Feature – In Depth: Optimum fleet disposal values

Organisations need to do more to get the best value out of fleet disposal, with diligent sales saving employers plenty, says Curtis Hutchinson

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Car disposal is the final piece of the fleet jigsaw but can all too often be a rushed measure, and carried out with little expertise or planning. This can have a negative impact because badly planned or managed disposals will inevitably result in cars being sold for less than their market value and leave some boardrooms exposed to accusations of failing to fulfil corporate governance issues.

Considering the maturity and sophistication of the UK’s fleet sector, it is surprising that when it comes to disposals many organisations still perform in a manner which would be seen as commercial hari-kari for any organisation that owns the cars on its fleet. Only firms which finance their cars through contract hire arrangements or outsource their running to a specialist fleet management vendor, are exempt from the responsibility of disposal because this is taken care of by their suppliers.

However, the importance of managed fleet disposals, in relation to corporate governance, is such a low priority that it does not even register on many business agendas. This could be about to change. In September, boardrooms around the country received a much-needed wake up call with the publication of Corporate responsibility for used vehicle disposal, a briefing document written by Peter Cooke, professor of Automotive Industry Management at Nottingham Business School.

The survey polled the views of 195 finance directors and 100 fleet executives, and its findings were damning because they identified a low level of awareness and a high degree of complacency among managers. "In a period of tighter corporate governance, growing demands for enhanced transparency and audit trails, and the growing role of duty of care, many fleets and particularly boards, might be accused of falling short of best practice in the management of their fleet operations," says Cooke. He suggests boards should start by addressing the terminology.

Vehicle disposal tends to be a negative term which infers that the item no longer has a value. Cooke suggests that companies embrace the concept of remarketing as a more "aggressive and proactive phrase" which immediately places an intrinsic value on the vehicle and would motivate firms to get the best possible returns. One starting point is to source new cars which will appeal to used car buyers and will have strong residual values. Key points to consider include the car brand, vehicle size, equipment levels and colour.

Colin Tourick, an independent fleet consultant, says: "When you are deciding what cars to put on your fleet, think about the typical used car buyer. They will be operating on a budget and can not necessarily afford a new car. They will want smaller cars because they are cheap to run or large people carriers for family practicality. If you are selling a significant number of large executive models you will not be selling the cars the average buyer wants to buy."

Favoured colours are grey, silver, black or dark blue while brown and green are to be avoided at all cost. "Used car buyers are a conservative lot and a good colour can add 10% to the sale proceeds," he adds. It is crucial for organisations to present their cars to the used market in the best possible condition. A thorough professional clean from a local valet company is likely to pay dividends but firms should not under-estimate the role of drivers in the equation. Companies should have policies in place to make sure employees take good care of cars otherwise resale values will be unnecessarily affected.

Tony Leigh, chairman of the Association of Car Fleet Operators (ACFO), says: "For fleets that buy their company cars outright and then dispose of them at auction or through another means are likely to see residual values hit by hundreds of pounds as a result of ill-treatment." He adds that fleets are potentially losing hundreds of pounds per car at the end of their working life as a result of driver misuse. In-house car user manuals can be used to set out what is expected of drivers and what will happen if these standards are not met. ACFO has also compiled a free self-help CD-Rom guide to producing a company car drivers’ handbook. On the disc, there are 20 examples of driver handbooks that have been contributed by members of the organisation.

The examples are drawn from fleets running between 40 and 4,500 vehicles, operating in a wide variety of industry sectors and are intended to act as templates to enable all fleet decision-makers to compile their own handbook suitable to their businesses’ needs. Firms that dispose of their own cars also need to monitor trends in the used car market which often follow a cyclical pattern. Alan Cole, editorial consultant for EurotaxGlass’s, the publisher of the monthly Glass’s Motoring Guide, which calculates the market value of used cars, highlights the current boost to residual values brought on by a weak new-car market. "The rate of used car depreciation slowed during the third quarter of 2005 (July to September), and values are expected to stabilise further still during October as car dealers search for good quality three-year-old vehicles," he explains. He also points out that values continue to be strongest for well-specified vehicles in the most popular small and family car sectors and those with diesel engines. In addition to car dealers, the main route to market of ex-company cars tends to be through auction houses.

When managed properly, the auction route can offer a useful outsourced vehicle disposal service which is professional and non labour intensive. With just two major auction houses in the UK – British Car Auctions and Manheim Auctions – and a number of smaller regional operations, the initial choice of partner is not wide. However, they all see the value of establishing long-term relationships with fleets and should therefore be able to offer a service suitable for an organisation’s specific needs and guarantee a good return on their assets. "From the governance viewpoint, the used vehicle is sold for the best possible price on the day. If the bidding is poor, a reserve may be set below which it will not be sold, but above that figure it will go to the highest bidder.

The whole process is independent and totally transparent with used vehicles prices set by market conditions," says Cooke. Likewise, professional local car dealers should be in a position to offer companies a good remarketing service. In many cases, these will be the initial supplier of the car and they may have maintained it over its fleet tenure. A good dealer will be able to identify a buyer and set a price to coincide with it coming off the fleet.

Whichever disposal method is chosen, it should be linked to best business practices and with an over-riding emphasis placed on achieving the highest financial return rather than a company stumbling from one distressed disposal to another with the inevitable knock-on effect on its bottom line. Cooke concludes: "Throughout the disposal planning process, it is important that [a firm] remembers what it is seeking to achieve – maximum market value, establishment of a clear audit train and compliance with the principles of corporate governance."

The timing of disposals

To get the best returns, the timing of the disposal of cars is critical. A useful tip is to avoid putting ex-fleet cars on the market in the month before the new car plates change in March and September. Colin Tourick, an independent fleet consultant, says: "Traders and dealers do not want to hold stocks of cars over the change date only to find that they then look older to buyers."

These are also key periods when dealers will want to keep their stocks of used cars low because they anticipate an influx of part-exchange models from new-car people during number plate change periods. Tourick also points out that organisations can achieve better residual values by addressing the time of year they source new cars especially if they are disposed of on their anniversary date rather than their mileage. "Don’t take a new car in February or August or you could be trying to sell it three years later," he adds.

Staff perks: Selling company cars

One way to cut out the middle man is to sell vehicles directly to staff, although this route is not without its pitfalls. The monetary advantage here is that the organisation is likely to achieve a better price because it is dealing directly with the buyer and should be able to set a price lower than the buyer would expect to pay in a dealership.

From an HR perspective, this can work as an attractive factor because employees will have a greater incentive to look after the cars they are driving. But the Sales of Goods Act would apply, giving staff the right to demand their money back if unsatisfied. And organisations would need to impose rules limiting the number of cars an employee could buy, otherwise disposal could turn into a private business opportunity. Likewise, costly repairs would also need monitoring prior to disposal.

Further information

Association of Car Fleet Operators Free handbook CD-Rom and details on: 01730 260162 or e-mail [email protected]

British Car Auctions Tel: 01252 878 555 for general auction guide

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Manheim Auctions Tel: 0870 252 0400 Web: www.manheimeurope.co.uk

Corporate responsibility for used vehicle disposal. A free 32 page report by Professor Peter Cooke is available from Andrew Walker on 01530 833535