Capital spending is a major obstacle for companies that rely on a lot of heavy equipment or infrastructure. Construction, logistics, mining and manufacturing companies traditionally purchase the equipment they need to keep operating.
While owning the equipment gives them control, it also ties up a lot of capital, racks up maintenance bills, and puts them at risk of underutilizing their assets when they’re not in use.
A big change is taking place at the moment. Across many industries, companies are moving away from the old model of purchasing and owning expensive assets and instead turning to on-demand access to the equipment and infrastructure they need. This change revolutionizes the way these companies allocate capital and manage their risks.
The problem of being a capital intensive company
Historically, ownership was viewed as a necessity in industries where access to this equipment was critical to getting the job done. Contractors are buying excavators, trucking companies are buying fleets of trucks, and manufacturers are building additional capacity so they can meet demand without relying on outside help.
But this model comes with a whole series of problems:
- You have to spend a lot of money upfront to buy the equipment.
- The equipment loses value quickly, so after just a few years you will only have a fraction of what you paid for it left.
- There are also ongoing costs for maintenance and storage.
- You keep the equipment even when you don’t need it – which is a waste of money.
- And there’s the risk that you’ll buy a lot of equipment and then struggle to use it all when demand drops.
In fact, many companies have devices that are not used frequently. Equipment purchased for peak demand simply sits idle between projects or during downturns, meaning you’re wasting good money after bad money that doesn’t generate real value.
This gets worse as margins get thinner, competition gets tougher and the pressure to get capital allocation just right increases.
The shift towards access rather than ownership
To get around these problems, companies are starting to adopt the “access over ownership” model. Instead of purchasing equipment that may not even be used all that often, companies are turning to leasing or renting the equipment and infrastructure they need on-demand.
This model is already well established in other areas. Cloud computing makes it possible for all IT hardware not to have to be lying around on site. Mobility platforms allow people to use cars without having to buy them. And the same idea is now being applied to physical equipment and infrastructure.
In the construction industry, for example, contractors are forgoing their own fleets and instead using rented equipment for the job. They maintain a core set of assets that they own and use, and then rent or lease the rest as needed for specific projects or phases.
This allows companies to adapt their spending to their actual needs.
What are the financial benefits of an on-demand infrastructure?
One of the main benefits of this approach is that it allows you to reduce your capital expenditures. Because you don’t have to spend a fortune upfront to purchase equipment, you can free up your capital for other important priorities like expanding, updating your technology, or hiring more staff.
Key financial benefits include:
- You don’t have to spend a lot of money upfront to buy new equipment.
- Your cash flow is more predictable because you only pay for equipment when you need it.
- You avoid all the depreciation costs that come with owning things that don’t give you a good return.
- You save maintenance and storage costs.
- And your operating costs become more predictable, making budgeting and planning easier.
Treating access to equipment as an operating expense rather than a capital expense gives you more flexibility and the ability to respond better to changing market conditions.
How on-demand infrastructure improves asset utilization
Another big problem with the old model is that many resources end up being underused. Some devices are used often, while others lie idle forever. This reduces your overall return and makes it more expensive to complete the order.
However, leasing or renting the equipment you need on-demand allows you to better tailor its usage to your needs. The equipment is used when you need it and is back on the market when you don’t need it.
This approach also means you can access the specialized equipment you need for specific tasks without having to purchase it and then store it in a warehouse somewhere.
This gives you more flexibility and scalability
In today’s business world, demand can change overnight. Project pipelines can rise or fall, schedules change, and market conditions change. And in such an environment, the flexibility to quickly scale up or down is a huge advantage.
On-demand infrastructure allows you to scale your operations without being tied to an asset base. When demand increases, you can buy more equipment to meet demand – and when demand decreases, you can reduce spending and save some money.
And this is particularly useful in construction, where different projects require different types and amounts of equipment at different times.
Digital platforms make it much easier to track down and access the equipment you need. Platforms like Quotor give you an overview of what’s on offer so you can find the equipment you need without having to buy it yourself.
Reducing the risk of uncertain markets
Finally, in the long term, on-demand infrastructure reduces the risk of purchasing a lot of devices that may not be used as often as you thought. In industries where the market is volatile – and there are many industries at the moment – a real problem is that you buy equipment in a boom and then leave it unused in a bust.
However, if you only lease or rent the equipment you need, you aren’t making a long-term commitment. You can adjust your resource usage as the market changes – meaning you can avoid the costs of maintaining unused equipment.
This risk mitigation is becoming increasingly important as the industry currently struggles with the overall volatility of the market.
Technology makes everything possible
Ultimately, all of this is made possible by the rapid advancement of digital technology. Online platforms, data analytics and real-time tracking make it easier for companies to find, compare and access the resources they need. These technologies make it much clearer where to find the equipment you need and how much it costs, allowing companies to make decisions much faster and with much more information. And what’s more, they make it much easier to source the equipment you need from multiple suppliers without the associated hassle.
As more companies move to digital technology, on-demand infrastructure is becoming more integrated into industry workflows, especially in places where equipment plays a large role.
A change in the way companies handle capital
The idea of on-demand infrastructure is part of a much larger shift in the way companies think about capital – instead of just tying up their money in physical assets, they are starting to really value things like flexibility, efficiency and the ability to adapt quickly.
This shift does not mean that they will no longer own assets. Many companies still have the equipment they really care about right on site. But the balance is shifting. People are becoming increasingly selective about what they own, instead using access models to fill gaps and manage everyday things that are difficult to predict.
In construction, this is a fairly fundamental change in the way equipment is procured and used.
Wrap up
Reducing capital costs through on-demand infrastructure is more than just cheap – it’s a way for companies to respond to the problems that arise from the way they used to own things and the fact that things are moving very quickly.
By switching from owning things directly to having access to them whenever you need them, companies can do many good things, such as keeping their equipment running most of the time, reducing the loss of money due to financial risk, and deploying their capital in a place where it will produce a better return. As more platforms are built for digital things, this model will continue to grow in asset-intensive industries.
