BUSINESS MODEL OF SOMALI PIRATES

The Business Model of Somali Pirates is an eye opener especially when you realize that they incorporate elements of Shareholder Management; Vendor Manageemnt and Operational Cost Management seamlessly into their business model. Doubt whether they teach this even in Harvard or INSEAD ?

1. Introduction:

A basic piracy operation requires a minimum eight to twelve militias prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat.

2. Investment and Shareholder Management:

The costs of the operation are usually borne by investors, some of whom may also be pirates. To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 other volunteers are recruited as militiamen to provide protection on land if a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

3. Supplier Management:

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

4. Operational Cost Management and Dividend Determination:

When ransom is received, fixed costs are the first to be paid out. These are typically:

• Reimbursement of supplier(s)

• Financier(s) and/or investor(s): 30% of the ransom

• Local elders: 5 to 10 %of the ransom (anchoring rights)

• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum — the profit — is divided between classes-A shareholders.

Extract from Annex III (http://somalitalkradio.com/2010/mar/un_report_somalia.pdf