By Mark Boada, Executive Editor
A “perfect storm” is forcing government fleets to outsource an activity that the overwhelming majority still complete in-house: routine vehicle maintenance.
That’s the outlook from Steve Saltzgiver, a 30-year-plus fleet management executive who’s spent the last six years as a consultant with Mercury Associates, in an hour-long interview with Fleet Management Weekly. Mr. Saltzgiver had previously been a journey technician, transit supervisor, and a fleet executive for a city, two states and two corporations, executive director of the National Conference of State Fleet Administrators and is currently a member of the NAFA Board of Directors.
In Part One, Mr. Saltzgiver said that in the face of an accelerating shortage of qualified auto technicians and increasingly complex vehicles, government fleets may need to begin considering the outsourcing of their routine maintenance. In Part Two, he talks about the economics of fleet routine maintenance in the public and private sectors, and explains why outsourcing is usually less expensive.
How common is it for government fleets to do routine maintenance and repairs on their own?
Nobody has a real handle on that, but I would say that 15 to 20 percent outsource and 80 to 85 percent do it themselves. But every fleet is different, and they run the gamut. You’ve got everything from the state of Tennessee, which has pretty much outsourced its entire fleet maintenance, to the state of Utah DOT that does almost everything themselves.
I have some clients who even do their own body work. Some do their own alignments and everything else. But the more typical model is they keep the routine stuff, like oil changes, safety inspections, light diagnostics and replacing parts, and they outsource the specialized stuff, like body work, glass repairs, replacing tires, and complex drivetrain repairs that are in warranty.
Does it vary by fleet size or the location of the fleet depot?
I think it’s a graduated scale. If you’re a very, very small fleet, most likely you outsource a lot more than if you’re a big fleet that is more self-contained and can do more. If you’re in a really rural area, and you don’t have capable outsource resources around, so, most likely you are doing your own. For example, a lot of the DOT depots in Utah are in the middle of nowhere with limited outsource capabilities, and other areas of the country are in a similar situation. Because of their remote location, there’s probably not a capable vendor in those areas that could do everything.
Do government fleets that do their own routine maintenance know how much it really costs?
No, most don’t. One of the things that government fleets have a problem with – and I know because I worked there – is they do not track their sunk costs. For example, a public fleet rarely puts into their technicians’ labor rate the cost of the building, the cost of the utilities, the cost of the administrative support personnel and activities. So, they’ve got a pretty hollow labor rate.
What do government fleets believe is their hourly repair technician rate?
A typical stated labor rate I see in government is between $45 and $65 dollars an hour. By comparison, the private sector is usually between $100 to $200, depending on what region of the country you’re in, and that’s a number that usually represents a fully-burdened labor rate. I did run across a government fleet a few months ago that put it at $90, which is much closer to what it should be. But I would say that most public fleets just set a labor rate that’s less than the private sector. They don’t even do any analysis of it. It makes them feel good that they’re less than the private sector.
When Mercury Associates does a rate study and load into the hourly wage of a technician with the related pro-rated costs over the entire operation, we often see that these public entities are actually somewhere over $120 an hour, with some approaching $200 an hour. So, if you look at it from a cost-benefit perspective, outsourcing is usually less expensive.
And do you have any idea as to what percentage of government fleets are in that situation?
From my experience, I would say 80 per cent of them, probably. Mercury rarely sees a fleet that takes full account of all its expenses that enable it to do routine maintenance themselves. Now, to put this in perspective – most people who call Mercury are looking for someone to help them. Most of the time, the people I engage with don’t have the full picture. And every time we do these analyses, they’re completely overwhelmed, they can’t believe their costs are that high.
What do you tell fleets to do to understand just how much it costs to provide maintenance and repairs on their own?
They need to do what we call “ABC analysis” — an activity-based cost accounting exercise to identify their full cost of maintaining assets in-house. That means, look at all your costs holistically. Anybody who supports fleet, like HR, like IT, what the building utilities are, all the benefits for the mechanics, all the shop tools you have to buy, all the training, all the parts ordering, receiving, storing and distribution. There’s an allocated overhead somewhere that’s supporting you. You need to be sure you track all those costs.
Knowing that is important for fleet managers to defend the way they do things. There are a number of outsource companies coming after the public sector because people can’t and don’t know their costs.These people are able to go to leadership and executives and show that they are less expensive than the government fleet. As a fleet manager, you want to have the full facts in your back pocket and know your costs exactly, so you can defend yourself.
Let’s say I’m a state fleet, and I’ve got maintenance garages all over the state, and I own them. And I’ve equipped them with the hydraulic lifts and diagnostics equipment and all the tools. Then I find out it would be cheaper to outsource, and to do so I’m going to have to get rid of all that stuff.
Right. If you want to make it a cost-effective decision to take care of the taxpayers and constituents, you’d have to divest yourself of that. The other option is to go through and do some Six Sigma and Lean analyses and see if you can optimize your operations to remove unnecessary waste and get your labor rate down to a level competitive with the outside.
So, what are the things fleet managers need to do to cut the costs of the services they provide?
I would recommend they take a very close look at all of their processes, like the maintenance process. Take a particular vehicle in for maintenance or repair. Follow the job with a stopwatch and make sure you have no extra steps in there. And take several of your other key jobs and do the same thing. And then look at processes like the way you acquire vehicles, for example, or the way you process accident reports. Make sure you don’t have any bottlenecks or people involved who don’t need to be involved. It’s really about flow-charting, process mapping, and just taking the fat out of the processes, the unnecessary steps. You have value-added steps and you have non-value-added steps. I would wager that most people don’t look at that often enough.