Diane Croessman,
Deputy Practice Leader of Strategy and Competitive Alignment,
The Alta Group
To sustain market relevance, vendor programs must stay focused on emerging trends. These programs have a long history of providing equipment and service suppliers with turnkey financing options. As a result, strong vendor relationships have been cultivated for years, if not decades, between some program partners. The more successful partnerships are those that leverage mutual values, create competitive market offerings and develop strong end-user relationships. This requires a high level of collaboration as well as the ability to adapt to change in order to remain relevant to all of the stakeholders involved in these programs. Over the course of the next few years, we will continue to see rapid change that will re-shape the status quo. Some immediate trends we need to consider include the:
Transition to a New Breed of Leadership
Each generation of leadership brings warranted change. The difference between prior historical periods and what we are experiencing today is the unprecedented speed of change. New leaders have a heightened awareness of technology, lifestyle agility, sustainability and social responsibility, and they perceive unlimited opportunities to change the end-user experience.
They draw on their own experiences to define successful vendor programs. The uberization of many consumer products influences how they think about shared use options in a business environment to ensure the preservation of natural resources. Whenever possible, they will prefer energy efficient versus fossil fuel assets. They also tend to have a more holistic approach to physical and mental well-being and are aggressive advocates for work-life balance. And, just as passionately, they demand diversity, equality and inclusion.
Although the individual and economic implications of COVID-19 brought significant worldwide hardship, it also created an environment that provided employees with more choices. No longer limited to physical office locations, individuals can more easily find employment with companies having similar convictions and values. Because employees can readily examine social media and internet content for a company’s commitment to social responsibility, the existence or non-existence of a strategy around these commitments can play a direct role in attracting and retaining the best talent. As new talent migrates to companies with demonstrable social responsibility success, there is good reason to assume that these companies will be more effective in transitioning beyond the status quo to create above average, long-term stakeholder value.
Emergence of ESG
Most emerging leaders are eager to demonstrate their commitment to their values. The strength of these convictions is often emboldened by regulations and legislation, and recent regulatory and capital market requirements have made ESG an imperative topic for boardrooms, investors and customers. This has elevated ESG to where it is now becoming an integral part of corporate culture in defining priorities. The Equipment Leasing & Finance Foundation, recognizing the importance of this topic, has published a new study, “The ESG Imperative: Understanding the Opportunities for the Equipment Leasing and Finance Industry” by The Alta Group.
Many companies have already embraced a corporate philosophy of “doing the right thing” and have published voluntary reports on their progress towards key initiatives. Soon there will be more standardization and compulsory reporting. The expectation is that standardization will enable a higher level of data integrity and improve reliability in the communication of an organization’s ESG efforts. It will also level the playing field in terms of creating comparable ESG performance scoring so that investor, employee and customer decisions can incorporate these scores into their assessment processes. Ultimately, ESG focus will likely be woven into every aspect of building internal corporate strategies, selecting external partners and attracting new talent.
In many cases, even the best existing vendor relationships will not survive if partner strategies around ESG value creation are not aligned. At a bare minimum, there is an expectation that companies will incorporate ESG assessments into their partner selection process. This might be in the form of a basic checklist or could include a more rigorous examination of published ESG scores and stack rankings. Partners with a committed focus on ESG will be cautious of low scoring partners who could potentially tarnish the brand.
Beyond this basic assessment, vendor funding partners may be more specifically evaluated on their ability to support ESG friendly circular offerings and their willingness to expand portfolios to new ESG equipment classes and service options. Circular offerings minimize waste associated with ineffective utilization and destruction of equipment at the end of a lease period. Equipment associated with circular models are generally designed for a longer useful life.
With the potential addition of service management content to equipment transactions, to ensure that equipment maintenance retains a high standard, the extended useful life of that equipment can be leveraged across one or more end users. The end result is that fewer natural resources are utilized to address supply/demand requirements, first use equipment can be more effectively priced on a pay-per-use or consumption basis, and residual equipment can be transitioned to new or secondary markets. Although the demand for these offerings has become more prominent in the marketplace in recent years because of end user requirements for more cost-effective utilization of assets, these offerings will gain even more momentum with regulatory pressure on ESG. The value proposition for end users around these circular models will be enriched with a natural alignment to ESG and can potentially influence ESG scoring. Similarly, providers of these offerings will be able to demonstrate their commitment to delivering improved asset utilization options to end users and should see equivalent benefits to their overall ESG performance attainment objectives and scores. With even more focus on these offerings than in the past, vendor partners who are unable to address capabilities for consumption pricing or second market utilization of assets will become increasingly irrelevant.
In addition to the impact that circular models will have in raising ESG scores, there will also be more emphasis on portfolios that are rich in ESG related asset classes, like electric vehicles. In some cases, the lack of asset history can create a reluctance to assume residual risk on these new asset classes. This will require risk mitigation strategies between vendor program partners until an adequate amount of history can demonstrate reliable asset value recovery. Another consideration when older technology transitions to new technology is the potential risk to pre-existing asset residuals. These transitions need to be carefully coordinated to mitigate the ultimate profit impact of residual deterioration.
Lastly, when enhanced services and software content are incorporated into these managed transactions, vendor partners will need to mutually address any potential performance risk recourse and associated accounting implications.
Transition From Analog to Digital
Rapid change has fostered an enormous reliance on technology. New leaders have grown up teething on technology devices. Not only will they push to incorporate technology as a solution to improve business processes and personal flexibility, but they will also demand the use of technology to enhance the end-user experience. Although analog systems currently dominate the landscape for equipment leasing systems and applications, the demand for more efficient and user-friendly mobile/digital applications will increase. Hi-tech manufacturers no longer want a low-tech equipment financing platform. The look and feel of a manufacturer’s brand can be diluted by a vendor partner who is still in an analog world. For most equipment financing providers, digital applications may have started with a focus on electronic signatures, but digital platforms are evolving to span the entire ecosystem to include all stakeholders involved in the end-to-end equipment financing process. Successful platforms will support the highest levels of security requirements and data integrity, potentially enabled by blockchain or other evolving capabilities.
Some of the challenges in adopting these platforms for vendor programs will include identifying applicable customer transaction subsets that can benefit from low touch models, transforming end-to-end processing that could include disruptive transformation planning and potentially converting pre-existing portfolios to ensure that customers with multiple transactions are not confused by being serviced from multiple platforms. For those funders who are successful in making the transition, the benefits of adopting a digital focus will include speed and efficiency in the end-to-end process, cost reductions from reduced manual intervention, improved customer satisfaction through more reliable self-service mobile applications and a more contemporary value proposition that fits into modern brand images.
One important lesson learned over the past two years is that change isn’t always predictable. However, when it involves emerging trends, like the ones discussed above, there is an opportunity to be more deliberate in planning and aligning internal and external objectives among vendor program partners. The pace of change does not show any sign of slowing down but vendor programs will benefit from a new generation of passionate leaders and an industry that places significant value on the talent of these incoming leaders, the power of social responsibility and the transition to a digital future.
ABOUT THE AUTHOR: Diane Croessmann is deputy practice leader of strategy and competitive alignment for The Alta Group. She has more than 25 years’ experience building successful vendor finance programs and is also co-author of the Equipment Leasing & Finance Foundation’s recent report, The ESG Imperative: Understanding the Opportunities for the Equipment Leasing and Finance Industry.
