CAR LEASE

News - 2009 Archive

Whole Life Costs

Parlez – vous ‘TCO’?

Why your fleet needs total cost of ownership / operation

While lots of businesses are talking about the benefits of whole life costs- otherwise known as total cost of ownership / operation on the Continent - surprisingly few international companies seem to be actually doing it. This could all soon change, according to Paul Ormerod, director of sales for top ten fleet management company, ING Car Lease.

TCO, or total cost of ownership / operation as it’s known across Europe, has been one of the buzzwords of international fleet management over the past few years, but our experience as a top ten leasing businesses suggests that relatively few companies with cross border interests are embracing the mantra. This is a great shame, as work we have recently completed with several company fleets have shown that a thorough analysis of their fleet can save them significant sums of money, while offering company car drivers a better choice of car.

While the idea of whole life costs has been put on the backburner in recent years, while other issues such as corporate manslaughter, fuel costs and the economic downturn have taken centre stage, now could be the time to act for international companies.

Before we look at the reasons why TCO will soon come of age, let us remind ourselves of the basic principles of the process and how it generates value at a local level. From a UK perspective, the new tax regime that will affect rental and capital allowances is due to be enforced in April 2009, giving companies little time to act if they want to minimise the potentially huge financial impact these moves could have on their fleet costs.

Strange as it may seem, most companies still use outright purchase – cash in the bank – to buy their fleets. Many FDs and fleet managers still look at the purchase price of a car as the main indicator of the cost of the vehicle, without really assessing the actual cost of running and disposing of the car over a 3 or 4 year period. Then there are those companies that claim to have embraced the WLC ethos, by including the residual value (i.e. the resale value of the car at the end of the term) in their calculation.

However, the real art in developing a more meaningful WLC model involves calculations on NI Class 1A, fuel costs, insurance and from April 2009 the new net tax position that takes into account a car’s CO2 emissions.

Many companies still operate fleets on their purchase price or P11D banding – which provides a very basic and misleading measure of a vehicle’s true costs. As well as costing the businesses unnecessarily, this basic approach narrows employees’ choice of car based on an artificial figure. In our experience as many as 40 per cent of businesses are still using outmoded, inaccurate methods to assess the cost of running their fleet, including P11d as a base for vehicle selection. The new tax changes in April should act as a catalyst to change that.

If bosses needed an additional incentive to re-evaluate their approach to fleet financing and choice of vehicle, consider the following brief illustration. We recently undertook a whole life cost analysis on two cars, both executive models, costing £25,000 and £23,000; one a 2 litre diesel, the cheaper a 2.5 litre petrol saloon. On the face of it, many companies would go for the 2.5 litre petrol car, based on the fact that it is £2,000 cheaper than its diesel equivalent. However, once you begin to delve deeper into the implications of running the car over a four year period, you soon see that purchase price can be a very poor indicator of the true cost.

Once items such as fuel economy, the cost of business mileage, carbon emissions and NI costs are factored in, the ‘cheaper’ car costs a staggering £7,000 more over a four year period to acquire and run, compared to its £25k price tag alternative. Granted, these figures were calculated before the recent hikes in fuel prices were reduced, but these calculations still show how fleet choice on the basis of whole life costing can save fleets thousands of pounds.

Although it is an extreme example, imagine if a fleet of say 200 cars had been wrongly ‘speced’ to this degree? Moving from the £23,000 priced petrol to the £25,000 diesel car could save a business up to £1.4m over a four year period.

Clearly, in the current economic downturn, businesses need to look at every way possible of reducing outgoings and adopting the whole life cost methodology would appear to be an absolute ‘no brainer.’

Having looked at the arguments in favour of the WLC/TCO approach on a local level, assessing the adoption of this methodology across several countries paints a much more fragmented picture.

In our experience, there are several key cultural reasons why TCO has not been easily adopted across several borders. Firstly there is the natural preference for companies to source marques from their own manufacturers. Granted, global sourcing trends are having a positive impact, but the tendency for Italians to buy Fiat, the French to buy PSA and the Germans to opt for Volkswagen/Audi is still alive and well.

A second big issue that has not helped the adoption of TCO are differing tax regimes across Europe. Until recently, the treatment of company cars has been wildly different across the EU member states, which has made any sensible approach to whole life costing almost impossible. However, increasing harmonisation on this front – specifically regarding changes to carbon-emission based taxes – will do much to encourage more use of TCO in future.

A third major stumbling block is down to lack of clear visibility. Most international businesses are structured in ‘silo’ style building blocks, so that total visibility of fleet costs are rare to find. In reality, we more often see that leasing costs are dealt with in one department, taxes in another and fuel/maintenance costs in a third part of the business. If total fleet costs are not seen across an organisation, then potential savings generated via TCO are unlikely to be a top priority. Which is a huge shame, because fleets operating across borders could save themselves very significant sums of money.

There is clearly a huge prize there for cross-border businesses to gain total visibility of their fleets’ cradle to grave costs, cutting them by centralising the administration. Granted there are significant cultural barriers there, but for those businesses that can bring about change, the cost savings could be massive. Look at our example of a UK business that could save £7,000 over a four year lease. Even if we half this possible saving, this could add a notional bottom line saving of £1.75 million every year. Making TCO work across borders is no mean feat, but the potential savings are not to be sniffed at.