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5. One Man’s Fear Is Another Man’s High: Transfer, Sharing, and Exploitation of Risks in EaaS

Introduction

In the evolving landscape of the Equipment-as-a-Service (EaaS) ecosystem, managing inherent asset risks is fundamental to maintaining profitable and sustainable operations. One effective way of managing these risks is through strategic transfer and sharing, where risks are either shifted to another party within the ecosystem or shared amongst multiple stakeholders. Original Equipment Manufacturers (OEMs) can strategically distribute risks among customers, financiers, insurers, and resellers within the EaaS ecosystem. In this post, we delve into how these key ecosystem participants can effectively manage, share, or transfer risks, and how OEMs can even exploit certain risks as opportunities for innovation and value creation.


Placement of Risks: Where and Why

Optimising risk placement involves identifying which stakeholder is best positioned to mitigate each risk. Here's a look at where each risk might be best placed:


Asset utilisation risk: This risk is best shared with customers. Customers directly influence equipment usage, and their behaviour can mitigate this risk. By incentivising customers through usage-based contracts, OEMs can encourage efficient equipment use, thus managing the asset utilisation risk.


Residual value risk: Financiers and resellers are in a strong position to mitigate this risk. Financiers, through their financial expertise and risk management capabilities, can manage the fluctuations in equipment value. Resellers, with their knowledge of the used equipment market, can find buyers and set competitive prices, mitigating the loss from depreciated equipment value.


Obsolescence risk: This risk could be transferred to insurers. Insurers, through their broad market view and risk pooling capabilities, can manage the risk of sudden obsolescence. While OEMs must stay ahead of technology trends, insurers can help absorb the financial shock if equipment becomes obsolete faster than expected.


Risk Transfer and Sharing: Feasibility and Pricing Components

In the Equipment-as-a-Service (EaaS) model, transferring and sharing risks with different stakeholders helps OEMs distribute their risk exposure while fostering collaboration and mutual benefit. To ensure an effective risk management strategy, it's essential to consider the feasibility and pricing components associated with transferring or sharing risks with each stakeholder.



Sharing risks with customers

Customers play a significant role in the EaaS model as they are directly involved in equipment utilisation. It is feasible for OEMs to share asset utilisation risk with their customers through dynamic contracts that align pricing with equipment usage. Customers who use the equipment more frequently pay higher fees, while those who use it less frequently pay lower fees. This approach allows OEMs to offset the risk of underutilization while providing an incentive for customers to optimise their usage patterns.


Transferring risks to financiers

Financiers, such as banks or leasing companies, can help OEMs mitigate residual value risk by providing financing for the equipment. By purchasing the equipment and leasing it back to the OEM, financiers assume the risk of equipment depreciation. This risk transfer is feasible if the financier can accurately assess the equipment's residual value and manage the associated risks. The pricing component in this case involves the interest rate and leasing fees charged by the financier, which should reflect the level of risk transferred.


Transferring risks to insurers

Insurance companies can help OEMs manage obsolescence risk by offering policies that cover the costs associated with equipment becoming outdated or less desirable. The feasibility of this risk transfer depends on the insurer's ability to accurately assess the likelihood of obsolescence and the potential financial impact. Insurers may charge a premium that reflects the level of risk being transferred, and OEMs can incorporate these costs into their EaaS pricing model.


Sharing risks with resellers

Resellers can play a crucial role in mitigating residual value risk by purchasing used equipment from OEMs and reselling it in secondary markets. This risk sharing is feasible if resellers can accurately assess the market demand for used equipment and manage the associated risks. The pricing component in this case involves the resale value of the equipment, which should reflect the residual value risk shared between the OEM and the reseller.


By considering the feasibility and pricing components associated with transferring or sharing risks with each stakeholder, OEMs can develop effective risk management strategies that promote sustainable and profitable operations in the EaaS model. It's essential to carefully assess each stakeholder's ability to manage the risks involved and to ensure that the pricing components accurately reflect the level of risk being transferred or shared.


Risk Exploitation: Turning Risks into Opportunities

While the concept of risk in business often carries a negative connotation, it's important to note that risk can also present unique opportunities. In the EaaS model, the inherent risks can be exploited by OEMs to create value, drive innovation, and foster a sustainable business model. Below, we explore how residual value risk, asset utilisation risk, and obsolescence risk can be turned into opportunities.



Capitalising on residual value risk through circular economy

The EaaS model aligns well with the principles of the circular economy, which aims to reduce waste and promote resource efficiency. Residual value risk, the risk of the equipment having a lower market value at the end of the service term, can be seen as an opportunity in this context. By taking responsibility for the end-of-life disposal or repurposing of the equipment, OEMs can extract value from used equipment and materials, thus reducing waste and promoting sustainability. This could involve refurbishing and reselling used equipment, or recycling parts and materials for use in new products. This approach not only reduces residual value risk but also creates additional revenue streams and enhances the OEM's reputation for sustainability.


Exploiting asset utilisation risk to profit from taking risks

Asset utilisation risk, the risk of the equipment being underutilised, can be exploited by OEMs through dynamic pricing models that align costs with usage. By assuming the risk of underutilisation, OEMs can justify charging a premium for their services, thus getting paid well for taking on this risk. This approach encourages customers to optimise their usage patterns and ensures that the OEM is compensated fairly for the risk they are assuming.


Leveraging obsolescence risk as a business model to de-risk customers

Obsolescence risk, the risk of the equipment becoming outdated or less desirable, can be turned into an opportunity by offering flexible EaaS contracts that allow for regular equipment upgrades. By doing so, OEMs can de-risk their customers by ensuring that they always have access to the latest, most efficient equipment. This approach not only mitigates obsolescence risk but also enhances customer satisfaction and loyalty, as customers appreciate not having to worry about their equipment becoming obsolete.


In conclusion, each of the key risks associated with the EaaS model can be exploited by OEMs to create unique value propositions, drive innovation, and promote sustainable business practices. By adopting a proactive, opportunity-oriented approach to risk management, OEMs can thrive in the evolving EaaS landscape.


A Data-Driven Platform for Risk Management in the EaaS Ecosystem

In the modern EaaS ecosystem, digital technologies, and in particular data-driven platforms, play a crucial role in managing risk transfer, sharing, and exploitation. These platforms can collect, analyse, and provide insights on vast amounts of data from various sources within the ecosystem, offering a powerful tool for managing and mitigating risks.


A data-driven platform can help streamline risk sharing and transfer processes by providing detailed and real-time information about equipment usage, performance, and market conditions. This facilitates informed decision-making, enabling OEMs and other stakeholders to identify risks early, assess their potential impact, and decide the best course of action, be it risk sharing, transfer, or even exploitation.


For instance, data on equipment usage can guide dynamic pricing models, facilitating effective risk sharing between OEMs and customers. Similarly, data on equipment value and market trends can help financiers and resellers manage residual value risk more effectively.


Moreover, a data-driven platform can also support risk exploitation strategies. Detailed insights into equipment performance and usage can enable OEMs to identify opportunities for innovation, whether it's in improving equipment design, offering tailored services, or promoting resource efficiency in line with circular economy principles.


Therefore, a data-driven platform not only provides a robust foundation for managing risks in the EaaS ecosystem but also opens up avenues for value creation and competitive advantage. As the EaaS model continues to evolve, harnessing the power of data will be key to navigating the complex landscape of risks and opportunities.


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Conclusion

In the Equipment-as-a-Service (EaaS) model, managing risk is a critical component of success. The strategies discussed in this post provide a roadmap for Original Equipment Manufacturers (OEMs) to navigate the complex landscape of risk sharing and transfer, optimise their risk placement with stakeholders, and even exploit inherent risks to create unique opportunities and drive innovation.


Each stakeholder - customers, financiers, insurers, and resellers - brings a unique ability to manage specific types of risk. By aligning risks with those best positioned to handle them, OEMs can foster collaborative relationships, ensure fair pricing, and ultimately enhance their EaaS offerings.


Furthermore, the EaaS model offers unique opportunities to turn risks into benefits. By aligning with the principles of the circular economy, OEMs can capitalise on residual value risk to promote sustainability and create new revenue streams. Similarly, asset utilisation risk and obsolescence risk can be leveraged to enhance customer satisfaction and loyalty, while also justifying premium pricing.


In conclusion, effective risk management in the EaaS model involves more than just mitigation - it requires strategic risk placement, careful consideration of feasibility and pricing, and an innovative approach to exploiting risks as opportunities. As the EaaS landscape continues to evolve, those OEMs who adopt these strategies will be best positioned to thrive.


Remember, the journey of navigating through the EaaS model is complex, but with a proactive, opportunity-oriented approach to risk management, it can become a promising route to sustainable and profitable operations.

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