There have been many words written, conference discussions and round tables as to the transformative effect that electronic Bills of Lading, and electronic trade documents in general, can have on international trade and the world of commodity trading and shipping.
However, there still appear to be significant headwinds to adoption within sectors of the commodity trading community.
While some sectors – industrial and energy – are said to be more advanced in their adoption than agricultural commodities, the overall picture is of slow adoption and that a ‘tipping point’ is yet to be reached.
There are many articles on the foundational work required to prepare the world for eBL’s, such as the legal frameworks, technology platform, and the necessity for the interoperability across the eBL solutions, and also integration with stakeholder applications. This post will not re-hash these.
In PART 1 of this blog post I will focus on factors potentially impacting commodity trading companies decisions to embracing the eBL wholeheartedly;
In PART 2, to follow shortly, the focus will be on strategies to overcome these factors, catalyse transformative change and create value.
Embracing eBL and digital trade documents
Most trading companies are innovative risk seekers.
When it comes to margin opportunities and P&L, physical traders sniff out opportunities to create value (improve performance, improve margins, reduce complexity & risk) and differentiate themselves from competitors.
eBL solutions, in one form or another, have been available to the market for over 20years to date and the adoption rates remain stubbornly low in many commodity sectors. While internal resistance to change is often raised as a key hurdle to adoption, the commodity trading sector has shown itself to be quick to adapt and implement transformational change with speed when significant value is identified and can be captured.
The questions that must be asked then are,
a) in an industry which is innovative and has the proven capability to transform with (relative) speed, Why is the eBL in the commodity trading space not being wholeheartedly embraced? and;
b) What actions can be taken to influence change?
Unravelling the Dilemma: Factors influencing adoption
While the challenges to eBL adoption by sectors of the commodity trade are complex, many and varied, I would highlight the following current factors as key to influencing adoption decisions.
· Costs & Benefits of e-BL adoption
· Organisation Disruption & Transformation
· Internal Project Funding
· Business Scale & Reach
· Industry fragmentation
· Alternative Solutions
Costs & Benefits of e-BL adoption
To many actors in the sector, the business case for eBL adoption today is still to be proven.
To be an eBL pioneer involves the additional time and resource costs to onboard buyers, sellers, and service providers. Such costs, however, could be circumvented by followers.
This dynamic may potentially breed reluctance to take the lead and why sector platform initiatives, if successful, could benefit the broader trade sector by investing the resources, and laying the groundwork, for the broader trade to capitalise on in the future.
Balancing Benefits and Costs:
While eBL adoption and digitalisation of document processes offer benefits, they can also introduce significant costs. These costs can include
employee expenditures (redundancy, recruiting new skills, training and development)
upgrading existing platforms for the digital era
integrating / interfacing with multiple stakeholder applications
The immediate investment costs, and implementation risks, must be carefully assessed and balanced against the long-term benefits they promise.
Today this cost<>benefit analysis cannot be completed to any degree of accuracy and certainty. Benefits are, in part, externalised and costs internalised, in that eBL benefits are realised, to a large degree, by broader industry adoption outside of the control of a single organisation.
In a 2022 study by McKinsey it was estimated that. "Adopting an electronic bill of lading could lead to direct cost savings for all stakeholders, amounting to $6.5 billion a year". (container carrier eco system)
How benefits will be distributed over the tens of thousands of stakeholders in the international commodity trade, and how much these stakeholders would individually need to invest to transition into the digital era is an open question.
Is it a reasonable assumption that carriers & banks, for example, will pass on operational cost savings accrued through eBL processing to customers? Recent history suggests not.
That international trade as whole would significantly benefit from eBL and broader trade document digitisation is unarguable. Those with a high level of control over their supply chain, upstream & downstream, can clearly benefit significantly.
However, I would argue that for specific sectors and for specific actors, including many in the commodity trade, the costs<>benefits case for eBL adoption, as a singular objective, is still not crystal clear.
Organisation Disruption & Transformation
In today’s landscape, most trading, shipping and finance organisations rely heavily on human intervention to execute document processes.
To capture the benefits of improved productivity offered by digital transformation a comprehensive organisation strategy is imperative.
This entails two significant aspects.
Optimising the Workforce – organisations must assess the resources required, determining the optimal team size and the skill sets necessary for the successful implementation and execution of operations in a digital era.
Organisational Model - Digitisation and digitalisation are enablers of organisation models such as offshoring and outsourcing. With increasing digitalisation they become more attainable to a broader sector of the trading community, including SME’s. Arguably, to capture the full opportunity benefits of a digital strategy, including eBL’s, a different organisational model should be considered.
Concerns regarding the potential business disruption, business continuity and implementation risks must be considered in any decision to implement.
While there are potential advantages of eBL and trade document digitisation for many businesses the implementation may be perceived as complex and overly disruptive, particularly the employee implications, in relation to the value of the outcome.
For any business that seeks to embark on a digital transformation these outcomes have to be considered and leadership commitment to the transformation obtained.
Internal Project Funding
Interoperability has long been recognised as a requirement to encourage broader and faster eBL adoption. A plethora of eBL solutions presents both technical and process challenges to the trading sector and its stakeholders.
For those enterprises with limited IT budgets the functional priorities tend to be Commercial > Risk & Finance > Trade Execution/Operations…. In that order.
When there are many competing priorities for internal IT budgets the business case for eBL and e-documents adoption needs to be very strong to compete for funding. If the monetary benefits of eBL cannot be reliably quantified, with a certainty of payback, then it will be an uphill battle when pushing projects in front of CFO’s , CTO’s and senior leadership decision makers.
Business Scale & Reach
Bulk commodity trading behemoths that span the entire commodity supply chain undoubtedly stand to reap substantial benefits from eBLs, electronic documents and digitisation in general.
Global traders typically exercise meticulous control over their supply chain. They command:
Origin assets (exporting legal entity, terminals, vessel agencies)
Destination assets (importing legal entity, terminals, vessel agencies)
Internal service provision & contracting (financing, freight, agency, insurance, legal)
Zero counterparty risks on related entity transactions
Predictable trade flows
Significant influence on 3rd party service relationships
Transitioning to 'paperless' trade, with or without eBLs, should be relatively straightforward for the significant internal supply chain volumes of the ABCD++ tradehouses.
(There is a question then why, having so much control over their intercompany supply chains, paperless trade & eBL adoption is not higher in some agri sectors).
The situation is very different for the majority of trading companies, and in particular for SME’s.
Whether handling bulk, breakbulk, or containerised cargo, these traders predominantly engage with third parties, on the supplier and buyer side, and face:
· Unpredictable trade flows
· Elevated counterparty and sovereign risks
· Absence of internal asset ownership
· Reliance on external financing and services provision
· Low influence on 3rd party service relationships
For these entities, in this environment, implementing eBLs presents a formidable hurdle, even if they had a rock-solid business case.
Industry fragmentation
The more fragmented the industry, the more difficult it will be to have broad acceptance of eBL and e-document solutions across the commodity supply chain.
For instance, Agri commodities, especially those centred on container transport, experience high customer turnover and transactional relationships. Until eBLs and e-docs become the norm, continual onboarding and training of new counterparts, banks, and service providers would be a resource-intensive endeavour.
Alternative Solutions
There are several alternatives which already bring some of the benefits envisaged by digitising the Bill of Lading. While these alternatives might not replicate the seamlessness of a comprehensive industry-wide eBL adoption, they present valid solutions to overcome specific challenges encountered by commodity trading companies.
Current alternatives over which the eBL would give marginal benefits in some contexts.
Issuance of the Bill of Lading in 3rd country: subject to relevant stakeholder alignment, Owners and carriers can be amenable to the issuance of the BL through a representative in a country other than the place of loading. As example. A paper BL could be issued and released direct to charterers in Geneva on the same day/next day for a vessel completing in Brazil.
Seaway Bills: Mitigate the risks of lost or delayed documents and enable cargo release direct to consignee on arrival at destination.
Cash Against Copy Documents:Some commodity sectors employ CAD copy documents payment terms (pdf copy by email presentation) to speed up presentation for payment, reducing transaction costs and mitigating counterparty performance risks. Commonly employed with Telex Release (below).
Telex Release: A common practice in container trade for releasing cargo at destination without presentation of the oBL, mitigating risks of delayed or lost documents.
Ships Bag: The practice of placing a BL in the ships bag for delivery to the consignee/receiver directly at destination is still valid.
Letter of Indemnity: Used widely in the bulk & container commodity trade for delivery of cargo without presentation of an original bill of lading.
One issue the above do not comprehensively address, which eBL’s could, is the reduction of fraud risks arising through duplicate or false document presentations.
CONCLUSION
In conclusion, the journey towards widespread adoption of electronic Bills of Lading (eBLs) in global trade, particularly within the commodity sector, has been marked by a blend of optimism and persistent challenges.
While the potential transformative impact of eBL's on international trade is widely acknowledged, the pace of adoption has been notably sluggish in sectors of the commodity trade. Despite the commodity trading sector's reputation for swift adaptation to change when value is evident, the wholesale embracing of eBL's has remained elusive.
The challenges of funding & managing transformational change, industry fragmentation, the existence of alternatives, and the nuanced business case have, I would argue, collectively contributed to the measured adoption rates.
The ultimate driving force behind broader eBL adoption remains a subject of debate. While the maritime, trading and trade finance communities have been positioned as potential catalysts, the diverse stakeholder landscape and the underlying dynamics of the industry have introduced uncertainties.
Container carriers' ambitions for eBL are juxtaposed with the stark reality of limited digital adoption in the present.
As we navigate this landscape, a careful balancing of benefits and costs becomes paramount. The potential benefits, while substantial, are intertwined with intricate complexities. The value proposition of eBLs goes beyond mere digitisation of documents, encompassing larger systemic changes that need navigation.
In Part 2 of this exploration, we will delve into strategies to surmount the hurdles inhibiting eBL adoption and to steer the course toward transformative change.
Through collective efforts, innovative solutions, and a deepened understanding of the challenges, the commodity trading sector has the potential to unlock the true benefits of document digitisation.