Should shipowners build or buy new tech?
10 Dec 2018 - Matthew Kenney
With the shipping industry now fully recognising that a digital revolution has been steadily snowballing behind it’s back, carriers are facing the crucial decision whether to build or buy their next generation digital solutions. Surprisingly, a significant minority are opting to go it alone and build in-house - choosing to trailblaze through the undergrowth, rather than tread the paths laid out by the digital revolutionaries. But are their use cases so unique, that self-building is the only way to tackle the emerging industrial landscape of the future, and is the amount of time, energy, and budget worth the potential competitive upside?
In November 2018, the worlds largest shipper/carrier network INTRAA released the results of a survey carried out at their annual Asia Technology Summit in Singapore, showing that 71% of their supply chain membership felt they were ‘well on their way to being fully digitalised’. By contrast, only 13% claimed to have already achieved this aim, and if you were to isolate maritime carriers in these statistics, filtering out the NVOCCs, freight forwarders etc, then these figures would have been significantly lower still.
Ship operators, in particular, have a tough job answering a tectonic digital revolution. Operating ships is an extremely hazardous, technologically complex, and commercially precarious undertaking, which has always demanded well-proven methodologies and long-inherited wisdom, resulting in glacial rates of change. The sheer risk of catastrophic failure is high - think RMS Titanic, Exxon Valdez, Herald of Free Enterprise, Costa Concordia et al., not to mention the litany of bankrupted shipping lines who could not reconcile a haemorrhagic maritime cost base with erratic, complicated inflows and leveraged growth - Hanjin being a recent, and dramatic example.
Today’s digital revolution can and will make ship operating less susceptible to many risks by disrupting out-moded constructs, finding new efficiencies, and reducing (perhaps even eliminating) waste. Inevitably though, disruption poses an immediate threat to business continuity and sprinkles an additional layer of concern over an already febrile sector.
A brigade of bright start-ups and technical solutions providers have arrived, spurred on by calls to deliver shipping a digital and technological shot-in-the-arm with a dizzying array of SaaS, PaaS, BaaS, API, UI, Open-Source, Fully Integrated, Partially Integrated, AI, IOT and Web-Based solutions to problems carriers are only just realising they have. These new shiptech businesses bring with them a treasure-trove of experience from other sectors like data science, consumer electronics, fintech, and aerospace, and they are setting about demonstrating what computers are now capable of. By partnering with seafarers and maritime experts, they are bringing to bear real and meaningful solutions to industrial, environmental and humanitarian problems in shipping.
However, the surprising response from some operators has been to metaphorically batten down the hatches, assemble a war-council of their own IT people, and launch a quasi-clandestine in-house offensive; strategising blindly against their competitors in the hope that their creation will deliver a victory blow come the new tomorrow. Consequently, C-suites openly prevaricate on the need for digital standards and cooperation while secretly vying to deliver a digital knock-out blow from left field.
And in fairness, the benefits of an in-house, build-instead-of-buy approach are readily apparent:
Complete control over the final product - It will do precisely what is required (eventually; though perhaps not on the first, or even the twenty-first attempt), and you can rest easy knowing that whatever you have built is yours and yours alone.
In-house IT staff will completely understand the system from the ground up (until they inevitably move on - maybe to a competitor)
You are not having to pay a markup to a third-party business (just having to live with the agonising cost base of an R&D project with an uncertain ROI)
Unless outsourcing a design brief to a consultancy (the worst kind of fudge unless you genuinely do have a unique use-case and no desire to develop in-house), you only have to deal with the people you trust most - your staff.
Digitally ‘going it alone’ might seem like the independent route to a competitive advantage - perhaps in the belief that only the dead fish swim with the stream. But, while accepting this position is probably more an act of audacity over hubris, let’s consider the benefits of buying or renting digital utilities from an independent developer.
Consensus and speed of execution
By sharing ideas, and being able to see the common use cases amongst their clients, independent developers can focus on creating solutions that will hit the mark more accurately, and more robustly for the longer-term. Inevitably, the playing field will once again be firmly marked-out, and it’s undoubtedly better to be on it and competing than find you are out alone in the carpark.
As well as ensuring that your software actually works, buying a ready-made, tried and tested solution off the shelf (often with additional levels of customisation available as required) delivers new capabilities to a carrier exponentially faster than an in-house attempt can. In the months or even years that builders will spend creating their masterpieces, buyers will be skipping the queue and reaping the benefits much earlier, while continuing to focus on their core business.
A detailed study of in-house IT project success conducted by The Standish Group, reveals that only 29% of in-house system developments are successful, and the average cost to completion to be 200-400% more than initially anticipated. The reasons are involved, but often projects suffer difficulties with legacy system integration and unforeseen coding issues etc.
By contrast, purchasing a third-party solution often means fixed or zero capital expenditure, followed by a quantified ongoing cost, or indeed no further cost at all. Consider, for example, putting a team of 5 IT professionals together, and giving them 3 years to produce an extensive software package. It is not hard to imagine project costs exceeding $1.5 million upon completion - if it happens to be the lucky 1/3rd of projects that succeed. Now consider a SaaS package offering similar capability priced at $1000 / month, costing the company around $36,000 over the same period.
Not only are the cost savings significant, but the expenditure would have been contractually dependent on success. So the benefits are apparent even before we consider any resultant upside during this 3-year hypothetical study window; for example, how the $1,464,000 saved by renting a SaaS product could have been reinvested, and the scale of any resultant gains realised on the profit and loss sheet.
Predicting the future
Because independent developers, particularly startups and SMEs, are naturally focused on maximising value for their customers, they are tide-rode to future trends, and arguably more cognisant of approaching disruption.
As international resolutions, legislation, regulation and standards evolve to reflect a changing maritime domain, independent digital solutions providers can continually improve, test and implement changes to their platforms to reflect best practice, and act swiftly on feedback from their customers. Examples of this can be drawn from the consumer software space, where the likes of Adobe, Microsoft and Cisco now almost exclusively offer their applications through a Software as a Service (SaaS) model. In doing so, their users are guaranteed to be using the latest, most secure version with the most relevant features.
A shipping company’s in-house solution might be considered excellent when it is first launched, only to find it is obsoleted just months down the line for any number of internal or external reasons, leaving the company burdened with ongoing software update costs weighing on the balance sheet.
It could be argued that it is in the interest of every carrier who is considering a build-over-buy strategy to also consider what their staff could be working on if they weren’t tasked with developing proprietary versions of existing software. If ship operators are to avoid running aground on the shifting sands of regulatory and technological uncertainty; agility and a focus on core business competence ought to be front and centre, especially when new skills acquisition is so easily outsourced. The most successful inheritors of the trade routes of tomorrow will be the operators who have focussed on operating safe, efficient and competitive ships using the leanest and most risk-aware strategy they can muster. When it comes to the digital revolution, buying smart, rather than building solo, stands the best chance of achieving the desired outcomes in the leanest, most risk-averse way possible.