Point of View

Global business centers for equipment financiers: Leveraging Best Practices for evolution and growth

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According to ELFA's "2015 Equipment Leasing and Finance US Economic Outlook," 62 percent, or $922 billion, of investments in plants, equipment, and software is projected to be financed through loans, leases, and lines of credit this year. This equates to a 6% growth rate for the year.The "pent-up" or replacement demand that has driven equipment investments in the previous two to three years is expected to be supplemented by long-awaited expansion investments, as the capacity utilization rates of equipment in various industries is reaching historically high levels.

The next five to ten years will be a tipping point for the industry, where the ground rules of running a business and operating strategy are likely to be challenged. This change is being driven by digitization, technology innovation, access to multiple data sources, and changing end customer dynamics.

The "disrupters" of the future

Now is the opportunity for the equipment finance industry to start looking into the future and initiating the first steps towards transformation. The equipment finance Industry Future Council meeting, held in January 2015, brought up some insights on possible industry disrupters of the future:

  • Big data and analytics: Millennials are more likely to make their financing decisions on their phones rather than through traditional methods. Dramatic changes in end-customer dynamics like these require new growth and customer experience strategies. These will be based on predictive analytics and data gathered from numerous resources, like social media, leading the industry down an entirely new path.
Millennials are more likely to make their financing decisions on their phones rather than through traditional method
  • Regulation: Regulatory dynamics are impacting the capital allocation strategies of financiers. The role of technology, along with know your customer (KYC) utility tools to drive down cost of managing compliance, will be an important strategic differentiator, especially as the industry innovates and launches products like pay-per-use, asset sharing, and value-added services. As regulations become more complex due to market innovations, driven by digitization, additional guidelines like the introduction of lease accounting standards will force financiers to invest in new technologies.
  • Alternative funding sources: With easy access to abundant capital, "disruptors" like crowd funders are offering newer, cheaper, more efficient ways of financing, and they do not have legacy platforms to limit their speed. 
    The equipment finance industry will need to embrace some of their best practices to stay on the cutting edge— the risk of being complacent is too high.
  • Business operations transformation: The primary market differentiator for the future will be the end customer service experience. Initiatives such as automation of repeatable and rule-based equipment lending processes and the use of artificial intelligence to enhance the end customer experience are likely to play a vital role.
  • Talent war: Hiring and retaining millennials, who are looking for greater lifestyle balance than generations before them, is going to be a significant challenge that future managers must face

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What will the equipment financier operating model of the future look like?

To succeed, lessors will have to deploy operating models that enable both offensive and defensive strategies. Offensively, operating models will help penetrate new markets and bring insights and speed to conquer micro markets and enable granular growth. Defensively, operating models must accommodate product and process innovation, provide talent, lead the technology transformation, and make costs more variable. Success will be measured ultimately in the marketplace by the service quality delivered and the culture of service innovation created.

The term Global Business Services (GBS) has emerged to define a conglomeration encompassing a multi-functional operating model of integrated internal capabilities and processes with those of strategic third-party vendors

The fundamental shift in creating evolved operating models will come from the creation of Global Business Services (GBS) centers. The term GBS has emerged to define a conglomeration encompassing a multi-functional operating model of integrated internal capabilities and processes with those of strategic third-party vendors.

This will lead asset financiers to focus on managing just a few critical activities, like raising capital, sales, marketing, and managing credit. At the same time, the GBS centers manage all non-customer-facing, non-core activities, along with the technology they require. At more evolved levels, GBS centers have the potential to provide key solutions to potential challenges the industry is likely to face, such as:

  • GBS centers as drivers of growth: The equipment finance growth in the coming years will be driven by specific asset classes like trucks, solar, 3D printing, and industrial equipment. In addition, there is competition from industry disrupters such as peer-to-peer lenders that may have a greater impact on the market. The existing operating models do not typically react to change quickly because they are optimized for stability and not for scale and agility. GBS centers bring in the ability to create scalable and quickly deployable operating models inclusive of technology, process, and talent.
  • Technology as an enabler with originations platforms bolted on to Software as a Service (SaaS) servicing platforms: The ability to meet compliance requirements, drive data security, and achieve a variable cost structure are the primary factors influencing technology platform decisions. The focus on customer, dealer, and vendor interfaces built on state-of-the-art originations platforms is now an integral part of the "go-to-market" strategy. GBS centers are enabling end-to-end transformation in the technology space by introducing originations platforms that are highly configurable and meet evolving regulatory needs. These can also function as bolt-on solutions to SaaS technology platforms with transactional pricing structures inclusive of process management.
The ability to meet compliance requirements, drive data security, and achieve a variable cost structure are the primary factors influencing technology platform decisions
  • Process transformation to drive controllership: GBS centers will drive process controllership and innovation through a scientific approach to running enterprise-wide operations. The strategic value of GBS centers is derived from their ability to enable real business outcomes, like reducing revenue leakage, improving deal conversion, and reducing cost to serve. GBS centers break down organizational silos and reduce value leakage at interfaces by establishing clear linkages between process drivers and business outcomes.
  • Big data and analytics: The ability to leverage big data and analytics effectively would be driven by the ability to build practices that are a combination of deep programing experience, an understanding of equipment finance processes, and core technology platforms. Asset financiers will have to partner with GBS centers (strategic vendors) to fully leverage the potential of big data and analytics.
GBS centers have the potential to reduce the cost of operations by 30-60%
  • Talent war: The mismatch between the demand and supply of specific skills in particular locations is already profoundly influencing the ability to run specific processes and technologies cost-effectively. Finding the right resources at the right time and in the right place is more challenging than ever before. GBS centers enable equipment financiers to access trained global talent, which in turn can reduce attrition and risks related to lost knowledge management.

GBS centers will enable financiers to transform by enabling innovation and reducing costs

  • Product innovation: Lenders will move away from pure play leasing to usage-based models. GBS centers ease this transition through value additions in the re-evaluation of risk, relationship management with original equipment manufacturers original equipment manufacturer (OEM), and by redesigning the overall operating model strategy.
  • Reduced total cost of technology ownership: GBS centers will reduce the overall cost of technology, thereby aiding financiers in making investments in dealer portals, mobility solutions, self-service portals, and automated underwriting.

Equipment financiers need to build on this strategy as they continue embracing GBS centers in order to manage tomorrow's challenges and harness market growth.

This PoV is co-authored by Vikas Malhotra - Vice President and global service line leader – Asset Finance and Vijay Negi - Vice President and solution architect – Asset Finance

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