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Technology

Subscription Services in Manufacturing – Lexology

Manufacturing businesses, like many others, are facing the challenges and disruptions caused by COVID-19 and are likely to be compounded by the emergence of new challenges, such as the UK-EU trading relationship and post-Brexit regulations. As a result, these businesses are considering what steps they might take to mitigate against supply chain disruption in the future, Increased investment in automation and technologies is likely to be one of the key components in returning to pre-COVID-19 capacity and insuring against future disruption, as social distancing measures look likely to be in place for some time. Robot density figures for the UK are below the world’s average, which demonstrates that the UK has plenty of scope to further automate. Not only can automated industrial systems increase production capacity, but the quality of that production can be improved, along with greater safety for the employees operating the equipment. These systems can also be configured to provide more accurate data to optimise weak points and greatly decrease product defects due to human error.

A trend growing within the manufacturing industry, which we think will continue as more businesses consider implementing new technologies and automation, is subscriptions-based services. As well as the increased use of cloud-based services, in relation to AI and automation software, it is likely that the use of subscription-based models for equipment will also increase in the manufacturing industry, as pressure continues on both the equipment providers to reduce their costs and manufacturers to adapt to change. “Equipment-as-a-Service” (EaaS) is a concept in which machinery, equipment or production systems are not purchased, but are provided by a supplier for a period of time in exchange for a fee to use the equipment.

Given how crucial certain equipment and software is to an organisation’s operation, it is unsurprising that manufacturers may still prefer the control and security offered by a traditional software as a licence on-premise solution and owning or taking out a long term lease on equipment. However, the benefits of EaaS, (particularly when integrated with automation and AI technology), include reduced capital expenditure and regular enhancements that can improve equipment. By capturing equipment data, the equipment provider is able to use this for research and development and for predictive maintenance. This can help reduce equipment downtime and allows equipment to keep up with advancements and adapt to customer requirements.

Using a subscription model, customers benefit by not having to invest heavily in equipment, hardware, software and professional skills in order to obtain a wide range of functional capabilities. Also, as payments under a subscription agreement can usually be treated as operating expenditure for the purposes of the P&L account as opposed to capital expenditure, manufacturers have less of an investment in the supplier’s product than is the case with traditional purchasing or leasing options, which gives them more flexibility when considering switching suppliers. Given the nature of these contracts, the smart equipment market is likely to become more competitive and further reduce costs over time. We expect that EaaS providers will typically contract on their own set of standard terms and conditions and, whilst some providers will offer fairly balanced terms to avoid protracted negotiations. Most are likely to use terms that are strongly provider-friendly, excluding all but the most limited warranties and any liability for loss of data or service failure. Customer should, therefore, look to build in certain contractual protections for themselves, although the ability to do this will clearly be dependent on the respective bargaining strengths of the parties. At a minimum, an EaaS subscription agreement should clearly set out the equipment being provided, the additional services that the supplier is providing and delineate each party’s rights and obligations.

It will be interesting to see what trends emerge in the market for EaaS contracts over time. We expect a standard agreement to emerge that has similarities to both hire and maintenance contracts (containing delivery, installation and quality obligations) and software subscription agreements (including licensing software, maintenance of the equipment and software and having payment being on a “by use” basis). From a customer perspective, whilst this list is not exhaustive, issues of particular importance are likely to be:

  • Price Increases – the provider may agree to an advantageous initial price, to encourage the customer to sign up for the equipment services; however, the customer should seek assurances that this will not increase excessively over the term of the agreement, which can be done by fixing the price for a set period and/or putting a cap on increases.
  • Service Levels – it will be more important than ever for the customer to ensure that the supplier commits to service levels, which should be specific and measurable to allow assessment of key elements of the service. These should relate to service availability, equipment downtime, and response times to fix/resolve issues. Failure to meet the agreed service levels should result in the supplier having to compensate the customer (usually through service credits) and/or the customer having the ability to terminate the agreement, which puts pressure on the supplier to provide the services to a certain standard. Customers should consider the use of equipment and how critical it is to the business when trying to establish service levels. Standard provider terms may set low service levels or may not include them at all.
  • Data Use/Ownership – providers are likely to host their software services and store all of their customers’ data (including equipment data) in the cloud; therefore, customers should consider (i) the ownership of such data; and (ii) what security arrangements the provider will put in place. Loss of data or being unable to access data can have a serious impact on business, and so the provisions governing the availability of data, loss of data and liability in relation to the same should be given careful consideration.

2021 is going to be an interesting year for manufacturing businesses and how they adapt to the ongoing challenges they face. Investing in smart supply chains that are supported by state-of-the-art equipment, digital technologies, data analytics and artificial intelligence are likely to offer greater visibility and connectivity across the supply chain, and we expect subscription models to assist with access to such advancements.

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