Equipment as a service
From the April 2023 print edition
The main objective for equipment as a service (EaaS) is to change the mindset regarding the commercial relationship between the manufacturer and the customer. Instead of buying actual equipment, the customer will buy services, based on his utilization.
We might compare it to software in the cloud.
This approach is not new for equipment. One of the best examples is Rolls Royce and their airplane engines. Instead of selling engines, they are selling hours of utilization. In this business model, Rolls Royce needs to produce the best engines possible to reduce the impacts on the customer. The service level agreement, included in the contractual documents, is to provide the engines when the customer needs them.
Real-time data play a major role in this model. They can act during the trip and plan their interventions ahead at the arrival of the plane.
The EaaS model is an ecosystem allowing synergy with four specific groups within the framework of a business model. The main objective is to offer the customer service for a product, the monetization of which is based on the utilization. The main change is that the manufacturer will not only offer equipment but will also provide a variety of services to the customers. In the case of vehicles, the services could include maintenance, repairs, service roads, plans and specifications assistance, and so on. Some providers will even offer fuel or energy.
Finally, we need to identify the base of utilization for which the customer will be billed. For vehicles, the kilometres driven, or the engine hours might be examples. In some industries there may be other ways to establish the base of utilization. This approach represents the major difference with pure leasing.
In the EaaS ecosystem, four stakeholders are needed. The first one is the manufacturer of the equipment, the second is the customer, the third is the financial institutions involved, while the last one is the data integrators.
As the manufacturer, the producer of the equipment plays a crucial role in the model. The main goal is to produce equipment that will perform to meet customer expectations. Except for maintenance, the equipment should always be available for the customer.
The manufacturer should be the one aiming to eliminate the downtime. This situation will mean more robust equipment. If not, the manufacturer should be held accountable.
The other stakeholder is the customer. In the model, the customer just utilizes the equipment. He doesn’t need to assume responsibility for the maintenance and repairs. In exchange for the amount based on utilization, he will have use of the equipment to achieve the goals of his operations. This means he will be free to focus on his core business.
The third stakeholders are the financial institutions. They provide the financial support that the manufacturer and the customer must obtain for the model to work.
In both cases, the management of the financial risk will pass through this stakeholder.
When you have synergy between these four stakeholders, you are in a pure EaaS model. With the ongoing energy transition, some new players have invited themselves into the model. They are not manufacturers but offer a variety of electric vehicles and all the services required for the transition.
Finally, the data integrators represent the equipment manufacturers or other manufacturers
of technological solutions, which allows them to obtain the data utilization of the equipment.
This is of great value in the model because the pricing will be based on that data.
Transitioning to the EaaS model
The transition towards the EaaS model needs to be prepared for and understand by the stakeholders. A strategic plan should be prepared to make the transition.
The plan will be helpful for the top management, for the financial institutions, and for the investors, but also for the employees.
A change management process should also be put in place.
For equipment manufacturers, studies indicate that the transition could be profitable. It’s important to remember that the EaaS model includes not only the sale of equipment but also services. This is the major mindset change that’s needed to make the jump to this model.
We should add that scientific studies prove the concept based on statistical analysis.
Profitability will be obtained more easily at the beginning of the transition due to low requirements regarding expenses. Then there will be a kind of plateau.
At this stage, new expenses will arise. For example, more employees in service sales, there will
be a need for more visits to the customers, growth in operating cost, new information technology systems, and so on. When those expenses are met, the increase in profitability will restart.
Pros and cons
For the manufacturer, the advantages of this model include a growth in revenue, as well as a predictable revenue stream. The customer can expect to benefit from the ability to focus on the core business, the elimination of the CAPEX, and a reduction in OPEX (which will also become more predictable).
At the same time, the challenges to the manufacturer include having to draft a strategic plan, potentially change management and leadership, the stress of the transition into a contractual agreement, and the need to manage risk. Challenges to the customer include the need for leadership, plus having to demonstrate the economic advantages of the model.
The future of EaaS for vehicles
It seems that Europe is ahead of North America with utilizing the EaaS model for vehicles. Some manufacturers already offer this business model to customers. Those manufacturers are participating in the transition to more sustainable energy systems, so they offer electric vehicles, the billing for which is based on kilometres. The package includes all services, and they even offer logistics within their warehouse.
In North America, there are some projects underway with major vehicle manufacturers, large organizations that manage thousands of vehicles, or financial institutions. Hopefully the results will be available soon. There are also start-ups that are pushing the EaaS model fully or in part.
In conclusion, EaaS might be a new way for a fleet to provide vehicles for their operation needed to serve their customers. Currently, there is a lot of excitement with the model, particularly in Europe.
It is worth exploring.