Brokers: Heroes or villains?
25 October 2006
Author: John Mahoney
Brokers have burrowed a niche in contract hire by dealing exclusively with small- and medium-sized business, but do they offer value-for-money, or do they deserve their poor reputation within the industry?
The industry has a love-hate relationship with the 3000 brokers estimated to be working within the UK. Unofficially, the majority of car manufacturers are united in their dislike of these double agents who bring financial risk into their business, but because of their united strength have had to reluctantly learn to live with them.
Small-to-medium-sized companies on the other hand seem to love them, viewing them as lone mavericks on a mission to bring them better deals on their next fleet of vehicles, while cutting out the hassle of spending hours arranging finance and replacement vehicles.
Sitting on the fence are the dealers, content to use brokers when shifting volume to meet ambitious sales targets one minute and screaming blue murder the next when brokers step in and steal their custom.
So who's right?
Brokers first appeared with the emergence of contract hire in the 1980s. Back then they rapidly gained a reputation for, as one charismatic broker put it, "screwing the customer".
Since then, brokers have worked hard to reinvent themselves. They've grown up and attempted to separate themselves from the shady wheeling-dealing chancer by taking a more professional, customer-focused approach. But it's not because they are worried about winning any customer service awards - brokering has become big business.
Nowadays, multi-million pound turnovers are not uncommon. In fact, some brokers have become so big they have been triggering leasing giants' radars for years now, leading to considerable investment in companies such as Network which runs a franchise of brokers under the substantial LeasePlan umbrella.
Lombard Vehicle Management also manages a network of more than 130 brokers and gains 10,000 vehicles a year on the back of it. Or to put it another way, a quarter of all new vehicles the leasing giant delivers each year - a huge part of the business. Lombard estimates the total small business market to be worth a million vehicles a year.
With volumes like these, it's no wonder carmakers are forced to do business with brokers, with one leading carmaker's fleet boss declaring brokers as a "permanent part of the industry landscape" and essential to form "good working relationships with." But the insider, who refused to be named because of fear of a broker backlash, stressed that brokers should not be underestimated in the "significant financial risk they pose to the industry".
But what is this "serious financial risk", and if the small business is happy, why should we care if a large firm presumably makes less money?
"Brokers offer a lucrative route to market and have a huge success rate with the difficult-to-target small business," says our insider.
Problem is, they don't always say what they are going to do with the cars, and the strict terms of the supplying arrangement can be broken, with cars being sent to areas of the market not intended - with knock-on problems to manufacturers." These "knock-on problems" concern weakening residuals adding cost to the vehicles you run.
Over the years, manufacturers have developed increasingly sophisticated ways to maintain and manage RVs, but that management relies on being able to control cars through specific sales channels and in measured quantities. Brokers take away this control, and since contracts are normally shorter (2yrs/20,000miles) than the average big business (3yrs/60,000miles), they introduce cars prematurely to the market, adding instability on a model changeover. There's also the brand-destroying risk of cars ending up heavily discounted on car supermarket forecourts.
But not all manufacturers share these concerns, and some actively benefit from the presence of brokers in the fleet market.
"If people choose a company car through their company car list, chances are, because of our relative size, we're not on that list," says Mitsubishi sales boss Lance Bradley.
"The great thing about brokers is that they allow fleet to act like a retail customer, and we're more likely to be on their shopping list."
Small businesses' friend
It seems odd in an age of buying domestic products and services through direct channels that this practice hasn't been adopted by small businesses. Surely introducing a middleman introduces cost - a simple business adage? Brokers especially are no exception, earning healthy commissions for introducing businesses to contract hire firms.
Network Vehicles boss, Christophe Desplace, doesn't dispute that using brokers can introduce cost in higher rental fees, but argues they offer "fantastic value for money".
"Brokers are key to small fleets - you know that you will pay a fee, but they work hard to understand your needs and deserve your business. They're not afraid to work silly hours and work quickly with great flexibility."
Desplace adds: "They reduce the hassle factor and are experts at constructing a good best deal for their customer."
Intimate knowledge of how small businesses operate is where brokers capitalise. Small businesses have neither the resources nor the time to spend valuable man-hours shopping around and organising finance. Money spent on brokers is saved by better deployment of an MD's time to run their business.
Where brokers can fall down with small companies is offering deals that are impossible to repeat, playing havoc with a company's budgeting two or three years down the line. "Brokers should always be able to repeat the deal, says Desplace. "Beware of a really good deal today - three years down the line a broker may not be able to repeat it."
Stealing dealers' lunch money
Dealers live and die by the broker's sword. Brokers soak up volume and help dealers meet tough sales expectations in difficult times while simultaneously drawing customers away from their business.
It's because small businesses act like product-driven retail customers. In many cases a local firm visits its high-street dealer to discuss replacing the company car fleet.
Bradley, Mitsubishi's sales boss, explains the potential conflict that arrives when brokers compete with dealers.
"Dealers are sensitive to brokers; quite rightly, too - small brokers can come in and eat their lunch. Dealers will have spent time carrying out test drives and putting a deal together, only to be beaten on price by a broker who can undercut since they have no overheads."
However, Bradley highlighted that, if anything goes wrong, those buying through brokers could face difficulties getting support from a dealer that's been gazumped. To compete with brokers, Mitsubishi has joined together with Spitalgate Contract Motoring to provide dealers with more competitive contract hire rates.
The call for regulation
"Only industry benchmarks will provide customers with total confidence and rid any of the attached stigma that follows brokers," says Desplace from broker franchise Network.
The Network boss also expressed his concern at a recent BusinessCar event about the ease of setting up as a broker, which jeopardises the brokering industry's improving customer service standards levels.
Desplace is intent in increasing the levels of professionalism of brokers, with the knock-on effect of eventually improving the way they operate and negotiate with dealers and manufacturers.
Working closely with organisation such as the Financial Services Authority and BVRLA, his and other large broker firms are pushing for an industry approved Kitemark or traffic light system to make sure the broker you choose is professional, delivers the highest levels of customer service, and invests in their infrastructure.
Organisations such as the AVFB (Association of Vehicle Finance Brokers - www.avfb.co.uk) has already taken the first step of introducing a code of practice that sets standards of professionalism and best practice.
Lombard Vehicle Management and Network Vehicles will argue they are the model for the future of brokers. Basking under the buying-power umbrella of leasing giants, small businesses are given access to a cheap source of cars and competitive rates of finance.
But never underestimate the small broker. Their unparalleled level of cunning and ability to tailor-make a deal for a customer is difficult to match.
Satisfying the rest of the industry will be the proposed level of regulation governing best practice. Only then will dealers and manufacturers be truly reconciled with the small business' champion.