Equipment as a Service (EaaS) is creating a buzz in equipment finance. The belief that subscriptions have better Lifetime Value (LTV) because they never end versus a lease or contract that generates payments for a fixed period is an attractive proposition. Leasing companies seem to have a fear of missing out (FOMO) when it comes to the opportunities of the as-a-service economy and the AI opportunity of the data streams associated with subscription services.

But EaaS is as different from traditional leasing as Equipment Finance Agreements (EFAs) are from true leases for a very similar reason: managing the hardware. EaaS, like true leases, requires the funder to keep track of the location, condition and value of the equipment throughout the life cycle of the contract – for subscriptions that can mean the full life cycle of the equipment. EaaS takes asset management to a new level and requires new types of data and new kinds of analysis.

EaaS: Three definitions show the way

A common challenge for business leaders with any new technology or business trend is the variance of definitions that develop as the idea emerges. EaaS is no exception and there are a variety of definitions circulating whose common component is the subscription. But understanding the data implications and requirements of delivering a successful EaaS offering starts with building a definition of the product that best fits an equipment finance deployment.

Three definitions by key players in the industry – business analysts, Original Equipment Manufacturers (OEMs), and Internet of Things (IOT) vendors – provide actionable insights that can guide equipment finance companies on how to capture and analyze data for EaaS success.

Beyond just equipment to value-add services: The business analyst definition

Equipment-as-a-Service defined:
Any company that utilizes a core asset base or fleet of equipment coupled with the delivery of value-enhancing services to provide a comprehensive solution to satisfy its customer application needs.

Equipment-as-a-Service companies distinguish themselves based on levels of service offerings, including:

• Field-level consultation, complex engineering expertise, telematics, GPS tracking, remote monitoring, delivery/transportation, cleaning, refueling, skilled labor, mobilization/demobilization, ancillary equipment services, etc.

• Breadth and complexity of service/solution offerings add differentiation and enhance valuation.

Market and business analysts like Houlihan-Lokeyhave a somewhat abstracted definition of EaaS that does more to define the business and how it will compete than the EaaS offering itself. But this definition includes one phrase that is critical to helping an equipment finance business leader understand what they will have to do to transition from providing financing for an equipment asset to providing EaaS:

EaaS is not just about a piece of equipment. EaaS demands empathy to uncover the information on and the management of the users’ applications of the equipment to augment the value of the EaaS offering beyond the equipment asset itself to justify an ongoing, paying relationship for value added services.

From one-time sales to lifecycle management: The OEM’s definition

Original Equipment Manufacturers (OEMs) have been on the EaaS bandwagon for years under the moniker Hardware-as-a-Service (HaaS). Recently HaaS accounting software provider Hardfin created the HaaS 100 showcasing OEMs who have engaged the model. OEMs traditionally have sold hardware, but their investors have been pressuring them to move toward the higher margins and returns of software and the subscription economy. Not surprisingly the OEM’s definition of EaaS focuses on how they hope to change their revenue model from one-time sales to subscriptions.

WHAT IS 'EQUIPMENT AS A SERVICE'?

Equipment as a Service (EaaS) involves accessing equipment on a subscription basis and making periodic payments – rather than buying and owning it outright…EaaS is widely accepted as a way of mitigating cost – an issue that has always been important but has become even more so in recent years. After all, increased costs cut into profit margins. When construction companies switch to an EaaS model, they’re able to avoid initial purchase costs and keep that money in the business. Throughout the equipment's life cycle, less money and time are spent on maintenance and repairs because these are managed by the service provider.

OEMs like Hilti see the opportunity to sell equipment in the same way Amazon and Microsoft sell cloud services: a consumptive model. They envision “selling access” to more equipment and more users because the demand curve goes up fast with the reduced cost resulting from “paying for what you use.” The key phrase in this definition is the expectation of the customer/subscriber:

Delivering on this expectation requires a deep understanding of both the customer’s application needs and the distribution of users in the marketplace so that maintenance and repairs can be provided in a timely manner. OEM’s have the advantage that their product managers have traditionally focused on this information during the definition of their products, but as an EaaS provider they must gather this information continuously throughout the product lifecycle and across multiple users as opposed to a single buyer. Build once, sell once will be difficult with EaaS.

All the data all the time: The IoT definition

This brings the discussion to the technology of equipment data: the Internet of Things (IoT). IoT vendors have a vested interest in EaaS because they can provide the insights described above on everything from the status and location of the equipment to the behavior, demand, and location of the users.

• Equipment as a Service (EaaS) is a digital business model where machines or production systems are not sold, but rather provided for a recurring payment, often a subscription, a pay-per-use model, or a hybrid.

• Another important note is EaaS enables usage-based pricing models of IoT-enabled machinery. It is a simple concept: customers pay only for how much they use the equipment, and this is known because the devices are   interconnected digitally.

IoT vendors like Nitrobox love EaaS for two reasons. First, funders who wish to engage EaaS are going to need data offerings like those of the IoT vendors. Many captive lessors today, e.g., Caterpillar, Deere, and Volvo, have continuous data on the equipment right out of the factory and then capture user behavior data to keep track of usage, provide additional services like maintenance or consumable re-supply, and through analysis come to understand the dynamics of the market for their equipment application. The key takeaway from the IoT community’s definition of EaaS is the importance of empathy for customers and users:

IoT vendors know that smaller OEMs and independent finance companies must “retrofit” equipment with data systems to support the needs of an EaaS offering if they are going to make the transition.

EaaS requires product management data and skills

What do finance companies who hope to benefit from EaaS learn from these different points of view? They need to shift to a product management frame of mind in how they operate their business. Diane Croessmann recently summarized the difference between traditional equipment finance and EaaS: “Unlike traditional financing, where the underlying asset is part of a financial contract between the end user and the funding source, Equipment-as-a-Service is a contract between an end user and a service provider.” A product manager’s mission is to deliver on a promise, i.e., contract, between their brand and each user of their product. In EaaS that product is “the use of a piece of equipment.”

Consider the key take aways from above against the fundamental skills of good product management:

These product management skills should be familiar to equipment finance operational leaders, particularly those related to customers, but product management as a discipline requires an awareness of the separation of customers and users. Product Managers know that sometimes the person who buys the product is not the user and they know that users are the ones who determine whether a subscription is sustained. Customers stop paying for subscriptions that users don’t use.

EaaS business models will require significant changes in the data a financing company must gather and the analyses they must do. EaaS operations must augment traditional financing data and analysis of credit, cash flows, capital deployment, payments, and asset values with product management data that focuses on users. Users and user behavior are central to every product manager’s professional life and will also be the key to understanding and deploying EaaS.

The next part of this discussion will examine those data streams and highlight already available software systems that can help implement the product manager mindset necessary for an EaaS transformation.