In the past, businesses and consumers would typically buy new technology when needed. However, there has been a growing trend towards renting or leasing technology instead in recent years. This model, known as Device as a Service (DaaS), is quickly gaining traction for a number of reasons. When properly negotiated and executed there may be many advantages for DaaS solutions. As with all equipment financings, it’s all about the fine print on terms and conditions.
What is DaaS?
Device as a Service (DaaS) is a subscription-based model that provides businesses access to the latest technology without purchasing it outright. Under a DaaS agreement, a provider delivers and manages the devices, software, and services that businesses need, and the customer pays a monthly fee. DaaS has been promoted for years by many equipment manufacturers and technology value added resellers (VARS), however very few have truly offered a contract that is an operating expense vs a finance lease because the manufacturers and VAR’s don’t have the balance sheet or the appetite for risk to offer a TRUE DaaS model. The terms and conditions of the financing are typically designed with hooks to ensure the equipment is fully paid for by the business resulting in little to no risk to the service provider.
Why is DaaS becoming popular?
There are a number of reasons why DaaS is becoming popular, including:
- Environmental benefits: DaaS can help businesses reduce their environmental impact by keeping devices in use for longer periods of time. When you buy a new device, it is likely to end up in a landfill within a few years. However, when you rent a device, it can be returned to the provider at the end of your lease and refurbished or recycled. This helps to reduce the amount of waste that ends up in landfills.
- Cost savings: DaaS can save businesses money in a number of ways. First, businesses don't have to pay for the upfront cost of purchasing new devices. Second, DaaS providers typically take care of all of the maintenance and repairs, saving businesses a significant amount of money over the device's lifetime. Third, DaaS providers can offer businesses discounts on bulk purchases, further reducing costs.
- Flexibility: DaaS allows businesses to be more flexible in their technology needs. If a business needs to expand or contract its workforce, it can adjust its DaaS subscription accordingly. DaaS also gives businesses the flexibility to upgrade to new devices as they become available without purchasing them outright.
- Scalability: DaaS is a scalable solution that can grow with businesses as their needs change. If a business needs to add more devices or users, it can easily do so without investing in new hardware or software.
- Security: DaaS providers typically have a team of experts responsible for managing the devices and data security. Knowing that their IT infrastructure is in good hands can give businesses peace of mind.
Types of DaaS
There are two main types of DaaS:
- End-user computing (EUC) DaaS: This type of DaaS provides businesses access to laptops, desktops, and other end-user devices.
- Infrastructure as a service (IaaS) DaaS: This type of DaaS provides businesses with access to servers, storage, and networking resources.
Benefits of leasing for DaaS projects
There are a number of benefits to leasing for DaaS projects, including:
- Reduced upfront costs: Leasing allows businesses to avoid the upfront costs of purchasing new devices.
- Flexibility: Leasing gives businesses the flexibility to change their device needs as they evolve.
- Reduced risk: Leasing transfers the risk of maintenance and repair to the lessor.
- Improved IT agility: Leasing can help businesses improve their IT agility by freeing up IT resources to focus on other priorities.
How to choose a DaaS provider
When choosing a DaaS provider, there are a few factors that businesses should consider, including:
- Reputation: Ensure the provider has a good reputation and is known for providing quality service.
- Pricing: Compare different providers to find the best deal for your needs.
- Support: Make sure the provider offers the level of support that you need.
- Features: Make sure the provider offers the features that you need, such as device management, security, and maintenance.
How to ensure the DaaS financing component has the right flexibility for your business
When reviewing the terms and conditions for a DaaS contract there are several factors that businesses should be aware of that materially impact the total cost and financial flexibility of the contract. These contracts are marketed as a “Consumption Model” however the terms and conditions of the contracts do not allow the business to return the asset without a financial obligation. Here are just a few of the many items to consider prior to entering into a DaaS contract.
- Develop a financial model to test the thresholds for operating expense vs finance lease for the new ASC842 lease guidelines.
- Review and ensure that you fully understand what the financial obligations are at any point in the contract for an early termination.
- Understand the difference between interim payments, progress payments and base term commencements to understand the total cost of the contracts.
- Understand the relevance of the stipulated loss value (Stip Value) or Termination Value (TV) tables and how these values impact the total cost of the contract in the event of early termination.
- Review the end of contract options to ensure you have complete flexibility to go month to month and return any or all of the assets at end of contract without any obligations for first right of refusal or renewal options with the existing DaaS provider.
- In the event your business decides to change technologies, brands, or VAR’s, it’s imperative to have a detailed understanding of the equipment return rider provisions and what the equipment repair or replacement charges would be.
- Know in advance if the funding portion of the contract will be sold / assigned to another financial party.
- Make certain to receive a complete estimate for any and all UCC search and UCC filing and documentation fees.
- Review the financial analysis with your auditor to get their opinion if the contract qualifies as an operating expense or a finance agreement that will be viewed as additional debt.
- Consider and measure the total cost of an operating lease vs the financial obligations for the DaaS contract to ensure you have all of the flexibility you need AND the lowest possible total cost of contract. You might be surprised at the comparative analysis of the cash flows.
Conclusion
DaaS is a rapidly growing market that will likely continue to evolve and mature. As the DaaS solutions mature and the benefits of DaaS become more widely known, we can expect to see even more businesses and consumers adopting this model.
If you are considering DaaS, it is important to research and choose a provider that is right for your needs. With so many DaaS providers on the market, there is sure to be one that can meet your requirements. Blue Sky Capital Strategies offers advisory services backed by real time market intelligence and over two decades of equipment financing experience to ensure companies realize the lowest total cost of contract with the most financial flexibility for the equipment.