Other parts of this series:
Four servitization financing models that can help auto and equipment lenders meet current and future customer expectations, while managing operational and financial constraints.
The auto and equipment finance sector is evolving to address new customer expectations for bundled services and pay-per-use plans. For lenders and lessors, it’s time to think about whether a traditional financing model will continue to serve them adequately. We think adopting a servitization model could give your business a competitive advantage.
In our latest report, Servitization: making the shift from assets to services, we describe practical considerations and steps for financiers making the transition from a traditional finance model to a servitization model fit for the future. Let’s take a closer look at each of the four models and what they could mean for your business and your customers.
1. All-in Finance
The All-in Finance model is the first step on the path toward a more sophisticated servitization of financing, one that’s being adopted with increasing frequency. Under this model, customers lease an asset with bundled services provided by the asset manufacturer or a third-party.
For customers, this model looks much like the traditional financing model, but with the added value of some bundled services. The simplicity of an all-in offering makes it an attractive proposition for customers, while for financiers it means fixed cash flows. However, there is some risk for financiers related to the financing of software and third-party services. There’s also the potential that performance won’t meet customer expectations.
Today, it’s a model most often used by advanced bank-owned auto and equipment finance firms and manufacturers’ captives.
2. Outcome Finance
Outcome Finance is a more advanced form of servitization. Under this model, customers pay for outcomes—for example, price-per-mile, price-per-page or price-per-gigabyte—based on the use of a limited number of assets for a fixed term. We divide this model into two distinct categories, according to the level of commitment required by the customer.
- Pay-per-use with a full commitment. In this category, customers agree to pay for a quantity of outcomes, but with some flexibility to exceed that quantity, if necessary, with variable billing based on usage.
This model lets customers forecast their expenses over a fixed period. Their consumption is tracked, and their payments increase if their consumption is higher than expected. For financiers, variable billing means variable cashflow. Risks are related to the structure of the agreement with the customer and the enforceability of the language.
- Pay-per-use with a floor commitment. In this category, customers agree to pay for a minimum quantity of outcomes, but with the flexibility and expectation that they will exceed that quantity. Variable billing is based on actual usage.
For customers, this model offers a lower level of commitment, but if their usage exceeds the minimum, they’ll be charged for this additional consumption. Nevertheless, they pay only for what they use. For financiers, variable billing means variable cashflow, but with a minimum each period. Risks are related to the structure of the agreement with the customer and the enforceability of the language.
Generally, outcome finance models are used only by advanced auto and equipment finance firms with the backing of sophisticated capital market funders or alternative funders and investors.
3. Managed Services
The Managed Services model is even more sophisticated and is generally used for large-scale corporate offerings. Under this model, customers pay for services based on the use of multiple assets and under a service level agreement (SLA), for a fixed term. Fleet management is a common example of this financing model.
Customers benefit from ongoing access to business-critical services at scale, with fixed pricing based on agreed levels of service plus the flexibility of tracked service consumption so they can access additional service if needed. For financiers, the model offers fixed cashflow. Risks are related to service performance and the structure of the SLA.
This model tends to be used only by advanced auto and equipment finance providers and is funded by sophisticated capital market funders.
4. Subscription or Utility
This is the most sophisticated servitization model and offers the most flexibility to customers and financiers. Customers make periodic payments for services. They can cancel at any time, as long as they provide the agreed notice of their intention to do so.
We divide this model into two categories, based on whether customer payments are fixed-rate or per-use.
- Subscription. In this category, customers pay a defined rate for a service, monthly or annually. Subscriptions are similar to rentals, with a similar level of flexibility and shorter terms.
For customers, this model offers almost no surprises. It’s aligned with usage and allows them to exit the agreement with a limited notice period. For financiers, it offers predictable fixed cashflow but for shorter terms.
This model tends to be provided by software companies, cloud providers and a growing number of more traditional auto and equipment manufacturers.
- Utility. In this category, customers acquire the services on a pay-per-use basis, paying monthly or quarterly. A common example of this is residential power—customers are attached to the power grid and charged according to their electricity use.
For customers, this model offers a high degree of flexibility. They can increase or decrease their usage as needed and pay accordingly. Their only commitment is to provide notice of their intention to cancel the service. Utility services cannot be financed, by definition, so financiers play a limited role.
Key considerations before you start
Your selection of a servitization model will be based on your strategic business priorities. However, all of the four models will demand a broad degree of business transformation. Before you move forward, we recommend asking the following questions:
- Do we have the IT infrastructure necessary to support a servitization model? Remember that you’ll need to collect and analyze data and develop a variable billing capability. We recommend using a cloud-based as-a-service solution for maximum flexibility.
- Do we have the digital capabilities we need? Data is the new currency, but leveraging digital technologies is also about harnessing your talent and driving operational efficiency across the entire auto and equipment finance lifecycle—from credit to servicing, collections and asset management.
- Do we have a network of ecosystem partners in place? If you’re bundling services and maintenance with assets, you’ll need to rely on trusted providers to support the level of service you’re offering. Furthermore, you might choose to take advantage of established business process outsourcing services.
- Do we have the change management capabilities needed to successfully adopt a new model? In our experience, transformation requires sponsorship and commitment from the highest levels of the organization, as well as broad buy-in from across the entire business. Change management professionals can ensure that the right structures are in place for the smoothest transition.
There’s no avoiding it: servitization is the future of financing. Forward-looking auto and equipment finance providers have already begun to make the shift. We recommend you take the time now to choose a path that will future-proof your business and help you to face the evolving market with speed and agility.
To learn more about and read our full report Servitization: making the shift from assets to services: