Equipment-as-a-service: A CapEx vs OpEx decision

As software becomes a larger part of every aspect of industrial automation, even replacing traditional hardware more often, it’s probably not a surprise that software’s subscription-based business model is also playing a larger role in industry. For some companies, the decision to buy or rent automation equipment depends on cashflow and infrastructure budgets.

There are advantages and disadvantages to buying machinery (capital expenditure) vs. leasing equipment or production (operating expense), says Bryan Powrozek, senior manager and industrial automation team lead at Clayton & McKervey, an international accounting firm.

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The advantage of buying is that it’s usually cheaper in the long run than renting. “If the equipment can hold its value over the long run, and I have the cash to pay for it, then I may want to buy it outright,” Powrozek says. The obvious disadvantage of buying is that it eats up available cash.

“If cashflow is tight or there is a desire to preserve cash for working capital or other matters, I’d want to lease, as it typically requires little to no upfront costs, and the payment is spread over time,” Powrozek says. If the purchase includes technology that changes quickly or can become obsolete, leasing might also be a good idea.

“A business’ financial statements and associated financial ratios will also be affected by this decision,” Powrozek says. “Leasing is still a form of financing, so the business will want to determine if the rate being charged is less than the rate they could obtain if they financed the purchase through bank debt.”

The equipment-as-a-service (EaaS) model may help automation companies and their customers that perform maintenance internally to work better together and keep machines running optimally. “Many automation companies are already engaged on some level of maintenance and services as part of their equipment contract, so this is a natural evolution, similar to many consumer products. The hardware is included in the monthly or annual subscription, rather than being sold separately,” Powrozek says.

“Larger, more advanced consumers of equipment will tend to use an integrator to develop and implement systems but then handle the maintenance using internal resources. As the systems become more complex and new technologies are rolled out, it becomes harder for the internal resources to stay up to date with all the latest development. You end up with situations where customers try to manage the preventive maintenance and updates internally and resist calling the vendor in until the last minute. Having an EaaS relationship gets past some of this by having the vendors come in periodically as part of the agreement,” Powrozek adds.

The complexity of advanced equipment might also be an obstacle for small to medium-sized companies that don’t have the capacity for internal maintenance. “A properly structured EaaS agreement can cover the regular maintenance and upkeep the company may not be able to handle with their own resources,” Powrozek says.