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The credit squeeze, rapidly-escalating fuel and raw material
costs, an economic downturn as well as CO2 emissions and carbon
footprint issues, have propelled company car costs back into the
headlines.
As a result, companies running fleets of cars are urged to
review their policies regarding car provision and the total cost of
ownership (TCO) to ensure they achieve best value for money for the
organisation and its shareholders.
No longer a straightforward affair
There was a time, not long ago, when fleet management was a
relatively straightforward affair that was carried out by whoever
in an organisation had the spare time.
Realistically now, fleet management, with its associated
operational, fiscal, environmental, corporate social
responsibility, financial and human resources issues is one of the
most complex parts of overall company management – even though it
is rarely regarded as a core competence.
JATO Dynamics is a company that has developed a TCO web-based
system for lessors and fleet managers. Matthew Saunders, fleet and
leasing manager at JATO explains to Motor Finance that the
complexity of running a fleet should not be underestimated. “It is
virtually impossible,” he says, “for one person to be expert in
optimising residual value, understanding the factors which
influence servicing maintenance and repair and keeping on top of
all the current technological and legislative changes affecting
company cars at present.”
In addition, fleet lessor Arval has worked with the University
of Buckingham to develop what it describes as “the first true cost
of operations model” in the market. Jon Mackney, consultant with
Arval tells Motor Finance that in the past fleet calculations have
suffered from the absence of real costs, whereas the total cost of
operations tool places the full spectrum in scope, including
vehicle selection, capital costs, residual values,
operating/maintenance costs, tyre costs, fuel costs, CO2 footprint
and accidents and road safety.
Benchmarking the fleet
Mackney says: “Initially, individual fleets are identified and
compared to a benchmark. Target costs are then set for the fleet
and a plan agreed as to how to move from current to target costs.
The model then supports the fleet operator in developing,
implementing and monitoring programmes of cost reduction.”
Professor Peter Cooke, head of the Centre for Automotive
Management (CAM) at the University of Buckingham stresses: “Right
now the automotive industry and the company car are in a state of
flux – even revolution. This means that there is a fundamental need
for ever-tighter management of true costs of ownership.”
The true cost of operation, according to Cooke, includes all of
the costs associated with running the vehicle. “In the case of
leasing,” he explains, “part of those costs will be included in the
monthly lease cost – service, tyres, cost of capital depreciation
and so on – depending upon the contract agreement. However, if a
company is managing the costs itself they will form an important
part of total vehicle cost.”
There are still further costs, Cooke points out. “Fuel,
insurance, administration and vehicle choice that will be paid
directly or indirectly by the user organisation and may not
necessarily be allocated back to the individual vehicle cost. The
TCO operation identifies these costs as part of an outsourcing
operation and seeks to manage and monitor them against
best-practice benchmarks.”
In this way, Cooke adds, the TCO can be identified, managed and
monitored against best-practice benchmarks for individual units on
the fleet to ensure the operator is achieving best value for
money.
Residual values
While it may be accepted that residual values (RV) may vary
between vehicle brands, there are many other issues that can
influence the ultimate RV of the vehicle.
In the case of contract hire, the issues of used car disposal
are taken over by the leasing company. However, an increasingly
important element of the TCO equation is the method by which the
used vehicle is taken to market at the end of its prime life.
“Of course,” Cooke says, “the disposal picture goes far deeper
than alternative routes to market. Hidden or not-accounted costs on
disposal can be significant. These may include: movement to a
disposal site, ongoing depreciation, interest charges, damage,
insurance, preparation, auction fees, commission and conditions on
sale.”
One analyst has likened the real hidden costs of company car
disposal to being “like the hidden costs in selling a house”.
Disposal costs are covered in Arval’s TCO; in the case of
contract hire, they are built into the overall rental costs. For a
contract hire deal there may be a “ratchet” incorporated – so any
return above a base figure will be either paid in full or shared
with the fleet operator.
Cooke adds: “Suffice to say, a contract hire agreement leaves the
vehicle user far less open to end-of-life shocks, provided the
vehicle has been maintained and treated properly within the agreed
parameters.”
A robust model
Arval/Buckingham believes that the TCO model is robust and has
been tested against a wide range of applications and fleet
operators. Mackney says: “From time to time new comparisons will be
released by Arval to ensure they are up to date. Equally, the
economic model will be updated to reflect changes in government
policy towards cars, particularly in the form of VED, personal and
corporate taxes and allowances and, of course, significant
movements in petrol and diesel costs.”
The TCO model took some six months to develop by the CAM in
conjunction with Arval’s in-house consultancy team. With its
development, Arval is expecting to be asked to support fleets
further with a unique approach to outsourcing which will see the
responsibility for the operational running and administration of
fleets being managed by them. “This will enable the professional
fleet manager to focus on the delivery of strategic improvements to
the fleet, while ensuring that the complex legal and legislative
obligations are completed,” Cooke concludes.
ALPHABET: A money-saving TCO tool
Fleet leasing company Alphabet has released a TCO tool for
customers’ use (see examples, below). “TCO is right at the top of
our agenda,” says managing director Mark Sinclair.
It is absolutely vital, he says, that tax changes are taken into
any account of the whole-life cost of running a vehicle. “Using
Deloitte’s Car Selector software, we can provide a detailed
breakdown of the VAT recovery rate, corporation tax costs and
capital allowances – something that can only be done if you know
the customer you are talking to.” This will have “a real impact”
from April, he says, when sweeping changes to capital allowances
will come into force – “meaning fleets which acquire cars emitting
over 160g of CO2/km may still be paying the price some 40 to 50
years down the line,” Sinclair adds.
Customers who use the tool wisely can get “a triple win”,
Sinclair says – a more desirable car, a eener fleet, and cost
savings to boot.
