Efficient fleet management plays a pivotal role in the success of any organization relying on a robust transportation infrastructure. As technology continues transforming how businesses operate, fleet management software has emerged as a powerful tool to streamline operations, optimize resources, and enhance productivity.
However, when evaluating major additions to your fleet, it is crucial to go beyond the upfront costs and delve into Total Cost of Ownership (TCO). TCO analysis provides a comprehensive financial estimate encompassing direct and indirect expenses associated with acquiring, implementing, and maintaining fleet management assets, whether they are software systems, hardware systems, or even new vehicles. .
In this article, we delve into the importance of understanding TCO for fleet management software, exploring the factors contributing to the overall cost and how a thorough TCO assessment can lead to informed decision-making and long-term cost savings.
The cost of investing in any major purchase is no small feat to calculate. Think about when you bought your first car or truck. Your focus was probably on the sticker price, but investing in a single vehicle means a possible lifetime of additional expenditures. Sometimes, that higher sticker price at the beginning means higher quality and less maintenance, but sometimes it just means that maintenance costs will continue to be more expensive. All these aspects of the calculation consider the overall expense of possession.
The TCO essentially seeks to measure the explicit and implicit costs associated with purchasing and maintaining a product or service. Some things to consider include any hardware and software acquisition costs, software or hardware implementation costs, training costs, costs for maintenance and support, and any upgrades. Essentially, you will need to spend anything you know to use whatever you purchase in the best way possible.
Calculating TCO should include the cost of any capital, maintenance, asset depreciation, licensing, and vehicle administration.
The formula is essentially…
TCO = Acquisition costs + interest/financing costs + vehicle running costs - resale costs
DIVIDED BY:
Total mileage or engine hours over the lifecycle of the vehicle.
So let’s break those variables down a little bit!
Initial costs will include acquisition costs, so the selling price for the vehicle, manufacturer concessions or incentives, any vehicle up-fitting costs, licensing, pre-delivery inspection, administration costs, and of course, all associated taxes to stay compliant! Then, there is the actual purchasing cost. Some companies have a very low cost of capital and may decide to buy their vehicles, while others like the advantages of leasing or borrowing. Either way, interest costs (or opportunity costs of ownership) and lease administration fees are important to consider.
Then of course, there are the operating costs while you rent, lease, or own any vehicle or fleet of vehicles. These are costs like fuel, insurance, maintenance, identification plate renewals, repairs, tolls during operation, any possible tickets or accidents, and any other cost you can think of that comes with managing a fleet of any kind of assets. To calculate operating costs, fleet managers must look at data regarding mileage and engine hours, diagnostics, driver safety, and collision reconstruction. These data points can be easily accessed from your GPS-tracker dashboard together with any dash cams or fuel cards your fleet manager has established to collect valuable data.
Finally, no breakup is ever cost-free. Whether you decide to resell your vehicles or retire them completely, you will also have some costs here. If you decide to sell, you’ll need to consider which vehicles will be most attractive on the market and the best mileage and age for replacement. Study the market and be sure to understand your vehicle is lifecycle so that you can plan for when it’s time to part ways. Just be sure to factor this stage into the TCO!
Calculating TCO is in no way an exact science. It is a metric that can help you, together with other metrics like Return on Investment (RoI) that should all fit into your forecasting and budgeting planning. A few factors can adversely influence your calculations that are completely out of most people’s control.
Inflation.
The first is inflation. The rate of inflation and the cost of borrowing money will affect the value of any assets you have in your fleet. Believe it or not, these rates are generally driven not by rational actors making smart decisions but by unforeseen forces influenced by world markets, pandemics, housing bubbles, and many other factors.
If you are paying $1,000 for support for software per year and the vendor contract allows them to increase by 3% per year, that $1,000 becomes $1,125 in year 5. Over 5 years, the costs change from $5,000 to $5,309. At 5% (which is not uncommon), the cost becomes $5,525 over 5 years, a 10% cost. That may seem counter-intuitive, but % increases year over year have a compound effect. Budget a little for inflation when making your initial calculations!
Disaster recovery.
Disaster recovery is a crucial aspect that business owners sometimes overlook when considering their requirements. In certain instances, this omission may be intentional to reduce perceived expenses, while in other cases, it may be due to a lack of awareness regarding the additional costs involved. Collaborating closely with the business is vital to outline their disaster recovery and business continuity needs clearly.
This entails establishing both a recovery time objective (RTO) and a recovery point objective (RPO), and assisting the business in comprehending the associated implications. Subsequently, defining and accurately assessing the architecture and hardware required is essential, aligning them with the established objectives and ensuring cost-effectiveness.
Crazy Things We Couldn’t Predict.
The world can be a crazy place and everything can affect your real TCO. It’s just reality. Conflicts and geopolitical tension, natural disasters, government changes, and policy changes can all drastically affect the real cost of operating your fleet. New subsidies may come into play. Gas prices may change drastically. Everything is volatile.
That is precisely why putting together your TCO as you build your fleet is so important. You’ll be able to have a road map to turn to, update, and use to track what you are spending throughout each asset’s life cycle. One of the best ways to get a TCO that is as accurate as possible is by using real data points to conduct regular analyses of your fleet operations. Rastrac has a number of solutions to help you and your fleet operations make the most of your data to increase calculation accuracy and help you stay in the black with your accounting.