Equipment-as-a-Service can be a winning solution in manufacturing – but only if it’s financially viable

Subscription models have been gaining traction in the digital economy for many reasons. In manufacturing, Equipment-as-a-Service (EaaS) is replacing the traditional capex model, with a reduced equipment’s total cost of ownership (TCO) because it provides OEMs with guaranteed and recurring income in exchange for giving customers the value and service experience they demand – a win-win situation where both parties are financially incentivized .

But for it to be a winning solution in the long term requires careful consideration: an effective EaaS model can be a challenging ask, and for many industry players, it must be financially justified.

Why EaaS is a game-changer in manufacturing

EaaS was uncommon ten years ago because infrastructures could not support it. Advancements in IoT, cloud computing, data, and analytics have made remote monitoring and predictive maintenance possible, allowing companies to transform their business models and monetization efforts.

The trend is visible to have a reliable shift from “Consume as you go” to “Act as you consume” the equipment data. Whether it is purely an availability % or an optimal utilization without much of a use or rather an “abuse factor” of the equipment, each metric can be tracked, monitored, measured, and managed to a direct financial feed. A shared accountability gets both the parties to be equally vested in the effective execution of an EAAS.

Many clients have also learned the disadvantages of the traditional model the hard way: when a machine breaks down, repairs can be expensive and time-consuming, and the downtime results in steep production losses.

Another issue is being stuck with an equipment that starts to become obsolete for years due to a long-term contract. When this happens to an everyday consumer, the cost is relatively small, such as the cost of replacing a bulky CRT television or a mobile phone operating only on 3G. But for OEMs and their heavy machinery, the cost can be in the millions.

Customers today are adopting a more proactive approach with EaaS. For example, instead of paying $25 million to own a heavy equipment , many prefer to pay $10 million to lease it on a subscription model with a fixed fee on recurring payments – one that allows flexibility in changing equipment and services when needed. As part of the subscription contract, the OEM must ensure the machine maintains a near-perfect uptime or face penalties. It’s incentivized to take care of the equipment, benefitting the customer, while the OEM guarantees revenue year-over-year. And to maintain the equipment, the company can offer aftermarket parts servicing – tapping into an additional revenue stream and boosting customer loyalty and satisfaction.

But it must make sense and be financially viable

The time is right to stretch the modern-day/cutting-edge infrastructure by couple of more notches, get us out of the comfort zone to devise a business model backed by financial incentives. However, succeeding with the EaaS model, requires it to be financially viable. Companies should anticipate that a contract may not be as lucrative in year five as in year one due to high inflation, supply chain disruption, or changing market conditions that affect the cost of maintenance. Missing a large upfront payment is another drawback; in our previous example, this would mean missing out on $15 million that can be leveraged for immediate investment into innovation and technology.  

Cash flow is yet another potential problem, especially for new entrants and smaller OEMs. Generating a positive return on investment for equipment and services provided upfront takes time to offset the cost – time that many companies cannot afford. Companies should therefore carefully consider if EaaS is financially justified for their situation.

EAAS moves the needle to higher productivity gains, longer and reliable Equipment life cycle while reducing the TCO. Furthermore, it builds a trust between the customers and OEMs, with the former owning the equipment and letting the later managing all aspects of its maintenance and operations.

Capgemini understands both the opportunities and challenges of operating in the subscription economy and is positioned to help manufacturers innovate and thrive in this landscape. I would be happy to hear from you and your company’s ambitions – let’s explore the best way to approach EaaS to make it a winning solution for a more profitable future.