Adding value to shipbroking solutions

SHIPBROKERS are central players in the shipping industry. Their livelihood depends upon the web of relationships they weave around the world. They deal at the sharp end, broking between owners and charterers, or sellers and buyers of ships. As with all professions, the range of shipbrokers’ abilities and specialisations are variable within the industry and indeed within companies themselves. From the outside, the general view is that shipbrokers are employed by their customers to ‘nickel and dime’ on their behalf, and not to do too much thinking. But the work of shipbrokers has always been highly individualistic and strongly oriented towards client relationships.

There is a view that a sea-change is taking place in the industry - a move towards ‘execution only’ shipbroking similar to that which has taken place in stockbroking. If the customers are not actually employing their brokers to analyse their projects, then the business is already not far removed from what could be labelled an ‘execution only’ service. This would, in turn, have far-reaching effects upon all the players in the industry, positive for some and negative for others.

Looking from the legal side of the industry it is interesting to speculate how much lawyers really understand about what goes on inside shipbroking companies today. How well (if at all) are contacts maintained between lawyers and brokers, and does it matter? Clearly, shipbrokers are a source of business for law firms. The industry is perhaps unique in that brokers themselves usually prepare the documentation purporting to reflect the agreements reached between their principals on multi-million- dollar transactions, often with the minimum of paperwork, and their errors can have long-term consequences. One suspects that the legal profession in general regards shipbrokers with a degree of condescension on one hand, whilst, on the other, thanks heaven for their existence and their current role.

Against this background, the Maritime Advocate has taken a closer look at one shipbroking company to see what it regards as the challenges facing its business and how it intends to deal with them.

Cleaves Ship Broking Ltd, and its sister company Cleaves & Co, do not conform to the traditional concept of a typical broking company operating worldwide from a dark corner of a quiet street. They actually work out of newly refurbished offices in London’s West End. Director Tony Foster explains, "We bought the business out of Inchcape at the end of last year. Prior to that, the company was in the offices of Inchcape Shipping Services in EC2. Those offices were adequate for the agency company, our then-parent, but not for us. We don’t need to be flashy but we do have to entertain and accommodate visitors. Shipowners expect at least a comfortable chair in a decent room with a bright aspect and a good cup of coffee.

"We are also working hard on the development of Cleaves & Co, which is geared to providing financial services. In that company, we believe presentation and first impressions are even more important than for shipbroking."

Cleaves Shipbroking was founded in 1976 as a breakaway from J C O’Keefe and Company. Since then, it has undergone several changes of ownership. Having been bought by Lambert Brothers, which was itself under the ownership of Hill Samuel (later TSB), it then passed into the hands of Inchcape. Tony Foster explains the history: "Inchcape’s interest was centered upon the agency business of the old Escombe Lambert and its interest in shipbroking - at that stage some sixty people with representatives in Tokyo, Singapore and Spain as well as in London - was almost incidental.

"In 1994, Inchape struck a deal with Hintz, Lea and Davis whereby the directors of that company would merge their business into Inchcape’s shipbroking businesses and manage the whole thing under Inchcape."

After two years, and a lot of restructuring, what remained was two of the three directors of Hintz, Lea and Davis, namely John Davis and Tony Foster, and the two companies now trading independently, Cleaves Shipbroking and Cleaves & Co. "We had hoped for synergy between the creative shipping ideas we had to put forward and the power and geographical spread of the Inchcape group", says Foster. However, the management of Inchcape Shipping Services was occupied with its own very large agency business. It was not interested in direct investment, and it really only looked at the bottom line. On that basis, we felt as though we might as well be working for ourselves, and the buy-out from Inchcape was amicably negotiated since both parties felt that a divorce was the best thing."

The companies under the control of Tony Foster and John Davis have strategic goals - focusing on shipbroking, financial services and consultancy. At the same time, they are sensitive to developments within the industry. Tony Foster says, "We are well aware of the power and reach of the biggest companies like Clarksons. Cleaves cannot match them in this respect. But there will obviously be a role for niche players with known areas of expertise, of which we will be one. We will not try to do everything but we will concentrate on being very good at what we do.

"For example, the IT revolution is hitting shipping, just as it has revolutionised the way other businesses operate. Information is readily available everywhere - so much that we don’t have time to read even half the stuff which comes across our desks. Our clients are receiving more of the same plus as many brokers’ reports as their fax machines can accommodate. However, what the industry lacks is sharp analysis. In our previous company, we always found that clients needed a sounding-board, a consultant more than a broker. Brokers are in plentiful supply. But industry knowledge and the ability to analyse a commercial opportunity for a client (or indeed evaluate the client's own business) whilst grasping its financial implications are not so widely available.

"The idea that a broker will earn hundreds of thousands of dollars’ commission for being the first to advise a buyer that a certain ship is for sale has to be crazy. A move towards the ‘execution only’ type of business is likely to benefit the biggest companies the most. The more sophisticated shipping business, requiring a wide range of expertise not limited to day-to-day shipbroking, is where we can be most effective. Of course the big boys can do this too in that they have the financial resources to invest in personnel - but in this defined area there is much more of a level playing field for medium-sized, niche shipbrokers.

"Furthermore, talent is at a premium and is hard to find, even if you have the money to spend. Needless to say, we can do the simple service given a chance, but we are not here simply to provide business for British Telecom. Essentially, information becomes increasingly available and cheap. It is the quality of analysis on offer that will ultimately distinguish one broker from another."

Several broking companies, small and large, are trying to move into financial services. So what will Cleaves & Co be doing that will make it different from the rest? John Davis says, "The concept of ‘added value’ is not new. Our intelligent competitors can see this just as well as we can. How you actually add value will be through quality of work (which means staff) and ingenuity of solutions. To give an example, the vast majority of the world’s shipping fleet is financed by simple first mortgage debt. At the moment, debt is cheap and equity is expensive, but this is not always the case. We are looking at ways to finance fleets using instruments new to shipping – which can replace mortgage debt, provide cheaper borrowing for shipowners and better risks for lenders. One way to do this is through securitisation, where we have put in place a joint venture with a major bank. The product we are developing will not work for all owners in all circumstances, but it can revolutionise the financing arrangements (and balance sheets) of certain companies.

"Consultancy is another aspect of the business with rich potential. How many times do you hear of major clients who have used outside consultants to assess their business - and these consultants are not even in shipping? The reason is simple. Until now, these clients have not found a company in the industry with sufficient credibility and presence to offer this service.

"Call it the ‘IBM factor’. If you order a new computer system for the company and use IBM machines, it is hard to argue that you took an unnecessary risk. We aim to be in a position where our consultancy is viewed in the same way. Having worked for big companies involved in other businesses, we know they use consultants regularly as a means of independently checking their strategy and their performance. Shipping can definitely benefit from such a service."

There are other, more specific, areas where consultancy comes into its own, for example with banks. Davis and Foster have set up a company called The London Shipping Consultancy which aims to help banks in every area of their relationships with shipowners, or other prospective borrowers with a shipping angle. This company is supported by Clifford Chance, which will provide all the legal services for which the clients may use it. Other supporters of the company will be leading shipmanagers and possibly insurance brokers, as well as Cleaves Shipbroking and Cleaves Maritime Valuations.

The company, which will be launched fully in October, aims to provide a one-stop service for banks which can help them check the commercial and technical viability of new projects, monitor existing projects, or unwind projects in a distress situation. Some banks do and will continue to do most of this themselves, but market research to date suggests that many either do not have such close monitoring (either in-house or by third parties) or they like the idea of finding all the necessary services in one place.

Foster and Davis want to find new ways to replace old-fashioned methods currently in use - whether in broking, banking or consultancy. They believe there is a wide gap between the services presently provided by banks and those provided by shipbrokers, and that the use of business methods which other industries regard as commonplace can be applied successfully to shipping.

Davis says, "We are providing a service. That service should be efficient and give value for money. It should not conflict with our clients’ own businesses. The difficulties we face today are largely in persuading people that they need what we have to offer - which means being open-minded and giving us the opportunity to show what we can do. As long as companies can get away with working in the way they have always done and make decent profits, it will be hard to change their thinking. However, as in the liner industry today, when companies are having to check their bottom line on a daily basis we find that people are ready to listen."

Davis and Foster have already taken steps to cement relationships with law firms by their arrangement with Clifford Chance. Foster says, "There will always be a huge requirement for legal work in the industry which must be done by specialists, but lawyers do not always have time to focus on the commercial aspects of their own cases and are obviously restricted by the Law Society in the type of work which they can undertake and the method of charging for it. On the other hand, a shipbroker alive to the commercial aspects and not purely the execution of the law could provide consultancy upon request and could link to a law firm those of its clients in need of legal services.

"It is all about ‘added value’. If we provide a credible and reliable source of commercial analysis for a firm such as Clifford Chance, it can add value to its services. In turn, its support for our consultancy company gives it a level of probity which otherwise might take us months of marketing to reach."

And the last word? "At the end of the day," says Foster, "it is all about adaptability. If the marketplace doesn’t want change, we will have to look again at the old style and revert. If, on the other hand, our instincts are correct, we should be among the first to benefit. That will be more fun as well as more profitable. We know that many of our ideas might meet resistance, but we are looking to the long-term future. It is very easy in our business to become bogged down in the deal of the day, particularly if that deal is highly profitable, but that doesn’t build a business."

Uncorking the partnership

JOHN Davis joined Hill Samuel as a graduate from the university of East Anglia in 1974, not knowing that he would be placed with Lambert Brothers, and has been in the business ever since.

Tony Foster joined Wallem Ship Broking in 1976, as a law graduate from Oxford and, likewise, has not looked back.

The pair are close friends as well as business partners and have worked together, on and off, since the early 80s when they were together in Wallem’s Hong Kong office. They also own a wine business in the City of London called Uncorked, situated in the Broadgate Centre, and have a shared interest in horse racing ( John is a director of Newmarket Racecourse) and soccer ( both season ticket holders at Queen’s Park Rangers) . Tony has a lifelong interest in music and, if persuaded, can sing, word- perfect, songs from every musical you know and love.

While they clearly like to separate business and pleasure, they don’t see the need to keep away from each other outside office hours. Tony Foster says, "We are not identical twins. John lives in the country and I live in central London. He plays squash and I go to the gym. But seriously, after all these years, John and I obviously know each other very well and we know each other’s strengths and weaknesses. As in a good marriage, we work on our weaknesses and give way to each other’s strengths. We both set great store by honesty - by being honest ourselves and expecting it from those around us. On this basis it should be possible to deal with any problems which arise."