Are your fleet costs visible? Are they clear and easily comprehensible to all stakeholders, including those outside of the fleet management organization, such as fleet users and your organization’s leadership? How do you know if you are doing a good job of managing costs, or if fleet costs are even reasonable?
The most common thread among all of Mercury’s engagements as a fleet management advisory firm is the desire by leadership to improve efficiency and reduce costs. And yet, while some organizations may know their total fleet costs, when asked about a specific subset of costs, such as maintenance and repair, or particular portions of the fleet, such as law enforcement or the roadway maintenance fleet, many organizations are unable to answer accurately, if at all. This is often due to lack of a properly designed chargeback system.
Defining a Chargeback System
A chargeback system is a means for internal service organizations (in this case, fleet management) to recover the costs generated by the consumers (users) of the goods and services they provide. A properly deployed chargeback system relies on chargeback rates that include the direct and indirect costs associated with furnishing a distinct good or service (e.g. parts, sublet repair, and in-house maintenance and repair). Fleet management should fully recover their costs with these rates.
At a minimum, a good chargeback system will ensure the equitable distribution of costs to the users that generate these costs, while avoiding cross subsidization. However, the principle underlying the use of a cost chargeback system to finance a fleet’s operation is that fleet users will do a better job of managing their costs if they have to budget and pay for them in a way that is clear and comprehensible, than if those costs are largely invisible.
This is because fleet organizations that use a chargeback system, in essence, are selling goods and services rather than giving them away. Organizations that are required to pay for the resources they consume are by and large more motivated to manage consumption than those that receive such resources for free. For instance, a department that pays for repairs to its vehicles is more likely to appreciate the benefits of a good preventive maintenance (PM) program and a sound fleet replacement program than one that receives PM and repair services for free. However, if the rates charged do not accurately reflect the true cost of the service provided (as is often the case with artificially low labor rates), the impact on the fleet user will not have the desired result.
When Costs are Poorly Managed
Flawed chargeback systems most often are caused by a failure to properly account for all costs. Other times, true costs are skewed in pursuit of a perceived benefit or good. One example is simplifying the budget process by utilizing average or “all-in” flat fees for variable costs such as maintenance and repair; or the costs are skewed simply due to a lack of understanding on how to properly allocate them. In any case, these flaws create a lack of transparency that makes even the best-intended system murky in terms of understanding the true costs of the fleet, especially for users and stakeholders outside of the fleet management team.
Fleets with poorly managed costs are usually poorly managed fleets. And, no matter how well the fleet is managed otherwise, without a properly designed and executed chargeback system, it is impossible to optimally manage the costs of that fleet. Why? Simply put, you can’t manage costs you can’t see.
A thorough and transparent chargeback system places both responsibility and authority for fleet costs in the hands of the user group that generates these costs. It allows users to manage their own costs by making consumption decisions in accordance with their operating needs, and by managing the behaviors of their drivers and operators accordingly. At the same time, the need for fleet management to justify its rates and fees to its customers will drive the quality and efficiency of its services, as the competitiveness of its rates and fees will be easier to compare with outside organizations (e.g., commercial providers of similar services, peer organizations). The result is a more effective and efficient utilization of fleet resources as both the user and service provider are required to substantiate their decisions and actions via readily available empirical measures — that is, cost.
Designing an Accurate Chargeback System
The most cost-effective government fleet organizations are usually set up as an internal service fund, if not formally, at least effectually. As a result, every fleet user agency within the government organization is charged for all of the services and goods it consumes, and the fleet is required to be a completely self-supporting internal service organization. This means that by the end of the fiscal year, the fleet organization is expected to “earn” an amount essentially equal to expenditures, which in turn requires the chargeback system to be accurate and effective.
The system utilizes service-based chargeback rates to levy a combination of fixed monthly charges and transaction-based charges for the replacement of fleet assets, asset operating costs, and asset management services. This methodology categorizes all fleet costs in their proper activity component and serves as the foundation for all charges. Customers are charged only for the goods and services they consume (e.g., mechanic labor and markups on parts, fuel, or sublet services) and a fleet management asset fee. The capital rate (i.e., fleet replacement chargeback rate) is separate and billed to the appropriate customer as an independent charge component.
The chargeback rates are updated annually, and based on the actual costs of the fleet over the previous several years, along with good sense adjustments for one-off circumstances. These costs should include all the expenses that enable fleet management to exist and operate. Beyond the obvious costs, such as salary and wages for maintenance staff, incorporate all general administrative costs, utilities, rent, information technology costs, and other direct and indirect costs.
Last, but not at all least, the billing system makes the charges (and ultimately the costs) of managing and maintaining the fleet clear and easily understood for fleet staff and users. Invoices should be laid out and enumerated logically and clearly to ensure all users can identify primary costs and fees independently. For example, a brake repair should show the cost of purchasing the necessary parts, the markup for those parts, the amount of labor hours used for the repair, and the appropriate labor rate. Typically, billing is done monthly.
While the chargeback process may sound complicated, Mercury has found that most government organizations are able to allocate costs, create a rate schedule, and provide users with strong budget estimates in one spreadsheet workbook with as few as three or four spreadsheets. More importantly, implementing or improving a chargeback system has proven significant for reducing operating costs and identifying problem areas within a fleet operation. Evaluating fleet costs should be in the diagnostic toolkit of fleet managers and consultants alike. Step one is to make sure those costs are visible — because you can’t manage costs you can’t see.
About the Author: Marc Canton is a senior consultant with Mercury Associates. He can be reached at MCanton@mercury-assoc.com.