One main objective the fleet contract aims to establish is determining the type of relationship the fleet wants to have with its supplier or vendor. Photo courtesy of mediaphotos via istockphoto.com.
Elements of an Effective Fleet Contract
Securing contracts that fit a company’s purchasing needs — and ensuring the correct steps for success — remain fundamental to the fleet procurement process. An effective process comes when we can engage in discussions with key procurement specialists and company stakeholders, understand supplier and negotiation strategies with vendors, and measure key performance indicators (KPIs).
“The contract categories established for fleet procurement are usually based on the nature of the engagement and the types of products and services that are being purchased. The different categories can include referral agreements, reseller agreements, master product or service agreements (products, professional, legal, financial, training, staffing, contractor, and other services), and software license agreements,” said Barbara Banas, Senior Director of Procurement for Wheels, Inc.
Fleet managers should collaborate with a procurement contract specialists and the company’s legal department to review commercial terms of the contract, said a fleet manager for an insurance company, who requested to remain anonymous.
“If the leasing structure is a capital lease, common to North America, then you need a master services agreement (MSA) to cover items like fuel and maintenance, and then a master lease agreement (MLA), to cover the terms of financial leasing,” said the fleet manager. “If the leasing structure is an operational lease, then you would just need an MLA, and perhaps a variation agreement, to make changes to the wording in the MLA as it is written. Another type of contract that fleet managers may execute is an international framework agreement (IFA) that would cover terms, such as account management, which are relevant to FMCs and used by one company for their fleets across multiple countries.”
Fleets and fleet management companies can work together to establish ideal contract templates for certain purchasing needs, Banas said
“It is extremely beneficial for fleet management companies to build a contract template for each purchasing category specific to their company,” she said. “General categories for fleet management companies typically include assets, maintenance, dealers, rental, auctions, transportation, subscriptions, and professional services, among many others.”
Key stakeholders should be involved in the creation of contract templates, including members of procurement, legal, risk, and IT, as well as category subject matter experts.
One main objective the contract aims to establish is determining the type of relationship the fleet wants to have with its supplier or vendor.
Protecting the Contract
The initial non-disclosure agreement that’s set up during the establishment of a contract is used to protect negotiations with suppliers, Banas said.
Understanding the supplier and negotiation strategies early on are essential aspects in designing a fleet contract, as certain elements of a the supplier and negotiation strategies are relevant to creating an ideal contract.
Critical elements of the supplier and negotiation strategies should include identifying the nature and type of relationship to be established, category, types of products or services needed, impact the deal may have on customers, and the deal financials, she said.
Assessing the risk of engagement with the supplier is another important element to consider when establishing protections that are part a contract template, Banas added.
“Based on the risk profile of the engagement, you should include terms and protections that mitigate any identified risks,” she said.
Protections that can aid here include:
- Description of the engagement
- Definition of the products/services
- Term and termination
- Deal financials
- Invoicing process
- Standard of execution
- Service level agreement with performance expectations and financial penalties
Fleet managers should work with the procurement team to develop a set of KPIs to measure a supplier’s capabilities.
“A strong set of KPIs are assurance of supply, quality, service, cost, innovation, relationship — commonly referred to as AQSCIR,” said the fleet manager. “Service Level Agreements (SLAs) can be made out of the KPIs, and can be part of the contract. There should also be financial penalties if the supplier doesn’t meet a certain score on the KPIs, or meet an SLA.”
Banas added that contracts can either be mutually beneficial for both parties or one-sided.
“Generally, mutually beneficial contracts are more easily negotiated and accepted,” Banas said. “Whereas, heavy handed one-sided contracts tend to be much more difficult to negotiate and make it much harder to do business with a company, which in some cases end up straining the relationship and causing more problems than they are worth.”
The Importance of the RFI/RFP
Setting up a request for information (RFI) and request for proposal (RFP) are fundamental to the securement of the fleet contract, and can ensure fleets procure the most competitive products and services.
“RFPs can be used when breaking into a new market segment to compare new suppliers, when current suppliers are not performing to your expectations, when existing suppliers are driving price increases or rebate decreases, when suppliers have undergone a significant organizational change such as an acquisition or sale which poses additional risks to your organization, or if you are looking to right-size your supply base,” said Banas. “RFIs are generally used as to gather information about suppliers’ capabilities for comparison purposes. Gathering competitive intelligence around the specific suppliers including their related capabilities and size, their values and expectations, pricing and other financial structures, warranty, actual performance against SLAs, customer service and process requirements, enable the procurement leaders to make the best informed decisions when selecting their supply base. Such competitive information then can serve as the basis for the contract.”
The terms of the contract can change, which may be due to a change in how the supplier operates, or if the relationship between the fleet is affected in some way.
“Conditions of a contract can absolutely change given a new set of circumstances – such as new executive leadership, new corporate/financial goals, corporate cash flow,” said the anonymous fleet manager.” I found changing the contract to be more effective when senior leadership and global general counsel communicated the needs directly to the vendor.”
Source: Fleet Financials
I´m a Fleet Management expert, and the manager of Advanced Fleet Management Consulting, that provides Fleet Management Consultancy Services.