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Linking outcomes and opportunities

26 June 2017

Brian Foster, head of Industry Finance at Siemens Financial Services in the UK discusses an emerging business model which links payment for equipment and technology to resulting business benefits.

Digital innovation is changing the way business works and it requires both small and large companies to stay ahead of the digitalised world to remain competitive.  In the past, businesses would acquire enabling machinery and technology with the expectation that, once operational, it would allow them to remain competitive for long periods, often across a decade. Rapid developments in digitalised equipment however, are now compelling organisations to review their thinking and look to regularly upgrade machinery and technology. The Internet of Things (IoT) enables equipment and technology performance to be remotely monitored, analysed, improved, predictively maintained and made more efficient, and virtual environments are bringing new products and processes to market more quickly. 

This has enabled finance providers to increase the transparency of 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. 

Pay-for-outcomes
Being able to pay for business outcomes, rather than paying to use the technology that the acquirer believes will produce beneficial outcomes, has seen significant growth in the last few years. The emergence of a new generation of digitalised technology that links people, technology and organisations has made it possible to closely align what is paid by private- or public-sector organisations with the expected business benefits. This notion is now being more widely discussed as the emerging business model in manufacturing. (Reference 1) Finance and technology are being combined into an integrated value proposition where the solution provider offers organisations the possibility of paying for expected business outcomes, such as productivity improvements, optimised uptime, precise performance gains, cost reduction or reduced energy usage.

‘Business outcomes’ can take many forms, depending on the priority of the end-user organisation. Manufacturing companies usually seek one or more of four business outcomes - reduced cost per manufactured product unit (through, 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 knowledge of the technologies involved, along with their likely impact on the user organisation, is required. (Reference 2) 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. 

The pay-for-outcomes option 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. 

An example
Kübler & Niethammer is a midsized papermaker based in Saxony, Germany. The company continuously aims to improve the environmental and resource friendliness of its manufacturing processes. Most recently, it did so by implementing an efficiency optimisation programme for its power plant that involved installing an additional steam turbine SST-060 from Siemens Power & Gas. To preserve the company’s lines of bank credit for tactical needs and opportunities, Siemens created a tailored pay-for-outcomes arrangement for the company. The financing arrangement made it possible to match the reduced energy costs resulting from the new turbine technology to the cost of the new technology and therefore pay for it. Regina Ludwig, chief financial officer at Kübler & Niethammer, said, “Siemens is supporting the expansion of our energy supply to include electrical power by contributing the excellence of its play technology as well as the expertise of its skilled financing specialists.”

Pay-to-use
Pay-to-use arrangements, enabled by financing techniques such as leasing, rental and asset finance, have steadily gained ground over the last 20 years.  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.  This also allows the benefits of the equipment’s use to be broadly matched to payments over time while providing a means of avoiding technology obsolescence.

Alongside the emergence of the ‘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. 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.

Siemens research suggests that both pay-for-outcomes and pay-to-use finance models will continue to gain popularity. The result for organisations 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.

References
1 University of Cambridge, Institute for Manufacturing, “Making the Shift to Services,” October 2014; “Information Age, How the Internet of Things is Changing Business Models,” May 4, 2016.

2 See, for instance, McKinsey, “Digitizing the Value Chain,” March 2015; Industry Week, a Transatlantic Race to Digital Manufacturing, August 25, 2016.


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