By Dan Saunders, Managing Director, Decarbon Capital
In a world of mega-businesses such as Google, Facebook and Uber, companies are placing less focus on the ownership of assets and more on being asset-light in order to be nimble and seize commercial opportunities that maximise profits. Their success is encouraging the next generation of business to do the same; which in turn is increasing the demand for outsourced services.
Historically, successful companies would be asset-rich having impressively large balance sheets, with liabilities to match. However, Software as a Service (SaaS) has changed the way that businesses consume technology and in this service-based economy we are finding that it is no longer necessary to own assets. True success in a business, logically, comes from focusing on the areas with the greatest value-add. In recognition of this, asset intensive businesses of 2016 are demanding the opportunity to outsource those areas of their business in order to focus on attracting the highest margins.
With businesses like Zip Car, customers are not obliged to park cash in assets that depreciate in value even when they are not being used. On a commercial scale owning assets is a great deal more costly than the personal insurance on a car or an MOT, so businesses are looking at options to free the cash that can get tied up in these assets whilst retaining the value they create.
On-demand service offerings currently in the market range anywhere from traditional offerings such as distribution as a service including the use of trucks, supply chains, and logistics technology; utilities as a service - something that has been around for generations; and data as a service; to the newer and more innovative concepts such as lighting as a service whereby lighting infrastructure is fully funded by a third party and paid for only as light is consumed.
Investors in the current marketplace are searching increasingly for opportunities to support their clients through service-based models as a way of enabling them to increase productivity without the need to assume greater risk.
Furthermore, new Global Accounting Standards (IFRS 16) are coming into effect from January 2019 requiring that operating leases must be brought on-balance sheet. These changes will have significant implications to the financial ratios of businesses big and small, and will likely affect their ability to borrow in the short to medium term.
To date, operating leases have been held off-balance sheet, enabling businesses to benefit from having the underlying assets accounted for as an operational expense rather than both as an asset and more importantly as a liability.
This material change to the accounting treatment of operating leases is expected to bring c.$3 trillion of assets globally on the balance sheets of companies. This will have a significant impact on the ability of businesses to obtain credit and may take years for traditional debt financing organisations to adjust their expectations of what credit worthy companies look like. In the meantime, alternative financiers are coming up with ways to assume a greater level of a company’s operational risk in order to help their clients. One solution is to outsourced services that do not apply penalties for lack of use. This type of risk profile lends itself to risk-taking investors rather than banks and traditional financiers who typically prefer to shy away from volatile income streams.
The world of commerce is most certainly going through a transition phase, with outsourcing being just one of the many changes. It is an exciting time to see how corporates adapt to the changes in accounting standards and which models of alternative financing help them to best navigate the new rules in order to maximise productivity.
- Accounting’s big shake-up to bring more transparency; Kate Burgess and Harriet Agnew; FT.com January 20, 2016; http://www.ft.com/cms/s/0/138fe994-bdd5-11e5-846f-79b0e3d20eaf.html#axzz4H7lb4uVo