Fleet News negotiation article

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Author: Colin Tourick. Published by Fleet News, May 2020

Now more than ever, we need win-win solutions

We sighed simultaneously, looked up and smiled wryly. They had just announced yet another hour’s delay to our flight. So I did what no Brit ever does: started talking to a complete stranger.

Turned out he was an American businessman going home at the end of a work trip. “Successful?”, I asked. “Definitely”, he said, with a broad smile.

He told me he owned a mediation organisation. “Matrimonial? Business disputes?” I asked. And he said no, he only worked with governments, helping resolve disputes between nations. He’d been doing this for thirty years.

“Well, we’re not going anywhere for at least the next hour”, I said. “Any tips you can give me?”

He smiled and said he didn’t need an hour. “Most people go into a negotiation saying what they want but rarely explain why they need it. If I’m thinking about my wants and needs I’ll negotiate hard. You’re doing the same. It’s a zero sum game. What I gain you lose. However, things change if I tell you why I need a particular outcome. Human brains are geared to finding solutions. You’ll start thinking about my needs as well as your own. You’ll get creative. Maybe you’ll realise there’s something you could offer that we haven’t discussed that would deliver value to me, cost you little and make your overall offer more acceptable. Two brains are now working on solving my problem. That’s the key to dispute resolution.”

I’ve often had cause to thank this stranger for his sage advice and thought about him during the Fleet News webinar on how fleet managers are managing during the current crisis. Many participants had vehicles parked up, with drivers furloughed or working from home. So they were paying for vehicles they were not using.

I know that some fleet managers have been trying to negotiate payment deferrals with their leasing companies over the last few weeks, with varying degrees of success.

So with those words of sage advice still in my ears, I will use the rest of this article to set out, for the benefit of fleet managers, some of the issues facing leasing companies at present, and vice versa. By understanding each others’ needs, rather than wants, perhaps you can work together to devise tailor-made solutions to alleviate some of the pain that so many businesses are feeling at present.

Dear Fleet Manager. I’ll assume that yours is not an ‘essential’ business in a ‘keyworker’ sector; you lease your vehicles on 3-4 year contract hire with budgeted maintenance; many are standing idle; your business has stalled because of the lockdown; you have claimed all you can under the government’s schemes and need to preserve cash.

Your leasing company is faced with problems on all sides. They make a tiny margin on each lease and rely on volume to make a profit, but new business has dried up. They also hope to make a profit when selling ex-lease vehicles, but used vehicle prices are tumbling. They know that some of their clients will not survive the crisis, large numbers of vehicles will be returned and they will make a loss when selling these. At the moment your leasing company is saving money on the maintenance on your laid-up vehicles, but those savings will be dwarfed by the hit they’ll take from the fall in used vehicle prices. And the FCA’s proposal to freeze personal contract payments will hit them hard, as PCP and PCH have been growth areas for leasing companies in recent years.

Leasing companies are highly-geared: lots of debt, not too much equity. It doesn’t take much of a downturn to damage their capital. Whilst many of them belong to larger groups – banks, motor manufacturers, motor dealerships – those businesses are suffering too. So when they insist you pay rentals for vehicles that are standing idle, they’re doing so from necessity.

Dear leasing company account manager. When your client comes to ask you for help over during the crisis, they are doing so out of necessity at a time of stress.

Fleet managers tend to be busy people but the lockdown has added new burdens such how to ensure driver wellbeing is maintained despite workload increases (in ‘essential’ businesses); dealing with furloughed drivers’ concerns about being charged benefit in kind tax for cars that can’t be driven because of lockdown, the sanitisation of multiple-shift vehicles between shifts, and so on. And meanwhile their finance directors are insisting they find ways to reduce fleet costs – often the third largest item of expenditure after people and premises costs – and in particular to preserve cash.

If you can find a way to help them they’ll be more likely to be around in future to pay your rentals and order new cars.

No-one knows how long this crisis is going to last. I think it will take more than a year for stability to return, though it will be a new normal with lower GDP. Once we’re out of this, leasing companies will hope to resume trading normally. People tend to remember those who help them when times get tough. Goodwill is a fragile thing: hard to win, easy to lose.

So my first piece of advice is for both parties to talk. Don’t just set out what you want but why you need it. Seek out ways – creative ways – to help meet each others’ needs. It’s not a good time to dig your heels in and be inflexible.

If I was a fleet manager that was not an ‘essential’ business, I wouldn’t now be asking my leasing company to recalculate my lease rentals based on lower mileage. Any saving would be marginal and would be outweighed by the reduction in used vehicle values the leasing company would want – need – to build into the rental calculation. I’d ask them to reduce my rental payments for the next three months by a very significant percentage and I’d agree to pay back the shortfall in the last three months of the lease.

Leasing companies are about to suffer pain, so I’d also offer now to extend all leases due to end in 2002 by six months, and in 2021 by three months, with rentals unchanged, and give each party the option to extend for a further three months. That would help me – I certainly wouldn’t be adding new vehicles to my fleet any time soon – whilst also helping the leasing company – allowing time for the used vehicle market to recover.

The real problem for a fleet manager comes when staff are made redundant and their vehicle is simply no longer needed. No-one is in the mood to pay early termination fees at present, but the leasing company needs these if it is to clear its books. So, if I was a fleet manager I’d ask for these payments to be deferred by 9-12 months. Yes, I’d accept the liability, but I’d want to preserve my company’s cash during the crisis. And the quid pro quo for this? I’d need to find something to offer that the leasing company would value and that I can afford.

So here’s an example.

Leasing companies spend an awful lot of time, effort and money whenever they pitch to win a new client or to retain an existing one. So as a quid pro quo for deferring the payment of early termination fees, I’d offer them my loyalty – a commitment that for the next three years they will win all of my business. If they don’t currently have sole supply of my fleet I’d guarantee to order from them every time one of their vehicles comes off lease. I would of course want to build in some safeguards here to ensure that rentals don’t go sky high (recognising that rentals are likely to go up anyway because the recent reduction in interest rates was miniscule compared to the sharp reduction in used vehicle prices we’re about to see).

It’s time to have a really good conversation with your leasing company.

Fleet World article

Making the most of lockdown: Key advice for fleets

Colin Tourick FICFM on how fleets can best spend the coming weeks and months in lockdown to good effect.

It’s April, the Chancellor has delivered his Budget and in a normal year I would now write an article about how the Budget will affect company car and van fleets. However, the coronavirus crisis is having such an overarching effect on everyday life that I feel it would be wrong to spend too long now discussing the Budget.

So let’s get that out of the way quickly so we can concentrate on more pressing matters.

The Chancellor froze company car Benefit-in-Kind tax rates for 2023/24 and 2024/25 at 2022/23 rates (hooray!), fuel duty was frozen again, plug-in car and van grants were extended to 2022/23, £500m was committed to increasing the number of rapid charging points, the inflation-linked increase in VED was confirmed and – broadly – the fleet industry drew a sign of relief. Plenty of Budgets have been uncomfortable for fleet managers. This wasn’t one of them.

Let’s turn now to coronavirus and the current lockdown.

There are always winners and losers at a time of national crisis. The winners today include supermarkets, delivery services, the private medical sector and companies that produce hand sanitiser and toilet paper. The losers include entertainment venues, retailers, manufacturers, conference organisers and many other businesses. If you’re amongst the winners you may well be rushed off your feet as your company ramps up to meet an unprecedented level of demand. If you’re amongst the losers, many of your drivers may be sitting at home with little to do.

These are all short-term phenomena. The virus will pass, people will go back to work, life will slowly return to normal. But it’s unlikely to be the normal we knew before. Some businesses will find their businesses boom – psychotherapists and divorce lawyers come to mind – but others will have been badly damaged by the downturn in business. Consumer confidence will have declined, government debt will have ballooned, there will be inflationary pressures and many people will be more interested in repaying debt, rebuilding their savings or looking for a job than in going out and spending money.

And let us not forget the other factor that hasn’t gone away: Brexit. I cannot imagine that in their wish to rebuild their economies as quickly as possible, the EU will be in the mood to deliver much by way of concession to the UK’s Brexit negotiators.

So, without wishing to be unduly negative, it’s probably fair to say that for many businesses the next year or two are likely to be quite uncomfortable. There will be pressure to do things more effectively, efficiently and at lower cost. And, as fleet costs are often the third largest overhead for many businesses after staff and property costs, it’s fleet managers who are going to be called upon to deliver those efficiencies and cost savings.

So let’s assume you’re a fleet manager sitting at home with rather less to do than normal. How best to spend the next several weeks – or months – until this crisis has passed?

Here are some suggestions I have been giving fleet managers:

  1. Clear your desk. You know all of those things that have been sitting on your desk or in your inbox for ages that you never had time to get around to? Good news, you have some time. Deal with them. At least that way when you get back to the office you’ll have a clear desk and a clear inbox.
  2. Redo your budgets – they’re out of date. The good thing is that you’re saving money on fleet costs (fuel, servicing, etc) at the moment. Indeed you may continue to save fleet costs once the crisis has passed if demand for your company’s services falls. However, used vehicle prices are falling which means that either you’re going to get less for your cars when you sell them or your leasing company is going to lower their residual values when calculating their rentals. Time to redo the numbers.
  3. Research new areas you had not yet considered, where you might reduce costs or increase efficiency. A decent fleet management system to replace all of those spreadsheets? A telematics system to help you manage your fleet more effectively? A better fleet reporting system? An automated mileage reporting or fuel cost management system so you can that would allow you to move away from all those bits of paper – and give you decent management information in the process? You can research all of these and more online, from the comfort of your home.
  4. Start benchmarking. There is plenty of fleet cost data available online. You should be able to benchmark many of your fleet costs from the comfort of your home.
  5. Get studying. Sign up for one of the Institute of Car Fleet Management’s excellent courses and get yourself a qualification. The ICFM (now part of the Association of Fleet Professionals) have stopped running face-to-face training for now but they have a range of online courses.
  6. Work out what value your fleet policy is delivering to your company and your drivers. Some of your cars are perk cars which, I know, deliver non-financial benefits to drivers, but let’s concentrate here on the financial side. For each car, calculate the cost to the employee of each personal mile driven. Some of those costs will be huge. Time to have a chat with them about foregoing their car and receiving a pay rise instead? Both the company and the driver could save money.
  7. Then do the same sums for your ‘business use’ cars, but this time work out the cost to the company per business mile. Once again, some of those costs will be huge. Time to look for a different solution?

This period offers a golden opportunity to do the things you always said you’d get around to if only you had the time.

Fleet World article

Fleet Finance: “It’s a tough time to be a fleet manager”

Over the years I must have read that sentence in the trade press dozens of times, usually when some aspect of government policy was having an impact on company vehicles. Truth is, it’s never been a particularly easy time to be a fleet manager. Government policy aside, fleet management is a multi-faceted, complex and specialised area of business, and even the most highly experienced fleet manager will tell you they’re always learning something new.

But there’s no question about it: the landscape for company vehicles now is very confusing. I’m sure that some fleet managers will be feeling nostalgic for those days when if you ran a fleet of diesel-engined cars funded on maintenance-inclusive contract hire you were almost definitely doing the right thing.

The BVRLA’s recently published Industry Outlook 2020 is a concise exposition of the key issues currently occupying the minds of the people who run daily hire, leasing and fleet management businesses.

It was compiled with input from 20 leading experts from across the fleet industry. The BVRLA is the industry’s trade body and its members are responsible for more than five million vehicles in the UK, including one-in-eight cars and one-in-five vans. Whilst the report is primarily written for the benefit of BVRLA members, its members’ concerns are also fleet managers’ concerns, making this report required reading for fleet managers.

As the report says – and fleet managers know – the sector is facing challenges.

Cars are becoming increasingly connected and are generating vast amounts of data. However, little of the value of this data has been reaching fleet managers, largely because the necessary deals have yet to be sorted out between the manufacturers, leasing companies and end-user fleets to determine who will control this data. Leasing companies would love to access vast amounts of real-time data and would no doubt find all manner of innovative ways to package it for the benefit of their clients. Sadly, this innovation is being stifled at present.

Demand for electric vehicles is increasing and is likely to increase sharply from 6 April when the 0% Benefit-in-Kind tax rate is due to come into effect, once rubber-stamped in the Budget. When your drivers realise they can have company cars without paying any tax, they will really start to look seriously at EVs. However, there is already a problem with the availability of such vehicles, particularly upmarket models, and this will not materially improve in 2020. And the charging infrastructure is still a problem. Too few charging points at home, at work or in public places.

Many fleet managers have been caught in a cleft stick: on the one hand they have drivers for whom the word ‘diesel’ has become toxic, yet Euro 6d-TEMP and RDE2-compliant diesel cars are remarkably clean, cost less than comparable electric vehicles, deliver great mpg and have lower emissions than most comparable petrol-engined vehicles. But can they make a comeback in the minds of drivers?

The relentless increase in Benefit-in-Kind tax rates has driven many company car drivers – particularly low-mileage perk car drivers – to ditch their company cars in favour of cash allowances. Some of these drivers use their allowance to pay monthly for cars on maintenance-inclusive personal contract hire or personal contract purchase, so these cars are being professionally managed. But others are simply buying used cars or using existing family cars, leaving fleet managers trying to ‘manage’ grey fleet cars they don’t control. Nightmare.

Mobility solutions have been touted for many years but we are a long way from the promised vision of a fully integrated system that can take an employee from A to B using the optimal mode of transport at the lowest after-tax cost for both the employer and the employee and with the lowest level of emissions.

In three years’ time the situation should be very different. The EV supply issues will have been sorted out; there will be a lot more charging points in place; there will be many more data-driven solutions available to help fleet managers and drivers; diesel may have come become sufficiently acceptable again to be viable for high-mileage drivers for whom EVs aren’t an option; viable mobility solutions will offer real alternatives to the traditional company car and – hopefully – we will have a stable tax environment where once again we will know what is happening with company car tax four years in advance.

However, none of this helps fleet managers decide how best to fund or manage company vehicles in 2020.

My suggestion therefore is that they should think of the next couple of years as an interim stage where they need to find solutions that will work until we arrive at a brave new world in 2-3 years’ time. The question, therefore, is how to do this. In other words, what can a professional fleet manager do now that will keep costs as low as possible?

I think the solution is to be found by deciding car by car, driver by driver, the optimum funding solution.

Across-the-board funding solutions such as ‘contract hire for all’, which worked back in the day when BiK rates were lower, simply don’t work anymore. Some of your drivers cover much higher levels of business mileage than others. They may pay tax at a marginal rate of 20%, 21%, 40%, 45% or 46%, depending on their levels of income and where they live in the UK. Contract hire will be the ideal solution for some, a company-organised PCH scheme will be best for others and an ECO scheme for others still, whilst some with perk cars may indeed find cash allowances deliver the optimal solution.

Blended contract hire/ECO schemes have been used for years by some larger fleets to make huge savings. Now, the optimum solution requires a blend of contract hire, ECO, PCH/PCP and cash allowance. This is, actually, achievable, because the decision about which solution works for each employee is a simple matter of mathematics.

Ask your leasing or fleet management company to do the sums for you. As the BVRLA Industry Outlook highlights, those companies have been investing heavily in consulting solutions. They should be able to help you choose the optimal funding method for employees changing their cars in 2020. And by the time you come to replace those vehicles, things should be a lot easier.

Colin’s updated thoughts on Brexit

Article originally published by Fleet News 30 September 2019

https://www.fleetnews.co.uk/guest-opinion/hope-for-the-best-plan-for-the-worst

We are in the vortex of a national crisis. Actually, crises.

* Constitutional – can the PM refuse a direct instruction from Parliament?

* Democratic – which should prevail, the will of the people or the will of their parliamentary representatives?

* Economic – no one seems to know how bad things will be when we leave the EU, (with or without a deal).

* Social – there has been a sharp increase in antisocial behaviour (racism in particular).

* Political – have we ever seen so many disaffected MPs?

This is a particularly British crisis. No riots, no petrol bombs, no tanks on the streets. Perhaps we should be thankful for such small mercies.

Many businesses have yet to assess how leaving the EU will affect them, deal or no deal. Fleet managers are wondering what to do next. Frankly, they have already had a pretty bad year, dealing with the impact of WLTP, sharply rising BIK rates and employers wondering whether to bail out of their company cars and take cash instead.

In the past few months, I’ve found myself giving a piece of advice to managers I’ve rarely given in 40 years in fleet: wait and see what happens. We don’t know if there will be a deal and have no idea what shade of government we’ll see if/when there is a general election.

It seems to me that some of Labour’s policies are a long way from business-friendly. Would a Labour government lead to a reduction in business investment and economic activity? And, if so, how might that affect your business?

The Liberal Democrats are riding high in the polls. They would campaign to hold another referendum and remain in the EU. Would that mean business as usual?

The Conservatives want out, but would they really leave without a deal?

And can any party win a majority?

Waiting and seeing is not the same as doing nothing. There is a lot to do. ACFO’s call for fleets to prepare a disaster recovery plan is spot on. A no deal Brexit will lead to disruption, delays, price hikes and some shortages. We need to hope for the best, plan for the worst and stay flexible. Now is a very good time to delay vehicle replacements.

Car subscription services: proceed with caution

Article first published in Fleet Leasing 19 December 2019

https://www.fleetnews.co.uk/fleet-leasing/news/insight/car-subscription-services-proceed-with-caution

Should leasing companies move into the car subscription market? Colin Tourick outlines the risks involved.

There has been a growing interest in car subscription services, also known as car-as-a-service, for a whole host of well-understood reasons.

These include:

  • more kids going to university than ever before and leaving with £50,000 of debt
  • more people moving to cities, where public transport is plentiful and parking is a nightmare
  • the rising cost of car ownership 
  • people becoming used to paying for things by monthly subscriptions that they can cancel at short notice
  • the heavy burden of company car tax.

Under a car subscription, clients are offered cars on no-strings-attached contracts, either for a short, fixed duration of, say, three months or cancellable on demand without penalty. The contracts include full maintenance and servicing, insurance, rapid delivery, a small down payment and either a short, fixed duration (perhaps two or three months) or the flexibility to hand the car back at will.

A large YouGov/Zoura study recently showed that 24% of Brits would forego buying a new car and subscribe to a car-as-a-service product within the next year.

Millennials were the group most interested in this option, and, as the researchers said, this is “pushing companies to rethink their business model”.

Those companies, of course, include leasing companies.

Leasing companies’ role in the increase in car subscription services

More and more lessors are offering personal contract hire (PCH) and personal contract purchase (PCP) to meet rising demand from consumers and to ensure that, when an employee decides to opt out of their company car, the opportunity to supply them with a car is not lost forever to a manufacturers’ captive finance company.

And now it is being suggested that subscriptions services will be the next ‘big thing’.

LeasePlan recently entered the market with its monthly car subscription service, Subscribe and Drive.

CEO Tex Gunning said: “Increasingly, our customers – whether they are corporate, SMEs or private individuals – would prefer a ‘car-as-a-service’ with no strings attached in terms of car type or duration. They just want ‘any car, anytime, anywhere’.”

Volvo, Wagonex and Drover also offer car subscription services in the UK, while in America the market is currently dominated by car manufacturers, including BMW, Audi, Cadillac, and Porsche.

Should your leasing company get in on the action?

Many fleet leasing companies are looking at how they can get a piece of the action. But should they?

Traditionally, when a leasing company delivered a new car to a fleet client it stayed on hire for three or four years. They collected it at the end of the contract, ideally when delivering the driver’s next car. There is no ‘down time’ in this arrangement: the client pays for the car throughout the hire period and also pays if they want to terminate the arrangement early.

If fleet clients needed cars for shorter periods – perhaps while the driver was waiting for delivery of their new car or to meet some other short-term requirement – they used the services of daily hire companies, and the deal was often arranged by the leasing company.

There is a very good reason for this division between leasing companies and rental companies.

They cater for the needs of very different customers.

Someone who wants a car for three years will be very specific about their requirements. Colour, engine size, fuel, transmission, make, model, derivative, factory-fitted options, and so on. A tailor-made product.

Someone who wants a car for a few days or weeks generally isn’t bothered about most of these things.

They want to car to be of a certain size and quality and to able to transport a certain number of people and a certain amount of luggage, but beyond that they don’t much mind which car they get. That’s why car rental companies offer cars in groups: mini, economy, compact, full-size and so on.

When they tell the consumer they will be getting a ‘Fiat Panda or similar’ they are managing expectations and giving themselves the flexibility to deliver whatever car in that group happens to be available.

“If I was running a fleet leasing business I’d be talking to colleagues in the daily hire sector to discuss how we can meet demand from my clients for flexible leasing, using the rental company’s resources.” Colin Tourick

Daily hire companies have a very large number of cars available, either from their own fleets or by arrangement with other rental companies.

These cars have been bought at massive discounts, new from the manufacturer, and when they come to be sold nine to 12 months later the rental company will have suffered very little depreciation or maintenance cost.

The driver may have collected the car from the rental company’s local depot, or if the client is big enough and has a sufficient number of rental days per year, the rental company might have delivered it to the driver’s place of work.

Rental companies have massive infrastructure to support this: many cars available at short notice, a good spread of depots across the country and a small army of drivers available to move cars. So the direct cost per hire and vehicle movement is low.

Most fleet lessors have none of these natural advantages. They buy cars at good prices, certainly, but normally nothing like the prices paid by rental companies.

When a driver signs up for a subscription service from a leasing company and wants a car for, say, three months, they are likely to want to choose their own car rather than leaving the choice to the supplier.

But the leasing company is not going to be able to let the driver configure the car they want, because no other driver of that car in future may want that particular spec. How is the lessor to deal with this? Buy more cars than it needs, or try to channel clients into taking cars that don’t meet their specific needs?

Neither option is good.

The driver is likely to want to have the car delivered, which means it will need to be moved – at the lessor’s expense – several times each year.

Giving the client the flexibility to end the contract on demand, at little or no cost, means giving them the opportunity to cause financial pain to the lessor.

The way to avoid all of this pain is for the lessor to charge rentals that are high enough to cover all of the additional costs that are implicit in the delivery of this type of product. But those costs are going to have to be very high indeed to ensure they cover void periods and the need to move cars long distances around the country. It will be hard to make them look competitive against the cost of, say, a conventional three-year lease or indeed a corporate daily hire rental.

One way to reduce some of these costs is for the lessor to show, on their website, the vehicles they currently have available.

If a driver happens to want one of those, great, but if they don’t, will the lessor be willing to let the driver click off that site and onto a competitors’ site or will they try to retain the client by offering them the chance to specify the particular car they want? That way they’ll win the deal, but at what cost?

And will fleet lessors ever really be able to compete with daily rental companies for this type of business, given the massive advantages those companies have – both infrastructure and price?

This is a risky product for the fleet leasing industry as currently configured.

Just because there is demand for something, it shouldn’t automatically follow that lessors should be clamouring to buy new cars (or allocate used cars) and set up departments to meet that demand.

The risks here are high, the revenues uncertain and the opportunity for losses are great.

Also, this product isn’t new. A number of companies have been set up over the years to offer ‘flexible leasing’, and none of them has been particularly successful. One or two have failed spectacularly,

If I was running a fleet leasing business I’d be talking to colleagues in the daily hire sector to discuss how we can meet demand from my clients for flexible leasing, using the rental company’s resources.

Synergy Automotive hits service highs

Great news about a small business in the leasing sector delivering world class-customer service.

https://www.yorkshirepost.co.uk/news/synergy-beats-top-firms-for-service-index-1-9364776

https://www.yorkshirebusinessdaily.co.uk/2018/09/25/yorkshire-leasing-provider-outperforms-fortune-500-companies-in-world-class-table/

https://www.harrogatechamber.co.uk/NewsItem.aspx?ID=360

More here  and here

Company Car and Van Tax 2018-19 is published

 

The 8th annual edition of Company Car and Van Tax has just been published by Eyelevel Books, in conjunction with KPMG, Ogilvie Fleet, Low Cost Vans and Fleet Operations.

Company Car and Van Tax 2018-19 has been fully updated and includes information on optional remuneration, salary sacrifice and car allowances.

The book covers everything a fleet manager or company vehicle driver needs to know about tax, including car benefit tax, fuel benefit tax, VAT, income tax, corporation tax, capital allowances, fuel duty, vehicle excise duty and national insurance contributions.

Published in conjunction with KPMG, Fleet Operations, Low Cost Vans and Ogilvie Fleet, and is available from amazon.co.uk, tourick.com and all good bookshops, priced at £50 paperback or £41.67+VAT PDF ebook.

The paperback will be available late June 2018, PDF is available now for immediate download.

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