In order to define what exactly third party ship management is we will review the BIMCO SHIPMAN98 contract, which actually is an agreement between the ship owner and a management company, which for a fee will undertake the management of the former's ships. More specifically, it is obvious in the contract that the managers are not the owners of the vessel but act as agents, as it is stated in clause 3, of the latter. More specifically, managers are to provide a variety of services like crew management, commercial management, insurance arrangements, accounting services, technical management, S&P services, operations management, chartering and bunkering for a negotiated fee. Mitroussi (2003) suggests that in order such services to be considered as third party, the managers have not to be in any way financially connected with the company and have no shares in it. The importance of this type of ship management was first recognized by Sletmo (1989), who identified that ship management companies are not only responsible for cost efficient shipping but for the globalization of it too.
Though shipping has been one of the most important ways of transport through human history, third party ship management has appeared to be a relatively new idea. Only after the Second World War the need the first companies started to develop, where during the 60's and 70's oil majors started gradually to seek for professional ship management (Branch, 1996), while during the 80's speculators who bought ships not for trading but to gain profit for their constant rising prices needed to hand them to third party management companies (Mitroussi, 2003).
ship owner's stance against third party ship management
As mentioned above, in order to consider third party ship management there has to be no shareholding interference of the managers to the shipping company (Mitroussi, 2003). If one examine the BIMCO SHIPMAN98, can see that managers can have the full and complete control of the vessel, run every aspect considering it, with the owner becoming just a person who has invested a sum of money on buying a ship.
However research (Mitroussi,2004) has shown not only that the majority of owners are far from willing to employ third party ship managers (Greece and UK sample), but among those who do only half of them, 53%, does this for their entire fleet, and not for all the operation aspects of the vessel. In particular the majority of owners prefer to hand the crewing of their ship to third party managers where the technical management comes second. Furthermore, the responsibility for provisions, accountancy, operations and bunkering follow in the ship owner's preferences. We must also refer that these last services are not stand alone provided but in connection with the technical management services. Finally the research also provides that Sales and Purchase and chartering services are rarely accepted by the owners since these aspects are directly connected with the income and the assets of the company which owners want to have control of. (Mitroussi, 2004)
Economic Reasons for turning to third party managers
Not neglecting that ship owners are entrepreneurs, in order to turn to third party managers they must have economic benefits from such an action that will reduce their costs. Considering the production cost, which is the cost for management either in-house salaries or third party management fees, it might be reduced when professional management happens for a variety of reasons. (Panayides, Cullinane, 2002). At first, single shipping companies, especially smaller one's, are not in the position to achieve efficient economies of scale due to low production levels. In other terms, professional ship managers are in a position to achieve much smaller production costs through economies of scale since they operate a larger fleet, and have a larger bargaining power. (Panayides, Cullinane, 2002). Moreover, Panayides and Cullinane (2002), quoted Muris et al (1992) that the most important economies of scale are succeeded through more efficient information systems, better knowledge and access to the capital markets by third party managers. In that case we can see that lower costs are not the only reason for turning to professional management but operational flexibility is equally important, since when a ship owner wishes to turn to a market, human resource for instance, he will have the bargaining power and the access of his manager.
Secondly, Panayides and Cullinane (2002) suggest that in such a competitive market as the shipping one, ship owners who cannot cope with this competitive environment will have a disadvantage since they will not be able to "follow" their competitor's price which, with assistance of achieved economies of scale, can operate at lower production cost and reduce their prices.
Thirdly the same authors (2002) revealed that by engaging a company to multiple activities might experience diseconomies of scale and suffer from negative economic results. In that case, it should give away some aspects of operation to professional managers in order to concentrate on the core ones. Such results can be seen when the main activity of the company is not shipping but it operates, in order to fulfill its own transportation needs; and in case of asset speculators who buy ships not to operate them but to gain from possible rise in their actual value.
Decisive Factors for Third Party Management Employment
Mitroussi (2003) presents in her paper the conditions that interact with the ship owner's decision to employ professional management and create "Managerial capitalism". These are either connected with characteristics of the shipping company itself or its operational environment and are named as the company's size, type, age and operational environment.
Company's Size
Pugh et al (1969), revealed that increased numbers of employees leads in "structural differentiation" in the company and create the need for separate departments and specialization. Confirming that opinion, Mitroussi (2003) identified that as a company's size is increased, decision making is delegated and the organizational structure of the company is changed. Shipping companies are transformed from centrally administrated, by the ship owner companies, to more complex entrepreneurships consisted from specialized departments, each one responsible for decisions concerning their specialization. Such complicated organizations consist in reality a case of separation between ownership and management and urge for expert and professional management (Mitroussi, 2003). In general smaller companies with limited employees can run everyday activities efficiently, but as the size of the company grows and urges for organizational reconstruction the owner-manager's constraints and upcoming coordination problems can cause inefficiencies (Mitroussi, 2003). On the other hand, larger companies are said, (Clarke, 1987), to be more diversified and an expansion of such firms in new operations, for example a new type of ship, struggle for professional and experienced management (Mitroussi, 2003). Also, the same author suggests that in the case when shipping is not the only,or not the core business area of the company, the employment of third party managers can turn the interest of the entrepreneur to other issues and company activities.
Company's Type
In order to understand hot the type of the company interferes with the employment of third party ship management we must identify the two types of company ownership, the privately/family owned and the publicly ones. The first are considered to be companies that are owned by a single person, or members of particular families (Davis, 2001) and the latter are companies whose shares are in the hands of separate individuals or investors (Financial Dictionary).
The owners of family run businesses are reluctant against third party managers believing that by handing the management of their company over will not only gain no financial benefits but in addition to this they will lose the sense of freedom, independency and creativity the everyday interference with firm's activities provides them. On the other hand, in joint venture companies, ownership is a mere title and is not related with control, which lies in the hand of professional managers, consisting a clear case of separation between ownership and management. (Mitroussi, 2003)
Company's age
It is arguable that the more mature a company through the years the more experience is gained through everyday activities and as a result the less there would be a need for professional management (Mitroussi, 2003). However Mitroussi (2003) considers time not of its natural meaning but as to the life cycle of the company and succession from one generation of a family firm to another. In her research she identifies four stages regarding life cycle which are:
Stage One: The foundation of the company and its building
Stage Two: The maturity of the company, where the initial owner is called to cope with issues regarding development and growth
Stage Three: Where the second generation come in command of the firm and the first conflicts arise
Stage Four: The transformation of a private company to a public one, when new investors come in and professional management takes charge.
Levinson (1971) considers two types of rivalry in family business, the father-son and the brother-brother rivalry. While the founder (father) considers his business as his "mistress" and an "extension of himself, he does not want, unconsciously, the next generation to succeed. Moreover, rivalry between brothers for the approval of the father and frictions between them can, in combination with the father-son rivalry, cause the company to decline (Levinson, 1971). Mitroussi (2003) suggests that, in that terms, the separation of ownership and management where no emotions interfere in the decision making process is related to the company's age and stage of cycle of life.
Environment
Finally we must not neglect that companies are not stand alone organizations but a part of a more sophisticated environment with which they interact in their everyday activities. Mitroussi (2004) presents a series of trends that effect positively the third party management sector.
In the era of globalized markets, to which shipping has to adapt, it is of vital importance that ship owners have to take advantage of all the opportunities that may arise, especially concerning manpower markets and the choice of flag for manning or tax reduction reasons
Furthermore, Mitroussi (2004) also mentions that since shipping is now a part of the logistics and supply chain, more complex operations are introduced that ship owners by themselves are not able to cope with, so in order to keep their business running they turn to expert managers that professional ship management companies provide.
Moreover, in an era of rapid improvements on information technology (IT), investments and hiring of skilled personnel on this particular subject is the key to success, which shipping companies may not be able to afford by themselves.
In addition to these, Mitroussi (2004) identifies that the lack of properly trained crew to employ on their ships, ship owners turn for this reason to professional managers. Indeed ship management companies, like ASP for example, present themselves as experts in crew management, which are able to provide ship owner qualified and well trained personnel from their manning pools as third party services. (ASP Ship Management Group).
Another factor that has to be taken into account is the increased liability in case of marine accidents and pollution (Mitroussi, 2004). In such a case ship owner might escape liability, since under Shipman98 the managers are held responsible from damages that result from their negligence. Such a liability may be limited to a specific amount (10 times the management fee) but can still be a way for the ship owner to escape responsibility. (Ana Pestana, Steamship Mutual, 2007).
