David Rawlings sets out on the path to the ‘perfect fleet’

This reform of company car taxation, brought about in 2002 when
the government changed the way that company cars were taxed,
prompted a fundamental review of the value of company cars. We saw
many companies opting out of the company car and entering Employee
Car Ownership plans. Companies have frequently failed to analyse in
detail the full implications of opting out or staying loyal to the
company car, which is far from a straightforward ‘in’ or ‘out’
decision. In my experience, too many companies have tried to treat
the choice as exactly that and have ultimately paid the price in
terms of rocketing costs, administration overload and disgruntled
employees.

Historically, businesses have generally paid little attention to
the CO2 emissions of cars on their fleet because they view them as
an issue for drivers and not a business matter, despite the
National Insurance cost being based on the drivers’ benefit-in-kind
charges. More recently, businesses are increasingly conscious of
their “green” credentials and benchmarks such as carbon footprints
are frequently discussed at board level. Besides this, we are
seeing a new tax strategy from the government that will move the
focus on cutting car emissions to businesses themselves. 

Lowering the CO2 emissions of company cars can lower the tax
cost for both the business and the drivers. It is therefore obvious
that if the whole life cost does not contain the tax cost, then a
huge part of the picture is missing. Despite this, many businesses
still use the rental or the upfront cost as a means of selecting
cars onto the fleet. Our unique software demonstrates that this is
a blinkered approach. Two cars with the same monthly rental cost
can have very different whole life costs.

Selecting the right cars can save both the employer and the
employee money and reduce their carbon footprint. Any attempt to
restrict choice, however, can be met with a surge of ill feeling
from staff, as cars are still a highly emotive benefit. Businesses
need to control costs and emissions, but in the current competitive
talent marketplace, they also need to offer flexible and attractive
packages. 

What is perhaps surprising is how infrequently many companies
review their policy.  When they do, some clients hope for a
quick fix, but where this is possible, it is very rarely an
effective strategy.

I believe that a sensible way to review vehicle fleets is to
follow a template. All fleets have different requirements, but the
following steps will apply to most fleets:

Set your objectives.

We usually start all of our projects with the simple question
“what are you trying to achieve?” Unfortunately the reply depends
on who you are talking to. Finance, Humans Resources, procurement,
and even the drivers are likely to have very different motivations,
so the replies received may not represent the intentions of the
business as a whole and can sometimes be impractical or, at worst,
not entirely honest. Although many objectives will be identified,
financial savings will always be near, if not at, the top of the
list, even if this is not openly declared. However, if cost is
taken as the key priority in isolation to others the effect on
driver morale can occasionally be disastrous. 

We have proved time and time again that focusing on up-front
costs such as list price or rental in isolation is the wrong way
forward. Indeed it is often possible to offer higher value cars
that have a lower whole life cost.

 Typically the following questions should be considered at
this stage:

• Why do you offer cars?
• Have you got the ability to accurately model the after tax
whole life cost of cars?
• Should you lease or buy the vehicles?
• If you offer cash or a structured cash scheme, when was this
last reviewed?
• Are your suppliers delivering the service you expect at a
competitive price?
• Does your car policy help or hinder staff recruitment and
retention?
• Do you have a proper health and safety policy in
place?
• Does your car policy form part of the environmental
policy?
• Can you reduce unnecessary business journeys?
• Do you still offer free fuel for private use?

The consolidated objectives must be reviewed and confirmed by
the key stakeholders at this point before the project can move
forward.

Establish where you are now

In my opinion few (if any) fleets really understand the true
cost of running their fleet. Unfortunately without this
understanding, managing costs in an effective manner becomes almost
impossible. Logically, it is only when you know what your fleet
actually costs the business that you can work out how much money
(if any) you can save by making some changes.

So how do you calculate your current position?

Ideally you should work out the whole life cost (including tax)
for renewing your cars under the arrangements you currently have in
place. To do this you will need to consider:

• How many cars have you got?
• How are the cars funded?
• What discounts do you obtain?
• What cash allowances do you offer and when were they last
reviewed?
• What penalties do you incur for excess mileage or early
terminations?
• What does the fleet cost in administration?

Once the true whole life cost is established you must allow for
the effect of cash flow on the business by taking into account the
time value of money (“discounted cash flow” in accountancy jargon).
It is this final number we want as without it is impossible to make
fair comparisons with any alternatives you consider.

The author is a senior manager in the Automotive Sector
group at Deloitte & Touche. The next article in this series
will look at reviewing employee groups, and selecting the
cars.

Motor Finance Issue: 43 – May 08
Published for the web: May 27 08 12:28
Last Updated: May 27 08 12:31