by Valerie L. Gerard & Patricia M. Voorhees October 2020
COVID-19 has forever shifted the equipment leasing business. Valerie Gerard and Patricia Voorhees explore how the pandemic has ushered in an “Age of Acceleration” and discuss how businesses will operate going forward.
Valerie L. Gerard, Senior Managing Director, The Alta Group
The medium- to long-term challenges and opportunities of the post-COVID-19 world are now coming into view. The virus did not remake business models but accelerated the adoption of market trends already in place, including digital transformation, managed services and environmental, social, governance (ESG) factors. New “pandemic proof” market models are emerging in life sciences, advanced robotics and drone use. The implications for the leasing company of the future are profound and becoming less opaque.
COVID-19 Accelerates the Industrial Revolution 4.0
COVID-19 profoundly changed the way the world works in a matter of months. Consumers shuttered at home turned to the internet to meet their needs, further popularizing streaming and food delivery services, online learning and shopping apps. Seemingly overnight, consumers embraced e-commerce business models. Similarly, the corporate world experienced an acceleration of market trends, emerging technologies and business models that had been in place long before the virus infected its first victim. Has COVID-19 birthed a new phase of the Industrial Revolution 4.0 — the Age of Acceleration?
Remote work is a concept that’s been around for decades. Until recently, it wasn’t a well-accepted business practice, as managers often questioned the productivity and even dedication of the worker at home. But COVID-19 created an immediate “laptop class,” or virtual workforce, as companies scrambled to remain open while protecting the health and welfare of their employees.
Employers have fully welcomed this smarter, more productive way of working with smaller, more efficient virtual meetings. Employees have embraced the benefits of work from home too. Employees could realize a de facto “raise” of about $3,000 annually thanks to fewer trips to the gas pump and lower commuting and dry-cleaning expenses.
The success of this COVID-19-driven experiment is leading many businesses to consider adopting WFH as an option long after return-to-work timetables have passed. A recent survey from IDC found that 90% of businesses expect to offer some type of WFH options in the future. Another trend impacting work environments is flight from megacities toward more affordable suburban locations. Either way, it’s clear businesses can operate with a smaller office footprint as they adopt more virtual work arrangements and re-design their offices with more flexible workspace options.
Daniel Pinto, co-president of JP Morgan Chase, recently told research analysts that a significant portion of his company’s staff could utilize WFH on a rotational basis in the future. If that’s the case, other financial organizations will certainly follow this trend. Some in the leasing industry are putting their buildings up for sale and others are not renewing leased office space. The necessity of call centers also has been called into question because the software they use is agnostic to the location of collectors and customer service personnel.
While corporate benefits to smaller real estate holdings exist, the shift toward WFH options presents challenges. Cybersecurity for remote locations will become paramount as hackers grow more adept at breaking into less-fortified home network environments. Disaster recovery plans will take on new importance. Managing remote workers will require new monitoring systems. Fortunately, many leasing functions actively use key performance indicators, which helps ensure execution of targeted productivity levels.
Digital Transformation and Digitalization of Data
The need to work remotely while managing customer experience and product needs pushed e-commerce into hyper-growth mode. E-commerce in May reached $82.5 billion, a year-over-year increase of 77%.1 According to data from Adobe cited by Forbes, it would have taken between four and six years to get to the May level if the growth had continued at pre-pandemic levels.
This dramatic e-commerce increase has original equipment manufacturers (OEMs) investing in technology to satisfy burgeoning demand while delivering optimal user experience. OEMs are pushing their finance partners to deliver integrated online finance solutions. LiftForward, which offers bundled subscriptions with vendors through OEM partners, has seen demand skyrocket in response to business and education demand for tablets. LiftForward CEO Jeffrey Rogers is seeing a new type of demand emerge. OEMs with successful, long-standing vendor partners are asking them to work with LiftForward to provide the integrated technology on the front end while their finance partner continues to fund the transactions.
Another equipment-oriented fintech recently provided a private label point-of-sale (POS) front end to a large construction OEM while their two main bank partners remained the funders. In both examples, the OEM insisted on the new technology front end. Clearly, finance companies that can’t provide seamless, integrated technology to enable financing at POS need to partner, buy it, or build it quickly to remain competitive.
Finally, digitization is thriving as leasing companies have accepted digital technologies such as e-signatures, which are common in financial products parallel to equipment finance. This adoption sets the stage for the next frontier: the automation of manual finance functions such as mid-ticket credit adjudication, smart contracts, electronic bill presentation and cash application. Lessors working with multiple-asset contracts understand the challenge “simple” cash application presents. Yet other industries have mastered this through adoption of digital front office and portal technologies.
COVID-19 has accelerated user demand for managed services out of sheer necessity. The risk, legal, pricing and asset-management challenges that have thwarted broad offering of managed services now pale in comparison to the subscription mindset of millennial and Gen Z buyers at a time of increased need for equipment and less cash flow for capital investment.
This is most apparent in the healthcare industry. The pandemic has laid bare the need to manage medical equipment utilization and sharing. Boston-based Cohealo facilitates the sharing of equipment by healthcare systems and eliminates rentals. The Dynamic Ventilator Reserve administered through the American Hospital Association, the Federal Emergency Management Agency and leading group purchasing organizations began utilizing Cohealo’s platform to track national ventilator availability and ease critical shortages by sharing between health systems. Company president Brett Reed recently shared that what used to be a fairly long sell cycle in getting large health systems to embrace their technology is now dramatically shorter, noting that, “COVID has won the business case for Cohealo; healthcare systems get it and are coming to us for a solution.”
ESG measurements have become increasingly important over the last decade. The pandemic has illuminated the “E” and “S” elements. Witnessing the dramatic economic pain in COVID-19’s wake brought into stark view the real impact of similar global risks such as climate change as it fueled wildfires and storms across the U.S. The emerging movement for racial equity and social justice has attracted broad participation across the racial, ethnic and gender spectrum.
The leasing industry — with its longstanding focus on asset utilization and total cost of ownership — is well positioned to offer finance solutions with positive environmental impact. When implemented well, managed services are a circular economy solution. The challenge for the industry will be understanding, measuring and being transparent about the environmental impact of the equipment finance business. Asset management as a function will play an increasingly critical role in managing a firm’s “E” fitness.
Standard & Poor’s, Moody’s and Reuters are creating ESG risk ratings for corporate and asset-backed security offerings. The leasing company of the future will need to understand, measure and communicate its environmental impact.
Recent studies prove that diverse teams mitigate risk and deliver superior returns. Most large companies have a focus on diversity through councils, senior leadership or both. Yet the current drive for social justice has graded past efforts insufficient to root out systemic barriers. True inclusivity demands transparency and progress.
The leasing company of the future will do well to humbly and honestly examine its inclusive representation in hiring slates, high-potential programs and senior leadership. A good litmus test of progress is the diversity of senior leadership. How diverse is the team running your most profitable business lines? Companies put people they value in charge of what they value.
New Market Opportunities Post COVID-19
Many leasing companies are planning to “pandemic-proof” their business models by entering new markets that are expected to perform well during a pandemic. Some of these markets, such as industrial robot and drone production, are still in early growth stages. Industrial robots can provide continuity of some supply chains during a pandemic — from critical medical supplies to other essential goods and services. Wider and deeper usage of robots by manufacturers is expected soon in part to prepare for the next pandemic.
Similarly, drone delivery of packages could prove vital in delivering medical supplies on a timely basis and in a safe manner. While drone delivery has been on the drawing board for a while, the Federal Aviation Administration’s recent approval of Amazon’s Prime Air will spur other competitors to do the same as they test their capabilities for the next coronavirus or Ebola outbreak. Meanwhile, these services will likely explode in demand from millennials and Gen Z-ers who highly value the “buy it now, get it now” business proposition. Drones have a public health application as well; they may help detect and monitor vulnerable areas during outbreaks.
The life sciences sector also has strong pandemic-proof appeal. Pharmaceutical, healthcare and biotech companies are leading COVID-19 response efforts, from the production of personal protective equipment and ventilators to vaccine development and related drug therapies. As a result, investment may shift toward more academic and private research laboratories that provide scientific research into disease prevention.
The financial impact of adopting these trends is beneficial to the bottom line. Not surprisingly, real estate costs will decrease as WFH arrangements become the norm. According to Gartner, 74% of CFOs surveyed intend to permanently shift some employees to WFH.2
Travel expenses are another cost saving item. While face-to-face meetings with clients will remain an important part of the sales cycle when travel restrictions ease, acceptance of virtual meetings will reduce the need to travel. Global Workforce Analytics estimates companies will save approximately $10,000 per year in business travel expenses for every employee who adopts WFH on a part-time basis.
Certainly there will be offsetting expenses around digital transformation, cybersecurity and appropriately outfitting a remote worker’s office initially, but long-term, the cost-saving opportunities, coupled with the expected benefits from digitizing the platform, should keep expenses down and operating efficiencies up. Similarly, revenue streams will benefit as businesses seek pandemic-proof market opportunities and adopt new products and services.
The future leasing company will look much different from the models employed before 2020. Already some leasing companies and fintechs have shown greater resiliency than the leasing industry overall because they were early adopters of digital transformation and/or shifted their business models toward these market trends; by contrast, those lessors with outdated models and legacy systems will be playing catch-up for some time. Other factors once non-existent, such as ESG measures, will become a critical decision-making factor for clients choosing to do business with a leasing company. Nevertheless, the industry will be on a better financial footing and the metrics used to judge profitability, operating efficiency and capital adequacy will change. Returns on equity of 20% or more and improvements of 10% to 20% in operating efficiencies may be the new norm. The new face of the leasing industry is quite attractive. •
“Gartner CFO Survey Reveals 74% Intend to Shift Some Employees to Remote Work Permanently.” Gartner. Apr. 3, 2020.
Valerie L. Gerard is a senior managing director with The Alta Group, where she leads the Strategy & Competitive Alignment practice in addition to being a member of the Management Committee. Patricia M. Voorhees is a director of strategic consulting and M&A advisor for The Alta Group, focusing on the fintech market with more than 25 years of experience in commercial finance. Diane Croessmann and John Hurt also contributed to this article.