Servitization and cash flow: Why your revenue grows but your cash disappears

Servitization and cash flow: Why your revenue grows but your cash disappears

The servitization paradox

A call that comes most often in late September or early October, when the year's numbers start to stabilize. A manufacturing SME has transformed its business model. Instead of selling outright, it now offers maintenance contracts, support services, remote monitoring. The numbers look promising. Revenue is up 25 to 30 percent. The order pipeline is expanding. EBITDA looks healthy on paper.

Then the CFO calls with a question nobody expects: "How are you financing this? Your cash is negative."

This is not an accounting error. This is what happens when an SME shifts from a transactional model (sell and collect quickly) to recurring revenue without calculating the real cost of that transformation from a cash perspective.

Research conducted on 10,028 companies across 25 countries shows that servitized businesses have higher revenue but generate lower profits as a percentage of sales. The sample contains a higher rate of business failures than expected.

Servitization is a financial transformation that, without deliberate management, turns apparent growth into a liquidity crisis.

This article answers a question nobody asks until it's too late: "How do I convert servitization's recurring revenue into positive cash flow without drowning the company in debt?".

The cash flow reversal: where the problem starts

In the traditional model, cash flow follows a straightforward sequence. You produce a machine (cost 70,000 euros), sell it for 100,000 euros, collect within 30 to 60 days, the machine leaves your balance sheet. You recover your capital investment.

It's simple. Money goes out, then comes back in concentrated and on time.

In the servitization model, the logic reverses completely.

You produce a machine (cost 70,000 euros), keep it on your balance sheet without selling it, the customer pays a monthly fee between 3,000 and 4,000 euros, you'll recover your initial investment after 18 to 24 months. Meanwhile, you finance the production yourself.

The question nobody asks is this: who finances the first month? Answer: your balance sheet.

Consider a real numerical example. An SME producing 100 machines per year:

Scenario A: Traditional sale

• Total investment: 7 million euros in production
• Collections: 10 million euros (immediately after sale)
• Working capital required: limited to 60 to 90 days of production cycle

Scenario B: Machine-as-a-Service model

• Initial investment: 7 million euros (machines stay on your books)
• Average fee per customer: 22,000 euros per year for 5 years
• Total collections per customer: 130,000 euros (distributed over time)
• For 100 customers: 13 million in contracted revenue
• Working capital required: double or triple



On paper, Scenario B looks better (13 million versus 10 million in revenue). In financial reality, Scenario B takes far longer to generate cash.

The real problem isn't price, it's time

Many SMEs ask themselves the wrong question: "Is our pricing adequate?". The right question is: "How much time passes between when I spend 70,000 euros to make a machine and when I recover those 70,000 euros?".

In the traditional model: 2 to 3 months. In the servitization model: 18 to 24 months. That 15 to 21 month difference is everything. Why? Because those 70,000 euros belong to you until you recover them. If you need to fund 100 machines per month and each contract returns your investment after 18 months, your working capital balloons from 70,000 to 1.4 million in less than two years.

For an average SME, that's impossible to finance without external intervention. Academic literature calls this the "fish-model." When your company shifts from upfront revenue (sales) to distributed revenue (subscriptions), comparable revenue performance dips while costs keep climbing. You're in the middle of the fish, where recurring costs accelerate and accounting-recognized revenue oscillates. In year one and two, that bloated belly of the fish is where many SMEs die. Not from lack of orders. From lack of cash. It's a phase you cannot avoid, but it's one you must finance deliberately.

The Servitization Paradox: Why costs climb faster than revenue

It works like this: the company invests in services, revenue grows, but at the same time operating costs grow faster than revenue, and margins compress. In this case, four root causes:

Cause 1: Recurring operational costs

In the traditional model, primary costs concentrate in production. Once sold, the cost drops.

In the servitization model, costs remain fixed for the entire contract duration: technical staff available to the customer, scheduled maintenance, spare parts, monitoring software, logistics, customer service. These costs don't disappear. They remain fixed, multiplied by the number of active customers, growing roughly linearly as your customer base expands.

Cause 2: Uncontrolled cost-to-serve

An SME thinks: "The contract is worth 22,000 euros per year, so it's profitable." The correct question is: what does it actually cost to serve that customer for five years? If maintenance costs 4,000 euros per year, logistics costs 2,000 euros, and dedicated personnel costs 3,000 euros, you're at 9,000 euros annually. Multiply that by five years: 45,000 euros.

Contract revenue: 110,000 euros (22,000 times 5). Total cost: 45,000 euros. Gross margin: 65,000 euros.

On paper that looks good. But that margin spreads across five years. In year one, you've incurred 100 percent of the initial investment (70,000 euros) plus year-one costs (9,000 euros), totaling 79,000 euros. Year-one collections are 22,000 euros. That's a cash shortfall of 57,000 euros. For 100 customers, that's 5.7 million in negative cash in year one alone.

Cause 3: Organizational complexity

Service operations require a different organizational structure. You need maintenance teams, intervention scheduling systems, contract management, per-customer cost tracking. In year one of a servitization model, that infrastructure cost isn't spread across anything. If you have 20 customers and infrastructure costs are 200,000 euros, you're allocating 10,000 euros per customer. When you reach 100 customers, that drops to 2,000 euros each. But today with 20 customers, it's a weight crushing your cash flow.

Cause 4: Building initial trust requires management overhead



In year one, nobody knows if your service operations will work. Customers demand transparency, metrics, reassurance. Customer success costs and performance-risk management are high. Over time, they decline.

So when does it actually make sense? Three scenarios

Not all servitization models carry the same financial profile. Italian industrial research documents that only 4 percent of industrial companies generate recurring revenue from digital services linked to machinery. Where they do, service margins run twice what equipment sales produce (15 to 25 percent). The model works, but only under specific conditions.

Scenario 1: Sale plus aftermarket services (The prudent approach)

The SME sells the product as before but adds high-margin services on top.

• Maintenance: customer pays
• Spare parts: customer pays
• Support: customer pays

Capital required: low (customer still finances the machine)

Recurring revenue: medium to high (they're add-ons, so 15 to 20 percent of total revenue)

Financial risk: low

When it makes sense: when you have

• Established customer base
• Limited credit access
• Tight margins on sales

An SME with 500 customers selling maintenance at 30 percent margins adds at least 50,000 to 70,000 euros of annual cash without financing anything. It's the lowest-risk model because the customer carries the working capital and you layer high-margin service on top.

Scenario 2: Scheduled maintenance contracts (the balanced approach)

The SME retains ownership of the machine but the customer pays a monthly fee.

Capital required: medium (you finance the initial investment; customer pays monthly)

Recurring revenue: medium (higher than traditional sales but distributed)

Financial risk: medium

When it makes sense: when you have

• Available credit lines
• 50 plus customers in the pipeline
• Ability to deliver standardized service

In this scenario, your negative cash flow in year one is predictable and financeable. After 18 to 24 months, you start generating positive cash flow and can finance the next customer from earlier customer flows. Most Italian SMEs should consider this their first step into true servitization.

Scenario 3: Pay-Per-Use or Performance-Based (the ambitious approach)

The customer pays only for what they use or for the results they get. You absorb performance risk.

Capital required: very high (you fully finance the customer; you absorb usage risk)

Recurring revenue: potentially very high (if the customer uses a lot)

Financial risk: very high

When it makes sense: when you have

• Access to structured financing (not traditional banking but private credit, infrastructure funds)
• Partnership with a specialized finance provider
• Sufficient customer scale (50 plus)
• Ability to predict failures and control costs

This is the model that brought us Rolls-Royce jet engines (pay-per-flying-hour) or Xerox photocopiers in the 1970s. For a 10 to 50 million euro SME, it's better to test this after consolidating one of the earlier models.

How it actually works: cases that succeeded (and what they cost)

It's not all theory. Three companies built servitization models and chose to do so publicly. Their numbers tell the story.

Rolls-Royce: Pay-Per-Flying-Hour (the model that worked)

Rolls-Royce offers aircraft engines under "TotalCare" contracts. Customers don't buy the engine. They pay per flying hour. Billing is fixed dollars per flight hour. "We are only rewarded for engines that perform."

The numbers: over 90 percent of Trent engines (the primary model) operate under LTSA (Long-Term Service Agreements). Each initial contract runs 12 plus years with renewals around 8 years. By 2024, Rolls-Royce had 248 LTSA contracts on roughly 4,000 engines in service.

The cost of this model: Rolls-Royce recorded a 5.6 billion dollar loss in March 2021. Why? When the pandemic grounded planes, revenue collapsed (no flying hours, no billing), but fixed costs remained. Rolls-Royce research on this model in 2016 emphasized that "the company must decide whether it prefers upfront cash or long-term profitability." Rolls-Royce chose the long game. By 2023, service revenue was still down 11 percent from 2019 levels.

The lesson: pay-per-use works. It transfers volume risk from the customer to you. When that risk materializes, the impact is catastrophic.

How do they finance it? Rolls-Royce talks about "net LTSA balance" as the critical KPI with investors, not revenue. Net LTSA balance is the difference between present value of future flows and costs already incurred. In July 2024, CFO Helen McCabe told analysts: "We continue to expect the net LTSA balance growth to be towards the lower end of the range of GBP 0.8 billion to GBP 1.2 billion, as shop visits ramp up in the second half of the year." She wasn't discussing sales. She was discussing the financial structure's balance.

Heidelberg: subscription contracts (the growing model)

Heidelberg (offset printing presses) launched its first subscription contract on February 6, 2018, with a customer named WEIG. Instead of selling the press, Heidelberg retained ownership. The customer pays a monthly fee plus per-page charges above the agreed-upon volume.

The numbers: by 2024, Heidelberg had roughly 400 subscription contracts (Print Site Contracts) and recurring revenue represented over 10 percent of total revenue. Customers on this model show "an average 20 to 30 percent higher machine capacity utilization" than traditional customers. For Heidelberg, the incentive flipped. Cutting maintenance costs no longer made sense. The more available the machine, the more the customer pays in volumes. Incentives aligned.

How do they finance it? For external financing, Heidelberg brought in Munich Re. Marcus A. Wassenberg, Heidelberg's CFO, said in November 2021: "We're proud to have gained Munich Re as a strategic partner. It shows us we're on the right track with our digital business models." In this structure, Munich Re (through subsidiary relayr) takes ownership of the physical machine and finances the investment. Heidelberg delivers service and revenue. Munich Re carries investment and credit risk.

TRUMPF: Pay-Per-Part (the high-risk model)

TRUMPF (laser cutting) launched a "Pay-Per-Part" contract on October 14, 2020, with Munich Re. The customer doesn't buy the laser. They don't pay a fee. They pay a fixed price for each piece the laser cuts. If the laser produces 100 parts per month, they pay for 100. At 50 parts, they pay for 50. Munich Re finances the machine, TRUMPF operates it, relayr supplies the IoT metering infrastructure.

The numbers: the first documented customer is Reiff Umformtechnik, announced September 20, 2023. By 2023, the model was live in Germany, Austria, the Netherlands, and Switzerland, limited to the TruLaser Center 7030 (laser cutting). Exact customer count remains unpublished. TRUMPF itself says: "We are venturing into new business models more prominently than ever before."

How do they finance it? Munich Re takes 100 percent of investment risk. TRUMPF assumes performance risk (the machine must work). The customer assumes volume risk (no parts produced, no payment). Mathias Kammüller, TRUMPF's Chief Digital Officer, said: "It is the first step towards providing our customers with an alternative to the traditional purchase of machines."

The structure: relayr collects metering data (how many parts, when, performance), TRUMPF uses it for billing and predictive maintenance, Munich Re uses it to evaluate risk and monitor loan performance.

The accounting: where you discover if the model really works

An invisible trap awaits every OEM moving to subscription: IFRS 15 accounting. In the traditional model (machine sale), you recognize revenue and cost on the same date, done. In servitization, revenue spreads across 5 years (the contract) but costs concentrate in year one (investment plus setup). On the balance sheet, you recognize revenue when the customer takes the machine (IFRS 15), not when they pay the fees. Unpaid portions remain on your books as "future subscription" (a multi-year receivable of sorts).

Rolls-Royce publishes its "net LTSA balance" each quarter: the total amount of contracted future revenue, net of costs already incurred. In February 2024, Rolls-Royce CFO David Smith noted: "[IFRS 15 would] bring profit performance for original equipment more in line with cash generation." Translation: IFRS 15 accounting tells you that you're profitable (profit distributed), but cash tells you that you're bleeding (investments concentrated). Accounting follows the contract, not the money flow.



Another trap: operating leases stay on your balance sheet for their duration. If you retain 100 machines under operating lease, they all sit on your assets, depreciated year by year. Your debt-to-assets climbs. Banks notice.

In Italy specifically, Article 96 of the Consolidated Tax Code applies interest deduction only to financial leases, not operating leases. If your model is operating lease, financing costs don't get fully deducted. That cuts into the tax advantage of the structure.

Distinguishing profitability from liquidity

One of the most common mental traps for SMEs is confusing "profit" with "cash." A servitized company might show: revenue growing 30 percent, order pipeline expanding 50 percent, EBITDA up 15 percent, operating cash flow down 20 percent, debt climbing.

That's not contradiction. It's the rule in year one and two of servitization.

Why? Your P&L says:

• Revenue: 13 million (contractual revenue recognized for 2026)
• Costs: 11.3 million
• EBITDA: 1.7 million

Your cash flow says:

• Year-one collections: 2.2 million (only initial fees and year-one payments from earlier customers)
• Year-one investments: 7 million (the 100 new machines)
• Operating costs: 11.3 million
• Cash generated: negative 16 million

These numbers don't contradict each other. EBITDA shows as positive through accounting recognition, but the actual money won't arrive for 5 years. The danger is that your bank looks at cash flow, not EBITDA. If your credit line ties to EBITDA and debt-to-EBITDA, you're safe. If it ties to cash flow, you're in trouble.

An SME that misses this distinction moves from "our business model is better" (true from accounting) to "we have a liquidity crisis" (true from cash) in under a year.

Four financial changes that matter

Here's what actually happens when an SME servitizes:

Planning the transition Without Sinking (A Realistic Roadmap)

If your SME wants to servitize without triggering a liquidity crisis, a path exists.

Phase 1: Aftermarket Services (Months 0 to 12)

Aim: add high-margin services without changing the financial model.

Actions:

• Structure maintenance, spare parts, support offerings
• Target margin: 35 to 40 percent
• Financing required: minimal (customer already owns the machine)

Result: you add 10 to 15 percent to revenue without changing working capital.



Phase 2: Scheduled Maintenance Contracts (Months 12 to 24)

Aim: shift from transactional to recurring revenue.

Actions:

• Offer annual maintenance contracts (customer pays a fee)
• Grow the portfolio gradually
• Establish a credit line to cover the cash gap

Result: year one is tough (negative cash); year two and beyond, year-one customer cash finances new customers.

Phase 3: Digitalization (Months 24 to 36)

Aim: scale service operations without multiplying costs.

Actions:

• Deploy IoT and remote monitoring to cut emergency interventions
• Use predictive maintenance to prevent failures
• Automate billing

Result: margin per customer improves (cost-to-serve drops) and cash flow accelerates.

Phase 4: Outcome-Based (Month 36 and beyond)

Aim: capture a bigger slice of the value created.

Actions:

• Price based on usage, availability, performance
• Transfer performance risk into the contract structure

Result: revenue potentially doubles; financial risk climbs.

Financing tools: seven families of instruments

Sustaining the phase where costs are already spent but revenue trickles in over time requires financial sophistication beyond standard bank lending. Available tools split between two critical variables: how many recurring contracts you already hold and how much credit risk you'll accept on your books versus how much you'll pay to transfer it to someone else.

The international taxonomy qualifies four forms as Product-as-a-Service: operating leases, pay-per-use, pay-per-performance, and subscription. The basic definition: "In a PaaS model customers pay for the services and outcomes a product can provide, rather than for ownership of the asset itself." Beneath that single definition sit radically different financial structures with different tax and balance-sheet implications.

Family A: Operating Lease, Vendor Finance, Captive Finance

Operating lease

The customer uses the asset for a defined period without acquiring ownership. Operating leases carry no buyout option and can be arranged by non-regulated entities with risk transferred to third parties. Unlike financial leases (where the user absorbs all risks, including loss), operating leases don't load risk onto the customer.

Italian tax note: operating lease fees are "100 percent deductible for both IRES and IRAP" with VAT recovery. It's not debt. It's a service. It doesn't generate fixed assets on the balance sheet. Typical duration: 12 to 72 months. In Italy, this practice struggles against the tradition of outright purchase.

Vendor financing

A specialized financial partner (often a leasing company or captive finance firm) finances the end customer's acquisition of "as-a-service" equipment while you collect immediately. The customer doesn't pay you a fee. They pay the financing company. You collect 100 percent upfront minus a 2 to 3 percent partner fee. Credit risk shifts to the financial partner, not to you.

Advantage: zero effort managing customer credit, immediate cash collection.

Disadvantage: lower margins per contract (the partner takes their cut) and dependence on partner availability for each new customer.

Factoring of recurring revenue

The company transfers to a factoring firm the credits generated by contracts (monthly fees, pay-per-use rates) and collects a portion immediately.

The pro solvendo form leaves you liable if the customer defaults (you retain credit risk), so it costs less (2 to 4 percent of transferred credits).

The pro soluto form transfers the risk entirely to the factor (if the customer doesn't pay, the factor loses, not you) but costs more (4 to 8 percent of transferred credits).

Advantage: you collect 95 to 98 percent of credit value immediately.

Disadvantage: the cost recurs and eats into margins over the contract duration.

Captive finance

A financial company controlled by your OEM group (or broader industrial group) that finances end customers. It keeps capital within the group and improves control of customer financial relationships but requires dedicated financial expertise and banking regulation compliance. Structurally similar to an SPV but under your direct control.

How it works: you produce a machine for 70,000 euros and sell it to your captive finance company for 70,000 euros. The finance company leases it to the customer at 22,000 euros per year. The finance company funds itself through dedicated credit lines (secured by contract flows). You have zero working capital because the finance company carries it. Risk stays segregated inside the finance company.

Advantage: you completely isolate risk from your parent company's balance sheet and can apply more aggressive leverage without hitting your credit standing.

Disadvantage: substantial legal and administrative complexity, separate governance required. Not all credit providers accept small SPVs. It's ideal for industry networks wanting to jointly finance the transition and share the vehicle.

Family B: Pay-Per-Use (Third-Party Financed vs Direct OEM)

Pay-Per-Use Financed by Third-Party Owner

This structure solves the OEM's balance-sheet problem completely because the machine isn't yours. An external lessor retains ownership, finances the asset, and the customer pays only for actual consumption. The lessor commits: "no minimum monthly payment. You pay only when you use the equipment."

The structure is explicit: "risk sharing arrangement where payment is due when assets are used" with "customized modeling per asset category given variations in economics and utilization." Telemetry and IoT are prerequisites. Without real-time usage data, the lessor cannot bill correctly.

Operationally, the structure splits into two layers:

• Billing layer: usage-based invoicing (automated through a subscription management platform handling quote-to-cash and revenue recognition)
• Funding layer: the lessor provides asset financing.

Example of partnership: in July 2022, a subscription management platform automated consumption-based billing while a European lessor provided financing, including extended asset life and options on refurbished equipment. Initial rollout in France and Germany.

Advantage: you finance nothing; the customer pays only for use; the lessor carries residual value risk (if the machine deteriorates faster, they absorb it).

Disadvantage: lower margins for you (the lessor takes a cut) and less control over the customer relationship.

Pay-Per-Use delivered directly by OEM

Variant without an external financial partner. You deliver the service directly, retaining machine ownership. Typical duration is 5 years with payment tied to production units (for pharmaceutical components: customers pay per thousand pills pressed). The customer gets purchase rights at residual value or return at term.

Advantage: you retain full relationship control and don't depend on third parties.

Disadvantage: you finance the entire asset, assume residual value risk, manage return logistics, and face usage risk (lower customer usage means collapsed revenue).

Family C: asset and credit monetization

Forfaiting

A forfaiter buys your future credits (multi-year fees) at a discount and pays you immediately. Unlike factoring (where risk partially stays with you via pro solvendo), in forfaiting you transfer the entire credit with zero recourse. Risk passes completely to the forfaiter. It's primarily used for international credits and medium to long-term receivables (6 to 10 years).

Advantage: immediate and complete payment, credit risk transfers to forfaiter, useful for exporters and OEMs with international customers.

Disadvantage: hefty discount (the forfaiter carries all the risk) and complex documentation.

Asset-Backed securitization (ABS) or securitization of service contracts

Future cash flows from a pool of contracts convert to tradeable securities. A Special Purpose Vehicle (SPV, bankruptcy-remote) receives your credits in "true sale," purchased on a daily rather than pledged basis. This makes the facility non-recourse. If the debtor doesn't pay, the risk doesn't come back to you.

How it works: you have 50 contracts, each generating 100,000 euros in revenue over 5 years. The SPV buys rights to these 5 million euros of future flows, issues bonds on the market to raise capital, and you collect immediately (minus structuring fees, typically 1 to 3 percent).

Advantage: you completely transfer credit risk and unlock substantial liquidity.

Disadvantage: requires sufficient volume (at least 3 to 5 million in contracted flows) to be worthwhile and structuring is complex, taking 3 to 6 months.

True Sale (Pro-Soluto transfer)

The mechanics: complete and irrevocable transfer of future credits to the SPV, which acquires them not as pledges but as true property. The advantage is that credits exit your balance sheet, reducing recorded debt and leverage ratios.

Asset-based lending

Connected machinery (traceable, remotely monitored via IoT, with precisely estimable residual value) makes it easier to get financing guaranteed by the asset itself rather than your credit rating alone.

How it works: the banker doesn't just look at your balance sheet but monitors real-time machine data (operating hours, maintenance status, location, performance). This reduces perceived risk. If the customer fails, the banker knows exactly what the used machine is worth and can recover it more easily. So financing costs less.

Advantage: rates run 0.5 to 1 percent lower than standard lending.

Disadvantage: requires solid IoT infrastructure and contracts specifying data ownership and the lender's access rights.

Sale and leaseback

The company sells machines already installed at customers to a leasing firm and takes them back under a fee arrangement, freeing cash without surrendering operating control.

How it works: you've produced 10 machines already at customers generating fees over 5 years. You sell these 10 machines (and associated fee rights) to a specialized leasing firm outright, collecting the present net value today (say, 500,000 euros). You continue supporting the customer, but a leasing firm owns and finances the machines.

Advantage: you unlock substantial liquidity without new balance-sheet debt and maintenance risk can stay with you (for compensation) or shift to the lessor.

Disadvantage: you lose formal ownership control and appreciation potential, and the lessor's cost is baked into the sale-leaseback price.

Family D: Risk transfer (Performance Guarantees and Residual Value Insurance)

Instead of financing directly, transfer performance or residual risk to a specialist insurer.

Performance Guarantees (IoT Coverage / Performance Guarantees)

An instrument designed explicitly for servitized manufacturing. It covers payment obligations arising from the guarantee while backing underperformance risk. If your systems underperform contractual levels, the reinsurer compensates payment obligations to the end customer.

Typical insureds are mid-market mechanical and plant engineering firms shifting toward digital solution provisioning. The benefit: protect your balance sheet and use capital for growth instead of holding it in the business.

The most mature mechanism is energy efficiency insurance. It covers material damage, business interruption, and asset performance. It covers the annual shortfall in energy savings versus the guaranteed savings amount.

Banks and private equity have grown hesitant to provide needed loans for energy efficiency projects. They don't always grasp the technical risk aspects but see it strictly as credit risk. A performance guarantee transforms your technical risk into insurable risk, which financiers understand and reward. Business interruption coverage is particularly attractive because it protects service fee income.

Residual Value Insurance (RVI)

Covers the clearly defined risk of asset value loss at lease end due to unforeseen market swings. It's market risk, not technical risk.



Typical coverage: 30 to 80 percent of estimated residual value.

Financial effect: enables lessors to borrow more against assets with less equity and lets lenders structure higher balloon payments with lower monthly payments (lower fees today because the lessor covers residual risk via insurance).

Typical buyers: leasing companies and lending institutions.

Family E: Operating Lease as CapEx to OpEx Conversion (Italian Market)

Operating lease fees are "100 percent deductible for both IRES and IRAP" with VAT recovery. It's not debt. It's a service. It doesn't generate balance-sheet assets. Duration: 12 to 72 months.

Important technical distinction from pay-per-use: in pay-per-use, payment depends on "one or more reference KPIs" (example: number of components produced). In operating lease, payment follows "temporally scheduled rates" (example: fixed 3,000 euro fee per month).



In practice: using operating lease converts a CapEx (machine purchase) into recurring OpEx, improving leverage ratios and immediate cash flow. The machine stays off your balance sheet, the fee is fully deductible, and the lessor carries all technical and operational risks.

Understanding risk in these models

Moving to advanced models requires grasping how financiers classify risk and value. The lessor's reference taxonomy distinguishes three models:

Product-Oriented Model: the customer owns the asset and carries both financial and operational risks. This is your traditional sales model. Risk passes entirely to the customer.

Use-Oriented Model: you (the supplier) retain legal and economic ownership and assume operational and performance risks. The customer pays for usage, not ownership. This is the "Machine-as-a-Service" model.

Result-Oriented Model: you retain ownership and absorb both performance risk and credit risk. The customer pays for the result produced, not the hours or availability. This is the most complex model, and you carry full exposure.

Adopting a use-oriented or result-oriented model means the financier (whether bank, lessor, or SPV) must price four risk categories separately:

Usage Risk: Repayment of investment is not contractually assured. If the customer uses less than projected, cash flow shrinks and the financier might not recover capital. It's the biggest pay-per-use risk because it hinges on customer behavior, not contract terms.

Credit Risk: Pay-per-use purely doesn't mesh well with traditional credit assessment models (built on historical balance sheets). The financier can't evaluate the company from its financials because future cash depends on consumption. They must use predictive models based on real-time usage data.

Residual Risk: The gap between collateral value and credit can only be modeled through usage assumptions. If the customer uses heavily, the machine deteriorates faster. Residual value, what the machine would be worth at contract end, drops. The financier must estimate residual value based on usage scenarios, not history. It's not an exact science.

Data Integrity Risk: In digital pay-per-use models, the financier must "ensure data integrity in the flow from asset to lessor." If IoT is compromised or data falsified, the lessor doesn't know whether the customer actually used the machine 1,000 hours or 500. This risk became critical with digitalization.

A fifth often-overlooked risk exists: misaligned incentives. The customer tries to cut usage costs. The financier needs to recoup the investment. A structured financier put it this way: the lessee seeks to minimize costs while the lessor seeks to recover investment. How could they ever find success together? This misalignment drives contract disputes, measurement conflicts, and legal risk.

On residual value, the lessor has explicit exposure. Residual value is the estimated future worth of an asset at lease end, accounting for depreciation. In pay-per-use models, this value fluctuates based on "customer behavior-driven revenue swings, requiring tailored strategies to mitigate financial risk." Heavy customer use destroys residual value, and the lessor recovers less than planned.

Managing these risks requires "legally binding risk-sharing agreements." It's no longer just a lease contract. It's a financial instrument that specifically allocates which party bears which risk under which scenarios and for what compensation. Simple pay-per-use contracts don't work. You need sophisticated legal instruments that bind both parties on usage measurement, price calculation, data inconsistency protocols, residual risk allocation, and more.

Choosing the right tool

Don't improvise. Before proceeding, honestly assess:

• How much capital can you afford to immobilize progressively
• How long before recurring revenue can self-finance growth
• How much risk you're willing to transfer

Many companies choose a transitional phase where traditional and servitized models coexist, avoiding immediate dependence on recurring-revenue-only cash flows.

Three KPIs you must monitor

If your servitized SME keeps tracking only EBITDA, revenue, and margin percent, you're flying blind.

Three metrics that actually matter:

1. Customer Lifetime Value (CLV)

CLV = Sum of [(Year-t Revenue minus Year-t Cost) / (1 plus discount rate) to the power of t]

It's not elegant, but it's the only number telling you if a customer is truly profitable. A contract worth 100,000 euros total that costs 95,000 euros to service isn't profitable. CLV at zero or near it means you're burning cash for fictional growth.

2. Cash Conversion

Cash Conversion = Operating Cash Flow / EBITDA

In the traditional model, this approaches 100 percent (cash comes in fast). In servitization, year one is negative (you're spending more than you earn accounting-wise). Year two and three turn positive. Tracking it shows when the model becomes financially sustainable. If it stays negative past year three, you have a structural problem.

3. Cost-to-Serve

Cost-to-Serve = (Staff plus Maintenance plus Logistics plus Software plus Allocated Overhead) / Number of Customers

It must drop each year as you scale. If it stays flat or climbs, you have a structural problem. You're adding fixed costs that don't spread across your growing customer base. Italian servitization research flags cost-to-serve as the most commonly underestimated variable.

The right question at the right time

Servitization is not a yes or no decision. It's a question every SME should ask itself this way: "How much capital am I willing to immobilize for how many months, under what growth scenario, to generate what return?".

If you're willing to immobilize 2 million for 18 months with gradual growth of 20 customers monthly to achieve 150,000 euros CLV per customer (translating to 30 million in total value over 5 years), servitization is for you.

If you lack credit access, your customer base is tiny (under 20 customers), or traditional-sale margins are already thin, servitization is calculated risk, not strategic necessity.



The real transformation is not from "product" to "service." It's from "short-term profit management" to "long-term value management." To do that, you must know what it costs you today, not three years from now when the first customer has remembered what "complaint" means.

Want to dig deeper with someone who actually does this?

Servitization as a competitive strategy—one that lets you escape price-based competition by transforming your product into a high-value service—sits at the heart of transforming your contract models, internal organization, and financial planning. All of that is explored in detail in an interview with Alessandra Gruppi, founder and president of Strategia & Controllo, a consulting firm with over 30 years of experience guiding companies and entrepreneurs through growth, reorganization, and international expansion.

👉 Watch the full interview on YouTube YouTube: Gestire l'innovazione nelle PMI: strategia, servitizzazione e AI.