulations as implemented by IMO in relation to pollution, discharge of

waste, and ballast water management have a vital impact on the industry. A ship

management company has to potentially free the ship owning companies from legal

accountability. Legislation that binds the owners and managers via contract has its

importance, and it is important to make sure that the services and the offers of the ship

management companies are up to the standards of industry levels. Also the provision of

wide range of main and value added services from ship management companies are

very attractive (Ebsworth, 1989).

Therefore the contracts and agreements with the KPI initiative concept have

been introduced like many other industries, so owners and managers work more

efficiently and cost-effectively. It is argued that it is important for third party ship

management companies to add the KPIs in the contracts and agreements they have

with owners.

This will prove how effective third party ship management companies are, and in

doing so, meeting the goals and targets may enable these managers to work towards

developing more robust and transparent performance- based management fees.

Therefore there has been a high growth rate in the maritime cluster over the last couple

of decades (Hervig and Jakobsen, 2001).

“So with China, India and South American markets all contributing to a boom in

world trade, quality ships are going to be needed. There’s no doubt about that and the

latest statistics suggest that upwards of 10,000 ships are currently on order, representing

a need for in excess of 400,000 NEW seafarers. But the shipping industry is facing a

problem of mammoth proportions.” [4]

Chapter 1 - Literature Review

1.1 Introduction:

The literature review gives an insight into the background of the subject of the

research. It is a form of an extended essay where the views and opinions of writers who

have written about the subject after exploring it themselves, are amalgamated. The

literature review is compiled after extensive reading on the subject of the research and

this can be done through articles, journals, newspapers, audio or visual material, the

internet and all sources of information. The literature is basically the criteria against

which research results are then contrasted. Literature review is important because it

allows the researcher to study the depth of research which has been conducted by

other people, on the subject in context.

1.2 Separation of Ownership and Control in Family Oriented Businesses:

The concept and creation of separating ownership and control was first

elaborated and given preference in the early 1930s where it was argued that the new

economic era has to begin where the power and control from the owners will be

transformed because of multiple owners and the transaction took place where the

companies became more manager controlled rather than owner controlled (Berle and

Means, 1932).

The transaction did not happen over night; we have traces since 1840 when the

appearance of rail roads and supply chain distributions and their integration evolved

into Modern Corporation and by the end of 19th century we had a new sub-species

known as a salaried manager (Chandler, 1990). The enterprises were managed by the

salaried managers who were not the owners but were representatives of the owners;

the same was attributed because of the positions they held in rail road networks and

telegraph systems and were fully established during the first world and second world

wars. It was the innovation within these organizations which put these salaried

managers in place where the control of the enterprise was in their hand practically and

hence a modern enterprise was born (Chandler, 1977).

It is also suggestive that most businesses have always been family oriented

before the separation occurred as per the arrival of a new business era of which we

know as Modern Corporations. Family oriented businesses have always been an area of

interest but no research has been found prior to 1975. Very few researchers have put

the ideas together and the discussions emerged about the family business systems.

However these studies only scratched the surface and were not able to explain or

understand the complexity of these businesses comparing to other forms of businesses

(Handler, 1989). Performance in those days was almost solely measured by profit.

Positive profit was a sign of stability and good performance. With the modern

corporations the separation of power and control made the picture more complicated

and the separation of power and control started with the birth of modern corporations

(Handler, 1989). There have been three dimensions for the configuration of the family

businesses as illustrated in Fig 1, which highlights these dimensions:

(a) Where ownership is more towards power and control, it is managed by the

owner or the family as per their experiences and depending on the time they

have been in the business and how much understanding they have developed

over time to control the family business. (b) Where there is a family involvement

but it is externally controlled and managed. (c) Where there is a family

involvement but the element of next generation in line.

Fig 1: Configurations of Family Businesses along Three Dimensions,

Source: (Handler, 1989)

1.3 Separation of Ownership and Management in Shipping:

Family owned shipping companies and development of its various activities gave

the concept of professional ship management companies and traces can be found since

back after Second World War (Underwood, 1989). In the mid 1960s capital investments

from the oil majors into ship investments increased the demand of development of

professional ship management companies and outsourcing was introduced and brought

into practice professionally (Panayides and Gray, 1997). In the 1970s there was an oil

crisis in the world and the OPEC countries increased the price of oil.

This gave an advantage to ship management companies and traditional owners

became under huge pressure and were not able to afford to run their ships. The

financial and oil crisis increased the credibility of the ship management companies and

owners were willing to outsource some of the services to third party ship management

companies. In 1980 the trends in traditional ownership of vessels were changed and it

was more about purchasing and selling of the ships in order to generate profits rather

than using them for trade and improving financial achievements (Parmar, 1988).

The changing world since the new era of Modern Corporation started brought

various segmentations. It was the time when separation of ownership and management

in shipping started. Further research has shown that there is a relationship among the

businesses where they have investors, key stakeholders, shareholders and then we have

senior managers and chief executive officers who make sure the goals and objectives

are achieved while benefiting parties involved in the relationship. This relationship is

further researched through various theories and models.

1.4 Agency Theory and Outsourcing:

Major economists such as Fama and Jensen (1983) have presented the agency

theory in economies. It is widely implemented in strategic business management and it

is directed in some ways but discusses the agency relationship through a contract. In

this contract one party is the principal who hands out work to another party which is the

agent who is responsible to make sure that the work has completed and the agent has

performed that work. The Agency theory attempts to describe this relationship using

the symbol of a contract (Jensen & Meckling, 1976).

The traditional contracts have always been based upon mutual interests of both

parties with various issues raised while the processes are put in place to achieve these

mutual interests. The researchers have focused on the special case of the principal-

agent relationship based on a contract between owners and managers of large

corporations (Berle and Means, 1932).

Agency theory talks about the relationship between a principal and an agent;

however there is an area which ends up in various problems. One agency problem is

when the goals and desires of principal and agent conflict from each other and the

second problem is that it is very difficult to monitor any one of the parties for the

conflicting issues between them. This leads the whole relationship to a difficult stage

and the biggest problem is of sharing the risk involved as the parties will have conflicts

between them (Eisenhardt, 1989). Both streams share a common unit of analysis which

is the contract between the principal and the agent.

Fig 2: Source (Eisenhardt, 1989).

Fig 2 illustrates Agency theory where principal and agent has a contract towards the

outcome. They also share common assumptions about people, organizations and other

information. However, they may differ in their style. Major areas to look at between the

contract and outcome is the effects of an agent’s utility, function, uncertainty, risk,

incentives, pay offs, agent and motivation. Skill, effort and randomness are the major

areas where there is risk involved and need to be looked at. It is argued that outsourcing

helps to control cost and improve quality.

In outsourcing, organizations do not need to spend time and money to improve

internal efforts to achieve the required results. The same can be achieved cost

effectively while it is less risky and speedier than normal (Susan, 1996).

Applying agency theory to the outsourcing industry in shipping, it is noted that

the principals in this case are the Ship Owners and agents are the ship managers or third

party ship management companies or other supply, logistic and technical expertise

companies which provide and offer their services to the Ship Owners and to the

financial institutions who own these ships.

It is suggested that in-house operations for the goods or services often involve

production at a very low level even to achieve a minimum efficient scale (McFetridge

and Smith, 1998). Therefore there can be more than one reason where we see the

agency theory is applicable and relevant to understand the relationship these concerned

parties establish, develop and maintain over a period of time of the contract. Ship

owners and ship managers have the same relationship which agency theory refers to,

however most of the experts are concerned with this relationship.

1.4.1 Agency Theory: A Double Edged Sword:

Most of the experts are trying to resolve the two major problems that can occur

in agency-relationships in businesses. First is the agency problem that arises when the

desires or goals of the principal and agent conflict with each other.

The second agency problem is that it can be very difficult or expensive for the

principal (ship owner/Financial Institution) to verify and confirm what the agent (ship

manager) is actually doing. The problem of this relationship is that it cannot be

established if the agent (ship manager) has not behaved appropriately and therefore

both parties involved (principal-agent) will have different attitudes towards risk and

both parties’ principal and agent will have a different approach towards that risk and

course of action to deal with such risks will be different for both the parties. None of the

above will want to destroy this relationship but when these problems occur during the

processes, it can be very insubstantial and preferences to deal with risks will be

different. It is because the unit of analysis for both parties is the contract or an

agreement which is leading this relationship of principal and agent to work, the focus of

the theory is on determining the most efficient contract which can lead this principal-

agent relationship to achieve the goals and objectives.

The given hypothesis about people involved who may have self interest,

bounded rationality and risk aversion can be some of the examples. For organizations

and companies it may be goal conflict among members, and information which is

considered as a commodity and which can be purchased is under the shadow of the risk

(Eisenhardt, 1989).

The agency structure is applicable to the various industries in various ways

ranging from macro level issues such as regulatory policy, and governments to the micro

level phenomena such as guilt, impression management, and other expressions of

egotism. Most frequently, agency theory can be applied to organizational trend as

positivist in where two parties are principal and agent (Jensen, 1983). During the 1960s

and early 1970s, economists examined risk sharing among individuals or groups (Arrow,

1971; Wilson, 1968). The literature described the risk sharing problem as one that arises

when principal agent has different attitudes towards risk. Agency problem may occur

when cooperating parties, ship owners and ship managers have different goals and if

there is a separation of effort (Jensen & Meckling, 1976; Ross, 1973).

Sea transportation in world trade and economic growth is the most important

element, however globalization of the world economy has increased the rivalry and fast

changes in technology has changed the freight and trade and industry markets.

This has affected the world maritime and shipping companies to proceed with

international stock listing (Syriopoulos and Theotokas, 2007). In such an environment,

ownership structure in particular is ranked high because it relates to the agency

problem between investors and managers (Principals-Agents). However, “agency

problem is an important determinant of firms operating performance” (Core, Guay and

Rusticus, 2005, p.395.) But at the same time it will be interesting to examine the

relations between ownership structure and operating performance for the maritime

industry (Lambertides and Louca, 2008).

Agency theory makes two specific contributions which can be applied to ship

owners, ship management and its organizational thinking. The first is the treatment of

information and information is regarded as a commodity which has a cost and it can be

purchased. This gives an important role to formal information systems in an

organization. The implication is that ship management companies can invest in

information systems in order to control agent opportunism, as per agency theory.

An illustration of this is executive reward and various authors have expressed

surprise at the lack of performance-based executive reward (Pearce, Stevenson, &

Perry, 1985; Ungson & Steers, 1984). However, from an agency perspective, it is not

surprising since such a reward should be dependent upon a variety of factors including

information systems. Specifically, richer information systems control managerial

opportunism and, therefore, lead to less performance conditional pay (Courty, Heinrich,

and Marschke, 2005).

One particularly relevant information system for monitoring executive

behaviours is the board of directors. In the shipping industry, boards can be used as

monitoring devices for shareholder interests as per agency theory (Fama and Jensen,

1983). The same is agreed by the argument that if principals are in the driver’s seat,

specifying tendency, creating incentive, and making contracts that agents, which in this

case are ship managers, must follow and revert with the required results as per

principal’s choice and instructions is very problematic (Sharma, 1997).

A second contribution of agency theory is its risk implications. Organizations are

assumed to have uncertain futures. The future may bring prosperity, bankruptcy, or

some intermediate outcome, and the future is only partly controlled by organization

members. Environmental effects such as government regulation, emergence of new

competitors, and technical innovation can affect outcomes. The companies are highly

influenced by agency theory and have an impact of agency theory on the modern

corporations and their senior managers, but there are limits of agency theory where it is

presumed to be very dominating and may result with the principal-agent divergence on

various issues prior to making decisions on the processes within modern corporations

(Eisenhardt, 1989).

1.4.2 Agency Theory and Stewardship Theory:

Further research has shown that there is a need of another theory which will

align the interests in these relationships. Stewardship theory is presented which

addresses the concept when agents in principal-agent relationship have no personal

interests but they work as stewards of the principals where their interests are same as

the principal (Donaldson and Davis, 1989). However it is suggestive that no authors have

understood or addressed the mechanism of this theory. There is need of research to see

if stewardship theory fits in with agency theory in literature landscape rather than

opposing it. This refers to the role of agent as a steward whose goal is to work as a

principal representative and make decisions on behalf of principals further to progress

and to achieve a company’s goals and objectives.

There are differences between the agency relationship and stewardship

relationship. In agency relationship the incentives are limited which the agent would get

in terms that the reward is limited. However in stewardship relationship, agent is

presumed to work on behalf of principal and will make the best outcomes which are in

the interests of principal and the organization. Motivation is considered to be one of the

major factors of the difference between agency and stewardship relationship. In agency

relationship the rewards are tangible, however in stewardship relationship the reward is

in terms of opportunities for growth and self actualization and agents are motivated in

the same way so to achieve the goals and objectives as defined, mutually agreed and

are designed with very less risk which principal and owners are willing to take (Davis,

Schoorman, and Donaldson, 1997).

1.4.3 Principal –Manager Choice Model:

Principal-manager model, as illustrated in Fig 3, talks about the variations and

has shown how the principals/owners of companies and managers/CEOs of the

companies decide which relationship, either agency or stewardship, they want to

establish between them. This model has shown various stages for example in (Cell 4) it is

shown when both parties’ principal and manager choose to have a mutual stewardship

relationship. The results will be maximizing potential performance.

Fig: 3 Principal –Manager Choice Model

Source: (Davis, Schoorman, and Donaldson, 1997)

Similarly at (Cell 1) when both parties’ principal and agent choose to have a mutual

agency relationship, this will result in minimizing the potential costs.

On the other hand at (Cell 2) if principal chooses a steward relationship and

agent chooses an agency relationship this will result in a situation where agent has

acted opportunistically and principal is angry and feels betrayed. It is suggestive that the

principal will try to use his power to either change the agent or may withdraw from the

situation. At (Cell3) if principal chooses an agency relationship and agent chooses a

stewardship relationship this will result in a situation when principal has acted

opportunistically and agent is frustrated and is betrayed.

At these levels when there is a clash and difference between interests, it will

slow down the process of an organization while achieving their goals and objectives.

Applying the stewardship theory to ship owners and ship managers, who are the

principal and agents respectively; the ship owners as principal need to define which

relationship they are going to develop over time and the criteria the ship owners are

going to choose to select a ship management company to outsource services from, will

be based on a contract. The contract can be based on performance or various variables

can be used to verify and evaluate the ship management company before the contract

or agreement between these parties take place (Panayides , Cullinane and Kevin, 2002).

It is suggestive that ship owners always have a selection criteria and aims and

objectives prior to choosing a manager to work as an agent on their behalf. The research

has shown that ship owners, as principal, have a strong reason of outsourcing services

from third party ship management companies to minimize the total cost for the services

received, as a better quality is based on transaction cost approach (Williamson, 1981). It

is argued that in ship owner and ship manager relationships, the bargaining costs arise

as both parties have self interest but in good faith (Williamson, 1985). There will be

cases where outsourcing ship management services can lower production cost

(Panayides, Cullinane and Kevin, 2002).

There is still a need of developing a more dynamic model with the variables

which may influence the principal-manager relationship and we may need to analyze

how prior decisions and time will affect the future relationships. These relationships,

either based on agency theory or stewardship theory play major role in performance of

an organization. The contracts they have between them are for common interests and

these theories are directly involved with the concept. When we talk about performance

and contracting between organizations based on these relationships, they can be used

to develop contracts based on performance. The relationships based on these theories

can play a major role when outsourcing services from third parties and developing

strategies based on performance which refers to a step towards growth.

1.5 Outsourcing and Its Major Issues:

Outsourcing is defined as “procurement of products or services from sources that

are external to the organization” (Lankford and Parsa, 1999, p. 310). In product

outsourcing it will be buying a product from a manufacturer where as in services

outsourcing it is more related to transfer of operational control to the outsiders known

as suppliers. It is difficult in today’s economy and business world to control and provide

services internally. It is suggestive that competitive advantage can be gained when

products and services are outsourced form the suppliers who are outsiders but

preference is towards cost effectiveness and efficient delivery of services on time. This is

the reasons that managers and senior managers look into outsource and commend third

parties.

The advantages of outsourcing can be strategic and operational. The short term

trouble avoidance can be achieved via operational advantages however the strategic

advantages will be to maximize opportunities with long term contributions. It is

apparition, purpose and economics that impel the need of outsourcing (Harkins, 1996).

On an organizational level the reason for outsourcing would be so the organizations can

focus on their core activities.

The most noteworthy issue and risk lie in the need to develop new management

competencies, capabilities and decision-making processes. This will include the

decisions on which services should remain in house and which services to be outsourced

and further how these relationships will be managed.

The mistakes in identifying core and non core activities can lead organizations to

outsource their competitive advantage however core and non core activities are

changing every day in today’s competitive business environment (Harland, Knight,

Lamming and Helen Walker, 2005).

1.5.1 Advantages and Disadvantages of Outsourcing:

Outsourcing involves many advantages that increasingly attract companies to

outsource operations to third parties. The first benefit is that owners have been able to

focus on their core businesses and the corporate resources, when the secondary

resources are outsourced. Cutting cost is often seen as a major advantage in

outsourcing. So this reduced costs, expanded services, improved employee productivity

and morale, and better corporate image and reputation.

It is suggested that most of the contract, as based on outsourcing target, at least

minimum of 15 % cost savings and sometimes between 20 to 25 %. These contracts are

usually signed for a period of 5 years or added clauses related to performance (Manion

et al., 1993).

At the time of recession, it is recommended for firms to go for outsourcing

contracts, hence saving money. These partnerships are a viable solution to the

productivity problem for the corporation undergoing downsizing of their employees

under the recession. Further outsourcing can be designed to meet the need and culture

of the organization (Runnion, 1993). Others propose that under changing business

conditions, demand of various services, products and technologies, outsourcing helps to

meet these changes and improve business flexibility (Greaver, 1999). It also helps to

demoralize the power of trade unions and improve the new credibility and image of the

corporate organizations (Kerr and Radford, 1994). Outsourcing allows for a quick

response to environment changes (Dess, Rasheed, McLaughlin & Priem, 1995) however

it should not increase the cost as associated with the bureaucracy (D’ Aveni &

Ravenscraft, 1994). Therefore the companies that outsource may earn long-term

advantages with such contracts and agreements.

Organizations can focus more on their core competencies as another benefit of

outsourcing, therefore defining and developing core competencies is popular among the

management researchers and practitioners (Prahalad and Hamel, 1990). Another

advantage of outsourcing is to promote competition among other suppliers,

competitors, for the products and services (Kotabe and Murray, 1990).

Figure 4 illustrates the various types of outsourcing which are peripheral and

core in unique ways. The proposed effects of peripheral and core outsourcing intensity

on firm performance further highlights the influence of firms’ strategy and environment

dynamism on outsourcing performance relationships. Referring to the section (Ship

Management Industry – An Overview) there are so many external factors affecting

shipping companies politically, economically, socially, technologically, environmentally

and legally.

Fig 4: Types of Outsourcing (Peripheral and core) and their impact on firm performance Source: (K.M.Gilley and A. Rasheed, 2000)

These factors have an impact on decision making processes for the organization

further to services they will outsource to. The ship management companies are

specialized to offer services to all these areas. Another advantage for outsourcing is that

companies specialized in these areas are constantly aware of what is happening and

they are more informative for the policies, law and new regulations coming into force

and they are specialized in dealing with these. At the same time their reputation in the

market along with other competitors makes them add value to the services they offer.

This includes areas from safety to quality, to technical management and purchasing of

technical materials and provisions etc, to make these services more precise and

valuable. Therefore, “Ship managers are looking at new ways to sell their services as

an alternative to what they say is a long-overdue rise in fees” [5]

Outsourcing has appeared to be a very productive way for organizations to

increase efficiency while managing performance; however there are disadvantages and

risks involved with outsourcing. One of the biggest risks is handing over an in-house

operation to an external party. It has been argued that if outsourcing is going to benefit,

it is critical to assess if the timing is right for outsourcing. The outsourcing decision plays

a major role while careful selection of the third party and management can use this

decision to enhance their strategic position (Carr and Pearson, 2002).

It is important that companies must have a strong control over their functions

which are outsourced or managed externally. There is a risk of losing suppliers as third

party management companies will deal with the suppliers and organizations will lose

the control they had on their suppliers. On one side there are advantages of outsourcing

but on the other hand the risks involved in outsourcing cannot be ignored. The risks and

disadvantages suggest that there must be a procedure to be implemented to enable the

organization to evaluate and control the performance while outsourcing to third parties.

It is argued that some of the organizations do not gain expected benefits. The reasons

told are focusing on short term benefits and lack of formal outsource decision making

processes, including medium and long term cost benefit analysis which increases the

complexity in the total supply network (Beaumont and Sohal, 2004).

There is evidence that “operating performance is positively related with

foreign held shares and investment corporations held shares, indicating better

investor protection from managerial opportunism” (Lambertides and Louca, 2008, p.

395).

1.5.2 Outsourcing and Competitive Advantage in the Ship Management

Industry:

After closely analyzing the function and issues of outsourcing, including its

advantages and disadvantages we can now hypothesize possible solutions to

disadvantages and risks to outsourcing. We may need to make sure that it is urgent to

maintain the environment to achieve the longing value for money schemes. The same

can be controlled and achieved by creating processes which cannot be duplicated or be

matched by the competitors. Clear positioning of organizations’ businesses in the

market and adding value to it.

Porter (1985) has presented the added value for what you are best at. The skilled

staff ability to untangle the complexity of legislation and available technologies and

understandable cost benefit proposal can be sustained throughout the organizations.

The globalization and internationalization of shipping has developed the opportunities

(Sletmo, 1986). The attractiveness to outsource services from third party ship

management companies is increasing because of various reasons such as shipping has

become more a part of logistics of supply chain. Similarly the innovation and

improvement in technology has increased the demand of skilled individuals and

specialized equipment (King, 1997). Therefore there is a demand of skilled workers at

sea and on shore (Richards, 1989).

The owners need to make sure the third parties they outsource to can show

their ability to imagine the future and understanding of latest industry developments. It

is stated that ship management companies can develop competitive advantage; the

element(s) that differentiate them from their competitors and understanding the

intense competition across maritime sectors. The competitiveness can be achieved

through the client and effective organization procedures (Collis, 1991). Hence

companies have access to intangible resources within the organisation they can utilise,

to achieve competitive advantage by evolving “resource-advantage theory of

competition” (Peteraf, 1993).

The same theory is to be applied to ship management companies in order to

establish and sustain long term relationships with the owners of the ships. Sletmo and

Holste (1993) introduced the notion of intangible resources for competitive advantage

in shipping at a nationwide, macroeconomic perception. However, an inquiry into the

Nature and Causes of the Wealth of Nations (Smith, 1776) suggests that companies can

develop relationships with other companies in order to succeed.

Companies do need to restructure their partnerships to sought competitive

advantage over competitors (Porter, 1997). While offering outsourcing services to ship

owners, the most important and vital asset is the client and hence to achieve

competitive advantage, long term relationships with the ship owners need to be

sustained and based on variables like trust, commitment, professional relationships

(Morgan, 1994) and value to client needs and requirements (Hallen, Johanson and

Seyed, 1991). Various issues have been discussed covering the disadvantages, which can

lead us to hypothetical solutions as researched in this dissertation. Performance based

contracts will play a bigger role while owners outsource various services from third

party ship management companies. We will further develop the concept behind the

performance based contracts and use of KPIs in the shipping industry.

1.6 Performance Based Contracts and Key Performance Indicators:

Although the literature available on performance and KPIs is extensive, and the

concept of performance management, in all its forms, can be found across a broad

range of literature, what is to be found in specific respect of “Performance-Based

Contracting in Shipping Industry” is limited. This is somewhat surprising when

considering the overall trade of the world, approx 90% is carried by international

shipping industry. The major imports and exports are not possible without

shipping. Seaborne trade is done via more than 50,000 merchant ships and the fleet

is registered in more than 150 nations. [6]

It is therefore required to look at the literary definitions of individual key words

and phrases that make up the title of this topic to try to satisfy our objective of a specific

definition. Performance based contracts refer to an agreement between two parties and

sometimes more than two parties, based on performance. Traditional contracts are

entirely based on requirements of the parties as agreed, however performance based

contracting is a framework for the delivery of products or services where payment is

directly related to the performance (Baker,1992).

Performance may lead organizations towards growth and has various stages of

development, the act or process of, the size or stage of, from a simpler to a more

complex stage and finally completed development. It is underlined that in business to

business relationships it is important to highlight the role of companies to provide

services to an agreeable performance while they proceed towards establishing contracts

between them. The companies are becoming more dependent to outsource services

from third parties on a competitive price and achieving improved performance and

growth as per market demand; however it is very important to define certain issues in

the contract. The agreement between these parties is designed so to avoid any conflicts

or elements that can affect the implication of the plan and processes while saving all

parties’ interests (Kumar and Markeset, 2005). In other words all companies require a

well-defined strategy which is related and relevant to the industry (Alexander, 1991).

The use of performance indicators can be internal and external; the same can be

used within an organization to measure performance to see if these have improved

operations of the organization. The external companies may use them to evaluate third

parties before the business contracts or agreements are made. One of the aspects

further to benefits of KPIs’ measurement is benchmarking the performance against the

industry standards. KPIs are about how the company is performing and how important

the performance is for the company in terms of in-house operations or specific projects.

The interest eventually is in the organizations’ performance outcome.

It is very important to understand the concept of “Performance Management

and its Evaluation”; that involves various levels of analysis while monitoring the

performance. A key tool used to see that processes are carried out safely are key

performance indicators. As the name KPIs suggests, these are the markers which various

organizations use to benchmark and special tasks are designed to mark the safety and

efficiency of the company. However, KPIs vary from industry to industry and they are

designed in a way to meet the organization’s aims, goals and objectives, developed from

the processes already established. The main reason of creating a KPI standard is with an

objective of internal improvement processes and improvement in external

communication about performance.

One of the major aspects in achieving performance is through motivation. The

motivation levels within the organization at all levels and defining, measuring and

stimulating employee performance through increasing the level of motivations and

various ways of compensating them and to make them feel that they are important to

the organization. This plays a major role in organizational performance and achieving

the goals and objectives. (Hartog, Boselie, and Paauwe, 2004).

Performance management deals with the issues within businesses; to determine

the effectiveness of businesses and the processes associated within it, Key Performance

Indicators are used. By collecting and analyzing appropriate data gained from

monitoring, measurement and inspection, we can obtain values or KPIs and analyze

trends. The subsequent analysis will assist businesses to continue to improve business

processes; similarly the key business areas which with every industry vary, some

examples are included in Appendix (A), which refers to key business areas and key

benefits of KPIs as implemented.

In general, the use of KPIs is primarily for internal use; however data from the

various areas within the business plays a significant part in statistical analysis. Initially

the indicators created are PIs which will then be reformed to the relevant areas from

time to time in order to highlight areas where either improvement has been made is

required or has to be made.

1.6.1 Development of a Performance –Based Service Strategy- A Frame

Work:

Establishing performance based contracts refer to the performance-based

service strategy where principals require certain services and these services are

outsourced at a competitive stage from agents or third party management companies.

Figure 5 illustrates a relationship of the service buyer’s strategy and service seller’s

strategy in terms of business growth while improving performance.

The strategy as based on performance is a process where required services are

designed to be delivered. The factors that affect this process are SDS and SRS and

external factors which include elements like geographical location, operating

environment and operational requirements.

Fig 5: A framework for the development of a performance-based service strategy

Source: (Kumar and Markeset, 2006).

After the services are delivered, the figure illustrates Gap which is the key area

where assessment of required and actual delivered services is conducted. To conduct

the assessment reporting of data, collection is done and later it is analyzed. During the

reassessment of influencing factors it is analyzed to see if this strategy is working and to

see if processes are compatible with the designed strategy and further to measure the

performance (Kumar et al., 2006).

1.6.2 Application of Performance Based contracts in other industries:

Performance based contracting social welfare programs, for example “The

Wisconsin Works” (W-2) have completely changed the welfare service delivery from the

government administration to performance-based contracting and private sector. This

has implicated positive effects on the overall progress of the delivery of the services. A

study has been done between 1997-2005 where the state has transitioned to a

performance based contracting regime.

There has been rational change in the contracts and measures were taken which

has shown very positive effects while measuring performance. That has improved the

contract efficiency over time and service providers have responded to these changes

and prioritized their efforts towards targeted performance goals, however the

deficiencies in contract management has also contributed to some performance and

contracts failures too (Heinrich and Choi, 2007).

“In 1997, concurrent with the introduction of Temporary Assistance for

Needy Families (TANF), Wisconsin ended the county government monopoly on

public assistance administration by inviting private sector agencies to compete for

contracts to manage local-level programs. Performance-based contracting was also

introduced as a primary mechanism for motivating and monitoring the

performance of W-2 agencies. Thirteen private sector agencies in nine counties

came to manage more than 70% of the W-2 caseload in September 199”.

(Heinrich and Choi, 2007).

Performance based contracting and its impact based in product reliability in

major manufacturer air craft engines has been investigated and discusses about the

service provided in after sales repair and maintenance support contracts, however these

contracts are based on the product reliability and the study has shown positive

incentives as created because of performance based contracts on product reliability.

The research also investigated and realized that there is an ongoing debate going

on, implementing performance based maintenance contracts in both private and

government sectors. Performance based contracts over time have become popular in

industries like automobile, defense, information, technology aerospace and

development of software which refers to software as a service. The relationships are

developed, based on performance and government and defence department in

particular looking into implementing performance based programs for better results and

sustainable growth in economy (Kumar et al., 2006).

Performance based contracting has been applied in the transportation industry;

the contracts are based on performance and called performance based maintenance

contracts. It is suggestive that these contracts do succeed when the contracting agency

and contractor both are ready to share the risk and reward, similarly they make sure

that procedures are adopted and KPIs are established to measure the performance and

aims and objectives to be prioritised accordingly. The use of performance based

maintenance contracting has widely accelerated in the world and therefore:

“By 2005, 35 countries had performance based maintenance contracts. By

early 2006, approximately 15 more were exploring or adopting this approach to

maintenance. In the United States and Canada there are already many examples of

PBMC. States, provinces, and other entities that have been leaders include

Virginia, Texas, Florida, the District of Columbia, British Columbia, Alberta, and

Ontario”.[7]

It is encouraging to see that Performance based contracts have been used and

implemented in other industries. This proves that these types of contracts on adoption

improve the efficiency and also give a further insight in their usage in various ship

management contracts and measuring of performance through KPIs. Business

performance has always been measured in financial terms but this has broadened the

effectiveness of measurement and success is also measured on customer and employee

measures of service quality. However balanced score card approach and its usage make

a difference, linking it with long term strategic goals of the company (Figge et al., 2002).

1.7 The Shipping KPI Project:

There is no international standard for ship management operational

performance in the world and this has led to a situation where a lot of companies are

defining, measuring and reporting performance information differently. There are

various issues with KPIs in the shipping industry. As mentioned previously there are too

many KPIs which has increased the risk for confusion and mistakes. There are a large

number of information systems, along with this there is a spread -sheet culture where

data is collected manually which increase the risk for mistakes. The lack of consistency

of PI definitions and of data collection processes may have an impact on overall

performance. It is a hard task to compare performance between two companies. The

focus on quality improvement is not possible because of lack of aggregated

measurements and benchmarking to the performance of the industry.

The companies found to be good at rewarding for good performance,

unfortunately are the companies poor at taking action to rectify poor performance. The

lack of transparency of data and lack of understanding of the different uses of PIs has

also affected the shipping industry in general. The CSR concept has emerged in various

reporting requirements because of the environmental issues.

There is an additional need of manpower to present this information to all

parties involved in the business. For above reasons there is a need of an international

standard in the shipping industry to measure the performance. Intermanager,[8]

MARINTECK,[9] The Research Council of Norway [10] and Wilhelmsen ASA[11] has

developed a Project research programme so these standards can be used across the

shipping industry first to boost performance internally in the companies in ship

operations activities and secondly to provide a platform for effective communications to

internal and external stakeholders. [12]

The SPI Hierarchy project as shown in Fig 6 is aimed to establish a performance

indicator hierarchy, so a limited number of high level indicators could be calculated

based on performance measurements. A study of KPIs was formed by the company ICS

Ltd [13] and these KPIs are used to establish SPIs. The SPIs express Safety, Security,

Technical, HR, Navigational Operational and environmental performance indicators.

Fig: 6 The SPI hierarchy

Source: (Shipping KPI report, 2008)

For effective policy making in shipping and implementing hierarchical logic,

further to decision making needs, clearly defined goals within the organization and

hence performance measurement for these policies (Frankel, 1992). By 2008 the

project research by the group of companies as mentioned previously were able to

establish the Performance Indicator hierarchy which consists of 7 Shipping Performance

Indexes (SPIs), 30 Key Performance Indicators (KPIs) and 58 Performance Indicators (PIs).

The PIs are considered to be building blocks and they give basis for the KPI value

calculations. Examples can be Collisions, Grounding, Oil Pollution, fire incidents. PIs are

the only elements that are reported manually or suggested ICT Solutions. The role of

technology in innovative organizations has improved over the period of time and the IT

solutions that companies are developing, are improving day by day to get these

procedures in place. These PIs to be added automatically and various softwares within

the organizations in use can be interconnected with each other to get the data available.

The 58 PIs are listed in Appendix (B).

The KPIs are expressions of performance related to specific areas and these are

expressed either as a mathematical combination of relevant PI values or a KPI rating

which is an expression and a value on a scale between 0 and 100, where a high rating

(100) is a result of excellent performance. Examples are Budget control per ship, Dry-

Docking Planning performance and Ship availability and readiness for cargo. [14]

The SPIs are expressed as a weighted average of relevant KPIs ratings on a scale

between 0 and 100. The main reason for the SPIs is to boost the performance and the

effective communication and information to external and internal stakeholders with the

overall performance of the ship, technical management office and crew management

office management. Appendix (B) specifically shows Matching Matrix of KPIs and SPIs

and further a calculation example from PI, through KPI to SPI is shown and further

values are shown in detail.

Chapter 2 - Methodology

2.1 Introduction:

Methodology is a particular research method which is employed in order to carry

out a research. The method adopted to undertake research requires one of two to be

characteristic of research before it is undertaken – inductive or deductive. Following

from this, the method is chosen according to the convenience and interest of the

researcher and availability of data. Choosing an appropriate method is one of the most

important steps in conducting research. There are several methods that can be adapted,

which can be either qualitative or quantitative. When designing the methodology, the

researcher needs to be aware of the research question/s and the aims and objectives of

the research.

2.2 Aims of the Research:

The purpose of this research is to observe, through different sources of

information, the previously stated theories and conclusions concerning performance

based contracts and the future of outsourcing in ship management while it is moving

towards KPIs. It is essential to observe this topic within its industry, hence the

researching of both ship managers and ship owners in various shipping companies.

The nature of research is both exploratory and descriptive. Exploratory research

is used for situations where little or no other similar research has previously been done

and hence limited amount of knowledge is there on which to build (Marshall and

Rossman, p. 16). In relation to exploratory research, descriptive research will be used

since it’s “goal is to develop a careful description of different patterns that were

expected during the exploratory stage” (Yin, 6). Thus, exploratory research will look into

whether performance based contracts will play a major role in third party ship

management companies while shipping is moving towards KPIs and it’s further use in

the future, and the descriptive part will consist of finding patterns for these findings

which could lead to possible conclusions.

There are many reasons why quantitative research was not the best method for

this research, the prime reason being that the research took out its elements from

theories previously stated by researchers relevant to this field. Also, the research is

looking into business relationships which usually involve human behavior and the

reasons that govern such behavior. And due to shortage of time and the nature of the

research, quantitative research would not have been appropriate.

Qualitative research is the kind of research design which has many different

emphases from quantitative research (Easterby-Smith et al., 1991). One of the most

prominent and significant differences between qualitative and quantitative research is

the priority given to the perspectives of those who are being studied rather than the

concerns of the researcher. Apart from that, a certain kind of emphasis is on the

interpretation of observations in accordance with the subjects’ own understandings.

The methods adopted for this research made use of structured, open-ended

written interviews, instead of face-to-face interviews. These were intended for two

groups of people; group A included five ship managers and group B five ship owners. It

was established well in advance that the number of participants required for this

research would be limited to at least four people per group.

One of the reasons for that is the fact that it is difficult to access people in this

profession. Written interviews were conducted instead of face-to-face or over the

telephone interviews because of the difficulty in accessing the ship managers and

owners. Many of them are situated in different countries and the most problematic

issue in this case would be the time difference – since every country is either a few

hours ahead of UK or a few hours behind. It would have been almost impossible to

interview each person at a time which would have suited both the participant and the

researcher (keeping in mind the time difference). The issue of recording these

interviews and then transcribing them would have proved time consuming and quite

difficult.

2.3 Research Design:

The interviews were designed in a similar way to a questionnaire, structurally,

however with a completely different purpose in mind. The interviews were expected to

be answered in the same way as in an actual interview setting. Questions were drawn

up and typed and then sent out in this format, with the expectation of being answered

just like in an interview, but typed up instead of spoken.

The open-ended interview questions to ship owners will concern the

outsourcing of third party ship management, separation of ownership and control,

sentimental values, performance based contracts and KPIs. Similarly open-ended

interview questions to third party ship managers will concern the relationship with

owners, performance based contracts and KPIs. The results from both interviews will be

cross examined in order to determine recommendations for future, changing trends

and the behaviors of these companies in the maritime business.

The information from both parties, ship owners from various shipping companies

and ship managers will be observed. This will be cross examined in order to support the

main leading question “will performance based contracts in third party ship

management play a bigger role while shipping moves towards KPIs?” The two types of

data will be evaluated qualitatively, as it focuses on developing individual views and real

life examples. There was a general company information form attached with all the

interviews that were sent out. This included some multiple choice-type questions which

required the participants to state information such as whether they were ship

managers, owners or both, where their company was located in the world, whether

they were aware of key performance indicators and questions about their offering and

outsourcing services.

Patton (2002, p. 230) says that “qualitative inquiry typically focuses in depth on

relatively small samples, even single cases, selected purposefully.” One of the reasons

that qualitative research was chosen for this dissertation is that the sample size was not

expected to be large at all. The researcher was expecting only six responses each from

ship owners and ship managers.

Unlike quantitative research, this research did not depend on larger samples

selected randomly. This research made use of purposeful sampling, the logic and power

of which lie in selecting information-rich cases for study in depth (Patton, 2002).

Information-rich cases are those from which one can learn a good deal about issues of

central importance to the purpose of the inquiry. The issues of central importance

mainly surround the themes of the research. In certain aspects, this research resembles

quantitative research. This is mainly in the area of the research design. The structure of

the interview questions and the way they were distributed is similar to quantitative

questionnaires. “Structured or non-standardized interviews can be used in survey

research to gather data, which will then be the subject of quantitative analysis”

(Saunders, Lewis and Thornhill, 2003, p. 248).

Even though this may seem like this research, since it carried out structured

interviews, is quantitative, this might shift the focus towards qualitative research:

‘’ Semi-structured and in-depth, or non-standardized, interviews are used in qualitative

research in order to conduct discussions not only to reveal and understand the ‘what’

and the ‘how’ but also to place more emphasis on exploring the ‘why’’’ (Saunders, Lewis

and Thornhill, 2003, p. 248). Interviews were the best way to find out the reasons for.

The purpose of interviewing is to allow one to enter into the other person’s perspective

(Patton, 2002). Qualitative interviewing begins with the assumption that the perspective

of others is meaningful, knowable, and able to be made explicit. Interviews are carried

out to find out what is in and on someone else’s mind and to gather their stories

2.4 Recruiting Subjects:

The subjects for this research were a diverse group of male, middle-aged ship

owners and managers from different shipping organizations. They are located in

different countries around the world, such as China, Singapore, Japan, Pakistan, Egypt,

India, Monaco, Greece, Germany, Netherlands, England and Scotland. The participants

for this research were recruited through several gatekeepers within the researcher’s

own organization. These gatekeepers were known to the researcher since they are his

colleagues.

The interview questions were first e-mailed to six gatekeepers in various

organizations who then forwarded them to other ship managers and ship owners that

they knew of in several shipping organizations in the world, thus creating a snowball

effect. In this way, the researcher got in touch with these participants through e-mail

himself; since once they knew about the research questions, they contacted the

researcher about it.

2.5 Sample Characteristics:

The total number of ship owners who responded to the interviews is six and the

ship managers are six as well. The participants are male and female (mostly male),

middle-aged ship owners and managers working in some of the prestigious shipping

organizations of the world. The profession is a male-dominated one, which means that

there were not many women ship managers and owners that were expected to be

available to participate in the research. Ten of the total numbers of respondents are

male and two are females. The ship managers and owners responded within a period of

one month.

2.6 Research Limitations:

One of the major limitations in this research was the fact that since the interviews

were not conducted face to face, this left out the chance to conduct semi-structured

interviews. The interviews had to be designed and structured a certain way for

everyone. Had there been the opportunity to conduct face to face interviews, it would

have allowed the researcher to initiate on-the-spot questions from the responses of the

ship managers and owners. This would have led to a further exploration of the issue of

ship owners and managers’ behavior and their approach towards performance based

contracts. Since you can form a question right there on the spot, in response to the

answer of a previous question. You can mould and shape the question as you interview,

thus leading to semi-structured interviews, but in this case the researcher had to design

the questions in a certain fixed way. There was no opportunity to initiate a debate with

the respondents’ first-hand on the issues that were being explored, due to this

limitation.

Another limitation of this research was that due to the inability to conduct face-to-

face interviews, the researcher did not have a chance to observe the facial expressions

of the subjects and their body language – two very important aspects of an interview.

These gestures give the interviewer a chance to better understand the interviewee and

to see where he or she is coming from while answering. There is a less chance of

misunderstandings or misrepresentations; there is however, bias in such interviews. This

is because the comments, tone or non-verbal behavior of the interviewer can create

bias in the way that interviewees respond to the questions being asked (Saunders, Lewis

and Thornhill, 2003).

This might be where the interviewers attempt to impose their own beliefs and frame

of reference through the questions that they ask. It is also possible that the interviewer

demonstrates bias in the way he or she interprets responses (Easterby-Smith et al.,

2002). This forms part of a range of data quality issues that are identified in relation to

the use of face-to-face in-depth interviews.

Chapter 3 - Overview of Significant Findings, Analysis of

Results & Discussion:

3.1 Introduction:

Findings refer to the results of the research conducted. Findings or analysis is

that step in research where the researcher lists down the results of what he has been

trying to answer through the research question/s. If the findings are the result of

quantitative research, they are likely to be statistical in nature; whereas if they are

qualitative, they are likely to be descriptive and exploratory in nature. The results of a

research either prove or disprove the researcher’s hypotheses or research questions.

3.2 Overview of Significant Findings:

This part of the dissertation will talk about the analysis of the interviews

conducted and findings of the research. These findings give an insight into the responses

of the ship owners and ship managers regarding the shipping business and the major

themes that are part of the literature.

3.2.1 Ship Owners:

Interview questions were sent out to various ship owners in companies abroad.

A total of five responses were received over a period of two weeks. These will be

analyzed one by one, also keeping in context the general company responses for every

participant.

RESPONSE 1:

The first participant identified himself as a ship owner and a ship manager. The

company he represents owns between twenty to fifty vessels and the geographical

location of his company is Asian. The management services they outsource are related

to crewing and their company belongs in the category of oil tankers. He says that they

are aware of key performance indicators and performance based contracts and would

like to investigate more about them in future. He says they have between one to five

contracts in place with third parties and no contracts based on performance.

In response to the question regarding difficulties and barriers, the participant

said that it was challenging to enter the shipping business in the beginning but his

company was prepared for that by looking for the appropriate staff to run the business,

getting approval from oil majors. He said that they set out to make repute within the

shipping world so that they could run the business successfully. They did this by

developing the trust of suppliers, agents and surveyors. He did not respond to the

question about sentimental value for ships and if he thought shipping was a family

owned business or not.

With regards to the question on outsourcing, the participant replied that they

had outsourced ship crewing at the time when their own pool of ship crew was not

ready to take over their full fleet. He said that they outsourced because at the time they

did not have their own pool of crew. It seems they do not outsource anymore in order

to have better control on their ships and to upgrade their fleet. The participant said that

what motivates his company to outsource was to be able to have an experienced crew

to run their vessel and to save cost in hiring shore technicians to rectify day to day

effects.

Since the participant’s company does not outsource at all, he did not need to

answer the rest of the questions and therefore went on to the remaining relevant

questions. In response to the future strategy he said that there is no plan to outsource

since they have their own ship staff who is experienced and trustworthy enough to run

the business at a lower cost compared to outsourcing and paying more. With regards to

the recession, this participant said that the current recession has definitely affected

their company’s business; their revenues have dropped, they have to reduce manning

onboard their ships and cost-cutting to reduce their direct running cost.

RESPONSE 2:

The participant is both a ship owner and manager and his company owns more

than a hundred plus vessels in Europe. The types of management services they offer are

crewing, technical management and chartering and they outsource technical

management, insurance, chartering and operations. His company belongs to the

segments oil tanker, bulk and container. The participant states that he is aware of key

performance indicators and performance based contracts and would like to investigate

more about them in future. He said that his company has between fifty and hundred

contracts in place with third parties and no contracts based on performance.

In response to the questions asked, the first being about barriers and difficulties

faced, this participant said that his company started out a few decades ago and their

major business was finance. He said that they do have a sentimental value for some

ships or ship-types. He believes that ship-owning is not principally a family-owned

business, however in their case, it is. On the questions about outsourcing he says that

his company mainly outsources ship management. He also said that third-party ship

managers are now an integrated, very professional part of the maritime industry.

He said that the reasons they outsource are for the flexibility of the organization

and world-wide coverage and what motivates them to outsource is flexibility and

competition between the competitors. Since his company outsources, he was basically

satisfied with the outsourcing of ship management party but still offered some

suggestions for improvement in transparency and he wrote ‘bringing the bad news.’ He

also said they have a very close relationship with the third party ship management

company that they outsource to.

With regards to the evaluation of overall performance of third party ship

management company that the participant outsources to, he said that it is ok to

evaluate and they do that through half-yearly meetings and reporting in their financial

statement format.

In response to the question about interference as a ship owner over their ship’s

operations, the participant said that they interfere and communicate on a daily basis

through a separate technical department at head-office and also via the operations

department. On selection criteria for ship managers, the participant said that it was

based on geographical coverage, size and reputation. He also said that they aimed for a

long-lasting relationship with ship managers.

Also, he agrees that it is preferable to change your manager after a long period

of time, depending on performance and the relationship. And that the changing of a

manager depends on performance and nature of relationship with them.

The respondent said they had purchasing contracts with third parties that they

outsourced to, believes, with regards to performance-based contracts decreasing the

risk involved in outsourcing, that it will be difficult to set straight objectives and targets

and believes performance based contracts should be encouraged in the future and that

they can make a difference towards achieving competitive advantage over competitors.

The participant says that taking risks is a way of life in the maritime industry and

that the current financial recession has affected his company. They have lower charter

rates and have problems in finding finances.

RESPONSE 3:

This participant says that his company is different from most maritime

institutions in that the ship, named X here, became part of the company as part of a

floatation away from the original parent company. Explaining the sentimental aspect he

said that as it was an older vessel and since the company is not a sea faring company,

there is no sentimentality that one would find. He goes on to say that since the cost to

run the vessel is really high, it is seen as the company albatross. He did not answer the

questions regarding barriers or if it was a family owned business or not.

In response to outsourcing, he said that the company outsources all the seismic

and marine logistics operations. He says that this is what they have logistically inherited

because the bareboat charter is short (2 years remaining) and there is little

compunction in the company to take over those roles. Ease of operation, lack of

experience within the company and a short time line to set up a fully functional logistics

and operations department within the company to have to just dismantle it again, is the

reason he says they outsource.

He believes that the outsourcing of ship management party is ‘a strange

marriage of convenience.’ With respect to the areas which require improvement, he

says that because of the lack of accounts and costs experience in running ships, there is

friction which is excerbated by errors found and the lack of explanation notes in

accounting for certain aspects of operations. He also says that there are no set KPI

factors employed to evaluate the overall performance of the third party ship

management company that they outsource to. He also said that there should be ways to

evaluate their performance and that they do look at account variation, HSE and ship

downtime as indicators and use seismic marine ops experience to judge on

performance.

His company has a free hand in how the marine side operates and he does not

believe in micro-managing. He will get involved in the shipping operations only if there is

a trend which he feels through experience, should be rectified, then only he will get

involved or he would rather ask his operations manager to get involved. He also believes

that there is no need to change a long-time manager if he is competent. His company

has mutual aims and objectives with third parties that they outsource to due to the

efficiency and effectiveness of ship operations done at minimum wasted cost.

In response to the question about performance based contracts, the participant

believes that they do play a big role in the shipping business in some quarters because

the KPI can be put into a laptop and numbers crunched, stats formed and decisions

made purely on that. He believes that the soul of maritime operations is personalities,

whether good or bad. The newer bright young thirty year olds who are now starting to

run marines will change the face of the maritime industry because that is the way they

work. He believes that gut feeling is slowly diminishing. Performance-based contracts

should not be encouraged, he believes, as he says ‘because I am not an accountant. If I

see a trend I’ll act on it and expect a reciprocal response to resolve the issue. The end

result of any contract is fairness on both sides and a lack of friction. Money causes

friction – full stop.’

In response to the question regarding future strategy towards outsourcing and

taking risks in the business, the participant says that business of the modern variety is

risk adverse unless there is no option, which is the case with them. He says he would

personally take a risk based on his experience as long as he knows the odds of failure

are long.

He says that the recession has not affected them but the price of oil does; ‘Yes

there is a correlation but not in the same way as simple internal economic supply and

demand. China and India still require large amounts of oil and gas and that will offset a

National recession within the seismic industry. Shipping goods around is a different

model.’

RESPONSE 4:

This respondent is a ship owner and the size of his company is between one and

ten vessels, located in Europe. They outsource technical management services along

with insurance and operations. The management service they offer is chartering. The

company belongs to the chemical segment and their headquarters are in Europe. They

are not aware of KPIs and performance based contracts but would like to investigate

more about them in future. They have between one and five contracts in place with

parties and do not have any contracts based on performance.

This participant says that it was not difficult for his company to enter into the

shipping business because they had management for dry bulk carriers before they

moved to chemical tanker management. He says they do have sentimental value for

their ships and it is a family owned business. They outsource technical management and

post fixturing services. In the beginning, they preferred to outsource because chemical

tanker management required specific experience which they have never encountered

before.

Professional services motivated them to outsource and they do so because they

do not have enough vessels to manage themselves and support their management

expenses. They are satisfied with outsourcing of technical and post fixturing services

because they control them and ask for the best service which they are provided with,

compared to other management companies. He says that they keep them well-informed

about all operations, give them options for supplies, closely follow up vessel inspections

and their crew in the office is well-educated.

He says that it is not easy to evaluate the overall performance of the third party

ship management company that they outsource to and they have consultancy services

from their credit bank and shipyard owner because it was a new sector for them and

they needed to be guided by experienced people. They have not given full control of

their ships to the third party management. Before they make a decision, the third party

always ask their permission and report all operations and results to the respondent’s

company.

He says that they select their ship manager not for their reputation but for their

professionalism and location and same language also is a criterion. They do not believe

in changing a manager based on how long he has been with a company but on the basis

of having issues with them that cannot be resolved. Their mutual aim with third parties

is to have professional services with fewer outgoings.

He says that they believe performance based contracts play a major role in

shipping. This helps to see where you are business wise and how much you are risking or

how much your profit is. When you start a business, he says, you make a plan and a

purpose to reach a profit in a designated time. With performance based contracts, you

can compare how much you get to first base with your aims. When replying to the

question about key performance indicators, the participant said efficiency in due time is

the most important indicator followed by knowledge and experience, reporting of

operational performance, good planning for making expenses minimum and evaluating

the business in different categories.

He believes performance based contracts should be encouraged - controlling

your business development or risks will help towards the future of the company. He said

that unless they extended their fleet, they would keep on outsourcing. For developing

your business, you need to take risks sometimes, he says. But it depends on what kind

of risk you are taking and how much it can be controlled. The recession has affected his

company as well; first the rate went down which is the only income in the shipping

business. Delay in payment made them weak in the market against bunker suppliers and

other third parties. Paying much effort on financial issues instead of vessel performance

is another reason.

RESPONSE 5

This participant identified himself as both a ship owner and manager and owns

between one and ten vessels. The company is located in Europe and the types of

management services they outsource are insurance and chartering. The services they

offer are crewing and technical management. The company belongs to the segment of

oil tanker and the headquarters are located in Europe. The participant says that they are

not aware of performance based contracts and key performance indicators but would

like to investigate more about them in future. They have between twenty and fifty

contracts in place with third parties and have no contracts based on performance.

The participant says that in the beginning it was not very difficult for them to

enter into the shipping business because they have very professional and experienced

staffs who have worked in the industry for many, many years. He also said that because

they have been in the ship building business and built all the ships in their possession,

they did have a sentimental connection with the vessels in the beginning. But with the

passage of time, he said that they lost this perspective and focused more on the

business side. To give an example, he said that their CEO did not even see the eighth

vessel that was built.

They outsource commercial management and insurance. In the early stages, he

says that they had outsourced technical management of their vessels but with the time,

experiences taught them that the main issues should be under their control. Still, he

says he believes that some items can be outsourced as long as they add to the value of

safe and beneficial operations. He says that the main reason they outsource is

Commercial Management.

The reason they decided to outsource is because of very strong international

bonds, experience in the international trading area and a history to enable these items,

is vital for successful Commercial Management. The reason that they do not outsource

Technical Management is because they have tried it before and experienced that the

third parties might not be as immaculate as they are. Their motivation for outsourcing

comes from working with professional companies that are focused on their specific

subjects and receiving high quality service and cost efficiency.

In response to the question regarding mutual aims and objectives with third

parties that they outsourced to, he said that they believe that mutual objectives are the

only way to safe and successful operations.

Long-term relationships and mutually beneficial operations are the aims and

objectives they agree on. He wrote ‘Not Applicable’ in response to the question about

performance based contracts and KPIs and with regards to the future strategy towards

outsourcing and risks he said that they are planning to carry on with their strategies

about outsourcing; he says they may adapt them according to the requirements and the

progress of the Industry as well as their own needs. Their approach is very flexible and

may be shaped accordingly. He says that they are open to calculated risks in case a

decrease occurs in the service quality they receive from third parties.

3.2.2 Ship Mangers:

Interview questions were also sent out to various ship managers in companies

abroad. A total of five responses were received over a period of two weeks. These will

be analysed one by one, also keeping in context the general company responses for

every participant.

RESPONSE 1

In response to the question regarding difficulty entering the shipping business,

this participant said that there was not much during the start up of the business. He also

said that due to the fact that he joined the company at a later stage when it was all set

up, he is unable to comment on this.

In response to the question: ‘What do you think of the ship management business now,

compared to when you first entered the business?’ he had this to say:

‘The Ship management business has changed significantly since I have entered in it,

mainly due to the following reasons:

There are many ship managers now. It’s highly competitive.

With implementation of ISM/ISPS/Port State/Vetting and many other inspection

regimes, the paper work and work both onboard and ashore have increased

significantly.

Shortage of competent crew.

Shortage of qualified and experienced superintendents’.

He said that outsourcing is beneficial to the owners of ships since they can focus

on their core business of chartering, commercial operation of the vessel and maximize

their return of investment. He also said that he is satisfied with the owners of ships. The

ones he deals with are one of the biggest tanker owners of the world. He continues to

say ‘due to having the same safety and operational requirement of the fleet and sharing

the common values in terms of environmental protection, retention of competent

seafarers by paying due incentives etc we have good relatioship with the Owners.’

There was one question which asked the participants if they thought culture had

an effect on how ship owners behaved and wanted to opperate their ships. This

respondent said he thought yes since there are evidences that those owners who

belong to different parts of the world, hence different cultures, do behave differently;

‘For example the behaviour of Northern Europeans, Greek and Japanese Owners

behaviours are distincty different’.

The respondent said that it is always difficult to evaluate the overall

performance towards achieving set goals, mainly due the complex nature of his job. He

went on to say that safe and successful operation of the fleet has various aspects in it,

for example dealing with Flag/Class, managing staff in office, employing and retaining

competent crew onboard, dealing with accounts, purchasing and finally making difficult

decisions to safeguard the environment/protecting owners/charterers commercial

interests, there is always a fine balance to pay; You cannot simply measure all these

attributes with numerical value, hence the subject matter is always difficult.

While answering the question which asked how much say a ship owner has on

the ship’s operations and day to day decisions, the participant said that a prudent owner

has much to say about the operation of his vessels. He said that his company has a

seamless interface with the owners and they are fully involved in making major

decisions in terms of safety and commercial issues. However, in terms of normal

operation of the vessel, they do have the freedom and full control over it.

With regards to the marketing of services to ship owners, he said that as a global

ship manager and market leader, they are known to all ship owners. Mainly the new

business comes on the basis of their reputation and competitiveness. Also, responding

to the question about management criteria, the participant said that the vessel must

meet their criteria before they take her in to management.

Talking about performance based contracts he said that these are always

welcomed for the companies as theirs, those who are at the top end of the market and

have full commitments towards safe and quality operation. However, they may have a

negative effect due to driving the operations through various KPIs/numbers, to meet an

overall target which could sometimes jeopardize safety and increase risks. Yet, despite

some of their negative effects, he does agree that PBCs should be encouraged in the

future. That will give more advantage to run management companies well and take out

substandard managers from the market.

The participant said that he would definitely prefer to add KPIs for Oil Major

Acceptance which is the most important criteria for tanker vessels suitability for

business at present. The least important, in his opinion, is a formal meeting with the

owners. He also says that the in-house performance of their company is good. There are

KPIs in place for both operational and financial fields. However, prefers to see more

focus on human factor elements in the KPI settings.

He says their core competence is availability of huge resources and global

presence. Maintaining a high reputation, securing high value businesses and finally

looking after the employees in order to retain them, are the key points for their

sustainability. Regarding future strategy towards promoting performance based

contracts, he says they can do that by paying more emphasis on performance based

contracted owners as they can easily see the results which would further enhance their

opportunity to get more business from them as well as their acquaintances. In response

to the question about taking risks in the business, he said no, he would support taking

out calculated risks and always pay attention towards a balance between high and low

risk businesses.

RESPONSE 2

This participant identifies himself as a ship manager. His company owns between

twenty and fifty vessels and is located in Europe. The types of management services

they outsource are crewing and insurance. The management services they offer are

crewing, technical management and operations. The headquarters are located in

Europe. The participant says he is aware of KPIs and PBCs and would like to investigate

more about them in future. The company has between five and ten contracts with third

parties and do not have any contracts based on performance.

He says that as a ship manager, it was not difficult for him to enter into the

shipping business because the company was formed primarily to service their

shareholders fleets. In response to the nature of the shipping business now compared to

back when the business was first entered, he says that he first entered the ship

management business in 1990, having come from sea. There was a lot more respect

shown for superintendents at that time, he said, and it was seen as a promotion from

the sea staff. He also said that the industry was a lot less regulated at that time.

The participant says that outsourcing is beneficial to certain owners for the following

reasons:

To investors and speculators who want the flexibility to move in and out of ship

ownership

To ship owners who want to specialise in niche sectors and need dedicated

managers

To small ship owners who need to benefit from economies of scale

For large ship owners who want to ‘benchmark’ the cost and efficiencey of their

‘in house’ management

To ship owners who have a expanding (or contracting) fleet and who need

flexibility in respect of crewing needs

In response to the satisfaction with ship owners, the participant says that many

ship owners contract with ship managers and then do not hold their end of the deal. He

says that his company has been fortunate that they provide services for responsible ship

owners who value and are prepared to invest in, their services. He also says that without

a doubt culture has an effect on how ship owners behave and want to operate their

ships. He says that a shady ship owner will never believe that he is getting an honest

service from his ship manager. He would expect the same done to him as he would do

to others. On the whole, ship managers open an honest and transparent business,

especially those accepted for membership within ‘InterManager’.

With regards to how much say an owner has on the ship’s operations and day to

day decisions, he says that for the vessels that his company manages, the owner retains

the commercial management and so, has the ultimate say in all operational matters.

They do, however, work very closely with the owner to maximize operational efficiency.

He says: ‘A good owner will always take a close interest in what is happening onboard

his ship [his investment].’

The participant said that in order to market your services to ship owners, they

strive to be the very best in the operating sector and so far owners have come to them

with their business, even asking them to manage other types of vessels. They do not

actively market their services but do try to maintain a reasonably high focus at industry

forums. The criteria, he says, for entering into management is this: the vessel, but most

importantly the owner’s business, has to fit with their own business model. He goes on

to say, that they had previously taken management of older [poorly maintained] vessels

as a favour and found that they required vast resources to bring them up to an

acceptable standard. This deflected resources from their core business and would not

be allowed to happen again.

Talking about performance based contracts he says that they fully support them,

having worked with them in the past on offshore units. They do not use them in their

present fleet as the shareholder/owners demand excellence and they are prepared to

pay the cost of the resource to deliver it. To be successful, the PBCs have to work both

ways, he says. More risk = more reward [provided you get it right]. The counter

argument he gives is that the manager should provide excellence regardless – if you get

paid a realistic fees to allow you to attract the best resources.

In response to the question regarding KPIs, he lists them down in this order:

Safety statistics must be at the top of everyone’s list

The ship owners profitability against his forecast [shows that you are interested

in his business and are prepared to share the commercial risk and enjoy the

reward]

Keeping OPEX within budget but

Without incurring off-hire

He concludes, replying to the question about PBCs by saying that his company would be

up for them, and that it seems that it is the owners who are less in favour of them.

RESPONSE 3

This participant did not fill out the the general company information sheet. He

says that he is not new to the shipping business, it was a well-established ship

management company and he has been in the business for many years. In response to

the question about sentimental value, he says that there is no sentimental value but

dedication to what has been achieved and the hard work that actually matter.

Comparing the shipping business in the past to today, he says that it is difficult to

compare shipping business twenty years ago with today. It has become more

complicated, more regulated and the costs are much higher. Talking about outsourcing

he says that it is beneficial as every owner will not be able to master the expertise in

every field of the shipping business.

Talking about his satisfaction with the owners of ships he says that many owners

are satisfactory, however the objectives are not always common, especially in the wider

aspect of the shipping industry. With regards to culture he says that culture has an

effect on everybody. Different owners from different cultures approach their business in

their own way with some cultural influence. Responding to the question about the

evaluation of the overall performance towards achieving goals, he says that there are

systems and procedures within the company to achieve objectives. KPIs are used to

evaluate performance, therefore it is fairly easy to analyse the level of performance.

With respect to how much say a ship owner has on the ship’s operations, he says

that an owner’s say on the day to day decisions vary from owner to owner. Certain

group of owners would like to have almost full control, others leave day to day matters

to the manager. Talking about the marketing of services to ship owners, he says that

ship management companies are marketed like other organisations on the standard of

service they provide. Reputation bulit through the years by providing good standard of

service is one of the major advantages. The criteria for the ship owners to qualify are

analysed through risk assessment for new business. Background history of owner,

financial stability, compliance to industry requirement and experience within industry

are considered.

Responding to the question about performance based contracts he says that

performance based contracts do not work well for long-term ship management, they

are fit for project management, i.e., turn key. However, ship management contracts

have owners and have to be met to fulfill the ship management agreement. Basically, he

writes that PBCs are not suitable for ship management.

Technical management and compliance with industry regulations and

requirement are their core competencies. They maintain and improve them through a

continuous improvement process i.e., review of KPIs, retaining of good quality expertise

within the organization and achieving set targets.

With regards to the evaluation of in-house performance, he says that the

company has its own KPIs and these are evaluated every quarter. KPIs include

compliance with industry requirements, financial stability and working within set

budgets, providing high standard service to clients, optimizing ship running costs etc.

Commenting on the areas that need improvement, he said that sea going onboard

management requires improvement.

RESPONSE 4

This participant is both a ship manager and owner, with between twenty and

fifty vessels, located in Asia Pacific. The type of management service they offer is

technical management. The segments his company belongs to are oil tanker, bulk,

LNG/LPG and VLCC. The headquarters is located in Asia Pacific. He says they are aware

of KPIs but not aware of PBCs; however they would like to investigate more about them

in future. They do not have any contracts based on performance.

The participant says that theirs is an old set up and started by managing own

vessels. Comparing the shipping business of the past and today, he says it is more risky,

cumbersome and less profitable now. Outsourcing, he says, is economical but quality

remains questionable. In case Manager has some owners also, one incident on with

such owners can risk their ship’s reputation also. He says that a majority of their owners

are very close to them. If ship managers are good and strong, they can even convince

ship owners to follow their culture and let them operate the way they think is best. He

says in the case of his company, mostly ship owners get involved when there is a serious

incident which can lead to off hire or reputation of the owner having effects on their

business.

With regards to marketing, he says that the best marketing is by projecting ship

manager reputation amongst oil majors which is what they use. Other factors are much

secondary. He says that it is preferred not to take the ship into management if it does

not fulfill the criteria of entering into management. They have rejected many offers in

the past he said. There is no compromise with the quality practices which at times have

higher expenses. He does not specifically respond to thoughts about PBCs.

It seems that he does not have much knowledge about PBCs and would like to know

more about them.

RESPONSE 5

This respondent did not fill out the general company information sheet.

This participant says that his entrance into ship management was essentially an

extension of a career at sea and superintendence as an owners’ representative. Talking

about today’s shipping business; he says that the pace of life is more hectic now than in

the past or perhaps it is because old age is creeping in. He says: ‘Certainly in the past

there was more scope for self expression and discretion, now largely destroyed by the

ISM and other instruments which require strict adherence to the book. The result is a

grey norm with no room for flamboyance.’

Talking about owners and satisfaction, he says that owners are diverse and

require careful attention to their specific needs. However, it must be observed that

there are fewer ship owners these days and more persons or corporations who own

ships – there is a world of difference between the two. Whichever type of owner or

special requirements of the owner, the ship manager must in concert to obtain the best

parameters for the safe and efficient operation of the vessel. In response to culture and

it’s effects, the participant said that owners from a seafaring background or from

countries with a seafaring history, such as the Greeks and the Norwegians can be

demanding and require detailed reporting to satisfy the innate curiosity.

On the other hand, he says, professional or experienced owners can also be an

asset with the superior understanding concerning the operation of their vessel.

The respondent says that there is a great variation of owners, some are reluctant

to relinquish control of their vessel to a third party whereas at the other end of the

spectrum some owners are happy to allow the ship manager free rein to manage the

vessel. As in other applications, it is often the person who is confident of their own

abilities who permits greater discretion than those who lack self confidence and tend to

be interfering unnecessarily in the operation of the vessel.

With regards to marketing services to ship owners, the participant says that the

prime marketing asset has to be the company’s past record and reputation. Often, he

says, size hampers marketing as owners are always suspicious of large entities where

their vessel may not receive sufficient attention. Geographic location has some bearing

on good marketing as owners are more likely to be impressed by an area rich in

seafaring, for example Glasgow, as opposed to an address in Wigan or some other

obscure town.

In response to the question: ‘Is it preferred not to take the ship into

management if it does not fulfill the criteria for entering into management? What major

criteria do you have in place for the ship owners to qualify before you take their ships

under your management?’ the respondent had this to say:

‘ No Ship Manager likes to turn down tonnage, especially if the management fees are

high however there is a solid case for turning down tonnage on the grounds of a vessels

condition and poor history. In this era of Equasis and other web sites giving access to

ship’s history a poorly performing vessel can have a detrimental effect on the overall

perception of the Company which can and often is damaging to the reputation. That is

not to say that with proper discussion and agreement between owner and manager that

a sows ear cannot be made into a silken purse. But it is a delicate and normally

expensive path to tread.’ About performance based contracts, he said that they will

certainly bring pressure to bear on the ship managers and while the subject is sound – to

obtain superior management of the owners’ prized asset, it is also flawed. Unscrupulous

managers will manage the KPIs while the fabric of the vessel is deteriorating. It is a fine

balance and the PBC is not, he says, ‘a silver bullet.’

Many aspects of the management of a vessel can be subjected to KPIs, number

of deficiencies, number of detentions, are prime KPIs, in his opinion. Efficient operation

of the machinery can be crudely gauged by fuel consumption etc. In-house performance

is gauged by the adherence to the company objectives and these are in turn audited on

a regular basis both internally and externally. At the end, he had this to say about PBCs

and their future:

‘Like all large Corporations we are a risk averse body and performance based contracts

do definitely have a down side encouraging the chasing of KPIs to the possible detriment

to the more fundamental safe and efficient operation of the vessel. It is too easy to

forget that there has to be a personal aspect to ship operation the interaction between

Owner and Manger is essential for a successful operation.

KPIs have always been with us but possibly not so well defined and ordered as they

were the province of good Superintendents with experience and knowledge. The more

ordered world of ISM and other governmental bodies and requirements have reduced

everyone to a grey norm.’

3.3 Analysis of Results and Discussion:

The further detailed analysis of the results from various questionnaires are

discussed below and linked with literature review as applicable. The same has been

reviewed and analysed to complete the discussion.

3.3.1 Ship Owners

The separation of ownership and control over time has changed and the same is

highlighted by Berle (1932) and Chandler (1990). The modern corporation and salaried

manager’s existence and their evolution have been very segmented and dynamic. The

findings of this research have revealed that most of the ship owners who participated in

this research agree with the concept and creation of separating ownership and control.

It is also revealed that most of the ship owners have their representatives who speak

and work on their behalf, however most of the ship owners have agreed that they do

have a sentimental value for their ships and still in today’s modern world it is considered

and regarded as a family owned business. It is suggestive in the literature review that in

past the sustainability and performance measurement referred to the profits. The more

profits have always been a symbol of stability and good business.

One owner of the ship has not responded at all on the sentimental and family

oriented question and one other owner has suggested that they did have a sentimental

connection with their ships in the start but with the passage of time, they have lost this

perspective and they have focused more on the business side of the shipping industry as

a ship owner. This agrees with Handler, (1998) who suggests that the power and control

over time has separated with the birth of modern corporations.

In literature review, Agency Theory talks about the agency relationship through a

contract where the principal hands over work to another party, who complete that as an

agent (Fama and Jensen, 1983), however this relationship may have conflicts and lead

this relationship at a difficult stage and sharing the risk is the biggest problem of all

because of the conflicts they have between them (Eisenhardt, 1989). The outcome of

the research suggests that ship owners act as a principal in the shipping industry and

ship managers act as agents. The main reason most of the ship owners out source is

because of the shortage of the required specific experience to operate their ships.

Further it is mentioned that unit of analysis between these two parties is the

contract, where principal outsource services from third parties because of various

reasons but the most common reason the literature review has talked about is because

of the efficiency and cost effectiveness that leads the principal to outsource services

from third parties (Susan, 1996).

The research also shows that legislation has made shipping industry a very hard

one to cope with all the matters in house. The ship owners believe that the reasons of

outsourcing are for the flexibility of organization and world wide coverage. The

flexibility and competition motivates them to outsource. The research shows that there

is a short percentage of the ship owners who prefer all the operations of their ships to

be dealt in-house. They suggest that they have developed the expertise and experience

over time so that they do not need to outsource services at all. Greaver (1999) refers to

the same in literature review, that outsourcing to meet these changes and improve

business flexibility.

There are various reasons and references available in the literature review which

support the idea of outsourcing and discuss its advantages and disadvantages. One of

the biggest advantages for outsourcing from third party ship management companies is

to minimize the total cost for the services received at a better quality based on the

transaction cost approach (Williamson, 1981). The research findings have revealed that

it can be very costly for a ship owner to develop a fully functional logistics and

operational department within the company and for a short time line and to have just

dismantled it again is not wise. It is suggested that outsourcing of third party ship

management is a strange marriage of convenience.

Literature review refers to Stewardship theory and develops a relationship

between agency theory and stewardship theory, however it also suggests about the

issues which may oppose them to be presented together. In agency theory it is stated

that rewards are tangible and in stewardship theory rewards are in terms of

opportunities for growth and objectives as defined. It is also suggested that agents are

motivated towards the goals and objectives and are designed in a way that principal and

agent are willing to take risks together (Davis, Schoorman, and Donaldson, 1997). The

participants (Ship owners) in the research conducted have indicated various issues

around these theories with an implication of a practical approach towards it. It is

suggested that lack of accounts and costs experience in running ships, there is friction

which is exacerbated by errors found and the lack of explanation notes in accounting for

certain aspects of operations can spoil the relationships.

In 1997 the principal–manager choice model was presented. It was specifically

designed to evaluate and define the nature of relationships principal and agents have

with one another and the selection criteria for the manager. The research shows that

the end result of any contract is to be based on fairness on both sides and a lack of

friction (however, money causes friction). It is also found that ship owners’ decision to

outsource third party ship managers is based on the criteria of geographical coverage,

size and reputation.

The Literature review narrows down the difficulties and problems both parties

can face if their approach and relationship towards the goals and objectives are

different or if there is a disagreement. This refers to a dispute and may slow down the

process and outcome of the contract as established between these parties (Donald and

Davis, 1989, 1991). The results show that aim for a long term relationship and changing

of managers is completely based on performance and nature of relationship with them.

The Literature review suggests that outsourcing has appeared to be very

productive in various organizations to increase efficiency while managing performance.

The outsourcing decision plays a major role and this decision can be used to enhance

the strategic position of the company (Carr and Pearson, 2002). The results of this

research have shown that ship owners have different views for the strategic

implementation and future outsourcing decisions. The mutual aims and objectives with

third parties can alter and setup the future outsourcing decisions. One of the results has

shown that taking risk for the business is risk adverse unless there is no option. The

results show that they are open to risk on the basis of their experience as far as the odd

failures are long. One result has shown that the specific ship owner has no plan to

outsource at all in future as they have their own experienced staff and trust worthy

enough to run the business at a lower cost compared to outsourcing and paying more to

third party ship management.

Performance based contracts and key performance indicators suggest that KPIs

are used to measure performance and that contracts based on performance refer to the

frameworks for the delivery of product or services where payment is directly related to

performance (Baker, 1992). The research results in the ship owner community have

shown mixed views about KPIs and especially very negative approach towards

performance based contracts. The results have shown that there is no ship owner in this

sample who has any existing performance based contracts with third party ship

management. One of the major aspects of achieving performance is through motivation.

This plays a major role in organizational performance and achieving the goals and

objectives (Hartog, Boselie, and Paauwe, 2004).

Kumar and Markeset (2006) have suggested that a performance based service

strategy needs to be developed and a frame work presented to look into issues related

to performance and factors that affect the performance and the process itself. However

the results of this research show that outsourcing is done by ship owners but

performance evaluation is mostly done through half yearly meetings and reporting their

financial statement format.

The literature review has shown that performance based contracts have been a

success in various government and non government and private organizations.

Performance based programs are to be introduced and implemented for better results

and sustainable growth in economy (Kumar et al., 2006). However It is found that there

are no set KPI standards in the shipping industry to evaluate the overall performance. It

is found that the modern shipping industry is going to be run by young thirty year olds

which may change the face of the maritime industry. The soul of the maritime industry

is personalities, and it is said that performance based contracts should not be

encouraged. It found that the ship owner community thinks that KPIs can be put into a

laptop and numbers crunched, stats formed and decisions are purely made on that.

It is found that it is very difficult to measure the performance of third party ship

management companies, some of them have hired the consultancy services from their

credit bank and shipyard owner and this is completely a new concept and they prefer to

be guided by experienced professionals. However some of the ship owners have

supported the idea of KPIs and also shown future interest for the same. This community

of ship owners thinks that performance based contracts play a major role in shipping.

This helps to see where you are business wise and how much you are risking or how

much your profit is.

It is also found that efficiency in due time is the most important indicator

followed by knowledge and experience, reporting of operational performance, good

planning for making expenses minimum and evaluating the business in different

categories. It is believed that performance based contracts should be encouraged in this

community of ship owners, so controlling of business development or risks will help

them progress towards the future and for sake of development and growth, certain risks

need to be taken in the shipping industry.

As per literature review, at the time of recession it is recommended for the firms

to go for outsourcing hence to save money and solution to productivity problem for the

corporations undergoing downsizing of their employees. The outcome of the research

suggests that all ship owners have been affected by the current financial recession in

different ways. It is suggestive to design the outsourcing contracts to meet the need and

culture of the organization (Runnion, 1993). The results show that the ship owner

company revenues have dropped because of which some ship owners have made plans

to reduce manning onboard and cost cutting to reduce their direct running cost.

One of the owners has claimed that they have lower charter rates and have

problems in finding finances. One finding for one owner suggests that the financial

recession has not affected them but the oil price does; there is a correlation but not in

the same way as simple internal economic supply and demand. China and India still

require large amounts of oil and gas and that will offset a national recession within the

seismic industry. The Owners’ approach can be flexible and shaped accordingly and they

are open to calculated risks.

3.3.2 Ship Managers

Economists examined the risk sharing among individuals or groups (e.g, Arrow,

1971; Wilson, 1968). The ship managers are found keen to share risk with ship owners

and suggest that outsourcing is beneficial to the owners of ships since they can focus on

their core business of chartering, commercial operation of the vessel and maximize their

return of investment. Due to having the same safety and operational requirement of the

fleet and sharing the common values in terms of environmental protection, retention of

competent seafarers by paying due incentives etc Ship managers have developed good

relationships with ship owners. The literature review suggests that to bring results as

per the requirmenet of prinicipal choice can be very problematic (Sharma, 1997).

However the research shows that ship management has become very

comeptitive over time with the implementation of ISM/ISPS and Port State etc and the

paper work has increased both on board the ship and ashore. Shortage of qualified crew

and shortage of expierenced supritendent. The ship managers are found to establish the

comptencies to meet the ship owners’ choice. It is found that outsourcing is beneficial

to certain owners for various reasons especially for the investors and speculators who

want the flexibility to move in and out of ship ownership. It is also found that ship

owners who want to specialise in niche sectors and need dedicated managers are

looking forward to outsource. Ship managers suggest that it is beneficial for small ship

owners to outsource because they want to benefit from economies of scale. Also for

large ship owners who want to bench mark the cost and efficiencey of their ‘in-house’

management.

It is suggestive that companies must have a strong control over their functions

which are outsourced or managed externally. The performance must be evaluated and

controlled, there is a risk of loosing control over various suppliers. The risks involved can

not be ignored (Beaumont and Sohal, 2004). The research shows that it is always

difficult to evaluate the overall performance towards achieving set goals, mainly due the

complex nature of the job and it is noted that successful operation of the fleet has

various aspects in it.

The results of this research show that ship owners, with regards to how much

say an owner has on the ship’s operations and day to day decisions have the ultimate

say in all operational matters. They do, however, work very closely with the managers to

maximize operational efficiency. ‘A good owner will always take a close interest in what

is happening onboard his ship’. The same is agreed in the stewardship theory and

stewardship relationship when agent and principal do have common goals and

objectives and they both work together towards the performance maximization

(Donaldson and Davis, 1989, 1991). It is found in this research that ship managers have

to make difficult decisions to safeguard the environment/protecting owners/charterers

commercial interests. In the literature review it is stated that outsourcing allows for a

quick response to environment changes (Dess, Rasheed, McLaughlin & Priem, 1995).

However, in response to the satisfaction with ship owners, it is found that many ship

owners contract with ship managers and then do not hold their end of the deal.

The added value concept as given by Porter (1985) talks about what you are best

at. The research results show that the leading big ship managers’ core competence is

the availability of huge resources and global presence. Maintaining a high reputation,

securing high value businesses and finally looking after the employees in order to retain

them, are the key points for their sustainability. The same is supported by King (1997)

and Richard (1989) where they have talked about the increased demand of skilled

individuals and specialized equipment and high demand of skilled workers to work at

sea and ashore as well. The research results show that Technical management and

compliance with industry regulations and requirement are ship managers’ core

competencies. They maintain and improve them through a continuous improvement

process i.e., review of KPIs, retaining of good quality expertise within the organization

and achieving set targets. With regards to the evaluation of in-house performance, it is

found that the company has its own KPIs and these are evaluated every quarter. KPIs

include compliance with industry requirements, financial stability and working within set

budgets, providing high standard service to clients, optimising ship running costs etc.

Commenting on the areas that need improvement and keeping a close eye on sea-going

onboard management. The literature review suggests the same that competitiveness

can be achieved through effective organization procedures (Collis, 1991).

The outcome of this research in relation to performance based contracts and

KPIs shows that these concepts are always welcomed for the companies as theirs, those

who are at the top end of the market and have full commitments towards safe and

quality operation. However, they may have a negative effect due to driving the

operations through various KPIs/numbers, to meet an overall target which could

sometimes jeopardize safety and increase risks. Yet, despite some of their negative

effects, it is found that Performance based contracts should be encouraged in the

future. That will give more advantage to run management companies well and take out

substandard managers from the market. It is found that all ship managers prefer to add

KPIs for Oil Major Acceptance which is the most important criteria for tanker vessels

suitability for business at present. There are KPIs in place for both operational and

financial fields. However, there is a preference to see more focus on human factor

elements in the KPI settings.

The research shows that regarding future strategy towards promoting

performance based contracts, ship managers can do that by paying more emphasis on

performance based contracted owners as they can easily see the results which would

further enhance their opportunity to get more business from them as well as their

acquaintances. It is found that ship managers are up for Performance Based Contracts

but it seems that it is the owners who are less in favour of them.

The balanced score card approach and its usage makes a difference and will link

it with long term strategic goals of the company (Figge et al., 2002). The research shows

that this is not to say that with proper discussion and agreement between owner and

manager, a sow’s ear cannot be made into a silken purse. But it is a delicate and

normally expensive path to tread. About performance based contracts, most ship

managers have argued that they will certainly bring pressure to bear on the ship

managers and while the subject is sound – to obtain superior management of the

owners’ prized asset, it is also flawed. Unscrupulous managers will manage the KPIs

while the fabric of the vessel is deteriorating. It is a fine balance and the PBC is not, but

‘a silver bullet’. In-house performance is gauged by the adherence to the company

objectives and these are in turn audited on a regular basis both internally and

externally.

It is found that like all large Corporations Ship managers are a risk, averse body

and performance based contracts do definitely have a downside encouraging the

chasing of KPIs. It is too easy to forget that there has to be a personal aspect to ship

operation; the interaction between Owner and Manger is essential for a successful

operation.

Chapter 4 - Conclusion, Managerial Implications,

Recommendations and Limitations

4.1 Introduction:

After the research has been conducted, the findings revealed and the results

discussed, the researcher offers some conclusion, managerial implications,

recommendations and limitations. The conclusions from this research are presented,

managerial implications will be based on these conclusions and later recommendations

which should be taken into account in order to improve, resolve or look into further, the

issues at hand. The recommendations are suggested as ideas given by the researcher

since he is aware of the issue he has been up close and personal with for some time. It is

the results and the findings that have an impact on the conclusion, managerial

implications and recommendations. Since the recommendations are based on the

results and findings; the research gives some hindsight to the researcher to offer

solutions or recommendations. Finally the limitations are discussed and what can be

done in future has been in sighted.

4.2 Conclusion, Managerial Implications, Recommendations and

Limitations

There are several aspects which have been exposed throughout this research.

Much like peeling back the layers of an onion, it is learned that the implementation of

Performance based Contracts in the shipping industry is a very wide concept and will

require a lot of academic and industry work to be done further to get these

implemented. It has been proved that Performance Based Contracts have worked in

other industries; however it can be concluded that the shipping industry is still hesitant

towards making contracts based on performance with third party ship managers

especially the ship owners.

Ship owners are found to be very dominating and are not entirely convinced to

engage in performance based contracts due to a handful of reasons. These include not

sharing their profit with third parties; taking a position of evasiveness in terms of

business related risks. As a result ship owners are typically only open to calculated,

relatively quantifiable risks. It is also worth noting that research has shown that there

will be an increase in outsourcing services from third party ship management companies

in the next years, because of the shipping growth. There will be a need of parameters

and variables to measure performance while keeping the reality of shipping business in

place.

From the results and findings of this research it can also be concluded that there

is an interest of some of the ship owners towards KPIs and they were found keen to

know more about it, however some of the ship owners do not know about performance

based contracts at all. This type of awareness level was found to be low and is strange

while the influence, ease of technology, media and publications is very strong in the

shipping industry.

Insight derived from this research has a limit in terms of generalization; it is

because of there is no international standard in place within the shipping industry

towards Performance based contracts and KPIs. This conclusion was made on the basis

of this research, that there is not one ship owner or ship manager who claimed to have

an existing performance based contract amongst themselves. The research taking place

within this sector is still ongoing by various organizations and It is concluded that

performance measurement plays a major role in positioning and strategic management

for various businesses.

There are evidences that those owners who belong to different parts of the

world, hence different cultures, do behave differently; ‘For example the behaviour of

Northern Europeans, Greek and Japanese Owners’ behaviours are distincty different’.

Different owners from different cultures approach their business in their own way with

some cultural influence, however it is difficult to develop an international standard in

the maritime industry towards performance based contracts and KPIs. It is concluded

that the process is slow but needs international communities involved in shipping

business to generate a common business culture where various appraches are blended

to achieve aims and goals while keeping environmental issues in mind at all times.

It has been found from this research that ship managers have shown a very

positive approach towards performance based contracts and KPIs and they are

comperatively willing to take new business risks in life. The managerial implications are

that various ship managers already have systems and procedures within their

companies to achieve objectives, and KPIs are used to evaluate performance, therefore

for them it is fairly easy to analyse the level of performance. Various ship managers

have KPIs already established which include compliance with industry requirements,

financial stability and working within set budgets, providing high standard service to

clients, optimizing ship running costs.

“Principal – Manager Choice Model” by Davis, Schoorman, and Donaldson

(1997), talks about various variations of the relationships among principal and manager

while in a contract, this research insight derived shows that the ship managers have a

mixed approach towards outsourcing and relationships with ship owners. It shows that

there is a great variation of owners, some are reluctant to relinquish control of their

vessel to third party ship managers whereas at the other end of the spectrum some

owners are happy to allow the ship manager free rein to manage the vessel. As in other

applications, it is often the person who is confident of their own abilities who permits

greater discretion than those who lack self confidence and tend to be interfering

unnecessarily in the operation of the ships.

The research question proposed to conclude it is clear that there is a majority of

ship managers who agree with the implementation of performance based contracts in

the shipping industry. These contracts will definitly play a major role while shipping

moves towards KPIs however there are limitations towards this approach from ship

owners’ side. It is not recommendable as ship owners’ awareness towards these

contracts is very limited. Industry is willing to develop key performance indicators over

time to measure performance but do not agree, to go into a contract based on

performance, at this time of moment. The industry is not ready to commit themselves

legislatively. However ship management companies are found to be confident and have

strength to use these contracts to achieve competitive advantage over their comeptitors

and develop long term strategies under managerial implications.

Therefore, based on this study it can be confirmed that in order to increase the

attractiveness of outsourcing in the shipping industry, more performance based

contracts should be used in order to attract ship owners and other new clients and

sustaining them. A balanced score card approach is (Figge et al., 2002) to be adopted

and linked with the long term strategic goals of the company. The ship owners’

domination towards the industry is recommended to be flexible and to develop a

balanced approach towards developing and sustaining these relationships in the long

term.

Currently the literature on performance based contracts and KPIs, especially in

ship management and the shipping industry, suffers from a serious lack of insight on the

preference to develop one standard for the shipping industry in order to develop

performance based contracting system and KPIs. The objective of this research was to

contribute to this limited area of research, but it is worth noting that generalization is

inappropriate for the following reasons. One being that the sample gathered can be

considered to be relatively very small and can not be generalized and applied to the

whole ship management and shipping industry, however it gives an insight approach of

the participants to the research question. It is also possible that the interviewer

demonstrates bias in the way he or she interprets responses (Easterby-Smith et al.,

2002). This forms part of a range of data quality issues that are identified in relation to

the use of face-to-face in-depth interviews to view deeply the experiences and feelings

the participants have. One of the limitations was to have an access to ship owners and

ship managers and to motivate them to answer the asked questions. It is entirely

possible that this may have had an unforeseen impact on the outcome of this research.

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[7]http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_syn_389.pdf

[8] http://www.informaglobalevents.com/event/effectively-managing-shipping-kpis-course [8] http://www.intermanager.org/Home/tabid/54/Default.aspx [9] http://www.sintef.no/Home/Marine/MARINTEK/

[10]http://www.forskningsradet.no/servlet/Satellite?c=Page&pagename=ForskningsradetEngelsk%2FHovedsidemal&cid=1179127750262&querystring=KPI&spell=true&filters=langcodes%2Cen&isglobalsearch=true&configuration=nfrsearchersppublished

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http://www.sintef.com/project/Shipping_KPI/Downloads/Shipping%20KPI%20Final%20Report%20v1.2.pdf


http://www.intcap.com/

Appendices

Source : Can not be disclosed becuase of confidentiality Appendix - A

Key Business Areas. Key Benefits of KPI’s Implementation.

Performance Benchmarking performance against industry standards/

Provision of an accurate measurement of service levels/

Proof of compliance to ISO Standards.

Accounting /Running costs Identification, remedy and reduction of costly failures.

Insurance Sustaining the value for the current and Provision of

invaluable sales aid for new businesses.

Safety and quality Improvement of performance and safety.

Client relationship/satisfaction Delivery of low cost, high impact marketing/

Strengthening of marketing collateral/ Improvement in

relation to customer service and satisfaction.

Purchasing Enhancement of credibility with customers and

suppliers.

Strategic HRM Improvement of internal motivation with goal setting.

CRM/Coust. Relat. Manag. Demonstration of performance to prospective customers

Appendix B

“58” PI’s List (MARINTEK, 2008)

Appendix B

KPI –Shipping KPI Annual Report (2008). Source :

http://www.sintef.com/project/Shipping_KPI/Downloads/Shipping%20KPI%20Final%20Report%

20v1.2.pdf

The Shipping KPI Performance Hierarchy, Source



Appendix B

Matching Matrix of KPI's and SPI's

Source : (MARINTEK, 2008)



Appendix B

Source : (MARINTEK, 2008)



Appendix C

Appendix -C

Appendix – C

mba -reasearch -pbc ship management-hammad khawaja glasgow (1) (2)

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