For nearly twenty years, low interest rates, a mostly booming economy, and easy access to capital had companies spending freely on technology tools and innovations required to support growth. But today, the landscape looks different.

While the demand for technology is increasing, interest rates and inflation are far higher, and budget limitations are preventing companies from investing in the technology required to fulfill strategic initiatives. Plus, labor shortages are forcing companies into greater automation to reduce human capital requirements.

Those factors and more are fueling the rapid shift from ownership to usage mindsets. Why buy it when you can simply pay for what you use?

The Shift to as-a-Service Technology

Software has largely evolved from the old seat license model to the subscription-based approaches we’ve all become so familiar with. The monthly payments, contractual flexibility, enhanced affordability, and operational benefits associated with subscription models mean selling seat licenses for a fixed amount is all but extinct. But that shift opened the door to a revolution in how technology is used.

The use/service-based approach to technology acquisition has accelerated over the last 15 years. In a survey of senior IT buyers at 1,200 companies, we found the following change in ownership vs. consumption strategies:

Graph of Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Small Firms

Consumption-based, use-based, and as-a-service technology are increasingly shifting the entire business away from ownership models. Value-added technology sellers and technology manufacturers are fully invested in the shift, with forecasted growth from as-a-service-type offerings projected to drive increasingly greater revenue:

Exploring the Unexplored Benefit of This Shift

As more technology sellers work to build usage-based solutions to meet demand, there lies a benefit few are talking about – one that is uniquely effective in an environment with higher costs and economic turbulence.

By choosing as-a-service offerings, buyers and sellers alike are shifting technology from a capital expense to an operating expense. Here’s why that’s important:

  • Capital budgets and spending have direct balance sheet implications, often requiring a formal approval process, whereas monthly operating expenses typically live within a manager’s budget and roll up to the income statement.
  • As a measure of expense control, capital budgets are often limited in times of economic volatility. Paying the full cost of servers might be debated during budget discussions, but a minimal monthly subscription for data center services could avoid the budget scrutiny altogether.
  • Capital expenditures generally take on a long-term commitment, whereas subscription or as-a-service-based solutions are far shorter term, more flexible, and easily canceled – often cementing them as an operating expense or cost of doing business.
  • The above benefits can make it easier for technology buyers to keep technology needs in their budget, even when they’re under pressure. In fact, they might even lead to an affordable way to expand investment into new technologies when budgets are tight.
  • Consistent, affordable payments give buyers an easier path not only to make technology investments, but to stay on the cutting edge of technology. As the payments become a relatively fixed cost of doing business over time, upgrade decisions become far easier and can avoid the complex capital budget approval process.
  • In the same way buyers benefit from this approach, technology sellers benefit from a sales process that’s more solution-oriented than purchase-price-centered.

Potential Roadblocks Ahead

As they add as-a-service and usage-based capabilities, technology sellers are increasingly using their own balance sheet to build these solutions. But effectively doing so requires significant capital upfront, recovered over longer payback periods. Too much of this kind of financial circumstance can – and is increasingly starting to – lead to squeezes in their cash, cash flow, and overall financial positions.

As the industry explodes in this direction, their realization that they are not a bank will require deeper partnership with banks and other financial institutions to fuel growth. In fact, 78% of technology sellers report that the biggest hesitancy to expand their own as-a-service capabilities is the near-term capital required to fund the effort.

LEAF can help.

For over 20 years, LEAF has supported technology sellers with creative solutions to sell or acquire technology. With a track record of helping sellers build and deploy strategic use-based and as-a-service solutions, we offer the unique ability to scale expansion into this area while minimizing the financial pressures associated with the effort and, most importantly, help your customers with all the benefits of this acquisition approach.