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10 things to consider when choosing a leasing company - 19 January 2005

Price and service delivery are the two key factors in the decision-making process as fleet chiefs debate which contract hire and fleet management company to appoint. However, fleet managers, under pressure to ensure the best deal, may not always sign-up for the best service. Geoff Taylor, head of business development at ING Car Lease, looks at some of the key points to consider when selecting a vehicle leasing or fleet management partner.

Funding methods

Companies face an array of choices when deciding how to fund their fleet. And, it should be remembered, that depending on the type of fleet, the type of vehicles being funded, the mileages being clocked up and the lifestyle of employees that a mix of funding methods maybe the optimum choice. Businesses should take a consultative approach in partnership with their leasing provider to determine the most appropriate funding mechanism(s). Issues as diverse as overall cost, cash flow implications, balance sheet effects, corporation tax, VAT implications, benefit-in-kind taxation for drivers, flexibility to the business, HR/personnel implications, risk management and internal administration will all come under the microscope. Methods of funding - including outright purchase which could lead to a sale and leaseback arrangement as well as the many leasing options - should be reviewed at least annually to ensure that the current chosen route(s) remains the most costeffective and administratively efficient for the company as Government and European Commissioninspired fiscal and legislative changes may change the status quo. In addition, the client companies' changing business circumstances may also necessitate a review, if not a funding change.

Is open disclosure an option?

Having elected to contract hire, many companies decide to source a variety of fleet management services from their chosen supplier. Whether a company only leases vehicles from a contract hire organisation or adds on any number of fleet management services, fleet managers should always ask for a comprehensive breakdown of how the monthly rental charge has been compiled. Whether inclusive or exclusive of fleet management, leasing companies should provide full disclosure on the cost of each element of the package, including management fees. One of the major reasons for open disclosure is the suspicion among some fleet operators that it could be cheaper to buy each element of their fleet package separately from different providers. Invariably, not only will such a route prove more expensive it will also ultimately prove administratively cumbersome for fleet chiefs. Therefore, fleet managers, for their own peace of mind, should always ask for open disclosure.

Is there a guaranteed service level agreement?

If you can't measure it; you can't manage it. This maybe an old cliché, but it is as true in the fleet industry as it is in any other business sector. Service level agreements (SLAs) and agreed key performance indicators (KPIs) are a must from the perspective of both parties, leasing provider and customer. Both SLAs and KPIs should be clearly defined to ensure expectations and fleet performance requirements are met. Essentially SLAs and KPIs act as a barometer for fleet operators to ensure their chosen provider is delivering standards and services as promised; while for providers they are a 'live' document, which acts as a checklist to ensure expected standards are achieved. At ING Car Lease, SLAs are documents that remain fluid throughout a relationship enabling the company to react to any change within a customer's organisation or changes necessitated by external forces, such as new legislation.

Early termination and how is it calculated?

From time to time, fleets may find it necessary to terminate a vehicle contract earlier than initially agreed. This could be due to a number of reasons, such as staff redundancy. All leasing companies expect early termination charges to be included in standard leasing agreements. At ING Car Lease the following factors are considered in determining the termination charge:

The bulk of the charge is based upon the difference between the 'written down' value of the vehicle and the 'market value', which will decrease as the contract ages.
An allowance is made between the maintenance spent and collected to date via the maintenance budget. The exact amount will be determined by the vehicle's mileage at the time of termination.
Also taken into account in calculating the final early termination charge is the difference between actual interest cost (based on actuarial calculation) and the interest charged (included within the monthly rental).

By employing this method of settlement, leasing companies are not penalising their customers, or seeking to recover any lost profit arising from early termination. ING Car Lease believes this is a fairer system than settling early termination based on a percentage of outstanding rentals.

Termination damage charges

The British Vehicle Rental and Leasing Association's 'fair, wear and tear standard' is the widely accepted industry guide as to what constitutes fair, wear and tear for leased vehicles at the conclusion of the contract period. Many leasing companies, including ING Car Lease, will provide a copy of the guide to customers as it provides advice to fleet operators and drivers on maintenance routines and preventative action necessary to keep a vehicle in acceptable condition. The guide also defines the industry standard for every aspect of a vehicle's condition. A vehicle that has been maintained to the condition specified in the guide and showing no unreasonable wear and tear internally or externally will not normally incur end of contract refurbishment charges. However, for damage exceeding the standard, ING Car Lease will assess the cost of repair and charge the customer. Some leasing companies offer damage waivers that are included in the monthly rental fee. However, ING Car Lease believes an open and honest approach is invariably more cost effective from the fleet operator's perspective and as a company we will actively work with customers to minimise their exposure to end-of-contract charges.

Should contracts be driver specific?

One of the key features of vehicle leasing is that it provides for straightforward budgeting as monthly charges are known. However, this 'win' can be destroyed if various end-of-contract charges are incurred. We have already analysed end-of-lease damage charges, but how can excess mileage charges be countered? The simplest way is to tailor contracts to each individual driver's anticipated mileage. For example, while the standard benchmark contract is three years/60,000 miles it will be pointless signing up to that arrangement if an employee clocks up 25,000 miles a year. By linking individual contracts to each company car drivers' estimated mileage nasty end-of-lease excess mileage charges could be avoided. In addition, regular contract reviews should be insisted upon to ensure that mileage is reconciled throughout a vehicle's fleet life in line with the prescribed contract. This is particularly important in the event of job changes. It may also be possible to negotiate 'pooled mileage' rather than charging for excess mileage at a pence per mile rate and giving no credit for under-mileage, the leasing company may agree to the mileage of all vehicles being pooled and aggregated against the contract period. If there is a net excess there will be a charge, if there is a net credit it may be rolled forward into the next contract period.

Replacement vehicles

A replacement vehicle is invariably available within the terms of a typical lease. Contract hire companies will either source the temporary vehicle from their own 'reserve' fleet or via a daily rental company. Whether to have this written into a contract largely depends on the personal preferences of individual fleets. Some companies view the option as providing peace of mind in the event of an accident, for example. However, other companies prefer to pay for a temporary vehicle as and when required. The costs and benefits of each option should be weighed up. It should also be remembered that some leasing companies provide not only provide cars for daily rental, but also offer 'mini-lease' arrangements for rental periods of a month or more. This form of rental is cheaper than hiring a car on a daily basis and is not as prescriptive as full vehicle leasing.

Maintenance control

As we have already discussed fleets can lease vehicles on a maintenance inclusive or exclusive basis. Indeed, some companies may elect to buy their vehicles but then outsource service, maintenance and repair to a leasing and fleet management company. There are a range of reasons for outsourcing SMR to experts and the chief benefit is to ensure pre-event and post-event controls are in place. Vehicles, which are not maintained in accordance with manufacturer recommendations, can prove very costly in the event of a warranty rules not being met. Similarly, a failure to have a vehicle MoT'd on schedule could be equally troublesome. By removing the responsibility from the fleet driver in deciding when their vehicles require SMR work ensures controls are in place. In addition, many leasing providers, such as ING Car Lease, have pre-agreed pricing levels in place with dealer networks that reflect the volume of work they can expect. Outsourcing vehicle maintenance management ensures companies can benefit from these arrangements. Equally, these dealers will treat customers fairly in the knowledge that work undertaken and invoices will be checked and approved by experts, many of whom are engineers who previously worked in dealerships. By passing the maintenance risk for a monthly fee to an external provider, who will pro-actively contact drivers to arrange bookings for SMR work, budgetary control is improved.

Online reporting

In the last decade the trend for outsourcing non-core business activities has rapidly accelerated. Indeed, one of the most obvious areas for outsourcing is fleet operation. But, that does not mean companies should turn their back on the management of the fleet. All suppliers of outsourced services will require a specific contact within the client company - in this case potentially the fleet manager - who is their prime contact. Pro-active fleet managers will find that the utilisation of a leasing and fleet management company has removed the burden of day-to-day administration from their job task list and given them a significantly enhanced strategic role. Instead of handling routine inquiries from drivers - now handled by the outsourcing provider - the fleet manager has established themselves as the vital link between keeping drivers mobile, the external provider and the company board. Cruci al to this role is the availability of sophisticated management reports concerning every aspect of fleet operations. Such reports, today invariably available online, can be 'sliced and diced' in every way imaginable to provide robust data to significantly improve cost control.

What else can a leasing company do for you?

The ever-increasing impact on fleet operations of the never-ending legislation, emanating from both Whitehall and Brussels means expert help and advice is essential.

The overwhelming majority of companies in Britain operating vehicles do not have a full-time fleet manager so keeping a tight grip on new fiscal rules and legislation hitting fleets is extremely difficult - even for full-time fleet bosses it is a tough task.

As fleet vehicle experts, leasing and fleet management companies act as the 'eyes and ears' for companies to ensure their vehicles operate at optimum efficiency within the law. New legislation, for example the amount of laws targeted at improving the safety of at-work drivers, will be interpreted and customers advised on the actions to be taken.

Customers of ING Car Lease have the option to take up a full risk management solution. This can involve everything from a complete corporate health check and fleet policy review, through to individual driver risk assessments and bespoke training provided either on-road or via an e-learning programme.

Similarly, some companies have opted to ditch company cars in favour of a cash alternative or a personal leasing scheme. Many companies have come unstuck because they did not weight up the pros and cons of each scheme and its impact on individual drivers. Such decisions should not be taken on a whim and leasing experts can provide comprehensive analysis to aid the decision-making process. Invariably we find that a single funding solution will not suit all parties.

The range of external and internal factors influencing fleet operations will be many and varied. Working hand-in-hand with an expert third party provider will ensure the adoption of best practice procedures and that optimum business efficiency is achieved.

19 January 2005