Don’t Sign That! 21st Century DMS Contracts
Twenty years ago dealers routinely made deals with their DMS vendor on a handshake. The contract, delivered later, was a document that was rarely invoked or even scrutinized. A dealer could rely on his vendor to do what was fair and in both parties’ best interests.
Over the past ten years, vendor relationships have, in some instances, become totally contract driven. The rules have changed. Restrictive, binding agreements are presented, strictly interpreted and enforced to the letter. Some dealers found themselves in long contracts replete with what they considered to be impossible conditions. Worse still, some of these contracts automatically renewed and left the dealers open to expensive, heavy-handed “required upgrades”.
Recently, dealers, many of whom have been burned by these contracts, began to carefully examine the fine print. If a vendor wanted to gloss over the toughest terms and get a one-sided contract signed, a new method had to be found. So was born the “referenced contract”.
Many dealers still wind up with a surprisingly bad contract because of “referenced contracts”. This latest tactic makes it less likely that the dealer will be fully aware of what he is signing and everything to which he is agreeing. It works like this. A dealer is presented with either a physical contract with a couple of references to another document that is, in fact, the real contract governing the relationship. Often this “referenced” document is made to sound like it contains just a few innocuous items like a “user guide”, reference manuals and the like, and it resides on a password-protected website. Woe to the dealer who does not take the time to access the website and examine what is, in reality, the serious part of the agreement, incorporating the terms and conditions that primarily favor the vendor.
We hear the common refrain that the dealer, because he was pressed for time and wanted to get the computer rep out of his hair, signed the contract and made a monumental mistake that landed him in a now precarious position. They have legally agreed to terms they say they never even saw when they signed.
By using a “referenced contract” some vendors have been able to get some truly unbelievable clauses past dealers who are normally careful business owners. One of these clauses actually says that the vendor, at his sole discretion, can unilaterally change the contract at any time by simply revising the online document that governs the underlying transaction. It’s hard to believe that a dealer in his right mind would knowingly agree to such an egregious violation of sensible business practice. Unfortunately, dealers do this every day and make this very serious error of omission.
- If you have an existing relationship: Pull out each of your contracts and search for these references to other agreements. Read each clause and figure out exactly if and how deeply you may be buried by the terms. Determine rights you may still have. Do what you must do to limit any long-term obligation with which you are uncomfortable. Finally, get an expert to help- someone who knows what to look for and what other dealers have done in similar circumstances.
- If you are contemplating a new relationship with a vendor, get a professional opinion from an independent resource familiar with these contracts. You want a consultant who is very familiar with DMS contracts. Find one who is willing to give you a free quick synopsis of your potential exposure after reviewing the contract. We see the same problems time and time again and we know there are ways to alleviate them
What else can you do to protect yourself?
Acquiring the technology you need to operate your business is no longer a simple matter of getting a “good deal”. It requires you to navigate a minefield of inflated pricing, confusing hardware and software options and Byzantine contracts. Here are a few of the simpler contract issues that dealers need to consider (there are so many more!):
- Third party access – Will your main vendor play nice with other technology companies you choose to employ? Are you limited to a list of “approved vendors” that have generally paid a fee to your DMS company to be monitored? Under the guise of increased security, DMS vendors may force you to use the third party vendors that increase their income and reduce your choices.
- Does your contract match the proposal to which you agreed? Will you find that you didn’t get what you bargained for? Confusing packages and nomenclature can hide the truth. If you are not sure, don’t sign it!
- Price increases- Left to their own devices, vendors will build in price increases that compound yearly. Once you sign, you have given up all your leverage, you can’t change your vendor mid-contract so you have no choice but to pay.
- Maintenance cancelation- Does your contract allow you to cancel maintenance?
- Your new contract may not allow you do what you did in the past – cancel maintenance you no longer require.
- Buy/Sell- If you close or sell a store, do you still have to pay for services you will never use? Are you bound to use the same vendor in any new store you acquire? In some buy/sell situations, a bad computer contract can kill your deal. You’ll want to keep your options open. Co-terminus contacts- Do all your obligations to your vendor end at the same time
In summary, dealers must realize that they can’t rely on what they learned from previous negotiations. The old rules simply do not apply in the 21st Century DMS marketplace. Learn the new rules or pay the price down the road!