How to Audit Contract Vendors: Ensuring Top Performance
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“Outsourcing” has, in the minds of some fleet managers, become an oath, almost an obscenity. Hiring outside vendors to perform some of the basic functions that, in the past, were handled in house can instill anxiety, even fear, on the job.
But, in light of the steady erosion of resources available to fleet managers (or to any department level manager, for that matter) to get the job done, it has also become a necessity; and it is the fleet manager’s responsibility to choose the right vendor for the job, and to manage and score its performance. One of the normal processes in the above is the auditing of vendors.
The success or failure of any vendor, much like an employee, is ultimately judged by how well they do the job. For starters, vendors and their customers must agree on how that performance is to be judged and measured, and how often it is to be audited and reviewed.
That first step can be covered by the institution of a service-level agreement (SLA) in the overall master contract or agreement between the vendor and the fleet. SLAs are a critical element in any successful partnership, and should cover all aspects of the relationship:
- The performance metrics to be used.
- How they are to be measured.
- How often vendors and the fleet will review these metrics.
What the consequences are if performance falls below levels established in the SLA.
It is also not a bad idea to have a “right to audit” clause in the master agreement or contract. Such a clause would spell out what the customer’s rights are, what they can ask for, and how often audits can be conducted.
There are two aspects of “performance” that a vendor must meet. First would be the impact of the product or service on fleet costs — for example, whether fleet maintenance and repair costs have declined, remained the same, or increased once the program is fully implemented. The second would be performance in delivering the service. How quickly are phone calls answered? How soon are calls returned? Are reports and billings on time and accurate? How quickly are problems and requests addressed? Performance audits, then, can be conducted within these two very different scenarios.
Outside vendors bring programs to the fleet with the purpose of performing a function for which the fleet lacks either the expertise or the resources to perform in house. That part of the vendor’s performance — whether the program can actually do the job — can, and should, be audited regularly by the fleet manager.
The case can be made that there is a difference between an audit and a performance review. But for our purposes we’ll consider them one and the same: reviewing whether or not the vendor’s activity has been effective.
Let’s use a common fleet outsourcing program, maintenance management, as an example for both program and delivery performance. The purpose of a maintenance management program is to offer the fleet expertise (technological) and resources (e.g., people, communications, reporting) that are not available in house.
Maintenance management programs offer the customer a national network of repair facilities, payment means (such as cards, purchase orders, and coupons), technological expertise, centralized billing, and reporting.
Maintenance management programs generate a fairly large number of transactions each month, ranging from simple scheduled maintenance to major mechanical repairs. The goals of these programs are to facilitate transactions, remove the driver from the process, negotiate and manage transactions, and ultimately control and reduce maintenance and repair costs.
Auditing a maintenance management provider, as previously mentioned, begins with a service-level agreement, which for program performance purposes will lay out what the vendor agrees the savings will be, and how they’ll be measured. Recall also that there is a difference between auditing program performance and delivery; we’ll discuss delivery later on.
In order to audit program performance, both supplier and customer must agree upon a starting point. This will usually take the form of operating cost per mile figures for the last full period prior to the agreement, i.e., the NAFA cost categories “maintenance and repair,” “tires,” and “oil.” Better yet, if the fleet can accumulate these figures (expressed in cents per mile) over the previous several years, it would take into consideration any unusual circumstances which might have skewed the previous year.
Merely comparing the vendor’s results with past performance (benchmarking, in essence) is only a start. Again, maintenance management programs generate a large number of transactions, and each of them contains a number of fields of information. And, the accuracy and timeliness of that information is a critical element in tracking and managing costs. Here are some examples of what a fleet manager should audit:
- Unit numbers: Make certain that unit numbers are present, and correct, on each invoice.
- Odometer readings: Must be accurate and present on each transaction.
- Approvals: Based upon the approval limits in the program account setup, there are some transactions that require vendor, or even fleet manager, authorization. Invoices lacking proper authorization can, and should, be challenged.
- Pricing: A large majority of the transactions that come from a maintenance management program are generated by national account locations, where pricing is set nationally. Parts and labor rates can be audited against published price lists.
One of the key elements of a successful program is the accuracy of the data fields on all transactions, so that expenses are posted to the right vehicle. Indeed, both vendor and fleet should be concerned about the accuracy of the data, particularly in the presence of a service-level agreement.
Consider also a fleet fuel card program, where the number of transactions increases geometrically — usually more than one each week per unit, compared to about one each month under a maintenance management program. Fuel data is particularly important, as fuel can be as much as 70 percent or more of variable fleet expense (depending upon pump prices), and each transaction contains as many as 60 data fields or more. Not all of these fields are important to tracking fuel costs, but many are, and can and should be, part of any audit.
Clearly, a performance audit goes beyond simply comparing fleet costs under a vendor’s program to prior years. Just as, if not more, important is auditing a sampling of individual transactions for accuracy, and to ensure that critical information such as odometer readings, vehicle numbers, proper authorization, and pricing are correct.
How to Audit a Leased Fleet
As fuel makes up the majority of variable or operating fleet costs, so, too, is depreciation the major component of fixed or standing costs. For leased fleets, depreciation is the major component of the monthly lease payment when the most common fleet lease, the open end TRAC (terminal rental adjustment clause) lease, is used. There are a number of areas in a fleet lease which should be audited.
As far as performance is concerned, leasing does not have the same impact on fleet costs, in the same manner, as does a program like maintenance management or a fuel card. How, then, should a fleet manager structure an audit of a leasing program, and what components of the lease should be included? There are a number of sections of a fleet lease agreement that should be audited:
- Lease rate factors include a cost of funds component. Cost of funds factors can be fixed or floating, and, even when floating, often allow a fleet manager to fix the rate one time during the life of the vehicle. Rates change, and are based upon a number of possible sources, such as commercial paper, Prime rate, and LIBOR (London Interbank Offering Rate). The audit should check to make certain that the right funds cost factor is used and that the rate applied is the correct rate at the time the vehicle is brought into service, or when the floating rate is fixed.
- Billings for fleet leases are usually in advance — that is, the fleet is billed on the first of the month for the coming month. The commencement of billing depends upon the in service date; fleet managers should be certain that the billing is started at the right time.
- At the “other end” of the vehicle life, when vehicles are removed from service, billings should cease. That out of service date should occur on the day the vehicle is turned into the delivering dealer and no later. The audit sample looks to make certain the proper out of service date is used, and that billings cease on that date.
- Vehicles are sometimes moved from one area to another, and one driver to another. In order to ensure an accurate inventory, fleet managers should audit a sample of such moves; different states (and even counties and localities) have different tax laws, and the billing of such taxes, and other fees, must be accurate.
One component of a fleet lease which can be audited for both delivery and performance is the sale of out-of-service vehicles, and the application of proceeds from the sale to the overall transaction. TRAC leases provide that when a vehicle is taken out of service, the lessor causes it to be sold, and the proceeds applied to the unamortized balance of the original cost. Funds in excess of that balance are returned to the lessee, and any shortfall is billed to the lessee. This is the “terminal rental adjustment” to which the master lease agreement refers.
From a performance standpoint, the SLA can specify some indicator to be used to judge the quality of resale transactions, both in terms of the dollars and cents as well as timing:
- There are a number of used vehicle guides that fleet managers, and lessors, use to measure resale success, and fleet managers can audit performance using the agreed upon guide, as well as the size of any excess or shortfall vs. unamortized book value.
- The timing of the sale is important as well. The audit should include tracking how quickly the vehicle is picked up from the delivering dealer and sold, and when the proceeds are applied to determine the final lease adjustment.
Leasing “performance,” as a stand-alone transaction, isn’t quite as definitive as are management programs like fuel cards or maintenance management; lease costs during the life of the lease are the result of the original negotiation of the master agreement, and the rate factor determinants upon which the fleet manager has agreed. However, audits are important in ensuring the accuracy of those components as applied to individual lease transactions (correct funds cost factors, administrative fees). And, because of the uniqueness of the fleet open end TRAC lease, used vehicle resale performance, both in dollars and timing, must be audited as well, to make certain that vehicles are sold promptly and the proceeds applied to the billing in the period in which they occur.
As with any outsourced business program, fleet management and administrative programs should be delivered smoothly per any agreement or contract with terms and conditions that govern the relationship.
Fleet management companies provide service in two primary ways:
- Customer service: This is usually provided via telephone and/or electronically. Customer service is often offered through a call center, where a service representative is assigned various accounts, and takes day to day telephone calls from drivers, fleet managers, and even repair facilities. Such calls run the gamut from simple questions to serious problems that need immediate attention.
- Client service: Most fleet management companies assign a field representative or account manager, whose job it is to oversee the overall delivery of the program. This job begins immediately after the business is awarded, with account setup. The account manager (the job titles vary) acts in a consultative manner, working with the fleet manager on a strategic level to deliver the program at the highest level possible.
Auditing both customer and client services encompasses several primary measuring points:
- Most call centers have sophisticated call management systems, which track key statistics including time of answer, hold times, and dropped calls. The systems produce reports, sometimes daily, which are used by the call center management to track performance and make changes to improve performance. A customer service audit would include review of a sample of these reports, to track how quickly the ultimate customers, the drivers, are being serviced.
- The account manager is responsible for more strategic issues, such as problems with billings. The delivery audit would track problem-to-solution timing — that is, how long it takes from the time the issue is brought to the account manager’s attention, to the time it is acknowledged, up until the solution is provided.
The delivery of management programs (maintenance and accident management, for example) is audited much in the same manner as client services — that is, through speed of answer, limiting hold times, and call to solution times. The same holds true for administrative programs such as parking ticket payment or registration renewal. Tracking ticket non-payment penalties and the expiration of registrations should also be part of the audit.
All in all, auditing contract vendors begins with the setting of expectations by both vendor and customer, and its purpose is to make certain that service, transactions, and performance are all of the highest quality and accuracy.