Hardware solutions (no longer just the box)
The global Capex computer hardware market is forecast to reach USD$1,518bn in 2026 at 5.3% CAGR, whilst the Opex Hardware-as-a-Service market is expected to grow at a 25% CAGR to USD$300bn by 2027.
Sources: The Business Research Company, PR Newswire.
© Purtikka Dutt
Should you be funding your customers’ investments?
Customer demand over the past 10 years has shifted away from Capex hardware purchases towards Opex-based solutions, delivered as a service which includes tools, applications and management systems in addition to the hardware. In some markets the hardware device itself is now expected to be a virtualized software solution.
Customers typically want Opex-based solutions to reduce their net capital demands, freeing up cash to be invested in growth. They also seek pricing based on usage, which gives greater operational flexibility, and solutions that include maintenance of the hardware by the vendor (which is often an operational burden for the customer).
Developing and selling hardware-based solutions presents many challenges and often requires a complex, two-speed organisation. Skills, processes and financing are different for hardware and software: selling a box is a one-off but a service is a continuous engagement with the customer. Hardware development takes years, software just months.
Despite the challenges, there are considerable investor benefits to selling solutions compared to only the hardware. Driven by higher margins on the software and services, and by increased customer lifetime value due to higher switching costs and closer customer relationships, hardware solutions generate greater EBITDA, and valuation multiples tend to be higher at exit.