A Q&A with Diane Croessmann
What is the most pressing development equipment finance leaders need to understand right now about consumption-based financing?
Funders are gun-shy when asked about “consumption” models. Many of them associate these models with a payment that is 100% variable. And that translates to less confidence in recovering their equipment investment over the contract period. However, “consumption” doesn’t necessarily mean that the payment has no minimum. Many programs today are introducing consumption models that provide the end user with payments based on a sliding scale of usage that includes familiar “hell and high water” clauses to effectively guarantee collateral recovery.
Is the industry moving fast enough to meet customer demand for these pay-per-use financing options? Explain.
If you ask an end user, the answer is probably no. In a perfect world, end users might like to pay purely on usage…and more importantly, at a fair price. Today, generally, one of those two requirements is at risk. For an OEM or service provider, the reality is that the ability to predict and measure usage for many asset classes is still something that needs to be addressed before these options become widely available. Consumption models are also more administratively complicated and require investment in processes and systems to properly invoice, collect and distribute payments. All of these details have to be sorted out on a much broader scale.
Who are some of the industry leaders and innovators so far in this space? What’s their secret sauce?
There are sectors that are more advanced than others. Today, because of more sophisticated intelligence built into many classes of assets, a “unit of measure” can be tracked remotely and turned into usage models. Technology, medical, vehicle and other sectors have introduced asset tracking. However, there are many asset classes that aren’t as far along so they will lag in developing consumption models.
The ingredients for success start with the ability to create and monitor a unit of measure, and then require the ability to administer the process. Last but not least, you must be able to price the offering at a level that provides real value to the end user.
Which challenges do companies find the most vexing about these initiatives? What’s your advice for them?
If you’re a manufacturer, you’re trying to stay in step with the market. If the market is moving toward consumption, you’re forced to consider it. This could mean that you might be transitioning from an upfront cash model to a monthly payment model. If you haven’t used a funding partner in the past, you are trying to leap frog over straight-forward leasing programs to something more complicated. If you get it wrong, it can wreck your balance sheet and administrative processes. Even with a pre-existing funding partner, you may not have the right one ─ someone who can manage the complexity of consumption offerings.
We see OEMs stuck in totally unfamiliar territory. It can be daunting to consider the first step toward something this different. The requirements necessary for change might push them to delay or not do anything vs. trying to keep pace with the market. Overcoming the urge to “do nothing” requires a healthy commitment for change coupled with an understanding that change doesn’t have to be uncontrolled. It can be planned and executed in a practical and methodical manner.
Any common misconceptions we should clear up here about consumption-based finance models?
I would encourage everyone to reconsider the definition of consumption. It’s not an “either/or” model. There can be degrees of consumption and adoption. The first step is to actually define an “output” that can be translated into something of value to the end user. The next step might be to introduce consumption that includes assured recovery on a minimum payment. If the final objective is to enable an offering that includes a payment based on a 100% variable consumption component, it’s something that can come with more intelligence about “usage” behaviors but it doesn’t have to be the first step.
What’s The Alta Group’s involvement in helping companies transition to these newer forms of equipment financing?
The level of advisory services can depend on the level of familiarity that OEMs, service providers and funders have with these models. Alta has defined a comprehensive methodology that supports the process from market assessment to execution. We provide a guided approach to ease into these models based on the risk tolerances of all parties involved.
What are the most transformative challenges facing equipment finance today?
The impact of the Covid-19 pandemic has been felt by every industry. Individuals and companies are transitioning to “uncertainty.” The new normal hasn’t been totally defined but we do know some of the major influences.
We’re seeing an incredible increase in investments for automation. This is especially true in some sectors. As an example, manufacturing plants that were shuttered during the pandemic are turning to increased robotic options to minimize future disruption. The massive shift to e-commerce has seen warehouse automation come to the rescue to keep pace with e-commerce giants, like Amazon and Walmart. It’s also true for smaller establishments, where restaurants are testing robotic greeters and taking orders with little human interaction.
All of this investment is actually good news for the equipment financing industry but I anticipate we’ll see pockets of disruption, from private funding sources who aren’t constrained by regulatory restrictions. This could lead to a much more rapid adoption of interesting rental, consumption and services models.
Diane Croessmann is deputy practice leader of strategy and competitive alignment services for The Alta Group.