Parkinson & car leasing

Parkinson's law of triviality applies perfectly to fleet management and car leasing. Cyril Northcote Parkinson (1909–1993) posited in 1957 that the amount of time spent on a subject is inversely proportional to the amount of money involved. This wisdom later became known as Parkinson's law of triviality.

In short: people fuss over small matters, while decisions on large, complex matters are taken quickly and carelessly. Compare it to household finances: you may research which supermarket has detergent on offer this week, yet sign a mortgage offer next week without reading all the small print.

Parkinson explained the behaviour through the great complexity involved and the assumption that the other party (the mortgage provider) will surely know best. Sound familiar? If the law of triviality applies anywhere, it is to car leasing and fleet management.

Car leasing is the most complex commodity in business. It looks simple on the outside, but is secretly quite complicated.

That complexity is ignored by clients, because the other party (the leasing company) will surely know best. Fleet owners fuss over an extra percent of dealer discount, the driver's right foot or pennies off the fuel price, often encouraged by the leasing company, which never tires of pointing out the money to be had from dealers and drivers. The framework agreement, meanwhile, is signed with a flourish and never leaves the desk drawer again. Often no disaster, since the contents of that document offer little grip on containing costs anyway.

When procuring a framework agreement, the client often looks at the rates of a number of fictitious lease calculations. Those rates prove highly volatile: they change immediately after the procurement moment through shifts in list prices, interest and marketability. Moreover, in practice a slightly different car is often ordered than was requested during the tender. Ergo: ample room for the supplier to let the rate level creep up, in a way the average client can barely measure.

And we are not there yet, because the contract is concluded for a specific duration-mileage combination, and the chance that the car follows exactly that annual mileage is nil. At a relatively small percentage deviation, the leasing company may change the rate, and that changed rate is normally not traceable to the euro. Usually not to a tenner, or two. Eventually a final settlement follows, where surprises regularly appear: return damage, rates for excess and unused kilometres that are miles apart, or a retroactively changed lease rate when the mileage turns out to deviate after all.

Meanwhile, numerous lease products exist that should improve this transparency. One of the best known is the calculation matrix, which provides insight into all possible lease rates at different durations and annual mileages before the contract is signed. No more discussion afterwards about rate adjustments, you would think.

Examine these products closely, however, and you find plenty of chaff among the wheat. A number of leasing companies (a majority, even) simply builds the recalculation increase into the calculation matrix upfront. The deployment rate is sharp once again, but at changed mileages just as much margin is built in as before. Put the matrix rates of different providers side by side and they deviate strongly from the original quotation rate at large mileage deviations.

Tenders are 'bought' with unrealistically low lease rates and sky-high bonuses, after which the profit is secured during the partnership through hard-to-trace and sometimes improper calculation methods. The extent varies strongly per provider. The supply side's earnings model makes it necessary for the demand side to remove as much room for manoeuvre as possible, both at the front (the procurement phase) and at the back (the contract management phase), and to stay on top of rate developments.

When entering a new framework agreement, it is of primary importance to exclude these practices as much as possible and build a stable, transparent partnership with the leasing company. That also requires an adjustment on the client's side. During procurement, place less emphasis on theoretical rates and vague bonuses, and more on the durability of the rate.

Also realise that the previous offer may have been below cost. That cannot last: a leasing company must make a decent margin, and nobody wants a supplier that loses money. With a new, transparent framework agreement, the lease rate may therefore look higher than the old quotation rate. But then you know for certain that this rate really is the rate.

Re-procuring contracts often pays off, but putting a fleet to market is no child's play: car leasing looks flat and simple but is complex financial services. Professional attention to all pitfalls during procurement is therefore essential. Molthoff Fleetmanagement guides tender procedures, deploying knowledge from Scans and Cost Recovery projects to reduce the risks to a minimum. We look not only at the discounts, but above all at safeguarding the agreed price and service level, so the high discount stays high. You can call on us for: