Hardware as a Service (HaaS) adoption is increasing. UnivDatos Market Insights anticipates market growth at a 25 percent CAGR to reach $300 billion by 2027.
The benefits to end users are clear. Businesses that have grown accustomed to paying monthly fees for Software as a Service (SaaS) rather than buying licenses are open to using hardware for a monthly fee instead of making large capital expenditures to purchase it. The model includes routine maintenance and repairs related to wear and tear with regular use. It also eliminates risk. Businesses aren’t locked into using outdated technology – they can upgrade when the contract allows, often after 24 months.
HaaS is also beneficial to managed services providers (MSPs) and value-added resellers (VARs). It helps build sticky relationships with your clients, and you provide and manage total solutions. Additionally, HaaS enables you to standardize solutions to help your techs work more efficiently.
However, there is a potential downside to selling HaaS.
The Pitfalls of Self-Funding
During a GreatAmerica and Service Leadership webinar series, Paul Dippell, former Service Leadership CEO, pointed out that self-funded Hardware as a Service offerings can negatively impact an MSP’s balance sheet by increasing its debt load.
With self-funded offerings, the more successful you are at selling HaaS, the more debt your organization has. For example, if you are using a bank line of credit, you have $50,000 left on that line, and you have two clients with $35,000 projects, you’ll use your own cash reserves to help fund them. Then, if one of your clients defaults or goes out of business and you were relying on their monthly payments to fund future projects, your available cash flow is diminished.
Self-funding can also slow down progress toward your business plans, such as expansion or acquisitions – there may not be enough capital and credit at your disposal to fund both your progress and new HaaS solutions.
Minimize HaaS Risks
Lee Rozeboom, Vice President and Managing Director of Sales for GreatAmerica suggests steps you can take to minimize your risks when you’re self-funding HaaS:
- Limit the total investment of hardware for each client. If you spread your investment across your client base, you reduce your risk of concentrated losses.
- Shorten the window in which you are repaid in full. If you can recoup your investment in six to 12 months, it will reduce risk compared to allowing a client to repay over three years.
- Review your prospect’s credit history before you self-finance their equipment. Ensure your client has a solid track record of repaying debts and making on-time payments.
Alternatives to Self-Funding
Rozeboom adds that you also have the option of reducing risk through third-party financing. There are three approaches you can choose from based on your business maturity, commitment, and billing requirements:
- Traditional Financing: Hardware and labor costs – or the hardware alone – are financed on a monthly payment via a lease or finance agreement. The finance company pays the MSP upfront for the hardware and bills the client monthly. You can bill your client separately for the managed services, or the finance company can bill it, broken out as a separate cost.
- Bundled Rental: GreatAmerica offers Hardware as a Rental or HaaR. In this model, the MSP presents both the hardware and services as a single payment. The MSP gets paid upfront for the hardware, software, and labor. GreatAmerica bills the client for the finance payment and the managed services and sends the managed services fees to the MSP’s account via ACH.
- Direct Financing: This approach works best when an MSP is standardizing one or two products and wants to include them in their managed services fees. The third-party finance company pays you to purchase products, then each month, your client pays you, and you keep your markup and make a monthly payment according to your finance agreement.
In addition to reducing financial risk and maintaining positive cash flow, Rozeboom points out that third-party financing also gives you the benefit of spending less time managing payments and more time on your core competencies.
If Hardware as a Service is a growing trend in your market, it’s smart to determine how your business will meet that demand while protecting your business’ financial health.
You can listen to Great America and Service Leadership webinars on demand to learn more, including how to use the Financial Early Warning Score Calculator.