Ian Robertson Invigors

Pay-per-use and as-a-service equipment management models have been discussed in great depth within the asset finance industry, and yet, many companies have failed to gain the first-mover advantage. Ian Robertson, Nick Feasey and Tim Pearce state that companies need to catch up with this trend before they’re left behind.

Pay-per-use and as-a-service equipment management models have been discussed in great depth within the asset finance industry, and yet, many companies have failed to gain the first-mover advantage. Ian Robertson, Nick Feasey and Tim Pearce state that companies need to catch up with this trend before they’re left behind.

Robertson (pictured above) and Feasey are both executive directors at Invigors EMEA, an asset finance consultancy firm. Similarly, Pearce is a senior consultant on ‘as-a-service’ at Invigors EMEA.

COVID-19 has helped accelerate change in all manner of different ways over the course of 2020, including ever greater focus on digital delivery as well as a greater awareness of and focus on sustainability. One of the perhaps less obvious ones is how it has acted a catalyst for the consumerisation of business relationships. This has fast-forwarded the adoption of pay per use solutions and in turn primed the move to more as-a-service focused business models.

Whilst these were once concepts seen in a limited number of asset classes, 2020 has seen a rapid move into new collaterals and markets. Although fuelled by customers increased desire to match cash flows to their usage and business demand, this has also been enabled by the availability of new technology, data and systems.

Sensors now enable real-time monitoring of once ‘dumb’ assets and combined with pervasive cloud-enabled software, this allows for all manner of data to be collected and analysed, and in doing so form the basis of both new business models and new pricing structures.

Figure 1

The above figure shows how asset finance has developed over time and continues to evolve alongside the broader business transformation from product sale to the delivery of solutions.

This focus on cost and cash flow management are also encouraging end customers to focus more on outcomes and the total cost of ownership rather than owning equipment and managing all aspects of its maintenance and lifecycle management. This is giving a tailwind to OEMs and service providers to address this need and at the same time begin to transform their business from a product focused model to a service focused model.

This development brings with it significant advantages for OEMs and service providers, but also creates great opportunities for funders and lessors (see fig 2).

Fig 2. Features and benefits of “equipment as a service” (EaaS) solutions

Figure 2

This move naturally also creates new challenges for the asset finance industry and it surely has structural implications for the industry.

We at the Alta Group believe the industry is likely to bifurcate, with specialist actors capable of managing and providing physical services and managing the associated risks around service and usage as well as residual value benefiting. Other actors will likely focus more on providing cost effective funding.

We believe there is also a role for orchestrators and platform providers as well as specialist risk management companies who might partner with players who lack the specialist competences or have different risk appetites or return expectations.

Fig 3. The critical business components

Figure 3

In this picture it’s important to recognise the increased focus on the equipment itself. This is seen in multiple areas, including the physical services relating to the management, the assessment of usage risk with its more intimate understanding of how a customer is using equipment, as well as the related assessment of solution value and its pricing. Aligned with this last point is a focus on how to develop asset specific value propositions. Depending on the collateral in question there can potentially be multiple untapped value pools to be explored and capitalised upon. 

An example here could be increased throughput for production facilities from having more reliable equipment that OEMs sometimes in conjunction with insurers can provide availability and uptime guarantees. In a batch production setting, the ability to combine and schedule service and maintenance in line with production scheduling systems and customer demands can again enable an end customer to drive more outputs and revenue from the same production equipment.

As illustrated above, the “smarter” or “less dumb” assets referenced earlier, utilising their IOT data can help transform overall equipment effectiveness, (OEE). In essence OEE is a combination of availability, performance, and quality. 

The importance of each of these dimensions differs by collateral as well as potentially by customer group, but insight into this can be critical in pricing and positioning new solutions. This requires a much greater awareness of the equipment and how it is being used by the end customer.

It potentially might mean a paradigm shift from “box shifting” and/or providing customers “state of the art” equipment to a greater focus to solving for the client’s “state of need” and this in turn should imply a more effective use of assets and inputs. This also implies a lifetime approach to marketing assets and their 2nd and 3rd use, which in turn ties to circular economy trends which are also a growing theme in many sectors.

So what does this really mean?

Imagine a bakery, which has two production lines with two different ovens, one a modern state of the art oven with built in IOT sensors and predictive maintenance and another lower specification oven reliant on traditional planned service and maintenance.

It’s easy to see that the newer oven with the built-in sensor technology, remote monitoring and analytics package should yield a higher level of reliability and availability of the oven for production vs. the lower specification machine. Naturally planned maintenance vs. interventions when needed can also increase availability.

In this example, you can picture that this could be a question of capacity of one oven vs. the other, or indeed the ability to drive higher throughput potentially by having shorter heating or cooling cycles between different batches of products.

Another example is whereby the sensor is told to switch on and warm up the oven when a certain number of loaves have been removed from crates which also have sensors, ready for fresh bread to be baked and avoiding manual counting and planning & switching on the oven, thereby improving throughput.

In this illustration it’s perhaps easy to visualize that the quality of the product will again be most easily illustrated by the impact of temperature - its uniformity and control and the impact on the finished products themselves. Each connected machine should have significantly higher yields, as defects can be avoided through monitoring.

Ultimately as you can picture in this example, OEE effectively translates to a number of high-quality finished products that one oven produces vs the other.

This seems all pretty basic stuff - so why might it matter?

OEE as a measure clearly differs from asset type to asset type, but it’s clear to see how important the concept is, especially when mapped to the price point for a given level of OEE.

And this is where the asset finance industry might literally be able to have its cake and eat it.

In the world of advanced managed solutions, enlightened OEMs, service providers and asset financiers have the chance to blend their equipment knowledge, service execution capabilities and finance structuring and risk management skills to transform capital acquisition and drive financing penetration and leverage the as yet largely untapped capability of the IOT. It’s Alta’s view that the new as a service and pay per use transactions will not just displace traditional financing structures in some areas, but that it will also replace many cash funded transactions.

Regardless of whether you act, your competitors will

In short Alta believes that to be at the forefront of all these fast developing trends requires greater emphasis on understanding the equipment and its usage. This clearly implies increased strategic importance on having mature equipment management competences in the business.

This expertise and asset insight moreover needs to be shared across the wider business beyond the asset management functions and related areas such as pricing, into areas such as innovation and value proposition development as well as for some companies the newer risk management domains of usage risk and service risk assessment and mitigation. Ultimately this will facilitate a fundamental shift in business models from a product to a service oriented one.

The pace of change and move to these newer solutions also requires an ability to move with the times and focus ever more on the use of data and analytics. The companies that manage this transition most effectively have the opportunity to develop customer insights and craft richer solutions that will be challenging for competitors to replicate and displace.

Regardless of whether you act, your competitors will - deepening customer and partner relationships as they progress.