5 Things Every Fleet Manager Should Know About Service Provider Agreements
The key to any successful negotiation, be it for a service agreement or any contract, is knowing what you want, asking for it, and determining a fair price. On both sides of the table, a successful service agreement should be beneficial to both the company and the fleet management provider.
1. Understand Your Motivation
Before delving into an agreement with a fleet management company, establish what you are seeking from your current fleet management company (if your needs are not being met) and how this might be addressed. Placing your fleet out to bid is an extensive and, often, expensive process. Barry Steel, senior vice president of sales for Donlen Corporation, a fleet management company based in Northbrook, IL, advises companies to understand what is motivating the decision to change. “Making sure a vendor is a cultural fit is key to a successful partnership,” Steel says. “Their ability to meet your service level requirements will utlimately determine your fleet’s total cost equation. If these two areas are not satisfied, you will be disappointed at any price.” Greg Wallingford, vice president of business development for PHH Arval, a fleet management company based in Hunt Valley, MD, says putting a fleet’s services out for bid on a regular basis can be a costly operation. “The costs of bidding out a fleet and going through a request for proposal (RFP) process can be tremendous,” he says. “People often have to focus on the RFP instead of their regular work, and that can mean a large resource drain from productive business.”
2. Develop a List of Required Services
Before you begin negotiating with a fleet management company, do your homework about the things that must be included in the agreement. The ultimate goal of the service agreement is to reduce costs and increase service levels. LeighAnn Blake, fleet manager for Beverly Enterprises in Ft. Smith, AR, says her first move when negotiating a contract is to list all the services and goals that she wants the fleet management company to provide. “The company has to be able to produce and meet those goals,” she says. “The agreement has to be a support document that can guarantee those goals can be met.” Mike Christian, vice president of sales for Wheels, a fleet management company in Des Plaines, IL, says getting to the final negotiation stage is easier when companies can define specific objectives. “And a specific objective is knowing exactly what you need your fleet to do, or need your fleet provider to do.” A good resource that fleet managers can use to gather ideas on what other fleets are doing is through benchmarking. Bayer Corporation, headquartered in Pittsburgh, has a fleet of over 3,000 vehicles, managed by Jean Morris. Bayer Corporation recently used its strategic sourcing and negotiation management process to streamline its fleet operations and minimize total cost of ownership through an internal strategic sourcing team approach. Part of this approach was to identify conclusions based on extensive data analysis. “One of the things we’re very high on is the strategic sourcing and negotiation management process used by Bayer,” says Stanley Loper, procurement manager. “This process allows us to take advantage of new opportunities.” Remember that organizations, such as the National Association of Fleet Administrators (NAFA), are a good source of information when compiling the services you desire in a fleet management company. The majority of the time spent developing an agreement will be the time it takes to determine what is necessary for your fleet. However, benchmarking with other companies is a good way to ensure that you do not simply reinvent the wheel. The important thing to remember, says Christian, is that the fleet management company is not your enemy. “Fleet managers should keep in mind that [service providers] are not adversaries.” Michael Sawicki, vice president and general counsel for PHH, agrees. “We consider ourselves fleet experts and we can save our clients money if they let us do our job,” he says.
3. Involve the Right People
Get input from other departments within the company that might be affected by procuring an agreement with a fleet management company. Blake suggests getting input from the company’s drivers before presenting a plan to senior management. “We solicit the drivers and regional managers to get their input regarding vehicle type, vehicle use, and cost of vehicle,” she explains. At Bayer Corporation, the fleet’s strategic sourcing group contacted other departments within the company. “Our safety committee was involved, because the last thing we wanted to do was make a change in vehicle selection that would not meet our safety requirements,” says JoAnn Borgo, procurement specialist for Bayer Corporation. Larry Giddens, director of fleet and travel management for R.J. Reynolds Tobacco Co. in Winston-Salem, NC, says his company compared services among numerous fleet management companies before negotiating a contract. “We evaluated and visited several fleet management companies to determine which would provide us the best service, fair pricing, and commitment to technology we were looking for,” he explains. Reviewing the capabilities of potential suppliers is a step that, when taken early in the process, can help fleets better assess what they are looking for. “[The fleet manager] should lead [the service provider] in a direction they generally want them to go, but should also let the fleet management companies talk about all the different things that are pertinent and important in the business today,” says Tom Donato, vice president of sales, North, for ARI, a fleet management company in Mt. Laurel, NJ. Once the requirements are reviewed, most fleets issue an RFP to the fleet management companies of their choice. This typically outlines what is expected from the service provider, how it can be accomplished, and how the service provider will achieve these goals. “A good RFP should clearly state what the objectives are that the customer has,” advises Christian. An RFP contains all the qualifications the company is looking for in a fleet management company and places the responsibility of working with your requirements on the service provider. “The RFP identifies your needs,” explains Jeff Iverson, regional sales manager, national accounts for GE Fleet Services, a fleet management company based in Eden Prairie, MN. “At this point, all the fleet management companies are trying to determine what products and services we have that best meet those requirements.” Using other resources to assist with the development of an RFP can be a good way to get input from other companies about their strategy. “There is a good deal of networking that can go on if fleets need information about the RFP process; there are many resources available,” explains Karen Edris, senior sales analyst for LeasePlan USA, an Alpharetta, GA-based fleet management company.
4. Bring Your Needs to the Table
Negotiating the provisions based on your RFP makes this process more manageable. When sitting down with the fleet management company, know going into the meeting what you need to discuss and things that need to be clarified. PHH’s Wallingford says that most questions and concerns are cleared up before reaching this stage, leaving this discussion to focus on legal issues. “The business issues should be spelled out pretty clearly in the proposal,” he says. “By the time you get to the contract stage, what you should be doing is talking about legal issues.” Service-level agreements are becoming more commonplace in the fleet industry and are sometimes included in the contract as a means for fleet managers to measure the service they are receiving. Christian says these typically cover a range of several kinds of performance. “They tend to cover things such as responsiveness, cycle time, accuracy, and other performance measures,” he explains. Mark Conroy, vice president of marketing at LeasePlan USA, says that using the RFP as a guide will help fleet managers negotiate the business needs originally outlined. “You want to make sure that as you get into negotiating a contract you have the legal and business requirements represented, and you want to make sure that the business requirements are properly negotiated into that lease agreement.” Sawicki of PHH Arval, says it is a good idea to have a list of everything that needs to be discussed during contract negotiation. “We like to get all of the comments and questions [about the agreement] at one time – from the client – then have a call within the company to sort things into business and legal issues,” he explains. “Once we have all of our comments or responses in order, we schedule a conference call with the client.” Sawicki says this “clarification” phone call helps ensure that problems and questions are explained in one phone call, saving both the client and the fleet management company time during the process. Having your legal department on hand during this phone call can also help things run more smoothly. “When companies do involve their legal department, it usually does go more smoothly,” says Sawicki. “When I have to explain an ‘assignment clause’ or why we have an indemnity clause (which releases the fleet management company from property damage or personal injury liability when a leased vehicle is involved in an accident), it’s a lot easier to explain it to the lawyer or risk manager.”
5. After the Negotiation: Now What?
Most fleet management agreements are “evergreen” contracts; they are open-ended with no definitive end date. LeasePlan’s Conroy says that clients can amend their agreements as business processes and developments change. “From a funding standpoint, the client can make changes to the depreciation or amortization and it won’t affect the contract.” Ordinarily an opt-out clause is written into most contracts requiring one party to notify the other in case of agreement termination. The required notification period varies, but typically ranges from 30 to 90 days. Fleet managers say a good service provider will not be complacent once an agreement has been reached. “The fleet management company needs to be proactive and constantly looking for ways to better provide services to their clients in a cost-effective manner,” says Giddens. Fleet manager Morris says Bayer Corporation encourages its fleet management company to generate ideas that can improve the existing contract. “These days, companies are so busy and doing so many things that the proactiveness of the fleet management company is welcomed.” It is important for fleet managers to stay active in the industry and remain knowledgeable about trends in the fleet business that could affect an existing contract. Sawicki says fleet managers can make amendments to their contracts as business needs change. “If a client’s circumstances have changed, or they want to add a new service, we can add to the contract or amend the one they have,” he says. “Everything is agreed upon mutually in writing.” Donlen’s Steel says reviewing a contract does not have to be a formal process that occurs once a year, but should be a constant practice. “The provider should be evaluated with every phone call and every interaction with an employee.” Communication is key, says Donato. “There is a constant interface throughout the relationship,” he says. “It’s an ongoing, dynamic approach.” Bayer Corporation’s Strategic Sourcing & Negotiation Management Training Process
1. Bring together team members who have been through the strategic sourcing and negotiation management training, identify procurement category, and end-users. “Defining end-users is important because if you try to put a procurement strategy in place without having buy-in from this group, your program will not be successful down the road,” advises Dr. Soheila Lunney, director and head of Bayer Corporation’s senior staff office in material management department, and sponsor of the auto fleet strategic sourcing team.
2. Collect and analyze data from both internal and external sources. Identify findings and develop conclusions.
3. Develop a sourcing strategy from the finding and conclusions that have been identified from data analysis. Obtain approval for this process from senior management.
4. Talk to service providers, interview them, let them know your requirements, and have suppliers bid on your requirements through the RFP process.
5. Begin negotiations with suppliers. Negotiation Process
1. Define your requirements, establish negotiation objectives, and begin the process.
2. Meet with suppliers and review your position to determine whether your objectives can be achieved.
3. Reach a common ground. “If there is no common ground between what the buyer wants and the seller wants, you will never reach an agreement,” Lunney says.
4. Review the negotiated objectives achieved and the agreement with stakeholders and senior management for their approval.
5. Develop implementation and contract management plan to ensure you achieve what was negotiated.