Is this the key to removing innovation adoption barriers?
The global cargo industry is often accused of being traditional and reluctant in adopting new innovations. In a way this is true: the technology already exists to cut down emissions and costs drastically. However, instead of terminals and other customers, I believe it is us solution providers that should look in the mirror and ask ourselves why automation and other disruptive technologies are not currently in use in every major port.
I think there are two major reasons why innovation adoption has been slow in the cargo handling industry. Firstly, this is traditionally an asset-heavy industry where large investments are required upfront before being able to see results. Secondly, and most importantly, innovations have not always created the promised value to customers. For example, some of the first automation solutions for terminals did not fully live up to expectations, greatly affecting the industry’s willingness for automation adoption for years to come.
In other words, it’s understandable that terminals and other industry players have been cautious with disruptive technology. In a conventional costing model, they carry out most of the financial and operational risk related to buying them: a significant investment with the potential benefits having arguable credibility.
However, the benefits are real. For example, hybrid cargo handling equipment can cut down emissions in operational use by up to 40 percent and battery-powered solutions by up to 100 percent compared to conventional diesel-powered solutions, when electricity is generated from clean renewable sources. Similarly, a recent McKinsey survey indicates that operating expenses at automated terminals fall 15 to 35 percent, whereas the industry expectation of 25 to 55 percent reduction could be achieved with careful planning and management.
In fact, I believe in the value of our modern automation solutions so much, that recently we have started discussions with some of our customers to move into a performance-based cost model. In practice, this means that instead of paying for the ownership of assets, customers would pay for actual output over time, such as containers moved per hour.
Moving into this kind of costing model would be a revolutionary step in our industry. First of all, it reduces the upfront investment needed from customers to start using disruptive technology, making it financially accessible to many. In addition, the performance risk is transferred from the customer to the solution provider: if the output is not as promised, the customer will pay less. This also means that solutions need to be truly value-creating for customers, otherwise solution providers cannot afford this type of model as they won’t get paid for it.
In my view, this is a positive situation for everyone. Customers will be able to make use of technology they necessarily couldn’t afford with a traditional costing model, and can rest assured on getting results from their investment. Kalmar and other solution providers who are confident enough to take such an approach have great potential in speeding up the adoption of our newest innovations, while carrying the burden of proof to show value. And most of all, this speedier adoption of efficiency-boosting technology will have a significant positive impact on reducing emissions throughout the industry.
I believe performance-based costing will take off in the near future and a few years from now already be an industry standard. In addition to ports, similar benefits could possibly be achieved with this model throughout the whole cargo flow, meaning also vessels and road transport. Would you agree - could this be the mechanism through which we can finally drive innovation adoption and eco-efficiency to the next level? Is performance-based costing a feasible pricing method in our industry? Share your thoughts and join the discussion on social media with the hashtag #smarterbettertogether.