The shift toward subscription models and away from traditional acquisition and leasing models will transform the equipment finance business in the years ahead. Call them what you will –managed solutions, managed services, “as a service,” utility, pay per use or by any other name –subscription-based models already are gaining momentum in the industry.
In our latest e-newsletter, Diane Croessmann explores the changes in technology and human expectations that are propelling the rise of subscription-based equipment finance. She also advises companies to “prepare to be uberized” by managed solutions in specific ways. Preparations should, at minimum, cover the following key areas of business.
Contracting and Sales Process
Service providers or manufacturers will step forward as the contracting party with end users instead of lessors/funders. This creates new challenges in monetizing transactions if funders have less than a clear line of sight to payment commitments. For manufacturers and service providers, revenue recognition and sales strategies will also need to be carefully managed.
Performance Risk Management
In addition to credit risk, it’s inevitable that the relevance of hell-or-high-water clauses will be challenged by performance risk. This is further complicated with indemnifications required if there are multiple parties to the solution.
Pricing and Residual Risk Management
Pricing is largely dependent on the level of customer flexibility embedded into the contract as well as the ability to manage the residual process. Successful residual strategies can significantly mitigate risk and enable more relevant market pricing. Residual strategies can include recycling, shared use, residual guarantees, shared risk, etc.
Billing and Collection
Customer billing may require both fixed and variable billing infrastructure. If multiple parties are engaged, processes need to be defined for pass through billing, revenue recognition, issue resolution and cash distribution.
Security and Post-Sales Support
Customer relationships are dependent on the quality of the contract performance. This includes proper management of customer usage data in a secure environment.
Alta is planning more articles related to this exciting transformation. In the meantime, Croessmann recommends that companies be proactive in creating managed solutions strategies that benefit their businesses.
“It’s not a time to be timid. Although there is comfort in staying the same, it will take bold moves with bold leaders to leverage these new opportunities,” she writes in her article.