Outcomes and opportunities: finance models adapt to support digitalization across the manufacturing industry
The world of business is changing. Organizations no longer expect their established machinery, equipment and technology landscape to keep them competitive across a decade. The Internet of Things (IoT) enables equipment and technology performance to be remotely monitored, analyzed, improved, predictively maintained, and made more efficient. Virtual environments are bringing new products and processes to market more quickly.
This has enabled finance providers to increase transparency in how equipment and technology are being used, allowing them to base tailored financing arrangements on the expected business benefits resulting from the use of that technology.
Over the last few years, there has been significant growth in the availability of and interest in the idea of paying for business outcomes, rather than paying to use the technology that the acquirer believes will produce beneficial outcomes. The emergence of a new generation of digitalized technology that links people, technology and organizations has made it possible to closely align what is paid by private- or public-sector organizations with the expected business benefits. The notion is now being more widely discussed as the emerging business model in manufacturing. Finance and technology are being combined into an integrated value proposition where the solution provider offers organizations the possibility of paying for expected business outcomes, such as productivity improvements, optimized uptime, precise performance gains, cost reduction or reduced energy usage.
Being able to pay for business outcomes transforms the reliability of financial planning in manufacturing. Not only are costs more transparent, the risk of technology obsolescence, capital commitment, and so on are avoided.
‘Business outcomes’ may take many forms, depending on the priority of the end-user organization.
Manufacturing companies usually seek one (or more) of four business outcomes: reduced cost per manufactured product unit (through, e.g., faster production rates, reduced setup time, etc.); reduced operating overheads (for instance, lower energy consumption); ability (and agility) to deliver product variations to each customer without cost penalty; and faster product development (e.g., through virtual testing capabilities) – all of which lead to greater competitiveness, new market penetration and overall growth.
In order to confidently offer outcomes-based solutions, considerable knowledge of the technologies involved, along with their likely impact on the user organization, is required. That “intimacy” with technology and its applications does not tend to be the province of generalist financiers. It requires specialist knowledge and wide experience, along with a close relationship between solution provider and financing partner.
Alongside the emergence of this ‘pay-for-outcomes’ approach, it is likely that ‘pay-to-use’ methods will continue to play an important role in providing access to the latest advances in technology and equipment.
"Effectively, using pay-to-use financing, we can acquire equipment and make it generate cash flow for us immediately." – Toolmaking, UK
Pay-to-use arrangements, enabled by financing techniques such as leasing, rental and asset finance, have steadily gained ground over the last 20 years as businesses have sought to acquire key operating technology and equipment while broadly spreading payments across the period during which they are gaining advantage from the use of that equipment, machinery or technology. These arrangements have gained popularity as they support a company’s need to access the required technology to compete without requiring upfront capital and allow the benefits of the equipment’s use to be broadly matched to payments over time while providing a means of avoiding technology obsolescence.
Pay-to-use models are making it possible for manufacturers to make necessary technology upgrades and enjoy the business benefits that result. These models are also developing into more sophisticated forms that have flexed to embrace and accommodate trends in the technology markets.
Case study: pay-per-wrap at TRAKRAP
Based in Lancashire, UK, TRAKRAP manufactures a packaging solution for retailers that uses 90% less energy and 70% less wrapping film. As demand for its solution grew rapidly, TRAKRAP wanted to access a business model enabled by suitable financing that would help its cash flow and improve its customer service. Introduced to Siemens Financial Services by technology partner Siemens Digital Factory, TRAKRAP agreed a vendor financing arrangement that enabled its customers to spread the costs for the use of the system over the contractual period on a ‘cost-per-wrap’ basis. TRAKRAP receives payment for their customers’ solutions from Siemens at the commencement of the agreement and can continue to invest in growth. Martin Leeming, Managing Director of TRAKRAP ltd, notes, “The Siemens arrangement means we can develop as rapidly as the market demands. So we’re truly powered by Siemens, both financially and technically.” Without the need to acquire the equipment, the end customer benefits from the use of the system on a pay-to-use basis, without upfront capital expenditure.
Our research suggests that both pay-for-outcomes and pay-to-use finance models will continue to gain popularity. The result for organizations is the fusion of technology provision, maintenance, finance, updating, support, and so forth into a single, integrated value proposition. Embedded finance (where finance is an intrinsic part of the sales proposition) will continue to grow in importance as one of the key factors making such pay-for-outcomes business models work.
By Brian Foster, Head of Industry Finance at Siemens Financial Services in the UK
This article is based on findings from Siemens Financial Services (SFS) research. The full report, ‘Outcomes and Opportunities’, is available to download here: www.siemens.com/outcomes-and-opportunities