Well, it’s that time of year again – Holidays and technology forecasts.
In the past month, I have read countless technology trends pieces, authored a technology ecosystem trends for The Monitor, and participated in a webinar where technology trends and future proofing were a theme. Business leaders are trained to embrace future proofing as something that protects their business from the progressive disruption of technology – basically, technology insurance. And we all know how to sell insurance: FUD – Fear, Uncertainty, and Dread. Thus, we have the annual holiday season stream of technology forecasting whose primary goal is making CEOs uncomfortable.
I have never been a fan of FUD. I am a physicist, not a fatalist. I believe that I can understand and affect my own destiny so I would rather mitigate risk than fear it. Full disclosure: I buy a lot of insurance because there are things that I know I can hedge but not mitigate, e.g. hail and tornados in the Midwest. The key to buying or selling insurance is understanding the risk, preferably at a statistical level. With that in mind, what exactly are the risks that we hope to manage with “future proofing?”
Future-proofing is the process of anticipating the future and developing methods of minimizing the effects of shocks and stresses of future events. - Wikipedia
The most common application of this definition is technology as the stressful “future event.” If we are going to “buy insurance” for technology disruption then, we must understand the risks it presents to our business. For the purposes of this discussion in the context of equipment finance, let’s consider three derivatives of Michael Porter’s Five Forces as the basics of business risk:
- Reduced customer demand due to new equipment alternatives (new entrants/substitute products/bargaining power of buyers)
- Reduced customer demand due to new financing alternatives (new entrants/substitute products/bargaining power of buyers)
- Sales lost to lower cost, more efficient competitors (Rivalry/bargaining power of suppliers)
Now let’s future proof!
Reduced customer demand due to new equipment alternatives (new entrants/substitute products)
In a world that changes constantly due to technology, measuring customer demand with sales data increases the risk that customers will move onto an alternative and you as a supplier of the solution will be caught “behind the curve.” I saw a pitch last week that said 60% of Apple’s revenue was from products less than 4 years old. This is a blistering pace for innovation and intimidating to any product manager or financing executive alike.
Shorter product life cycles create risk for term-based financing because the value of the equipment decreases faster and with higher variability. Reduced demand for existing equipment is a threat to renewals which jeopardizes profits. It’s hard to be competitive with simple loans when your residual value at a three-year term is zero.
But technology is a double-edge sword - we must respect it and wield it equally. We respect it by addressing product lifecycle risk with the structure of the financing, but we can use the same technology to our advantage. Connectivity brings and enables new equipment features and new services – often via software. In a connected equipment world, customer demand can be measured continuously and in real-time via monitoring the use and maintenance. Technology can change how customers choose to solve problems but both manufacturers and financers can avoid demand risk by using data to get closer to customers.
Customers are the ultimate arbiters of which technology assets win. So, ask them what they think by watching what they do with your assets.
Reduced customer demand due to new financing alternatives (new entrants/substitute products)
Equipment finance is part of the Experience Economy. The core value of equipment financing is providing the experience of using the equipment for business. The risk we must assess, then, is “how else can customers experience the equipment?” Connectivity is providing customers with new experience alternatives, e.g. sharing, and providing finance companies with new models, e.g. usage-based financing. The fundamentals of customer choice are the same, but the time scales chosen are getting shorter because shorter “rides” improve the price and convenience for the user.
The axiom is “haste makes waste” when it comes to financing. Longer terms give more opportunity to hedge market risks. But longer contracts really push the risk onto the customer in a fast-changing technology world. New entrants will use the same financing fundamentals, but they will use real-time data to understand risk on shorter time scales. Those willing to engage real-time usage data will have insights into customer demand for the experience in a distributed model – they will quantify the demand and availability models to drive faster financing models that better serve customer needs for technology assets.
Sales lost to lower cost, more efficient competitors (Rivalry/New Entrants)
Lower-cost competitors is not a new risk and, honestly, not one that will ever go away because of technology. Moore’s Law, which is an empirical model of the cost reduction efforts of an entire industry ecosystem, exemplifies how technology provides lower cost products and services for over fifty years. Lower cost competition is a given. The good news here is that cost reductions are part of a progression – particularly in large, highly regulated industries like equipment finance. The fundamental to practice here is “continuous improvement.” Cost drivers we have discussed recently with customers include errant deals due to credit procedure non-compliance and delays due to manual execution.
But again, “haste makes waste” and automation of cognitive processes like customer selection is perceived as adding risk. In the IoT world, digital twins, mathematical models generated from historical data, are now commonly used with streaming data to predict connected asset performance. Equipment finance must use the same tools with its “operational machines” – origination, credit analysis, portfolio management, etc. Each of these functions are based on mathematical analysis and can be automated for more speed and lower cost.
Technology will continue to evolve, and technology forecasters will continue to publish FUD every New Years. But the solution is not “technology future proofing” initiatives. The solution to defending and sustaining your business is the same as always: get closer to your customers and pay attention to the fundamentals of your business. Respect how technology continues to change our lives but wield it to better understand your customers and improve your fundamentals. With connected equipment “This is the way.”