Cars: How to afford a fleet in expensive times

Have you seen the price of cars these days? They are frightening and unlikely to drop, even though the number of new registrations is down. The sales figures for January 2018 were down by 6.3 per cent, with 163,615 sales against 174,564 in January 2017. Mike Hawes, CEO of the Society of Motor Manufacturers and Traders (SMMT), says, “2017 was undoubtedly a very volatile year and the lacklustre economic growth means that we expect a further weakening in the market for 2018.”

2017 was undoubtedly a very volatile year and the lacklustre economic growth means that we expect a further weakening in the market in 2018. Mike Hawes, SMMT.

However, the slump may not extend to estate agents, whose obsession with smart motors is renowned. For many, it is a major perk, an expectation and an essential, as so much time is spent driving around to valuations and viewings. If you look at the ‘Why join us’ sections of the big national agency chains, the company car is high up there in the attractions, as a permanent perk and a performance prize, in quite a few of the larger agencies.

So how can an estate agency business afford the cars they need? How do they decide how to pay for them? And how do they manage their fleet?

Four year contracts may be cost-effective, but with property market volatility, it may be best to procure on short-term leases or long-term hire plans. Richard Hipkiss, MD Fleet Operations.

Richard Hipkiss, Managing Director of Fleet Operations, has some very interesting views and advice on how agencies can have the cars they need within a cost-effective procurement strategy while minimising the cost of managing their fleet.

It’s a challenging time in estate agency, you need the staff numbers to ensure you can service your area, but it’s a huge overhead when competition is on every corner. Should they buy? Lease? Hire?

Richard: “Property market volatility is a fact of life – but against a backdrop of worldwide economic uncertainty, Brexit and taxation changes, the sector currently faces particularly challenging times.

“Those involved in procuring and managing car fleets for the industry’s mobile professionals must consequently be looking to adopt strategies that are robust enough to withstand market volatility, cost volatility within the fleet sector and the accompanying threats to the business bottom line.”

“A strong fleet policy that provides for appropriate vehicle choice and low whole-life costs should also be backed up with clear processes for controlling key areas such as fuel spend, cost approvals, expenses and risk management. Businesses would be wise to determine the levels of resource and expertise they have in-house to effectively manage the key areas of procurement, operation and administration.

“A transparent and independent fleet specialist can help establish whether or not an external resource may be better placed to handle some or all of an agencies fleet services.”

At what point does the agency start to decide on buying or leasing and which vehicles to choose?

“Smart procurement processes lie at the heart of effective cost management. As things stand, the fleet industry remains cautious about residual car values and a downturn in prices may be on the horizon, both in the short and longer term.

“Companies can go some way to mitigating the effect of falling secondhand car prices by leasing vehicles on contract hire agreements. As costs are agreed up front, the onus falls on the leasing company to cover any shortfall that result from declining residuals during the lifetime of the lease agreement. “If secondhand car values continue to slide however, upfront costs can rise.

“Lessons can be learned from the recession of 2008, a downturn that led to both a shortfall of funding and lease rate variations of up to ten per cent. A fall in residuals may once again lead to wide lease rate differentials and so careful market scrutiny is called for.

“Headline prices are an understandable a focus of attention, but with the fortunes of agents’ inextricably linked to the rise and fall of the property market, consideration should also be given to the length of lease contracts and the overall fleet funding mix. While it may be cost-effective for agencies to procure the bulk of their fleets on typical four-year contracts, notorious property market volatility may make it prudent to procure a proportion on short-term lease or long-term hire arrangements. Such flexible arrangements, which may account for up to 25 per cent of an agent’s fleet, can help to mitigate future risks.

That sounds like a very sensible approach, what else needs to be considered? 

“You need to take into consideration the overall costs – all vehicle-related costs incurred throughout the length of a contract. Total Cost of Ownership (TCO), which includes not only leasing and purchasing costs but all real-life costs over the period cars are retained, offers the most complete and meaningful vehicle evaluation method. The calculation includes such variables as depreciation, fuel, insurance and maintenance to interest, tax and employers National Insurance.

“If company car TCO is to be minimised, cost visibility is crucial. Leasing providers will typically manage a number of services with suppliers, from maintenance and fuel management to accident and risk management too, wrapping these up within their fees. By managing direct contracts with suppliers, not only can agents more effectively control costs, they are better placed to ensure they’re receiving the best possible levels of service.”

So, a great deal of time and management effort can be saved by getting one supplier to do the whole lot? 

“Don’t put all your eggs in one basket. In a bid to minimise resource and administrative demands, sole supply arrangements are invariably adopted when agreeing contracts with fleet providers. In light of the current economic landscape however, putting all your eggs in one basket may prove a costly mistake.

“In addition to the benefits of ensuring transparency on all items of spend, breaking away from the constraints of sole supplier arrangements can also mean significant savings on upfront vehicle costs.

A chosen supplier may offer eye-catching deals on certain makes and models, but it is unlikely to offer the best deals for all vehicles. By choosing instead to search for the best price on every vehicle from different suppliers, on a typical four-year lease, savings of more than £1,000 per vehicle can be realised.

“Concerns over the complexity and management time involved with multi-bid leasing and the direct management of supplier contracts can discourage some companies from adopting this approach. Where this process is outsourced however, organisations can benefit from the same minimal resource demands they get with a sole supplier while reaping considerable financial returns on investment, in some cases as high as eight-to-one.”

For a business that has several branches across a couple of counties and many miles, a few dozen cars and about 60 different drivers, what else should they be doing, once they have the contracts and the vehicles in place? 

“Working within a multi-supplier framework gives companies the flexibility to work with the accident and risk management partners of their choice and to better tailor service provision to address specific challenges faced by the business.

“A best practice approach to risk management, rather than a tick-box approach to meet basic legal requirements, is an investment that can also reap rich rewards, reducing the cost of car maintenance, insurance premiums and fuel.

“Risk assessments combined with regular licence checks, incident reviews and driver behaviour monitoring can provide a wealth of valuable insights, enabling important areas of risk or inefficiency to be identified and monitored. With such information at their finger tips agencies can look to implement initiatives such as targeted training and driver education programmes.

“All employees, including those driving grey fleet vehicles, should be a part of such risk management initiatives, which can not only help in keeping a lid on costs, but can also help protect an agency’s reputation and play a key role in improving staff retention and morale.

“Whether you are overseeing a fleet of 20 or 200 cars, the management of multiple supplier arrangements need not be a challenging task and the potential returns can be simply too great to ignore.”

Richard Hipkiss is Managing Director at Fleet Operations, an independent fleet management consultancy.
www.fleetoperations.co.uk