How to Reduce Vendor Fees and TCO
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The never ending search for fleet cost reduction can be a challenge for even the most experienced fleet manager. Indeed, once a manager has been in place for a while, most of the excess cost has already been wrung out of the fleet, and sometimes it seems that the only thing left to do is to chase pennies.
But that isn’t necessarily the case; one area where savings can be achieved that is often overlooked is in the various fees suppliers charge to provide funding and services. Depending on the circumstances, these are often negotiable, not only in amount but in form as well.
The first step in developing a strategy to manage and reduce vendor fees is to take a complete inventory of all programs, and break down all the fees associated with each one.
The obvious place to start is with a lease if the fleet is leased. The typical fleet open-end TRAC lease consists of four basic elements:
- Depreciation reserve: The rate used to reduce the capitalized cost of the vehicle during the term in service.
- Funding: The rate bases used to apply to the funding portion of the lease rate factor.
- Administrative or lease fee: The fee charged to administer the lease, most often expressed as a percentage of the vehicle cost, less commonly as a fixed dollar cost added.
- Capitalization schedule: The pricing parameters that will apply to vehicles leased.
Depreciation reserve is not a fee. It is usually agreed on by both lessee and lessor, and is merely a way by which, based on the lessee’s replacement criteria, the capitalized cost of the vehicle can be reduced to a projected market value when it is replaced.
Also, nor is the funding portion of the lease rate factor a “fee;” however, there is some negotiation possible. Lessees are often given choices in both the funding basis as well as choosing fixed or floating rates. What is negotiable with a lessor is the markup over that basis; i.e., if the chosen funding source is, say, three year treasury issues, the lessor will add some markup (25 basis points, for example, or 0.25%). Fleets can try to negotiate this markup downward, which will result in documentable cost savings.
The actual fee element in a lease rate is the management or administrative fee. Let’s say that the fee proposed is 75 cents per $1,000 of asset value. This would add to the rate factor 0.00075 as a multiplier. This is often negotiable. Reducing that number down to 50 cents per thousand (0.0005), for a 500 unit fleet — assuming an average capitalized cost of $25,000 — would save $6.25/month, totaling a full $37,500/year. Notice the key point that this fee is added into the rate factor, which is then applied to the cap cost resulting in the monthly lease payment. Thus, as vehicle prices increase, so too does the administrative fee. One way of eliminating these automatic increases is to negotiate a flat dollar monthly administrative fee. It should cost the FMC no more to administer a $50,000 vehicle than it does one costing $25,000 (keep also in mind that the increased funding cost is captured via the funding portion of the rate factor).
The final element in the typical fleet TRAC lease is the capitalization schedule. Most lessors will provide a proposal setting out the capitalization formula for both factory orders and for vehicles acquired from dealer stock. This will often differ; fleet lessors, ordering from the factory through a dealer code, enjoy a “triple net” cost basis. Not so for inventory, which must be negotiated with dealers on an as-needed basis. It is common for capitalization schedules for larger fleets (more than 100 vehicles) to have pricing at or even below factory invoice cost for factory orders and receiving the benefit of some portion of the holdback. Purchases from dealer stock, however, usually contain some markup (flat dollar or a percentage) over cost, or over factory invoice. Although the cap cost portion of the overall lease proposal generally contains no fees, it is possible to negotiate a lower cost, for either or both factory orders and acquisitions from dealer stock.
There can be other charges that can appear related to a fleet TRAC lease. For example, there is so-called “deficit interest” that is charged if a vehicle is taken out of service at other than an annual increment. For “step down” lease schedules, where payments decline annually, the interest portion of the lease rate factor is based on an average outstanding or book value each year. Thus, for the first six months of the year, the lessee is overpaying interest, and for the last six, underpaying. The overpayments accumulate for six months then are “paid off” in the final six. If the vehicle is terminated during a year, there will be a deficit in the interest owed, as the charge is based on the average rather than the actual. Some lessors will bill that deficit to the customer when the final TRAC adjustment is made.
While FMCs in the past most often used the “rule of the 15th” to initiate billing on a new unit (where, if the unit is brought into service prior to the 15th of a month, that entire month is billed, if after the 15th, the remaining month isn’t billed), many have changed to what is called “interim rent”; the monthly payment is divided by the number of days in the month, and the actual days in service for the first month is billed.
Less common is the closed-end or net lease. These have a fixed term, penalties for exceeding contractual mileage limits and excessive wear and tear. Mileage penalties range from as low as 5 cents to as much as 15 cents per mile. Wear and tear penalties are generally deductions equal to an estimate of the cost of repairs.
The next most common fleet program that involves fees is maintenance management. Maintenance management fees are nearly always charged via a per vehicle per month fee, usually in the $5 range give or take a dollar or two (depending on fleet size and the overall customer commitment). Charges for actual maintenance performed is billed as it occurs, most often via fixed, national fleet pricing established by the various chains in the FMC’s shop network.
Fleet suppliers charge a per vehicle per month fee for maintenance management programs; this fee is for participation and for the resources the company brings to the process (national shop network, ASE certified technicians, flexible billing, reporting, etc.). This fee is always negotiable, even after the program has been in use for some time — if the fleet has increased in size either organically or via acquisition — and the savings can add up. Negotiating this fee down from, say, $5/vehicle/month to $4 saves the 500 vehicle sample fleet $6,000/year.
Often, there are also fees attached to the use of out-of-network shops, or even non-national account facilities (national account facilities being tire retailers, “quick” lube shops, and other auto repair national chains). Again, this can take the form of a flat dollar fee or a percentage markup of the repair cost. Negotiate the reduction of any such fees in the master agreement.
Finally, although it doesn’t involve (again) a fee per se, it’s important to understand how suppliers support a maintenance management program. Certainly a few dollars per vehicle per month is not sufficient for the clerical and administrative resources, technical expertise, and also carrying the repair receivables until the customer pays the bill. Discounts are negotiated with their national account suppliers (as well as independent shops) for bringing them business that the shops bore no cost to get. If a fleet generates sufficient volume, or the supplier senses they are in a competitive situation, it is possible for a fleet customer to negotiate the sharing of some small portion of those discounts as a rebate.
A note on fleet fuel card programs: They seldom if ever have fees attached to them; suppliers earn revenues out of the interchange fee they charge merchants for accepting the card (much like regular credit card issuers such as Visa and MasterCard). The interchange fees are nominal — roughly 2.4% of the transaction — but the volume can be huge. The 500 unit sample fleet will generate roughly $3,000-4,000/per vehicle per year in fuel costs. That’s $1.5 to $2 million per year in fuel costs for the entire fleet. You may be able to get a small piece of the $36,000 to $48,000 generated by the interchange fee.
We’ve seen that fleet providers charge fees for accident management generally in the form of a “per occurrence” fee, that is, the fee is charged only when the service is used. The fee primarily covers the cost of producing and disseminating the accident report, and handling the various processes — contacting the repair facility, arranging a replacement rental vehicle, negotiating and approving the repair, and handling the payment to the shop on behalf of the customer.
These are the administrative tasks handled by the supplier; as with the maintenance program, profit is derived via discounts the supplier negotiates with repair facilities and rental providers (known as “rebill discounts”). Also, as with the maintenance program, it is perfectly acceptable for a supplier to do so. After all, it is simply a matter of purchasing the elements needed to provide a product or service at a cost lower than that which is charged to the customer. There isn’t a company still in business that doesn’t sell at a price higher than cost. For some other businesses, however, it is possible to ask the seller to “lower” the price — in this case by sharing some of the revenue the discounts they receive.
Then there is subrogation recovery. When an accident occurs, there is a determination of fault. One of those involved caused the collision, and the resulting physical damage (this is different than liability or personal injury). A key service offered under an accident management program is action to recover the cost of repairs, as well as the possibility of recovering adjacent costs such as replacement transportation and even downtime. Fleet suppliers will glean the information they need to do so from the accident report (other party name, insurance company) and either contact the insurance carrier for recovery or, in the absence of physical damage, coverage from the individual.
The fee for this service is a contingency fee. If the supplier is successful in recovering all or part of the damages, it will retain a percentage of the total as a fee. This can range from somewhere in the teens to as much as 33%. As with all other fees in a fleet management agreement, this is negotiable. For example, if the fee is proposed at 25%, let’s assume the fleet experiences a 20% loss rate (a number of accidents equal to 20% of the number of vehicles in the fleet), half the incidents are subrogable, and the average physical damage cost is $3,000. Negotiating a reduction of the fee down to 20% drops the fee a full $150 per accident. Multiply that by 50 accidents per year (half the total number of accidents based on the 20% rate for the sample 500 unit fleet) and the savings totals $7,500 annually.
As for other programs, all carry a per incident (registration renewal, parking ticket payment) fee, save for the “fleet desk” service, which is charged a flat monthly fee or may even be added to the lease rate factor, and all are negotiable.
The three previous programs, leasing, maintenance management, and accident management, along with fuel card programs (which generally do not have fees attached to them) make up the foundation of the fleet management bundled solution. There are other programs that FMCs provide, and for which fees are charged:
- Registration renewal: For either a straight monthly or a per renewal fee, an FMC will renew registrations for all vehicles in the fleet.
- Parking tickets: Same as registration renewal; the FMC pays the ticket for a per-instance fee.
- “Fleet desk”: FMCs often offer their customers a toll free number, answered in the customer’s name, which drivers can call for help and advice based on the company fleet policy. This is charged in many different ways, including monthly per-vehicle charges, a factor added to the lease rate, or even a fee per call received.
The bottom line in all of this is that fleet managers need to first take an inventory of all the fees they pay, and which add to the total cost of operation of each fleet vehicle, and then work at negotiating reductions or changes that will help save money.
As with any business transaction, it is best to negotiate rather than demand reduction of fleet program fees. There is no logical reason to risk damaging an otherwise good, beneficial relationship with a supplier by making demands or threatening to take business elsewhere.
That said, do the best you can to negotiate the best program you can when the business is first put out to bid. Once the programs have been implemented, give the relationship time — a minimum of six months — to take hold. There will be an implementation period, where processes and procedures must be worked out, changes made, and the final form takes shape. See how the program goes, make certain that the supplier follows through on promises made during the sales cycle in their bid response. Once you’re certain that the program is the right one, ask for meetings during which you can present your requests for reductions in fees.
Keep one key item clearly in mind. If you have outsourced your fleet services to a bundled supplier — that is one company providing all programs (lease, maintenance and accident management, fuel card, and any fleet administrative programs), its pricing assumes revenue streams from all programs: markups on capitalized cost criteria, administrative fees and funding markups in the lease, rebill discounts and participation fees for maintenance management, per-occurrence and subrogation contingency fees in the accident management service, as well as negotiating revenue sharing for fuel and other programs where it may be available.
The threat of moving one or more of these programs to another vendor upsets the entire revenue model the supplier used to quote the business in the first place. Even in friendly negotiations, you may be faced with the fact that, in order to reduce fees in some programs, your supplier may require increases in others. Be prepared to address this issue, and decide how you will respond.
All in all, your fleet costs, and ultimately total cost of operation (TCO) are determined not only by the dollars expended and mileage driven, but by the fees your company pays for the services you need, and the resources these services provide. Negotiate from a position of strength: know all of the fees attached to the programs, pay your bills on time, and cooperate with your supplier to get the most out of the relationship. You’ll find that, in a very competitive marketplace, you may be able to save money without damaging the relationship you have with suppliers.