Underwriting for Consumption Risk: A Guide for EF Leaders 

Equipment vendors and financiers must rethink traditional underwriting as businesses shift from asset ownership to pay-per-use models, according to John Sullivan, a director at The Alta group who serves clients in the Strategy & Competitive Alignment practice. 

In a recent article in The Monitor, he warns that managing consumption risk — not just asset risk—is critical to sustainable profitability.  

“The rising demand for consumption-based models is fueled by several factors,” Sullivan writes. “Companies now favor predictable, scalable operating expenses over large upfront capital investments, preserving cash for strategic growth initiatives instead of locking it into depreciating assets. Consumption models also allow businesses to scale usage based on actual need, reducing waste from overprovisioning.” 

A fixed-payment lease is generally categorized as a capital expenditure, but consumption-based deals are a hybrid, he adds. The fixed portion may be treated as capex, but the uncommitted variable portion may be treated as an operating expense. This dual classification appeals to CFOs aiming to optimize balance–sheet presentation and improve financial ratios, Sullivan writes.  

Vendors, Lessors Must Embrace Consumption Models  

Consumption models drive predictable, recurring revenue streams, according to Sullivan. The upfront revenue per transaction may be smaller, but the total customer lifetime value often increases substantially. 

“Customers integrated into consumption models are less likely to switch vendors, creating stronger, more durable relationships,” he writes. “Real-time usage data enables vendors to refine product development, optimize pricing strategies, and enhance customer success programs.”  

For lessors, experience managing residual value risk translates well to underwriting consumption models. And in many cases, he adds, the risk profile is comparable to traditional FMV leases, offering new revenue opportunities without a significant increase in risk exposure.  

Understanding Consumption-Based Financing   

A simple car rental may include a fixed daily fee plus a variable charge based on miles driven, according to Sullivan. Similarly, in technology financing, usage-based pricing structures are becoming increasingly common:  

• Networking equipment may be priced based on port usage.  

• Servers may be metered by memory consumption (e.g., virtual machines) or server node utilization.  

• Software solutions may employ per-user, per-transaction, or per-processing-cycle billing models.  

“Ultimately, any asset where usage can be accurately measured can be structured as a consumption-based financing deal,” he writes.  

Reframing Risk: From Residual Value to Real-Time Returns  

If a lessor is comfortable assuming 20-25% residual risk on an FMV lease, why not take on a comparable level of consumption risk? The capital at risk remains the same, according to Sullivan. He points to key differences in how returns are realized:  

• Traditional FMV lease: The lessor earns zero return on the residual value (RV) investment until the EOT phase.  

• Consumption-based structure: Any variable usage during the firm term provides an immediate return on the capital at risk.  

Consumption-based deals often command a pricing premium to compensate for variability. Properly priced, these models offer a risk premium that can significantly enhance portfolio profitability, Sullivan writes.  

New Territory for many EF firms  

Because of the number of variables, consumption-based financing is an area where having sound advice can be essential to a successful new product offering. Putting in the work upfront to fully understand the expected usage case is critical in determining pricing and structuring the deal. 

For many EF firms, having an experienced advisor like The Alta Group can make a difference. 

“By applying structured pricing, building cushions for variability, and leveraging end-of-term revenue strategies, lessors can confidently extend flexible financing to meet the evolving needs of modern enterprises,” Sullivan writes. “In an economy increasingly driven by pay-per-use models, those who adapt their underwriting frameworks will secure a decisive strategic advantage.” 

Read the full article in the Monitor. 

The Alta Group’s advisory team is uniquely qualified to help clients assess readiness, develop strategic roadmaps, and implement pay-per-use and Equipment-as-a-Service programs. Learn more about our capabilities, and contact us for tailored support in consumption-based models. 

John Sullivan is a Director at The Alta Group, serving clients within the firm’s Strategy & Competitive Alignment practice. He spent more than 25 years as a global leader at Cisco Systems Capital, where he led the launch of Open Pay, the company’s first consumption-based financing model.