Fleet Management
New Equipment or New Business-Enhancing Technologies?
Considering a better way to finance fleet management solutions.
Martin Demers
In the current economic climate, many capital expenditure (Capex) budgets have been slashed. Waste and recycling executives faced with shrinking Capex allowances typically have to grapple with the question: “Do I invest in technologies to improve my operations and productivity, or do I buy more equipment?” Both are essential to a healthy and progressive business.
Today’s fleet and route management solutions have the potential to significantly reduce operating costs, boost efficiencies, improve safety, reduce emissions and fuel consumption, and improve customer service. They can no longer be considered a “nice to have.” To maintain a competitive waste business, they are now a “need to have.”
From Capex to Opex
Understanding the essential nature of fleet management technologies, some progressive vendors are now re-adjusting purchase and licensing business models to offer these solutions as a monthly recurring service-oriented offering instead. The difference? Fleet management technologies are then no longer capital expenditures, but become operating expenditures (Opex).
As a recurring monthly service, solutions delivered under an Opex model make it easier and faster for waste organizations to secure the resulting return-on-investment (ROI) benefits. Converting to a services-oriented approach will lower the upfront costs for waste companies and subsequently free up their Capex budgets for any required equipment purchases.
For example, by moving to a monthly Opex model to meet fleet technology needs, the Capex dollars that would have been used for these purchases can now be invested on other critical items such as the purchase of new vehicles and/or containers to grow your business. As an alternative, the Capex can be attributed directly to earnings before interest, taxes, depreciation, and amortization (EBITDA). In some instances, this can make the difference between a profitable or unprofitable fiscal year (see Figure 1).
Not a Lease—A Service Agreement
Services-oriented offerings are not lease arrangements—they are typically service agreements for a given number of months at a given monthly rate per truck for the fleet management equipment and software.
This approach recognizes that an investment in fleet technologies is a significant commitment that requires a level of confidence in a vendor’s expected performance. By allowing clients to enter into a monthly service agreement, the vendor essentially becomes a business partner by demonstrating complete commitment to the ongoing success of the project. A monthly services approach is a long-term relationship that requires the vendor to provide the waste organization with consistent value throughout the term of the agreement.
Waste and Recycling Organizations will Benefit
Following are 10 reasons why a monthly services model makes sense:
“All in” Agreement—This means that there are no additional costs for maintenance, warranty or upgrades. All costs to operate the system (excepting mobile carrier charges) are included in the monthly fee. At the end of the term you can renew or end the program. Very simple.
Monthly Payment is an Opex Line Item—This typically has favorable tax advantages to Capex, and does not diminish other potential lines of credit.
Faster ROI Path—Given that the monthly Opex is minimal as compared to the Capex, your ROI will be drastically collapsed so that you will be in the black within a few short months.
Lower Costs—A recurring monthly service model typically offers a smaller subscription-based pricing approach that avoids big upfront cash expenditures for hardware and software purchase or licenses. This model can slash your overall Capex.
Reduced Risks—With lower upfront capital commitments, you reduce risks of ‘hidden’ costs such as ongoing support, maintenance and upgrades. Plus, your solutions provider shares the risk and accountability in this long-term ‘pay as you go’ relationship.
Better Scalability—Buying new trucks? No problem. You can add new fleet vehicles without having to add additional fleet management Capex to your budget that could impact internal rate of return (IRR) assessments.
More Features and Functionality—Monthly services providers can typically offer more applications, so that small businesses can compete more effectively with access to big company features and capabilities.
Easy Maintenance and Upgrades—A monthly service model is more oriented to ongoing maintenance and support. Upgrades are managed as a component of the service.
Better Customer Service—A monthly subscription-based model is more customer-centric and responsive to your ongoing and evolving business needs.
Simplicity—It’s just easier. Easier to manage financially. Easier for budget planning. Easier to manage the vendor and the solution. Easier to demonstrate an ROI.
A Budget-Friendly Approach
Justifying the budget to measurably improve your business should not come down to a question of more equipment versus an investment in new technology. The resulting ROI from an effective fleet management system will typically justify your investment in these solutions. A more amenable monthly services model to implement such a solution will offer a budget-friendly approach that removes the ‘either/or’ questions and allows you to build your business from both an equipment and support systems point of view.
Martin Demers is a proven C-level technology executive with more than 20 years of experience in the technology and communications sectors. He joined FleetMind (Montreal, QC) in 2007 as co-owner and became the company’s CEO. Previously, he served as President and COO of Radialpoint, CEO of Interstar and as CMO of ACE*COMM. Martin has also held a number of leadership roles at Teleglobe Foxboro and CAE where he managed large scale international technology projects. He can be reached at [email protected] or visit www.fleetmind.com.
Caption
Figure 1
Comparing Capex and Opex financing models.
Capex | Opex | |
Fleet management solution | Large upfront purchase with additional maintenance, warranty etc. charges | All inclusive monthly fee |
How it appears in the budget | Equipment with depreciation | Operating cost |
When it is accounted for | Over a period of years as a depreciable asset | In the current month/year |
How is it taxed | Deducted over a period of time as a depreciable asset | Deducted in the current fiscal year |
Figure courtesy of FleetMind.