Fleet: economy model

On the cusp of recession, UK businesses are already feeling the pinch with
rising costs and faltering consumer demand.

At Opticar, we are finding that discussions with both existing and
prospective clients invariably turn to the need to reduce corporate spend, or
not to spend at all.

When a company gets into cost-cutting mode, it’s always the same areas of the
business that come under the spotlight. As a sales and marketing man, I know
only too well that the marketing budget is one of the first to take a hit. And
as part of the B2B supplier community, the fleet industry will inevitably be
getting drawn into a round of ‘squeeze the supplier’ negotiations, as clients
look to their fleet suppliers to produce savings that none can really afford.

Without doubt, the cost to companies of providing a car benefit scheme is
pretty huge when you bring together leasing rates, cash payments, fuel costs,
insurance cover, administration overheads and all the other bits and pieces that
contribute to it.

But as a ‘new face’ in the fleet industry, it surprises me that so few
companies understand the real net cost of running a car scheme with the various
tax disallowances, termination costs and national insurance implications that
need to be factored in.

This lack of in-depth knowledge at company level means that when fleet costs
comes under scrutiny, the easy fix is to get the suppliers to shave a few bob
off rates instead of looking internally at the efficiency of the fleet
arrangement.

But there is a much bigger picture for companies who are serious about cost
savings from fleet without devaluing the benefit to drivers. So how does it
work?

Single minded

Firstly, let’s look at those running one particular type of car scheme across
the whole company – let’s say contract hire. While this is administratively
straightforward, it is also reasonable to assume that a contract hire type of
arrangement will be financially suited to some drivers, but not to others, as
our costs illustration clearly demonstrates.

A ‘one size fits all’ scheme costs money. So logically, it follows that for a
company to make serious savings from the cost of running its fleet, it really
needs to consider ways of providing a mix of vehicle funding options for its
drivers.

While some companies do offer a choice, it is often more by way of lip
service than to maximise cost efficiency. Neither the company nor the drivers
are able to determine the financial pros and cons of the options available, the
wrong decisions are made and the benefit of mixed funding falls down.

So in order for a mixed funding scheme to work and deliver the level of
savings that a company will never find from supplier negotiations alone, it
needs to ensure that the following criteria is met:

• That drivers fully understand the cost benefits of the funding options
  available to them at the point of decision-making.
• That the scheme is efficiently administered and meets the expectations of
  the driver population.
• The benefit of the chosen funding option is maximised throughout the
  duration of the contract.

So running a mixed funded fleet strategy will give you the benefit of
substantial cost savings and maximise tax efficiency, eradicating expensive and
unnecessary tax leakage throughout the financial year.

Drivers benefit because they are able to identify the lowest cost way to
engage with the company scheme, and if they were previously restricted to a
company car list, they now have a wider choice through the addition of PCP
(personal contract purchase) as an alternative to a company car.

But most importantly, the substantial and wholly sustainable savings that
come from implementing a mixed funding strategy will make a huge contribution to
your company’s savings target.

The true cost of one size fits all

In this example, our company only offers a contract hire scheme to its
company drivers – a fairly typical arrangement.

Our typical employee drives a Saab 9-3 Sportwagon, covering 28k miles per
annum, of which 22k are business miles and pays 40% tax, with an ‘all fuel paid’
arrangement in place.

However, our driver would cost the company in excess of £3,000 net per year
less if the same car were to be provided as a PCP (personal contract purchase).

The same opportunity to reduce costs can apply when a company only offers an
ECO (employee car ownership) scheme to its drivers. Our same driver in the same
Saab 9-3 Sportwagon, driving 20k miles per year and 3k business miles would cost
almost £1,000 net per year less if he were to drive the same car under a
contract hire agreement.

The reality is that ‘one size fits all’ company car scheme cannot deliver the
same cost efficiency as a mixed fleet solution.

Peter Eldon is managing director of car fleet solutions
specialist Toomey Opticar