16/12/2009

By Paul Ormerod, Director of Sales, ING Car Lease.

Whole life costs (WLC) or total cost of ownership (TCO) has got a lot of media coverage in recent years, but is still not used enough by businesses to assess the true costs of running vehicles.

Using total cost of ownership as a basis to select fleet vehicles is a bit like recycling; we know we should all be doing it, but when it comes down to brass tacks, we revert back to type and end up assessing fleet running costs purely on the basis of purchase price. This is a great shame, as work we have recently completed with several company fleets has shown that a thorough analysis of their fleet can save sums while offering company car drivers a better choice of car.

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 the new net tax position that takes into account a car’s CO2 emissions.

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 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.

Although it is an extreme example, imagine if a fleet of 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 environment, businesses need to look at every way possible of reducing outgoings and adopting the whole life cost methodology would appear to be obvious. However, the model isn’t being adopted by companies across the board and in my opinion this can be attributed to a number of reasons. First and foremost WLCs means different things to different people as the definition of what is included in the model isn’t standardised across the industry, so organisations running fleets may find the subject confusing.

Secondly, a large number of organisations are running mixed fleets and presently the WLC model comes into difficultly when assessing vans. This is because manufacturers do not have to publicise mpg figures, which makes calculations for fleets that include vans very inconsistent and, further still, confusing.

Thirdly, despite the current economic climate there is still too much emphasis within companies to look at price versus cost. Organisations are basing spend on monthly rental costs, not overall annual costs, failing therefore to cut long-term spend. The fact is that if the WLC model was adopted by a fleet then overnight the price goes up significantly but companies fail to appreciate that it has gone up because all costs are grouped together, there are no hidden expenses elsewhere. Also, not all contract hire companies can provide WLC quotations as they do not have the IT infrastructure. Therefore these companies are pushing contracts based on price rather than cost and this is slowing the process of adopting the WLC model across the board.

The wider adoption of the WLC model is, in my opinion, reliant on a number of factors. Government legislation has been responsible for driving people to consider CO2 emissions of vehicles and ultimately this reduces cost. However manufacturers of LCVs should agree on a standard way to measure mpg so mixed fleets can get involved. The fleet industry itself has a responsibility to come to an agreement on what factors are included in the WLC model so customers can be confident they are getting quotes from different suppliers that are comparable. Finally, it is up to fleet suppliers to educate and inform companies about the benefits of WLCs and ensure customers get the fleet contract that is right for them, ultimately saving costs.

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