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In the past, a crowded balance sheet that listed lots of valuable assets indicated that a company had a solid base on which to grow. It represented a secure investment.
That’s not quite so much the case given today’s globalized “knowledge economy.” Now companies are increasingly considering fixed assets as liabilities—limitations on a company’s ability to respond fast to changing environments. On the other hand, analysts and investors measure profitability of an organization based on its capital employed. Organizations, therefore, still need the benefits of capital-intensive items, even if they hesitate to pay up front for them in big, cash-draining purchases that tie up their finances.
Enter “X-as-a-service” new model for acquiring those benefits.
With X-as-as-service, a company pays for a given service on what’s essentially a subscription basis. The company gets what it needs without the burden of purchasing and owning expensive, fast-depreciating, and perhaps maintenance-intensive assets.
Does a company need the latest in supply chain software?
In the past it would have had to buy it, plus maintain a costly team to keep everybody using it trouble-free. Given the software’s expense and the disruption that upgrading it entails, a company might end up using the software for longer than it should. Instead, with software-as-a-service (Saas), the company can pay a monthly fee to access the software via the cloud, with none of the financial or practical disadvantages that accompany ownership. The provider updates the software as necessary, making bug fixes and new features available to end users automatically and with minimal disruption.
Does a company need fleet services?
In the past it would have had to invest in trucks that immediately started losing their value—not to mention in the maintenance people, the space in which to store those trucks, and so on. Now the company can pay for fleet as a service, getting full access to vehicles without their cluttering its balance sheet.
Does a company need lighting?
(It does.) In the past, the company would have purchased a building-wide lighting system with hundreds if not thousands of lighting fixtures, switches, and other hardware, requiring regular upkeep. Now the company can sign a deal with a lighting-as-a-service (LaaS) provider and receive state-of-the-art, energy-efficient LED light without assuming management and maintenance burdens. The LaaS provider owns the physical lighting infrastructure, leaving the end-user free to enjoy the system’s energy and maintenance savings. LaaS implementations like these are often cash positive—that is, the energy costs plus the LaaS fees often cost less than the energy and maintenance costs of the conventional systems they replace.
Supply chain, fleet services, lighting: these are only some of the many X-as-a-service offerings available today. Software, platform, hardware, and data storage are others, and there are many more. In every case, CFOs enjoy the benefit of freeing up cash that they can then use for revenue-generating activities, for growing the business, or for whatever additional initiatives the company may not have been able to afford before.
Meeting the new benchmarks
Success with debt instruments like these can do wonders for a company, even beyond the benefits associated with the particular debt instrument itself.
For example, it can translate into higher company sustainability ratings from ratings firms. That high rating will in turn attract investment, whether from big institutions or from private investors who are increasingly interested in “investing their values.”
There are other ways to boost a sustainability rating. As documented in the corporate social responsibility reports that have become standard annual publications in the business world, companies are cutting carbon emissions, teaming up to remove plastic from ocean waters, working to improve work conditions, boosting transparency along their supply chains, tackling representation and inclusion issues, helping reduce the carbon footprints of their commuting employees, offering sustainable choices in their on-site dining options, and so on down an increasingly long line.
They’re also investing in smart technologies that make their operations and facilities greener, more efficient, and more comfortable for employees.
Cutting edge office buildings, for example, are integrating transformative technologies. An LED-based smart lighting platform, outfitted with sensors beaming data back to analytical engines, can have a big effect on a company’s sustainability profile. The LED luminaires themselves can significantly reduce lighting-related energy consumption. Smart control can maximize those savings, with a smart lighting platform dimming luminaires in response to bright noontime light or in areas of an office that are currently unoccupied.
The lightweight new model
In addition to the advantages already mentioned, the X-as-a-service model can make bookkeeping easier, eliminating the tricky business of quantifying how the purchase of a new machine translates into additional sales.
X-as-a-service is also useful to support a metric that is being used to evaluate a company’s financial strength more and more frequently: free cash flow—that is, the cash a company has on hand after covering its operational expenses and paying whatever is necessary to keep its capital assets going.
Obviously, having fewer (or no) capital assets is a good thing for a company’s free cash flow. And in these unprecedented times, when many businesses are struggling with the effects of the COVID-19 pandemic, good cash flow, with all the liquidity and flexibility it implies, can make the difference between thriving, merely surviving, or even going under.
The age of company balance sheets heavy with capital assets is drawing to a close. The new X-as-a-service model is making life easier both for the employees who use those services and for the CxOs who must make their companies’ financial profiles as appealing as possible.
