The Disruptive Forces of Change In Asset Management
by Jan/Feb 2020 2020
In a Q&A with Monitor, four professionals discuss the evolution of asset management and equipment valuation, how the pace of technological advancement creates economic obsolescence, and the possibilities for applying emerging technology to equipment management.
How is the asset management profession evolving and how is this profession vulnerable to the disruptive forces of change?
Condon: In many respects I see the profession continuing to remain essentially the same. True equipment management continues to involve a full understanding the overall transaction, the reason for and expected use of the underlying equipment and the potential value of the equipment based on all aspects, not just stand-alone equipment. Projecting residual values of equipment, which in all cases tends to be cyclical, and in many cases highly volatile, is the same as it was when I entered the industry in 1990 and incorporates all aspects of a transaction. Managing portfolios, anticipating negative and positive trends in equipment types and/or industries, as well as specific lessees, that is the job, same as it was 30 years ago.
What has evolved tremendously is information technology, the internet and readily accessible equipment data and resale data. Technology is the most prevalent disruptive force in the profession I see. This takes the form of access to wider information about equipment and resale data, but also in data analysis, as well as technological obsolescence within the equipment we value and finance. The growth in a global economy, changing regulations and accounting changes, are also forces of change for the profession.
Shaheen: The asset management profession has shifted towards being more customer service oriented, and technology has made equipment values more accessible and available in real-time. We also receive a wide variety of questions from both internal and external customers on a daily basis, which has made asset managers more important to the overall decision-making process, not just equipment valuation.
How has equipment valuation changed over the last 10 years, and how do you expect it to evolve over the next 10 years?
The downside to this is that there is really more to projecting equipment residual value than having access to historical sales data, which is just one piece of the puzzle and always has been. There are far too many unknowns in such historical data for it to be a highly confident projection of future value, and there are aspects of an actual transaction, documentation, client predisposition and relationship, which impact the potential of the transaction at lease end. I believe we will continue to see a deeper use of technology in the profession, but potentially with some negative consequences.
Shaheen: Access to information has become much easier over the last 10 years. Knowing who to consult with is still important, but as equipment databases have become more prevalent and robust, anyone can form a valuation these days. Similar to what has occurred with online news content, the way that we access equipment values will continue to change, and this information will likely no longer be freely shared, but would be available for a fee.
Some equipment shifts from being an asset to a recycling problem as time goes on. What can financial institutions do to stay ahead of the pace of technology that drives this transformation?
What should equipment finance companies look for in an e-waste partner?
1. Expertise in IT collateral and experience in IT leasing: It is imperative that your e-waste partner has extensive knowledge of the full spectrum of IT gear. And, deep experience in the IT leasing market to ensure optimal results if remarketing and full compliance if recycling.
2. Logistics support: For many companies, the logistics involved in managing IT assets at end of life are a challenge. Look for a company that can be your logistics arm. Seek out a company that can pack, deinstall, inventory and redeploy IT gear for you.
3. Protection of client data: Today, data is more than just the lease ending. What do you do with the client’s information on all the computers, laptops, phones, etc.? Certified data destruction with proper compliance reporting is critical.
Condon: Technological as well as economic obsolescence are large problems for equipment managers and appraisers, and overall for financial institutions. These are the reasons why forecasted residual values based primarily on historical sales data can be very misleading. We have seen coal cars go from being productive, income generating, long-lived assets to ‘recycling challenges’ based on regulatory changes and economic obsolescence. Similarly, crude by rail tank cars have been significantly impacted by regulatory change.
Financial institutions need to work hard every day, invest in intelligent employees and provide sufficient training. Proactively doing research, networking with industry suppliers, constantly reading industry material and covering all classes of assets being considered is crucial to staying informed. It is a large undertaking to be sure, to stay ahead of the changing landscape but vital for managing assets into the future successfully.
Shaheen: The shift towards software and services being the primary focus in the IT world has created a challenging risk for asset managers. With hardware values where they are and the challenges of re-licensing and obtaining maintenance for used assets, the best approach to mitigate this risk is to develop strong relationships with both your customers and remarketing partners. Understanding what your customer wants or needs is most important and being creative and flexible will allow you to price the transaction in a way that everyone can win. Likewise, developing a strong relationship with a remarketing partner is key since it will allow for various remarketing strategies to be utilized and provides flexibility to both lessors and lessees.
What are the possibilities for applying emerging tech to asset management (blockchain, AI, sensors, mixed reality and more)? What are the challenges? What are the opportunities for the future?
Klotzman: There’s a world of possibilities for applying emerging technologies to asset management because, despite being a critical component of the equipment finance business, most departments are reliant on manual processes, not technology solutions. Simply modernizing the department gives the equipment finance company a competitive edge over firms managing their operations via current systems. Most asset managers are dependent on datasets scattered across spreadsheets, email and paper files to determine the residual value of an asset.
Consolidating onto a single, centralized data warehouse with a history of all asset management activity, enables an asset department to easily see and measure the profitability of their activities in whatever level of detail desired, allowing challenges and opportunities to be spotted and acted upon with confidence. Like most technology initiatives, the biggest challenge is organizational buy-in because it takes cross-departmental collaboration to implement such a system. Certainly blockchain, AI, sensors, mixed reality, etc., are likely candidates for use by asset managers, but first, the foundational systems must be upgraded to cutting edge solutions.
Shaheen: As technology continues to evolve, we will have tremendous opportunities when it comes to data mining and internal reporting. Our ability to spot trends and measure performance will improve drastically. Access to equipment databases will improve, providing opportunities for more accurate equipment valuations. In addition, we will likely be capturing more information about our customers and their behaviors, which will lead to better decision making. These trends will make our jobs easier, more efficient and improve our ability to serve information to customers. Our greatest challenge will be regarding data security, and keeping customer information secure will be absolutely critical, otherwise, the benefit from these technology advancements will be lost.
What is your company doing to prepare for the future of asset management?
Condon: We listen a lot. We read a lot. We participate a lot. We educate a lot. In appraisal terms, functional obsolescence (i.e. technical related to the asset itself) and economic obsolescence (i.e. forces of change external to the asset itself) are the two areas that require my constant thought, education and consideration. Absent these two influences, physical depreciation and valuation is much less difficult. And as noted above these two influences are exponentially greater than when I began my career in equipment management and appraisal.
Klotzman: In conjunction with professional asset managers at SunTrust Equipment Finance, Ivory Consulting created AMS, the equipment finance industry’s first collaborative, end-to-end asset management software solution designed to streamline four critical functions — valuation, early and end-of-term dispositions, asset remarketing and portfolio reporting. AMS enables asset management departments to make substantial improvements, like streamlining operational processes by utilizing logical and scalable workflows, adhering to compliance and regulatory policies via authentication and role-based privileges, implementing auditable practices by leveraging a centralized data store that tracks all asset management activity and generating detailed portfolio reporting with the click of a button. Asset management departments may have not always received the attention to efficiency and technology they deserve, until now.
Shaheen: Crestmark is primarily focused on the customer experience and we are currently working on a total system overhaul that will include a new customer portal that will make certain information available on demand. We’re very excited about this improvement and believe our customers will be too, as it will improve efficiency and make their jobs easier. Updating our system will also carry the added benefit of putting ourselves in a stronger position to make better, well-informed decisions based on measurable data. •
Barry Shafran, President and CEO , Chesswood Group Limited
Barry Shafran shares the story behind Chesswood Group’s journey from a Canadian new car dealership business with automotive lease receivables of just $80 million in 1999, to a North American public equipment finance business with a portfolio of $1.0 billion in 2019. He says the one constant and key ingredient in Chesswood’s journey is its amazing team of tenured and committed people.