Anything-as-a-Service: Are Equipment Finance Companies Ready?
Michael Donnary
Senior Director @ Capgemini | Global Equipment Leasing & Specialty Finance Practice Lead
The dawn of equipment leasing led corporations to re-think the pros and cons of ownership. Busnesses are shifting away from large numbers of owned assets, reducing capital expenditure on asset acquisition and opting for a “balance sheet light” approach. A lessee's right to benefit from property, without concerns over end-of-term value or outdatedness, makes leasing a formidable alternative to traditional ownership. Recently, a new approach has taken this trend even further.
The XaaS Trend
The rise of Industry 4.0[1] has seen the equipment finance (EF) sector embrace digitization. This shift from ownership to usership, and now to solutions-oriented services, is reshaping the market. ?Businesses and consumers now prioritize obtaining value from comprehensive packages that include maintenance, uptime guarantees, and insurance—a trend known as the servitization of offerings or “anything-as-a-service” (XaaS)[2].
Take for instance, a hospital with an MRI machine—they're no longer interested in traditional rental contracts. Instead, they prefer to pay per use, counting on the manufacturer or financier to maintain the machine's continuous operation. Similarly, in offices, copiers might charge per page, while agricultural equipment on farms may incur fees based on hours of field use. This is a pivot to performance-based models where the utility of the equipment takes center stage.
Beyond Selling Products
Responding to these demands, companies are innovating with unique solution-based offerings. Philips, for example, has introduced Light-as-a-Service at Amsterdam’s Schiphol airport. Schiphol pays for the lighting it uses, while Philips handles the upkeep and functionality of the lighting systems. DLL Vendor Finance offers leases that adjust to equipment use by the hour, adding flexibility to the lease terms. Bayer presents a model where farmers pay based on crop yields. The equipment and its maintenance are managed by the supplier, and the farmer pays only for the results, not the machinery or service.
Equipment manufacturers are no longer just selling their products; they are now deeply involved in the ongoing productivity, maintenance, and servicing of these assets. The relationship with the customer extends far beyond the initial sale. On the financing side, lenders need to gain a comprehensive understanding of the borrower’s? business, how the asset will be used, and its value to the business. Financial products are becoming more integrated, combining the physical equipment with digital tools, services, and the original equipment manufacturer's (OEM's) expertise.
Equipment-as-a-Service
In the simplest form of these comprehensive offerings, a financing deal for equipment might include a basic service package, such as insurance, for an additional fee. This represents the introductory level of bundling services with financial arrangements. More advanced models adjust lease payments or financing installments based on the actual usage or the outcomes achieved by the equipment. These plans may include insurance, maintenance, and guarantees for uptime or replacement.
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The most prominent models for what is known as "Equipment-as-a-Service" (EaaS) include:
1.???? Pay-per-use
2.???? Outcome-based
3.???? Subscription services
4.?????Device-as-a-service
The core of business transactions is evolving beyond simple financing or providing usage rights; it now encompasses servicing all aspects of the customer’s needs, including the benefits gained from the asset’s use. Subscription models prioritize the overall experience with an asset, where the service package includes the asset itself. The customer is not bound to the asset, giving them less responsibility and control over it.
Subscriptions offer the flexibility to change, upgrade, or discard assets as business needs evolve, enabling manufacturers to manage the asset's residual value more effectively. This leads to deeper customer engagement and allows equipment financing firms to discover new revenue streams. "Everything as a Service" (XaaS) models are designed to retain customers beyond the end of the financing term, as they continue to use the bundled services.
In the world of equipment financing bundles, decisions are increasingly informed by detailed understanding and data about the assets' performance and utility, rather than just investment return rates (IRRs).
Some key differences between EaaS, leases, and loans are as below:
Whether a device, infrastructure, software or equipment, anything can and is being offered as a service. As per the 2022 Fortune Business Insights report that focused on the topic of everything-as-a-service, the global XaaS market size is estimated to be $559.14 billion in 2022[3]. A research paper published by Spherical Insights & Consulting indicates that the XaaS market is to grow at CAGR of 23.4%[4]. The North American XaaS market alone was around $282.10 billion [5] in 2022.
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Getting Ready to Embrace XaaS Fully
Supporting XaaS models requires significant changes throughout a company. For example, evaluating customer eligibility now involves a deeper analysis of product performance, its utility for the customer’s business operations, and the projected cash flow over time. It also necessitates understanding the customer’s operational risks, using historical data, and considering the added value and margins from services included in the bundle to determine the returns from the transaction. The expectations for returns on XaaS deals now involve complex factors beyond simply achieving IRRs.
In traditional leasing arrangements, lessors focus on tracking the physical location of equipment. In these scenarios, asset inventory management and residual value risks are primarily concerns for the lessor at the end of the lease term. However, for bundled solutions, the equipment turnover rate is higher, which means there’s a greater need for diligent asset management. The continuous management of disposing, refurbishing, or recycling assets presents ongoing risks.
Captive finance companies, often subsidiaries of manufacturing firms, may benefit from their close association with OEMs. This relationship can provide them with enhanced support for asset management and deeper insights into the equipment's functionality.
Bundling equipment with services necessitates the operational ability to generate bundled invoices, appropriately charging for both the equipment and service components. Service levels may need to be adjustable according to the customer’s business needs, such as offering higher uptime guarantees during a seasonal business’s peak times. For equipment finance companies, possessing flexible and agile billing systems is crucial for the success of XaaS offerings.
Such agility in billing reflects the broader need for technological nimbleness within the company. Software systems must be sophisticated enough to handle real-time equipment usage tracking, provide flexible rental contract terms, manage charge appropriations for different bundle components, and ensure compliance with various regulatory and accounting standards, including those related to revenue recognition.
Learning From Others’ Mistakes
The automotive finance industry was one of the early adopters of servitization, combining car sales with additional services like maintenance, tire replacement, insurance, and upgrades. This shift towards "Mobility-as-a-Service" (MaaS) and the integration of connected car technology has become increasingly popular. However, it hasn't been an entirely smooth transition. Some prominent initiatives like Mercedes Benz's 'Collections' and Ford's 'Canvas' subscription services were discontinued after pilot phases, while Jaguar Land Rover rebooted its own. Despite these setbacks, these companies have gleaned important insights into product development and customer needs, and they still offer various forms of subscription services.
The equipment finance industry should be mindful of these lessons. While XaaS models require a digital overhaul, leveraging data and analytics to enhance customer value is critical. However, there's a risk that over-digitalization could undermine the very benefits that XaaS aims to provide. Consider the case of John Deere, which, through data and customer feedback, has significantly improved its equipment. But a policy that prevents farmers from performing their own repairs has led to frustration due to the enforced dependency on John Deere's approved partners, which can lead to delays.
Conclusion
The challenge for equipment financiers is to embrace the XaaS model without losing sight of its core principle: to offer flexibility and meet customer needs effectively. Whether they can stay true to this principle and successfully implement XaaS without creating unintended barriers for customers is something that will become clear with time.
[1] Industry 4.0 is often touted as the fourth industrial revolution recognizing the technological advancements and encompassing the presence of digitization into various sectors like manufacturing, industrial, or services.
[2] Anything-as-a-service, or XaaS as the name suggests, is converting anything into a service whether a device, infrastructure, software etc. Some of the popular examples of XaaS are:
a. Software-as-a-service (SaaS) – one of the most widely adopted forms of XaaS, SaaS gives access to cloud-based apps at any time.
b.?Platform-as-a-service (PaaS) – cloud services that provide a platform to the users to manage applications without having to invest in infrastructure.
c.?Infrastructure-as-a-service (IaaS) – here, the entire data center space or network is offered as a service.
Senior Vice President, Global Sales and Business Development at Societe Generale Equipment Finance
7 个月Many large services providers and integrators are looking for off balance sheet (for them and thier large corporate global customers) XaaS solutions financing.
Strategic SaaS Product Management Leader | SaaS, XaaS, Subscriptions, Integrations, Payments, Marketplaces | Driving Revenue Growth and Innovation | Marketplaces |B2B Product Management | SaaS Product Leadership
7 个月Great summary of the challenges Michael Donnary