I have sat in conferences, seminars, and working sessions between lessors and their customers, and been astounded – and have said so – as to the gulf of understanding that can exist,” Chris Cooper, managing director of Challenge Consulting tells Leasing Life.
“It is not universal, so there will be those who read this and think ‘well he does not mean me’, but there will be many who do not know I mean them.”
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The ‘drop and go’ approach to asset finance may be nearing its end; enter the managed service contract. In the passenger car rental and commercial fleet industries, lease contracts with maintenance are widespread. In asset finance generally, this concept is beginning to increase in prevalence. Shifts in expectation towards a service model, rather than simply providing the asset, are gaining traction among lessees.
Increasing numbers of businesses, when seeking a leasing deal, look for more than just the physical product itself. Additionally, potential lessees seek assets to use when they are needed, and pay only for the time spent in operation.
The rise of usership preferences and the desire for added services presents significant challenges to the asset finance industry; however, the concept of managed service contracts is still developing. One legal mind Leasing Life contacted said it was too soon to comment, citing ongoing projects on this very topic that were too sensitive.
The structures in the leasing market are changing, and what it may look like in the future, is still, at this moment, being worked out. Leasing Life investigates where the opportunity may lie.
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By GlobalDataInformation As an asset
“Has the leasing industry led the way in helping clients and users in different sectors and different classes of asset understand how to manage assets?” asks Cooper.
“In terms of a managed asset, [there] has probably been less rather than more progress,” he notes.
The concept of a managed services contract goes beyond traditional leasing. Under a managed service contract, lessors provide support and services such as maintenance to the lessee throughout the lease term.
Dario Ghislandi, head of international business line, BNP Paribas Leasing Solutions UK, tells Leasing Life that businesses involved in construction increasingly seek additional services in their equipment finance leases. This demand, he says, presents a challenge to the leasing industry.
“Added-value services are most appreciated and in high demand by the market,” he says. “For instance, insurance policies that cover financed assets or the end-user company risks have become important.”
According to Cooper, some parts of the asset finance industry are further ahead in developing managed service agreements. “In the car and vehicle industry there is a long-established tradition of maintaining and disposing of assets, and the non-interest-bearing parts of those revenues clear have been, and seem to be, highly lucrative,” he adds.
Simon Olliphant, head of vehicle solutions strategy division (Japan) at Hitachi Capital Vehicle Solutions, explains that following its further expansion into Europe, the fleet lessor is looking to place increased attention on its services proposition in Europe.
“In the UK we’ve been very successful growing the added-value service. Things like maintenance, breakdown, replacement vehicle, accident management, risk management; those are key components,” he says, adding that Hitachi is also engaged in fleet management at a variety of levels.
According to Cooper, providing managed services is a way for lessors to increase their profitability while also improving coverage and the user experience for the lessee.
Paul Jennings, managing director at JCB Finance, tells Leasing Life that advances in technology, including GPS and advanced telematics systems, make it easier for lessees to harness information to allow them to provide services with assets.
“The more telematics and GPS that get installed in assets, the more opportunity for managed services is coming on stream. Such as the optimisation of efficiency of assets, like fleet management,” he says.
“It has been around for a long time but it is the recent availability, accuracy, and ease of acquisition of data that is now prompting a wider array of possible potential services.”
Using the agricultural industry as an example, Jennings says harnessing this data will allow lessees to better optimise their processes, reduce waste, and reduce negative environmental impact.
“[Benefits include] the optimisation of efficiency of assets, energy and carbon footprints, predictive repair and maintenance, and precision of crop spraying and cultivation, [producing] less waste,” he says. “There are significant savings to be had by employing the right kind of telematics and GPS systems.”
At risk
The concept of leasing as a service (LaaS), also known as usership, has continued to be the subject of discussion within the industry. Jennings says that in some areas of the leasing market, the development of this proposition is beginning to be explored.
“I would say there is a certain part of different markets that are moving towards a need to see what the total cost of utilisation or use is,” he says.
Despite this, few lessors have yet implemented pay-per-hour or similar models into their propositions. Jennings says the shipping industry has begun to use pay-per-use models with maintenance and services included.
“Rolls Royce for instance has a facility called Power By The Hour,” he says.
In May 2017 Rolls Royce and Norwegian shipping company signed a services agreement for two gas-powered vessels, Kvitbjørn and Kvitnos. As part of the deal Nor Lines pays for each hour the ships are in operation, and Rolls Royce monitors equipment on board, logs performance, and planned maintenance.
Jennings suggests that the added risk for lessors may be in part to blame for the lack of significant strides in LaaS. He says that pay-per-use agreements allow margins for lessees to become more predictable, and in doing so reduce risk from lessees at the expense
of lessors.
“It transfers more risk onto the backs of lessors rather than de-risk [them]; it is de-risking the lessee,” he says. “So all the [lessee’s] costs are predictable enough that future margins then can be far more accurately predicted.”
The concept of increased risk also comes into play when considering longer-term managed services contracts. As Jennings suggests, lessees are beginning exploratory work to determine how often assets are used during a lease period.
This information could be useful in calculating wear and tear, the likelihood of maintenance services being used, and how often they are employed. By providing a lease with added services, there is potential for costs to increase.
Such agreements would prove less predictable in financial terms than simply shouldering the residual value of the leased asset. At present, lessors have not fully calculated the financial trade-off between additional revenue from providing managed services and the likely cost of delivering them.
Know your customer
“The view that you [as a lessor] are there to lend money and you have some kind of security in the asset is not sufficient if you are going to take part in the risk-managed side of providing managed services,” Jennings says.
The main barrier to the development of full managed service contracts across the leasing industry is knowledge. Rather than simply supply an asset for a predetermined term, and disappear until the contract comes to an end, this model would encourage lessors to stay present and informed.
The interviewees tell Leasing Life that the key to developing these leasing concepts is deep understanding of the lessee’s industry and business structure.
Jennings says that site and application surveys are necessary for gaining information and enabling lessors to provide appropriate services for the leased asset.
“Site and application surveys are key to a machinery, equipment or vehicle supplier, making sure that the unit is fit for purpose to begin with,” he says. “So the lessor needs to make sure that they are content that the appropriate job has been done, in identifying the right specification, or it has been proven that the [asset] will do what it says.”
He tells Leasing Life that such surveys would need to be ongoing, with lessors paying regular visits in order to assess the lessee’s needs, and the condition of the asset.
“An assessment is made at each visit as to whether the item is performing and whether there is something wrong,” he says.
The use of telematics data and other information through the Internet of Things (IoT) is not sufficient, accord to Jennings. In-person meetings, regular site visits, and physical surveys must all feed into a lessor’s assessment of the customer’s needs. In this way, he suggests, appropriate services can be tailored and offered to the lessee.
Cooper argues that failure to understand the businesses they are leasing equipment to prevents asset finance providers from adding value to the leasing proposition. He says that in addition to gaining knowledge to enable lessors to provide services during the lease term, more should become involved in asset disposal. Understanding and becoming involved in the use, management and disposal of the assets are crucial to developing this approach, he says.
“If you take the view that the leasing industry exists – as opposed to just borrowing money in some other way – because of expertise, knowledge, and facilitation assistance in the acquisition, use and disposal of an asset, it is in the use and disposal of an asset where more [can] be done,” Cooper says.
What to do
“I suspect there’s greater customer interest and curiosity than can be fulfilled, generally speaking, across the leasing industry,” Cooper says.
The leasing industry is at a crucial moment. Experience and customer service are the new battlefields. In a crowded leasing landscape, providing a bolder proposition will allow an asset finance provider to stand out, and develop an advantage against their competitors. At present, however, it seems as though few are willing to take the risk and rise above the parapet.
Cooper suggests that lessors must think beyond their current practices and develop skills which are not natural to the industry. “One of the challenges is it is a set of skills and thinking which is not necessarily core to [the industry],” he says. “Huge swathes of skills would be [required].”
Willingness to collaborate with different industries also lies at the heart of developing a competitive and all-encompassing managed services proposition. Jennings says lessors require a shift in mindset to become used to arrangements with service providers where their own proposition may not include everything their lessee requires.
“It is about collaboration with service providers if they are separate. For a crusher or a screen that might be used in a quarry, is the dealer or the service provider capable of protecting that lessor’s interests?” he asks.
The leasing industry has proven a stable prospect for outside investment. A number of lessors were acquired by private equity firms in 2017. Seen as something of a safe haven producing steady returns with low risk, the leasing industry has generated significant investor interest.
“Over the last five years it has been obvious that lots of investors have looked at asset finance and thought it looks profitable, with good margins, a good track record of low bad risk, and easy entry,” he says.
Cooper suggests that the provision of additional services could further boost the leasing industry’s appeal for investors. He argues that while lessors pay attention to the beginning and end of a lease, there is much more that must be done “in the middle”.
“It does feel like there is an opportunity, and it’s an obvious margin-improvement opportunity, amid increasing competition.”
Ultimately, in order for managed services contracts to become more readily available, lessors in all asset classes must be prepared to use both technology and regular on-site visits to improve their market knowledge.
The interviewees suggested that lessors must be willing to partner with service providers if they do not have the means to improve their leasing proposition alone. Failure to do so could see competitors gain market share at their expense.
