We caught up with Rory Mackinnon, Sales & Marketing Director at Holman, to offer an insight into TCO and to ask: Is it the answer for your fleet financing decisions?

Total Cost of Ownership (TCO) can be a valuable tool for evaluating the comprehensive expenses associated with owning and operating a fleet. In principle, it provides the complete cost of vehicle ownership to create a fixed cost model. This includes the initial purchase price, its running and maintenance costs, and its disposal value at the end of the vehicle’s lifecycle.

However, the dynamic nature of fleet management costs, with factors such as fluctuating fuel prices, advancements in vehicle technology, and changing regulations, means that TCO alone will not provide the entire financial picture.

Integrating additional data ensures a more nuanced understanding of the financial implications. This broader perspective allows decision-makers to adjust strategies and make informed choices, leading to more responsive and effective decision-making in the rapidly evolving landscape of fleet management.

How TCO Works

On paper, TCO may seem a sensible and reassuring way for a business to reduce the unknowns and stabilise financial projections, and it does act as a solid foundation for selecting vehicles within a fleet.

Traditionally, TCO is calculated as follows: Before ownership, you select how long you want to keep the vehicle (usually between 12 – 60 months) and set the annual mileage rate. From there, you add the funding cost, service, maintenance and repair (SMR), fuel and residual car value, taxation and insurance based on expected usage to get a fixed estimated running cost.

Why TCO Alone Is Not Telling You the Full Story

The reality of TCO, is that applying a fixed-cost model to the daily running of a fleet is problematic due to the evolving nature of the market including:

• Petrol prices fluctuations
• Mileages variations
• Unexpected mechanical issues
• Actual fuel consumption
• Market changes
• Interest rates
• Driver behaviour

These real-world problems make it very difficult to predict a fixed running cost using the TCO model, and a lack of flexibility around your asset base can slow down reactions to market opportunities, a disadvantage that competitors will be keen to exploit.

The biggest challenge to overcome is the perception of ‘risk’. While having a fixed maintenance budget might feel simpler and safer than a variable one, businesses face a significant hurdle in effectively managing and disposing of problematic or non-functional vehicles due to a lack of control.

Couple this with the hidden costs that often only become apparent towards the end of finance agreements, such as extra charges from excess wear-and-tear or excess mileage, and the logic of using TCO calculations as an operating model starts to come into question.

The data speaks for itself. The latest FN50 report shows that 69% of contracts do not end on term. 12% of contracts incur excess mileage charges averaging at £528 per car. And at the end of term, 49% of contracts have wear and tear charges, averaging at £370 per car.

Considering all these factors, it becomes clear that TCO doesn’t provide the complete picture, but a valuable piece of the puzzle.

When fleet owners realise that it costs more than they budgeted, it’s often too late. They are then faced with the challenge of minimising the impact, either by de-fleeting the vehicle or working with their provider to ‘get out’ of a contract.

But what if you could constantly monitor the asset? If you could identify and anticipate any unexpected issues along the way you would be able to make the most efficient and cost-effective decisions without the high risk involved. Well, we understand these challenges, and with some forward thinking, Holman’s Portfolio Management system was born!

Holman’s Portfolio Management Service – The Real Fleet Solution

Holman’s Portfolio Management service treats each vehicle as an asset. We work around your requirements to review the optimum usage for your fleet, and our analytics tools can rapidly identify any problems along the way with guidance on when it’s most effective to repair or replace a vehicle.

We start with TCO to gauge what the vehicle may cost during the requested term and mileage. Then, we use real-time data such as SMR spend, VOR data, fuel spending, telematics, residual values and ongoing market data, to continually review against the TCO figure to give our clients the power and ability to make real-time decisions based on facts.

Conclusion

TCO is a valuable tool for capturing point in time costs to your fleet, but the reason it’s only one piece of the puzzle is that it’s impossible to use this model to accurately calculate costs over 3 or 4-year contracts in the ever-changing landscape of the industry.

We understand that for many businesses managing their fleet is not their core focus, and finding the time and expertise to review each vehicle in real-time can be daunting.

That’s why our Portfolio Management service was created with a solution focused approach; we recognised the need for an alternative to the rigid contract hire model. Our service provides our customers with the option to continuously shape and adapt their fleet to match current demands and future-proof against unpredictable changes. It’s all about giving you the flexibility you need, while ensuring a smooth and efficient management of your fleet.

At Holman, we take pride in driving what’s right for your businesses, by providing our expertise and solutions to enhance the value of your fleet.

Discover more about our Portfolio Management Services or talk to one of our team to discover how we make a real difference to your fleet financing.