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Richard Hipkiss' blog - 15 August: All that glitters

Date: 15 August 2016

Financial incentives and advanced profit share payments are becoming an increasingly popular carrot proffered by fleet industry suppliers as they compete to win customer business.

But should fleet operators entering into contracts with vendors be enticed by signing bonuses?

Hefty 'residual value profit share' payments, paid in advance by leasing companies, are a good example of the attractive commercial deals that are currently being offered to some customers.

Under such agreements, profits on the projected sales value of vehicles at the end of lease contracts are shared 50/50 between suppliers and customers - and are paid to customers upfront when a contract is agreed. It may be worth asking how such companies are so certain that profit can be guaranteed on a resale value in three or four years time.

These deals can range from upwards of £200 per vehicle to as much as £1000, meaning that, in some cases, million pound payments can be on the table for companies who are prepared to sign on the dotted line. For procurement, fleet or finance managers who are focussed on in-year savings, such inducements may seem too good to turn down. Moreover, there can be internal commercial reasons for accepting such payments.

The caveat emptor to fleet operators however is to demand transparency, conduct your due diligence and model your cost calculations to include the upfront payment and interest across the full term of the contract - such deals may not be all they seem.  If you liken taking such monies to a banking environment, when was the last time any financial organisation gave you £1 million and wasn't bothered about getting the money back or about interest repayments?

Suppliers will seldom offer something for nothing - the prudent will give careful consideration to how suppliers plan to get their money back from any deal.   And where leasing cost deltas can often be £30-£40 per vehicle/month between competing lease companies, imagine where such a delta could end up after accepting such an 'upfront' payment.

If the forecast fleet TCO is unclear, seek advice from an independent specialist. As the saying goes, all that glitters...

Richard Hipkiss is operations director at Fleet Operations