COVID-19 has accelerated change in myriad ways over the past year, including an even greater focus on digital delivery and sustainability. One of the less obvious changes is how the pandemic has been a catalyst for the consumerization of business relationships. This has fast-forwarded the adoption of pay-per-use solutions and primed the move to more as-a-service business models.
While a limited number of asset classes utilized these concepts previously, their reach rapidly expanded into new collaterals and markets last year. Although fuelled by customers’ increased desire to match cash flows to their usage and business demand, the availability of new technology, data and systems also enabled this trend.
Sensors now enable real-time monitoring of once “dumb” assets. Combined with pervasive cloud-enabled software, all manner of data can be collected, analyzed and used to form the basis of new business models and pricing structures.
Figure 1 shows how asset finance has developed over time and continues to evolve alongside the broader business transformation from product sales to the delivery of solutions.
This focus on cost and cash flow management also is encouraging end customers to focus more on outcomes and total cost of ownership (TCO) rather than owning equipment and managing all aspects of its maintenance and lifecycle. In turn, original equipment manufacturers (OEMs) and service providers must address this need while beginning to transform their businesses from product-focused models to service-focused models.
The development brings with it significant advantages for OEMs and service providers, as well as great opportunities for funders and lessors.
Of course, this move also creates new challenges for asset finance and it surely has structural implications for the industry.
We at The Alta Group believe the industry is likely to bifurcate, with some companies becoming specialists capable of providing physical services and managing the associated risks around service and usage as well as residual values. Others will likely focus more on providing cost-effective funding.
We also envision roles for orchestrators and platform providers. Additionally, specialist risk management companies may partner with players that either lack specialist competencies or have different risk appetites or return expectations.
It’s important to recognize the increased focus on the equipment itself. This is seen in multiple areas, including the physical services related to equipment management, the assessment of usage risk with its more intimate understanding of how a customer is using equipment, and the related assessment of solution value and pricing. Aligned with this last point is a focus on how to develop asset specific value propositions. Depending on the collateral in question, multiple untapped value pools may be explored and capitalized upon.
To illustrate this point, OEMs, sometimes in conjunction with insurers, can provide equipment availability and uptime guarantees to increase their customers’ production facilities. In a batch production setting, the ability to combine and schedule service and maintenance in line with production scheduling systems and customer demands can enable an end customer to drive more outputs and revenue from the same production equipment.
The “smarter” or “less dumb” assets referenced earlier, utilizing their internet of things (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 and 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 might mean a paradigm shift from “box shifting” and/or providing customers “state of the art” equipment to a greater focus on solving the client’s “state of need,” which in turn should imply a more effective use of assets and inputs. This also implies a lifetime approach to marketing assets and their second and third use, which ties to circular economy trends that are also a growing theme in many sectors.
What Does This Really Mean?
Imagine a bakery that 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 the other a lower specification oven reliant on traditional planned service and maintenance.
Availability — 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 for production versus the lower specification machine. Naturally, planned maintenance versus interventions when needed also can increase availability.
Performance — In the bakery example, this could be a question of capacity of one oven versus the other or the ability to drive higher throughput by having shorter heating or cooling cycles between different batches of products.
Using another example, the oven sensor could be programmed to switch on and warm up the oven when crates equipped with sensors are delivered to the bakery with pre-made dough for bread. When the unbaked loaves are unpacked, the crate sends a signal to the oven, which turns itself on and reaches the correct temperature when the dough is put into the oven.
Quality — In this illustration, it’s easy to visualize that the quality of the baked products will be affected by an oven’s temperature — its uniformity and control. Each connected machine should have significantly higher yields, as defects can be avoided through monitoring.
Ultimately, OEE effectively translates to a number of high-quality finished products that one oven produces versus the other.
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This Seems Basic — Why Does It Matter?
OEE as a measure clearly differs from asset type to asset type, but it’s an important concept, especially when mapped to the price point. And this is where the asset finance industry might literally be able to have its cake and eat it too.
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, finance structuring and risk management skills to transform capital acquisition and drive financing penetration by leveraging the largely untapped capability of the IoT. Alta believes that the new as-a-service and pay-per-use transactions will not only displace traditional financing structures but also will replace many cash funded transactions.
Being at the forefront of these fast-developing trends requires greater emphasis on understanding the equipment and its usage. It clearly implies increased strategic importance on having mature equipment management competencies in a business.
This expertise and asset insight must be shared across the wider business beyond the asset management functions and related areas, such as pricing into areas such as innovation, value proposition development and, for some companies, the newer risk management domains of usage risk and service risk assessment and mitigation. Ultimately, this will facilitate a fundamental shift away from product-focused business models toward service-oriented ones.
The pace of change and move to these newer solutions also require an ability to move with the times and focus even more on the use of data and analytics. Companies that manage this transition most effectively can develop customer insights and craft richer solutions that will be challenging for competitors to replicate and displace.
Regardless of whether you act, know that your competitors will, furthering deepening customer and partner relationships as they progress.
Ian Robertson is executive director and Nick Feasey and Tim Pearce are senior consultants in the As a Service/PPU Practice at Invigors, which is part of The Alta Group.