September 05, 2011

Who is really Getting Rich from Somali Piracy

Why is business model innovation important? How to design (new) business models? What are possible new revenue markets? Board of Innovation organizes anInternational Masterclass in Business Model Innovation on November 24, 2011. To get inspired; we will look to successful criminal businesses, and how they make their money.

As former analysis has already shown, Somali Pirates can be considered as pretty innovative businessmen. Like a good running company, they know their market by controlling Africa’s Gulf of Aden, they negotiate with their “customers” to get a better price, and in only a couple of years they have increased their “profit” with a factor 100. But are it really the pirates making the most profit out of this whole model?

In a report about “The Economic Cost of Maritime Piracy”, the annual cost of Piracy, is estimated between $7 to $12 billion dollars. The most remarkable fact is thatonly less than 2% of the annual estimated cost actually goes to the pirates. So where is all the other money going to? The business model involves more parties then only Somali fishermen and shippers. As we have visualised below; insurance companies, security contractors and national navies are winning in this model too.

The piracy model is a great example of the“Fear Economy”. Nowadays many (legal) companies use “fear” to boost their business. Think about the soaring sales of anti-radiation tablets & Geiger counters after the Fukushima disaster, “healthy” drinks to lower your cholesterol level, expensive anti-hacker software, and of course… unnecessary insurances.

In 2010, $148 million of ransoms were paid to pirates. On the other hand, $ 1.85 billion dollars were spent on insurances to cover piracy, that’s 10 times more than the actual ransoms that are given to pirates. In reaction to the growing threat and cost of ransoms, the whole model came in a loop and the maritime insurance industry has responded by increasing its shipping rates and premiums. As national navies declared the Gulf of Aden as a war zone, premiums increased even more.

Another winning party are the private security contractors. Their job is not to prevent piracy but to free the ship and crew by negotiating and delivering the ransom. Of course it is in the interest of the insurace companies that those ransoms stay as low as possible; that’s why a good collaboration between those two parties has been established. Security contractors enter into a sort of partnership with the attackers, building up reputation for fair play. “Successful negotiation funnels cash to criminal gangs, fueling further hijackings — and further opportunities for security companies.”

If you know that only 0,2% of all cargoships in the northeast Gulf of Aden is hijacked, the average cost of an armed transit through Somali waters is in the order of $34.000, war risk insurance can go up to $150.000 per ship, per voyage; it’s maybe better to take the risk!

Inspired by this business model? Join our International Masterclass in Business Model Innovation on Nov 24, 2011. Check

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