Tamarack was recently honored by the Monitor as one of equipment most innovative companies. The list includes some of the most respected companies in equipment finance. As a physicist, I find I often look at things a little differently than others. Physicists like the structure of fundamentals, laws in our parlance. The list got me thinking about the fundamentals of innovation and how they affect equipment finance. Most definitions of innovation include the word “new” which creates a challenge for someone looking for fundamentals that sustain over time. What’s “new” today will not be the same as “new” in the future yet no one expects innovation cease – it’s part of our human nature and the driver of economic growth.
Innovation in the equipment finance industry may have lagged over the years because of the general aversion to risk and focus on operational efficiency that often accompanies business model maturity. For me to understand what innovation means to Equipment finance I need to start with a fundamental definition and then apply that cross the value chain to see how innovators like those in the Monitor enjoy success.
In my perspective a fundamental definition of innovation will come from a design thinking perspective - focused on users and improving their lives or outcomes in some way. I agree innovation must include something new, but it’s not defined by products, technologies, or processes alone. Peter Drucker, a master of fundamentals for business and entrepreneurship, gave what I view as the best fundamental definition:
Innovation is an effect in economy and society, a change in the behavior of customers, of teachers, of farmers, of doctors, of people in general.
He then goes further explaining the key to affecting such a change:
An innovation, to be effective, has to be simple and it has to be focused. It should do only one thing, otherwise it confuses. If it is not simple, it won't work.
When combined, Drucker’s comments define three fundamentals for innovation:
- Creates a change in behavior.
- Delivers an economic or social outcome.
- Simple to practice.
A quick note on outcomes. Outcomes are an improvement for the target population, but an improvement in one part of a value chain may disintermediate another, e.g. Amazon’s direct-to-consumer model disintermediated thousands of brick and mortar retail businesses. This effect is particularly sharp in mature, slow to change industries like equipment finance as we will see below.
A not surprising characteristic of the fundamentals is that they are also central tenants of design thinking – users, outcomes, and usability. Thus, for our purpose, understanding what innovation means for equipment finance, we will first identify the people whose behavior we might change by following the journey of both the equipment and the financing. Each touch point of either journey from origin to use to funding has a person whose behavior we can change and is a point at which innovation can occur.
Equipment finance innovation changes the behavior of value chain participants.
As you can see from our figure, targets for innovation in equipment finance include:
- Vendors /Channel logistics partners
Now, when I reviewed the innovators in the Monitor list I had the three fundamentals of innovation from Drucker and these five groups of people in mind. I saw many who touched both the fundamentals and various groups in the value chain list, but four companies stood out. These four are changing behaviors and outcomes for key members of the value chain.
- Kabbage is helping small and medium business leaders see the future by helping them predict cash flow. Their general offering is lending and financial transaction processing, but like a healthcare provider they know that the best way to be healthy is to practice healthy behaviors. The same is true for small businesses – practice behaviors that generate good cash flow and the rest of the success formula falls into place. I expect this offering to change SMB behavior in the same way Apple is changing wellness with the Apple Watch.
- Syndifi is creating a classic two-sided marketplace to enable and empower both lessors and lenders in the same way YouTube connects performers to viewers. A two-sided marketplace changes the behavior and spending habits of both sides of the transaction. The key to facilitating transactions, of course, is trust – both sides must trust the platform that the offerings and purchases alike our honest. If Syndifi can create a baseline of trust I would expect their automation of syndication to transformative.
- LeasePath has taken a full enterprise approach to the integration of the leasing workflow with the business applications and IT afforded by the Microsoft ecosystem. Their enterprise view of technology facilitates transparency to both user and operational leaders because of they have simplified the integration to existing workflows and IT. Making something complex simple is equivalent to reducing cost and as such I expect LeasePath to be the choice of a new group of equipment finance entrepreneurs.
- QuickFi is empowering end users with DIY origination and in the process will transform equipment finance selling. They will change not only lessee behavior with on demand, real time access to more equipment, but in the process but will change behaviors of members of the value chain all the way back to the manufacturers as whole stages are disintermediated.
I believe the future is very bright for equipment finance because it enjoys increasing demand from the experience economy. The experience economy is much more people focused than the previous product and service economies. Innovation may have lagged in equipment finance due to conservative views, but a wealth of new digital technology experiences has created a sense of impending disruption. Those who design with innovation fundamentals – change user behavior, improve user outcomes, make simple to practice – and focus on the key users in the value chain will win the day. Their customers will embrace and enjoy a new experience. Their customers will enthusiastically adopt the innovation.