By Paul Scott Abbott
Some forwarders believe they might be more fairly compensated for the services they provide the project cargo sector, but whether an alternative way for getting paid will gain acceptance in a highly competitive market is questionable.
Panalpina’s Ken Long and Geodis’ Steen Christensen, speaking for themselves and not their companies, see another way – perhaps based on man-hour charges as opposed to markups and nominal transaction fees – as more equitable, particularly as their firms furnish expanded services.
However, it doesn’t seem to be a subject that executives of engineering, procurement and construction management firms, or EPCs, even want to discuss.
Long and Christensen broached the topic in sessions at the Breakbulk Middle East conference in Abu Dhabi, United Arab Emirates, making it clear they were talking personally and not on behalf of their respective forwarding firms. They expounded on their thoughts in separate interviews with Breakbulk magazine.
“Pricing is a huge issue in our business, and it’s usually not talked about,” said Long, who is Panalpina World Transport Saudi Arabia’s country head of energy solutions for the Kingdom of Saudi Arabia and Bahrain.
“We don’t use the proper mechanism for compensation in today’s market,” said Long, who has been in the energy logistics business for 40 years. “I think the industry is due a discussion.”
Markups Not Enough
Traditionally, project forwarders are compensated by way of a markup on unit prices for actual transport services, augmented by a transaction fee that is usually between 75 cents and US$1.25 per freight ton.
“No forwarder is making money on those fees,” Long said, estimating that it can cost a forwarder as much as US$7.50 to US$15 per freight ton to provide services.
His alternative proposition is for EPCs to pay forwarders man-hour charges for the various personnel engaged in providing services, with agreed-upon rates based upon classifications such as manager, supervisor, coordinator, and health, safety and environmental engineer. The EPC also would compensate the forwarder for actual transport costs, perhaps with a nominal agreed-upon markup.
Christensen, a 30-year industry veteran currently serving as Geodis Freight Forwarding’s Houston-based director for industrial projects for Eastern Europe, Middle East and India, said he believes an alternate methodology certainly merits consideration. But he was quick to say that forwarders must furnish value-added services to justify such a change.
“I’m all for finding another way to compensate the services we provide the industry,” Christensen said, “but I don’t want to compromise the services we provide and do not want to stop innovating.
“I don’t think changing the model and forcing the customers to pay more for the same service is the right way to go,” he said. “If we want to charge more, we have to create more value and we have to operate our companies in the most efficient, cheapest possible way.”
Profits Remain Elusive
Christensen, without naming names, said a couple of the most efficient forwarding companies, focused on a specific market segment and/or geographic region, may make earnings before interest and taxes of between 7 percent and 10 percent on projects, while the remainder of forwarders are gleaning EBIT of about 3 percent.
Whereas forwarders decades ago began offering value-added services such as tracking and tracing, Christensen said forwarders today “are kind of in a rut” when it comes to providing innovative value-adds.
“We have to do more to charge more, and we have to be more valuable to the customer,” he said. “We all keep doing the same old, same old; we just want more money for it. We have to continuously renew ourselves. We focus a lot on surviving and not enough on getting better.”
Christensen said the low-profit nature of the forwarding business does make it difficult to find money for research and development of value-added services, calling this dilemma “the curse of the industry that has to be figured out.”
Meanwhile, Panalpina’s Long said he believes the spectrum of services offered by companies such as his – with comprehensive shipment management from origin to destination, transport engineering, document preparation, customs clearance and line-item-level visibility through a material management system interfacing with that of the client – nonetheless justifies calling the firm a “capital project supply chain logistics provider,” not simply a “forwarder.”
Price Still Paramount
But, whatever the providers call themselves, the fact remains that standard industry practice of EPCs, international oil companies and other project logistics procurers is to award contracts to those offering the lowest price. And across-the-board use of the traditional method of compensation allows for the easiest apples-to-apples cost comparisons.
Long said Panalpina does have the man-hours-based compensation method in place for a very limited range of clientele, including one major multinational corporation, but it is very far from gaining broad acceptance.
Forwarders (or capital project supply chain logistics providers) are in part responsible for this, according to Long, who said such firms typically are reluctant to relinquish an opportunity to potentially “catch lightning in a jar” and make big money by resourcefully combining cargoes and securing an extremely low rate from a carrier.
On the other hand, particularly in this era of ocean rate volatility, the forwarder retains the risk that it could lose money if it locks in a rate too soon.
Long said he sees the alternative compensation methodology offering advantages to clients, with forwarders opening their books and showing the clients the actual costs for transportation.
“The total cost to the client will be less than it is now,” he said.
Procurers Keep Quiet
Even if that might be the case, it’s a proverbial can of worms EPCs apparently would rather keep tightly sealed. Not one of more than a dozen EPC executives approached for comment by Breakbulk agreed to offer a thought. Most carrier executives from whom comments were sought remained quiet as well, with a couple of exceptions.
Fernando Maruri, director of sales for the Americas for Houston-based Intermarine, said that he thought alternative methods of forwarder compensation are worthy of consideration.
“At some point, all businesses struggle with being properly compensated for their services,” Maruri said. “In a cost-cutting environment like the one we have been in, and where supply clearly exceeds demand, companies must look to counteract attempts of commoditization of their services.
“Forwarder services are not the only sector in the supply chain being asked to provide more services for less,” he said, “and it is not surprising that there should be a reaction from that segment to reassess compensation.
Maruri, who has been with Intermarine since 1994, said he thinks the advantage a company would seek in changing the traditional model would simply be to look for a better pricing model that more fairly compensates it for the services it is providing.
“However, moving to that model puts a lot of pressure on tracking and the efficiency of people and how they spend their time. Not every company is set up to move toward this type of approach. There will be natural resistance as there is with any change. Clients may not have the stomach for it in this market.”
He said that the model in place is “fairly straightforward and fairly easy to understand and track on both sides,” adding that he sees it as working best in growth environments when pricing is positive and stable.
“That model has, for the most part, been unable to protect the industry from very difficult years; however, this is likely more related to cyclical markets than of pricing strategy,” he said. “That being said, the exercise has value. There are always direct and indirect benefits in the process of seeking innovation and new methods to any process.”
Clichés With Teeth
Roger Strevens, vice president and global head of key and liner accounts of Norway-based Wallenius Wilhelmsen Logistics, said he sees the examination of compensation alternatives as tied to digital disruption that is increasingly impacting supply chains.
“Digital disruption is fast becoming a business cliché, but it’s a cliché with teeth,” said Strevens, who has been with Wallenius Wilhelmsen since 2006. “At least that seems to be the case for the freight forwarding industry. The signs of disruption are growing by the week.
“With that in mind,” he said, “it’s wise for the incumbents to be questioning the established business model. After all, achieving a favorable outcome when the winds of change are blowing is more likely when you do the disrupting yourself rather than taking a wait-and-see approach.”
Strevens said he is, in fact, encouraged that the notion of new ways for forwarder compensation is being discussed.
“Given the generally difficult breakbulk market conditions, there is a temptation to focus on the immediate challenges at the expense of those which may have an impact further down the line,” he said. “The fact that this topic arises now is a good sign that some players are keeping an eye on the horizon.”
Thus, the questions, according to Long, remain: How open is our capital projects logistics industry to fair compensation between owners, EPCs, freight forwarders and carriers; and does the current method of unit pricing deliver that, or are there better ways? BB
A veteran transportation writer for the past 40 years, U.S.-based Paul Scott Abbott specializes in maritime topics.
Photo credit: Shutterstock
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