Building EaaS capabilities can pay dividends for asset-based companies

Subscription models have transformed our life. Digital companies, such as Amazon and Netflix, have shown how successfully subscriptions can be executed. They offer experiences by providing a large value to customers, for example with discounted and expedited deliveries, an intuitive user interface, personalised and on-demand content. It means that customers associate these types of subscription with positive experiences and come to expect what we summarise as “flexibility, convenience and personalisation”.

We see a self-reinforcing cycle with these new types of subscription, enabled with technology: customers get on-demand, personalised content, an app-based interface, or perhaps particular smart pricing models – while the providers or vendors gain extensive usage data that is generated by these subscription users, tying into the whole ecosystem built around big tech, big data and advanced data analytics. 

These customer expectations can be applied to (asset-based) industries and from the perspective of a B2C to a B2B customer. In our view, this lays the foundation for the EaaS market. EaaS can provide customers with a hassle-free and scalable solution, allowing them to lay focus on their core business. Further company growth on a granular level or economic growth on a macro level necessitate costly investment in equipment, but the pace of technological innovation means that equipment may quickly become obsolete. Both these issues can be elegantly addressed with the right EaaS solution. EaaS also offers benefits in a competitive environment that is driven by all kinds of regulations: in the face of external pressures, a flexible solution with predictable costs may provide much-needed stability for companies in fast-paced markets. This means our overall conclusion for the EaaS market is very positive.

To offer these designated subscriptions, organisations need to institute changes and we propose would-be adopters consider the following key points:

1. Subscription models for equipment are the starting point to extend original equipment manufacturer (OEM) business models for growth via additional services
2. Organisational culture needs to recognise the importance of the service business and place it on equal footing to the traditional manufacturing process
3. OEMs need to meet the expectations of customers that are spoilt from their B2C subscription experience. This capability must be built up or acquired before an EaaS solution can successfully be implemented

Once overarching organisational aspects – guiding principles, culture and capabilities – have been considered, it is possible to take a closer look at what an actual business model might look like. This also allows us to address what we see as key success factors for an EaaS offering.

The relationship between the parties is governed essentially by three contracts. The first is for the use of the actual asset or equipment, which can be designed on a flat fee, or pay-per-use, basis (the latter can be designed based on time, activity volumes or other measures). The second contract is for ancillary services, such as design, installation, maintenance, disposal, etc. and in many cases can contribute most profits derived from an EaaS offering. Lastly, any gathered data contractually belongs to the OEM and/ or service provider, who can use the data for insights to improve the specific customer relationship, maintain the asset or improve future assets.

In figure 1, EaaS success factors appear on the right, these include maximising value-add to the customer by cross-selling additional services, using IoT insights for continuous improvement and the need to “get it right” operationally given that the service provider shares business risks with its customers. 

Additionally, we see the potential for integrating third-party service providers, essentially turning the asset into a platform for services.

We’ve touched on various ingredients for success to implement EaaS. Now we want to explore the technology side a bit more since this may be more unfamiliar for OEMs and because we believe in the huge value-add to be gained from IoT technology.

In general, we expect the IoT ecosystem to grow; everything from home appliances to cars and machinery is becoming “smart”. We are also convinced that the market benefits from exponential effects: sensors and other technology are getting cheaper and way better; and with growing data volumes, the insights that data analytics tools can generate will be revealed.

Moreover, customer usage patterns, alongside wear and tear indicators, can provide valuable clues for maintenance, repair and next-generation product design. If these insights are used well, a company can create much closer customer relationships and build better products. 

And that is one of the key points here, OEMs will get to know their customers much better through said usage patterns and increased personal contact, building the foundation for additional services. 

Besides additional revenues from maintenance and insurance services, we assign 20% of the revenue flow – or their equivalent in cost savings and other efficiency improvements respectively – to insights gained from IoT data. 

It’s important to note that both services lend themselves well to being optimised through analysis of usage patterns generated through IoT. IoT is therefore the key element in EaaS solutions.

Building on some of these earlier concepts it is worth considering the financial and business case implications of the EaaS model.

Influenced by new accounting regulations, such as IFRS 16, the EaaS model implies that the underlying assets are held on the balance sheet of the OEM in our scenario (unless structured otherwise). This may reduce liquidity to a rather steep extent. However, revenue streams will also shift from a larger payment for every unit sold to regular usage and service fees spread over the useful lifetime of the asset. 

As you can see, the revenue from the subscription-based model exceeds the traditional sales model by far once additional services are considered. These additional revenues can come from maintenance, insurance, IoT and others, as previously mentioned. 

Finally, there is potential to generate additional service revenue without many of the capital-intensive outlays common to typical manufacturing processes. Tying into our second point, that service capabilities need to be created, the costs involved in building up personnel and the required knowledge are by no means insubstantial, but in contrast to R&D or cost-reduction programmes in manufacturing, they can be spread out over a longer period and be offset against incoming revenue immediately, reducing overall business risk. After accounting for additional operating expenses arising from the provision of these additional services, we can see that there is a very attractive margin to be gained from offering the EaaS model.

This is an edited version of Bernd Oppold’s address at the Leasing Life Conference on 19 November 2020.
Main Image:KPMG auditor company. Credit: TK Kurikawa / Shutterstock.com