August 13, 2019
What is Total Cost of Ownership (TCO)?
Total Cost of Ownership (TCO) is a financial estimate that uses purchase/lease price of an asset plus operating costs (both direct and indirect costs) to determine the dollar amount spent on an asset during its life cycle. TCO is used by fleet managers to estimate the value of a certain asset, the value of a department, and the overall value of an entire business. TCO calculations and cost analysis can be used to make informed decisions around purchasing, selling, leasing, expanding or downsizing a fleet.
Why calculating TCO is important
The most business savvy fleet managers are calculating TCO to have a complete understanding of the value of their fleet. Without this number and other data, decision-making becomes a much riskier task. Properly managing and estimating TCO is one way to ensure your fleet remains profitable.
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How to calculate total cost of ownership
While the details of calculating TCO might seem overwhelming, it’s all data and information that fleet managers likely already have access to via their fleet management system. Much of the data for calculating TCO is captured automatically by telematics tools that you may already be using, like fuel tracking. What is important here is keeping a central database for all of your records so you can access information in one place. Below are the key data points you should collect for accurate TCO calculations:
- Overhead vehicle costs. This includes the initial purchase price or lease price for every vehicle in your fleet. Be sure to include any interest rates or expenses incurred through financing. As you add to your fleet, track this information in your central fleet management system so that it’s easier to update your total cost of ownership analysis in the future.
- Maintenance, service, and downtime costs. It’s no surprise that maintaining and repairing vehicles comes at a high opportunity cost to your fleet. Staying on top of preventative maintenance can reduce unplanned downtime and can prevent your assets from needing expensive or unexpected repairs leading to cost savings in the future. Track the cost of all parts, labor, downtime and more to get a realistic understanding of your TCO.
- Asset depreciation. It’s common knowledge that vehicles almost never increase in value. Take the average depreciation value of a truck and apply it to the number of units in your fleet.
- Fuel costs. The actual cost of every dollar spent on fuel, including taxes. Consider the International Fuel Tax Agreement (IFTA) if your fleet drives across state lines or North American borders.
- Labor. How much do you spend to pay your drivers, service technicians, administrators, and beyond? Keep track of all labor costs, whether an employee drives a vehicle or not.
- Insurance and compliance fees. TCO must include the premiums you pay for fleet insurance and any other business insurance fees you pay. Compliance fees include permits and any violations incurred by your drivers or fleet.
- Information technology. GPS tracking and other telematics tools come at a cost. Other software purchases, such as CRM and accounting tools, should also be included. Be aware of any potential hidden costs such as licensing, installation, training etc.
How to keep TCO low
Keeping costs low and efficiency high is top of mind for every fleet manager. Knowing what your TCO actually is is the first step to understanding how to reduce it. As you go through the process of collecting the data you need to complete your calculations, take note of areas where you identify opportunity for improvements. There likely will be many data points that stand out to you. If you don’t know something is broken, you can’t fix it. So high cost of ownership can’t be controlled until you analyze all elements of it.
Below are other factors to consider in reducing TCO for your fleet:
- Invest in a SaaS fleet management solution. Outsourcing software services to a company that specializes in fleet management removes the need to take on costly upfront and recurring investments in data infrastructure, and gives you flexibility to expand your fleet tracking as technology improves. Off-site data centers can improve your disaster recovery, browser based tracking apps allow you to check the whereabouts of your workers and equipment whenever you need to, and the ability to track more than just vehicles can reduce your security costs.
- Use fuel tracking software to improve fuel efficiency. Help your drivers understand the difference between necessary and unnecessary engine idling with fuel tracking tools that provide the data and coaching your drivers need to improve their day-to-day fuel efficiency. Watch the savings multiply across your entire fleet. Some companies have seen a positive return on investment in just their first year using Verizon Connect’s software.
- Be proactive with preventative maintenance. Studies show that strict adherence to preventive maintenance will improve resale value of most units and reduce the maintenance costs incurred from repairs. Getting ahead of maintenance helps reduce issues from happening. You can maintain a detailed record of all preventative maintenance activities performed within a fleet tracking system - making it easier to calculate TCO - and to prevent any work from being done that isn’t required - which can increase your overall fleet maintenance costs.
- Driver behavior management software coaches better driving behavior and reduces useless idling, which eases engine wear and tear and saves you money on maintenance costs. Data from driver management software can be used to help prevent crashes, which can help lower the cost of repairs due to accidents, prevents injuries and fatalities, improve fuel efficiency, and reduce insurance premiums.
- Install fleet dash cams to gain context when incidents do occur and to potentially reduce insurance costs. Fleet dash cams mitigate risk, protect your commercial vehicles, and can be used as a tool to coach your drivers on safety performance. Dash cams identify unsafe driving behaviors and back up an incidents that occur with HD video footage.
Knowing what your TCO is will help you better understand your return on investment (ROI) and will help you identify opportunities for areas to save on costs. Calculate TCO early and often to gain a complete understanding of the cost of doing business. As you do your calculations, take note of key areas for improvement such as fuel efficiency, maintenance costs, fees from violations, and more. Take advantage of telematics technology to assist in your TCO analysis and to reduce costs. Contact us today to learn more about Verizon Connect’s tools for reducing fleet costs.