The role of leasing and Anything-as-a-Service (XaaS) in transformational finance
The digital and climate-neutral transformation presents a whole range of challenges, but above all opportunities for companies. On the one hand, there is a high need for investment in new technologies and modernised infrastructure. For North Rhine-Westphalia, for example, the annual investment requirement based on the study Transformation in NRW amounts to 45 to 55 billion euros for climate protection and 17 billion euros in digitalisation. However, digitalisation also offers companies a whole range of opportunities by leading to capital-saving technological progress.
Capital-saving technological progress through digitalisation has already arrived at many companies. For example, many employees are now increasingly using home offices due to the technical possibilities of digitalisation, which offers companies the opportunity to reduce office space. Through cloud computing, it is also possible to borrow machines and vehicles and charge them on a usage basis, which is also known as Anything-as-a-Service (XaaS). This technology has some parallels with leasing. Both allow companies to use capital assets in a way that is easy on the balance sheet, in that companies no longer have to buy capital goods, such as machines or buildings, but instead obtain them as a service for a fee.
Traditional leasing models in digital form
These business models can play an important role in the transformation because, as with leasing, they allow companies to save equity capital, which can then be used to finance other necessary investments. This is highly relevant especially due to the high investments in climate protection. In addition to applications related to business software, markets have also developed for hardware, i.e. machines and vehicles. Thus, one often finds the following classification:
- Software-as-a-Service (SaaS): While software licences used to be purchased, they are increasingly provided by the provider on a subscription basis. As a rule, the software no longer has to be installed, but can be used via a web browser. This model is now very widespread in the office sector.
- Infrastructure-as-a-Service (IaaS): In this model, the provider makes software and servers available as a service and allows data storage and processing.
- Platform-as-a-Service (PaaS): This model represents a further development of IaaS, in which it is additionally possible for customers to develop their own software using the provider’s server and operating system.
- Disaster Recovery as a Service (DRaaS): This is also a further development of IaaS, in which the provider copies and maintains the users‘ servers so that they can be restored after a data loss.
- Communications-as-a-Service (CaaS) and Network-as-a-Service (NaaS): This includes not only communications services, but also payment services provided by FinTech companies.
- Hardware-as-a-Service (HaaS): This includes classic business models of machine leasing, vehicle leasing and building leasing, which enable newer pricing and payment processing through digital measurement technology. In this way, machines or vehicles can be used by several customers without much transaction effort, as their usage times can be precisely recorded through data exchange and the public space serves as an access point, as in the case of car sharing, for example. Co-working spaces allow workplaces to be rented in a similarly precise manner through data exchange.
XaaS is included in the Technology and Trend Radar of the Federal Ministry of Economics and Climate Protection as one of the key technologies. The reasons are manifold:
- XaaS is being made accessible to a broad mass of companies through technologies that enable even faster and better networking between a large number of devices, such as 5G technology, gigabit WLAN, Bluetooth 5, the Internet of Things and cloud computing.
- Data collection, data analysis and prediction techniques, such as artificial intelligence (AI), machine learning and deep learning, natural language processing, data analytics and quantum computing enable usage-based billing of services and thus XaaS.
- The sharing economy and the subscription economy, which also includes XaaS, play an important role as digital business models for transformation.
Cloud computing has enabled disruptive business models, such as the sharing economy and the subscription economy, but also infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), software-as-a-service (SaaS) or anything-as-a-service (XaaS). These business models are new due to the management of data, but have similarities to leasing models. Compared to traditional leasing, however, the usage contracts can have shorter terms.
Capital goods can be purchased as a service
These business models are not new from the leasing industry’s point of view, but have evolved. For example, Xerox offered copying as a service early on via a usage-based payment model, which was settled via a charge from a copy card. As in the case of copying, where a copier no longer needs to be purchased but copying is offered as a service, this model can also be applied to other industrial sectors. For example, instead of purchasing a compressed air machine, an entrepreneur can purchase compressed air as a „service“ and charge for the compressed air used. In this way, the company can not only smooth its cash flow over time, but also reduce risks. If compressed air has been purchased as a service, it can continue to be purchased if the machine is defective, because the supplier must quickly replace it with another machine to fulfil the contract.
Transport-as-a-service is also a traditional model of the logistics industry or the taxi trade. However, the technical development via cloud computing and GPS tracking allows for better pricing. Car-sharing or e-scooter providers are further examples of vehicle rental with new access models and billing models via smartphone and public space as an access point. Similar further developments can be found in the area of storage, handling and picking. For example, traders do not necessarily have to maintain their own storage space, but can use the warehouses and logistics of large online mail order companies, for example. These models can also be applied in the area of office real estate, such as in the rental of co-working spaces. The difference to the traditional rental of an office is the brevity of the rental contract and the additional office infrastructure offered. In summary, XaaS can be described as a service with a short contract term. This allows not only to replace capital goods with a service, but also to react flexibly to peaks and troughs in orders if billing can be based on usage.
Machinery leasing to conserve equity
Machinery leasing is an established model that allows customers to replace a large-volume investment with a service. In agriculture, membership in machinery rings has traditionally been used, with farmers forming a cooperative to share machinery. Sharing offers a number of advantages: Firstly, there is no need for a large-volume investment of a machine with long standing times, as in the case of a harvester. Within the machinery ring, it can be used much more efficiently, as it has less downtime due to the change of users. In addition, there is a sharing of risks in the event of a breakdown of this machine, provided that a comparable machine of the machinery ring can be used. In addition, the machinery ring takes over the maintenance work on the machines.
XaaS allows machine leasing with a data-driven pricing model. For example, cloud-based machine usage provides John Deere with accurate location and usage tracking of machines, so it can use this information to bill for the service and quickly replace machines when they break down. In addition, risk sharing in the event of machine failure is improved, as the risks are spread over a much larger number of users than in the case of a machinery ring, whose number of users is comparatively small and regionally limited.
Leasing of machines, vehicles or buildings or the use of XaaS can play an important role in transformation financing. By leasing machines or workplaces instead of buying them, the equity can be used to purchase other machines and equipment instead. This can increase the overall investment volumes and thus achieve the climate-neutral and digital transformation more quickly. This would make it easier for companies to finance the large-volume investments for the transformation without taking on too much debt.
Outstanding importance for transformation financing
For the transformation in North Rhine-Westphalia, too, leasing and especially XaaS are thus of outstanding importance. This is because the high investment sums required to achieve climate neutrality would otherwise increase the level of debt of many companies. If higher indebtedness were to threaten a loss of creditworthiness, this could slow down the transformation, provided that securing creditworthiness takes priority over new investments. Leasing companies therefore make a major contribution to supporting the transformation, as they not only contribute to the financing of capital goods through leasing offers, but can also support the companies‘ balance sheet optimisation processes. Transformation financing therefore also requires leasing and XaaS so that companies can invest in climate neutrality in a way that is easy on their balance sheets.
Fin.Connect.NRW can also promote transformation financing by networking with the leasing industry and XaaS providers. In this way, when a company makes an investment decision, it could consider which capital goods need to be purchased and which can be demanded as a service. Through stronger networking of the finance industry and the companies with the leasing industry, the optimal ratio of financing and leasing could then be realised.
But the leasing industry itself is also undergoing transformation. Leasing companies, for example, finance a large part of the automobile market, including mobility concepts such as car sharing. For SMEs, this is a great opportunity in times when financing through bank loans is becoming increasingly complex due to regulation. In order to cope with structural change, it is essential for leasing companies to also have access to low-cost, tailor-made bank financing. For this reason, too, better networking between the financial sector and the leasing companies is important.