In a report from the Swedish University of Agricultural Sciences (SLU), it is shown that four types of forestry service contractors can be distinguished in Northern Sweden. These are logging contractors (LC), silvicultural contractors (SC), contractors focusing on other types of forest services (OFSC) than logging or silviculture (e.g. forest planning, ditching, wood chipping, machine transportation, etc.), and contractors who combine multiple types of forestry services (CFSC). The author of the report is Ida Larsson, forestry student at SLU, who within the FOBIA-project has completed her master’s thesis titled “Survey and analysis of business models applied among forest service companies in northern Sweden and its impact on profitability”.
The material for the study was collected in November 2018 through a questionnaire, which was answered by 186 forestry service contractors in the counties of Norrbotten, Västerbotten, Västernorrland and Jämtland.
The above mentioned contractor types are based on how the contractors’ turnover was distributed between different types of services. To be assigned to the LC, SC or OFSC category, at least 75 % of the turnover had to come from that type of service. Of the companies that participated in the survey, half were classified as LCs, 25 % focused on silvicultural or other forestry related services, and 25 % performed several types of services.
In her study, Larsson implemented a tool for mapping and characterization of business models that previously was developed within the FOBIA-project. Besides investigating the types of services offered by contractors, the Larsson also looks at the contractors’ customer base, machinery, pricing and sales methods, personnel, use of subcontractors, and the business owners’ own motivations for being a forestry contractor. These business model components were thereafter analyzed together with financial data in order to see if there are any correlations between the business models applied by contractors and their profitability. An important question for companies who are looking for development opportunities in a sector with a challenging business environment.
Varying profitability between contractor types
Larsson found that in year 2017, the mean turnover for logging contractors was 6.2 million SEK, and their level of solidity (shareholder equity/total capital) was 39 %. In comparison, silvicultural contractors had a higher solidity (48 %) but lower turnover (3.8 million SEK). Both groups had a net margin (earnings before tax/turnover) of 6 %. The net margin for OFSCs was considerably higher (15 %), and CFSCs had a negative net margin (-1 %). However, their solidity was on the same level as for the other groups, with 48.3 and 41.2 %, respectively.
Common to have a main customer
The number of customers varied between the contractor categories. LCs had the lowest number of customers, while SCs had a broader customer base. This was the case whether or not private forest owners were included; a customer group were each individual customer often contribute with just a minor share of the contractor’s total revenues. In all categories, a majority of the contractors stated that they have a main customer that account for more than 75 % of their total turnover. It was also rather uncommon among contractors to look for new customers. Of those who had a main customer, one out of five LCs had changed customer during the last three years, and only 10 % of SCs had done the same thing. Eight out of ten SCs had neither considered the possibility to change customers, and the same applied for 53 % of the LCs. In addition, when firms without a main customer was included, a majority of all contractors stated that they had not considered looking for new customers. Contractors considered the availability of personnel and the geographical location of the business to have a strong influence on their number of customers.
Table 1. Average number of customers per contractor category and share of contractors with a main customer
|Contractor type||Customers||Customers excl. private forest owners||Contractors with a main customers (= more than 75 % of turnover)|
Different contract types for different services
How contractors sold their services varied between the groups. Larsson found that LCs to largest extent sign contracts for periods that are one year or longer, while SC to larger extent have contracts with a duration of 6 to 12 months. For the latter groups, contracts for single assignments were also equally common. For OFSCs, contracts without a specific ending date were the most common. To sign contracts for single assignments was the most common method for CFSCs.
Table 2. Contracts types applied by the contractors (1 = not at all, 5 = exclusively)
|Less than 6 months||1.3||1.3||1.2||2.0|
|6 to 12 months||1.7||2.7||2.1||1.9|
|More than 1 year||3.1||2.1||2.3||1.9|
|Until further notice||2.3||1.4||2.8||2.2|
The most common pricing methods for LCs was the calculation model (where the customer calculates the price depending on mean stem size and a number of other variables affecting productivity) or price per mean stem size. However, one out of four stated that they mainly used other types of piecework rates. Among SCs, piecework rates were frequently used while the other two categories to higher extent priced their services per work hour.
Large machines dominate in the north
LCs and CFSCs had on average 1.5 and 1.6 machines, respectively. In the first group, large machines (16 tons or more) added up to 52 % of the total number of machines, and the remaining share was predominantly mid-size machines (11-16 tons). Only 6 % of the harvesters were small-sized machines (< 11 tons). In the other group, large machines were even more common (76 %). In addition, forwarders were also found to predominantly be of larger sizes (14 tons or more in maximum load capacity). Based on the annual harvesting volumes provided by contractors, mid-size machines were more commonly used for thinning, while large machines are used for final felling. Further, LCs stated that the average volume per machine and year in thinning was 18 000 m3 (solid under bark), and in final felling 44 000 m3. Corresponding figures for CFSCs were 6 800 and 32 000 m3. LCs were also found to have slightly newer machines than the other group, which more frequently stated that they buy machines in the secondhand market. The respective mean age of their harvesters were 4.4 and 6.3 years, and their forwarders were 5.1 and 8.9 years. The depreciation time for machines was in all cases just over five years.
Table 3. Distribution of forwarders and harvesters per machine size and type of contactor. Harvesters are categorized by weight (small <11 t, medium 11-16 t, large 16-20 t, XL >20 t), and forwarders by maximum load (small <11t, medium 11-14 t, large 14-17 t, XL >17 t).
|Share of harvesters per machine size (%)||Share of forwarders per machine size (%)|
Contractors primarily recruit local personnel
The average number of employees was 4.5 for LCs, 11.2 for SCs, 2.5 for OFSCs, and 5.1 for CFSCs. All types of contractors primarily recruit their personnel in the proximity of where they have their operations. However, SCs stated to higher extent than other groups that they also recruit personnel from other countries within the European Union. This was especially the case for larger firms. In almost all SCs (96 %), the personnel only worked single shifts. Among LCs, 41 % stated that all of their personnel is working in two shifts, while one out of four applied one shift scheduling for all of their personnel.
Contractors stated that they to rather limited extent hire sub-contractors, and it was neither common that they themselves sold their services to other contractors. CFSCs was the group that did this most frequently. The services primarily sold in this way was forwarding, pre-commercial thinning, and other motor-manual services. Further, contractors also buy services such as accounting, machine transportation, machine services and repairs. Services such as financial and legal consultations were only used to limited extent.
What motivates contractors?
To be able to work in the forest and to be one’s own boss were two important things that gave contractors motivation in their work. OFSCs stated to higher extent than other groups that solving the customers’ problems had a strong influence on their motivation. Further, from an industry perspective, contractors regarded the customer demands and requirements as highly influential on the future development of the forestry service sector.
Table 4. The respondents perception of things that motivates them as forestry service contractors (1 = to low extent, 5 = to high extent).
|Solving the customer’s problem||3.8||3.2||4.4||3.8|
|Being my own boss||4.1||4.0||4.4||3.8|
|Achieving a high profit or salary||3.5||3.0||3.1||2.9|
|Lack of other employment||2.0||2.4||1.4||2.0|
|The respect given to me as a contractor||2.1||1.9||1.6||1.9|
|The responsibility for my personnel||3.5||3.5||2.5||2.8|
|Being able to contribute to the community||3.1||3.0||2.9||3.1|
|The feeling of handling challenges||4.0||3.4||3.6||3.8|
|To run my own company||3.9||3.7||3.5||3.7|
|Being able to work in the forest||4.4||4.5||4.6||4.2|
Business models and the contractors’ profitability
When analyzing the business model components and the contractors’ profitability Larsson identified, for example, a negative correlation between contractors’ profitability (net margin) and the use of the calculation model for pricing of the services. A possible explanation given for this is that the method reduces the contractors’ possibilities to negotiate prices as the method builds on substantial amounts of historical productivity statistics, which makes the production economy very transparent for both parties. This reduces the risk in the deal, and thereby the price that can be charged. Another factor correlated to the contractors’ profitability was the age of machines, as contractors with older machines had lower net margins. Further, a positive correlation was found between the contractors profitability and level of solidity. Especially among LCs. Contractors’ that had machines had also lower solidity than other groups, which is explained by an increased need for external capital (loans) when investing in expensive machines. In the report, Larsson points out that the contractors with the highest profitability seems to be those with unconventional services types. Interestingly, there was also a connection between the contractors’ own driving forces and the firm’s profitability. However, to explain the underlying reasons for this relationship, more in-depth studies are needed.
Text: Thomas Kronholm, SLU