How many of us feel that the speed of change leaves us breathless as we swim upstream in this era of digital transformation? Although the Internet of things, artificial intelligence and machine learning all give rise to unimaginable new opportunities, the challenges that go along with these changes might prompt us to pull the covers over our heads and wait until someone else figures it all out.

There are volumes of articles, webinars and research studies that pretty much confirm the future. If you haven’t read them, let me summarize. Over 50 Billion connected intelligent assets will be woven into the fabric of our daily lives by the year 2020. Computing power continues to grow as the cost declines and the rise of the robot is on our horizon. This isn’t the time to pull the covers over our heads. It’s a time to make bold moves.

From the perspective of the equipment financing and leasing industry, the ability to use artificial intelligence to monitor and analyze asset usage will support emerging market requirements for “pay per use” or subscription programs. Ownership of assets is no longer a preferred model because “ownership” translates to waste. The pendulum has swung and it’s time to figure out how to be disruptive before you get disrupted. Getting left behind shouldn’t be an option for anyone.

In 2016 an initial study on managed services was produced by The Alta Group and published by the Equipment Leasing and Financing Foundation: Managed Solution Transactions on the Rise in the Equipment Finance Industry. At that time, the forecasted growth indicated that managed services transactions (MSTs) would grow to represent more than 20 percent of industry volumes within the next three to five years. As we enter 2018, there is no question that the shift toward MSTs is gaining momentum.

While there is debate on what qualifies as a usage model, there is one common theme. End users no longer want the inefficiencies of dealing with multiple parties when it comes to managing and maintaining equipment- related services, supplies, hardware and software. They are moving away from a dual contract model, where hardware leases and service contracts are negotiated individually but co-mingled as a bundled invoice, to a single contract model with one service provider who is responsible for overall contract performance. For the sake of reference, let’s call this integrated single contract a managed services agreement (MSA). The contracting party with the end user will be referred to as the MSA provider.

MSA providers can be manufacturers, distributors, resellers or service providers. Although banks and independent funders can support these MSA financial transactions, they are no longer the contracting party with the end user.

Let’s quickly look at the impacts that these MSA contracts have on both MSA providers as well as funders.

MSA Providers

As MSA providers assume their role as the sole contract provider, they also assume new risks and burdens in transforming from a traditional sales or service model to an integrated usage model. Unless MSA providers carefully consider both internal and external requirements, they can face challenges related to asset monetization, sale revenue recognition, periodic/variable billing, asset management and performance risks…to name a few.

A frequent problem for MSA providers creating a managed services program is the inadvertent elimination of critical activities by trying to move too quickly from market awareness to the launch of an offering. The exclusion of any critical step can open the door to long term issues. This is where it’s time to get practical.

To optimize the development of a managed services program, there first needs to be an assessment of readiness in the following areas:

• Market Analysis
• Risk
• Funding Options
• Alliance Strategies
• Legal Readiness
• Business Process and Systems Transformation
• Asset Management
• Pricing
• Accounting
• Value Prop Development/Launch

Once gaps are identified in the above noted categories a secondary phase should involve prioritizing gap closure activities, including any investment requirements for current and longer-term objectives. In many cases, gap closure will also involve the examination and selection of a compatible funder(s) that can ease some of the transition or permanent burdens.

Funders

Funders, whether banks or independent lessors, will find themselves in shifting roles and will need to look at transactional and end-user risk with a different lens. End-user credit risk becomes augmented by performance risk. Hell-and-high-water language is replaced by minimum commitment terms that have not yet been adequately tested by court systems. Mitigating these risks will require putting all contract documents and relationships under the microscope and may ultimately require varying levels of MSA provider recourse as well as establishing MSA provider credit limits. In addition, many MSA providers do not have usage billing or asset tracking capabilities. This will lead to requirements for funders to provide more complex transactional services as they compete for this business model.

Summary

Traditional equipment finance offerings have remained largely unchanged for decades. Even if the natural inclination is to resist or discourage change, sweeping technological advancements won’t allow any of us to freeze the market in time.

MSA providers and funders need to invest in developing offerings and processes that are not only relevant to end users today but are adaptable to future changes. Assessing key implementation requirements, creating a project plan and staying focused on closing critical gap areas will ensure that market offerings are more effective, implementation timeframes more efficient and risk mitigation more successful.

So, throw the covers off, be thought leaders and make the bold moves required to take the equipment financing industry into the next remarkable era.

The Alta Group is currently conducting an MST survey of manufacturers, distributors, resellers and service providers that will enable participants to begin assessing their readiness for managed services transactions compared to industry peers.