Paul Bent ,
Senior Managing Director,
The Alta Group

Diane Croessmann,
Director,
The Alta Group

Equipment-as-a-service (EaaS) is a widely recognized umbrella reference for performance- and usage-based offerings integrating equipment with related services. EaaS agreements bundle capital assets, services and other content into a single services contract. Funding of equipment embedded in these agreements is less similar to a banking arrangement than to the “servitization” of an underlying physical asset.

This characterization has caused EaaS to be viewed as a potential threat to more traditional equipment leasing and financing structures. Although, until recently, it more closely resembled a nagging reminder that disruption could be on the horizon — but not quite yet at the doorstep. The perceived momentum for EaaS appeared to be stifled by its economics, incremental risks and by the slower-than-expected integration of sensor technologies required to enable fully remote monitoring.

But all of that is about to change with the acceleration of advancements in artificial intelligence (AI).

THE END USER PERSPECTIVE

To better understand the potential impact of AI on EaaS, it helps to understand market requirements for EaaS from the perspective of both end users and service providers.

We currently have at least one generation of end users in the workplace who have grown up as subscription users. At a personal level, they have demonstrated a willingness to pay more on a per-use basis for solutions that are environmentally friendly and improve their personal productivity. We see this in their daily habits with the expanding regular usage of Uber, DoorDash, Instacart, a wide variety of entertainment subscriptions and many other applications.

It is no surprise that the same logic is transitioning into the workplace. In its truest form, EaaS is a solution predicated on a “per-use” or “per-unit of output” payment structure with no stringent commitment requirements. Traditional hell-or-high-water (HOHW) minimum payments are eschewed in favor of less predictable usage- or output-based pricing. In this highly flexible form, the utility of EaaS depends upon the ability of the service provider to optimize the use of an asset through one or more end users. This often requires sophisticated logistics platforms for recycling and remarketing of hardware to keep an asset in operation for longer than its estimated useful life, which is, in turn, much more environmentally friendly.

End users also want solutions that can simplify the monitoring and maintenance of increasingly complex equipment. EaaS provides an efficient solution by creating a one-stop shopping experience through a single supplier. Ultimately, from the perspective of the end user, true EaaS usage-based structures achieve optimal objectives that allow for flexible usage payments, are more environmentally friendly and improve individual and enterprise productivity.

OPPORTUNITIES FOR SERVICE PROVIDERS

While the benefits of true EaaS usage-based models for end users appear obvious, it might also appear that service providers bear the burden of offering this enhanced flexibility. In addition to some of the same risks that exist for traditional leasing and financing arrangements, service providers need to address incremental risks that include the uncertainty of asset utilization, complex logistics, service performance reliability and basic administration of billing and collecting. On the surface, managing these risks may seem overwhelming to service providers, but there are also significant incremental opportunities compelling them to actively promote these models. Service providers are generally manufacturers, distributors, value-added resellers or managed-service providers, all of whom are motivated to sell or re-sell equipment, but who are becoming even more motivated to create and sell services, software and other value-added content to enhance equipment profitability. This value-added content is often proprietary to the underlying hardware to distinguish its performance from that of a competitor, but can create performance headaches without specialized support. To ensure uncompromised performance, and to improve customer retention, service providers create integrated full-service contract “bundles.”

It would not be uncommon for profits and margins on the non-equipment value-added content to more than offset identified EaaS risks. This creates leverage for service providers to enable end-user flexibilities unlike traditional equipment funders, who are still limited by fixed-price HOHW requirements and are typically unable to offset profits from value-added content. Of course, as asset economic life and overall asset utilization continue to be extended through effective remanufacturing and recycling efforts, new equipment sales revenue can be negatively impacted. To combat this, service providers will address this cannibalization of new equipment by creating and putting increased emphasis on non-equipment value-added service revenue streams.

RISKS AND MARKET GAPS

Still, even with incremental profits from value-added content, some service providers will be unable to offset the incremental risks associated with these contracts and will need to mitigate them elsewhere. Mitigation methods can include increasing end-user monthly payment commitments or reducing contract flexibility. Many service providers will also rely upon off-loading balance sheet risk to traditional funders through assignment relationships. Even though the final offering may still be marketed under the EaaS umbrella, some of these mitigation structures do not embrace the nature of a true usage model.

When an offering becomes too diluted, it loses market relevance and can result in end users reverting to more traditional equipment financing structures, weakening the momentum of EaaS and contributing to the perception that a serious threat of disruption from EaaS may still be further out on the horizon. In reality, end users have not lost interest in these offerings. Rather, they are frustrated and disappointed in the gap between their requirements and available market offerings.

EMERGENCE OF EAAS

In spite of these frustrations, end users and service providers are clearly motivated to continue gravitating toward EaaS and to find better means for addressing the gap between objectives and current offerings. Technology, which has historically played a key role in enabling the interest and evolution of these structures, is likely to provide the key going forward.

Decades ago, most equipment placed into usage models required manual effort to collect usage information. Although some hardware — notably copiers and printers — could effectively count the number of usage events, there was no ability to transmit that information without manual submissions from the field.

Then came the early era of the Internet of Things (IoT). At a minimum, IoT provided a means to remotely monitor and measure usage by transmitting data across the Internet. While the ability to count and transmit usage did not make the equipment “intelligent,” it was a step in the right direction. Remote management through equipment sensors and internet connectivity ultimately evolved to provide hardware with the ability to download and monitor critical software applications automatically, providing end users with solutions that could analyze, predict, diagnose and even repair equipment and software issues without human intervention. Such an increase in functionality established a launchpad for EaaS by providing a more productive end user experience while also providing substantial revenue and profit opportunities for the service provider through add-on services and software applications.

THE NEWEST TECHNOLOGICAL SHIFT

Leaping forward to 2024, we now find ourselves experiencing AI in hyperdrive as the next technological evolution. Through the application of AI, EaaS will evolve to a point where equipment content represents a smaller and smaller fraction of the value of total output. When hardware is layered with analytical, diagnostic, preventative and other AI capabilities, the transformation of that intelligence into alternative revenue streams is almost limitless.

Service providers who currently incorporate 25% – 50% of value-added services into their EaaS models may find the proportion shifting to levels that could exceed 75%. In addition to the value-added service revenue streams derived from single transactions with individual end users, the assimilation of data from myriad worldwide end user sources, coupled with AI analytics, creates significant opportunities for service providers to monetize access to this data. New markets can be created that might include research institutions, academia, manufacturers of ancillary products and many others.

THE NEW MEANING OF “INTELLIGENT”

Discussions of AI can be controversial and may elicit a variety of strong reactions, including differences of opinion regarding AI programmed biases, analytical integrity, potential for misuse and social or business intentions. However, one thing that nearly everyone agrees upon is that AI will ultimately create inflection points at every level of the workplace and in every aspect of daily life. We have entered an era where the reference to “intelligent” assets has taken on new meaning — a meaning well beyond the original IoT reference. The hardware component of an EaaS transaction will become increasingly less relevant as the value of the data it collects and how that data is subsequently put to use continues to expand.

The impact of EaaS on traditional equipment financing has become undeniable, and while it may not yet be standing on the doorstep, it is certainly stalking the neighborhood. Entrepreneurial and forward-thinking service providers will exploit every opportunity made available by AI. Physical assets employing AI will, in the near future, be able to perceive, learn, create and demonstrate intelligence that far surpasses human capabilities. The relevance and risk of underlying equipment will be replaced by the criticality of the data and intelligence it enables. All of this translates into value-added revenue streams and profits that permit service providers to operate with increasing levels of autonomy. Pre-existing dependencies on traditional equipment funding sources will be less compulsory, especially if those dependencies interfere with end-user opportunities.

As we look forward, EaaS already begins to sound antiquated as the umbrella reference for these service offerings. With intelligence as the most meaningful output for many of these offerings, it seems more appropriate to acknowledge that we are really embarking upon the era of “intelligence-as-a-service.”

Traditional equipment and asset funders would do well to begin positioning themselves as enablers of IaaS rather than as victims or opponents of what will soon be standing on their doorstep. •

Paul Bent is a senior managing director at The Alta Group and the leader of Alta’s legal services practice. He has been actively involved in the equipment leasing and finance industry for decades, and has direct management and practical experience in virtually every critical aspect of equipment leasing management, transactions, operations and legal affairs. He recently received the Equipment Leasing and Finance Association’s 2024 Edward A. Groobert Award for Legal Excellence.

Diane Croessmann is a director at The Alta Group. She brings extensive experience in the equipment financing to a broad spectrum of clients who require support in examining strategies for market entry, asset management, managed services and a wide range of other activities that focus on developing and optimizing equipment leasing, financing and managed services opportunities. She is a past member of the board of directors and executive committee for the Equipment Leasing and Finance Association.