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The Real Costs of Overpaying for Technology

Just glance at your monthly financial statement. You know that almost everything you need to know about your store is right there but sometimes it’s easy to overlook some important details. It’s always the right time to remind ourselves of the business basics and the real costs of overpaying for technology. Our intuition tells us that a dollar saved has exactly the same effect on the bottom line as earning an extra dollar of gross profit. Our intuition, in this case, would be very wrong. As you can see in the chart below, the reality is that it takes a lot more than a dollar of gross to pay for a dollar of technology expense! It turns out that a dollar saved actually has the same effect as earning $5.91 in gross profit.

The below calculations are based on NADA published 2015 dealer averages. The following table summarizes the actual effort expended to pay for overcharges on dealership technology:

Five Year Effect of Auto Technology Overpayments

Monthly overpaymentGross Profit required to cover overpayment of a 5yr term deal# of vehicle sales required to cover overpayment
The above calculations are based on NADA 2015 dealer averages

There are only two ways to reduce your tech expense including DMS, CRM, and many others:

  1. Negotiate a better deal with all your vendors
  2. Buy less technology

The conclusion is obvious: A dealer should never pay at all for technology he or she doesn’t need and never pay too much for the technology he or she does require.

In the normal course of our business, it is common to find a dealer who is paying $2,500.00 a month too much for their DMS and other third party vendors. This dealer would need to earn $886,364 in gross over the next five years to pay just for the computer overcharges! The first 775 cars they sell will go to pay just for the excessive charges – not for their whole computer system – just the amount of the overcharges!

Since the average dealer sold 1050 new cars in 2015, the dealer’s entire New Car Department (and every person in the dealership who supports them) would have to work from January 1 to February 23 (54 days) to sell 155 new cars (annual portion of 775 cars) just to make up for paying $2,500 per month too much for technology.

Technology Vendors: DMS, Third Parties & Phones

Over the last decade, dealers have found that technology in its many forms can help them manage the very complex group of businesses that their once simple stores have become in today’s marketplace. This help comes with a cost.

The first digital technology was the Dealer Management Systems (DMS) with which every dealer is familiar. Other third party tech vendors now offer a burgeoning array of solutions to enhance dealership operations and productivity. The cost of these services that augment the DMS has become a major expense, often more than the DMS in some organizations. Because there are myriad vendors, each with different functions, costs, integration structures and contracts, it’s easy to miss the chance for savings and let the expense get somewhat out of control.

Some of the major third party solutions dealers employ are:

  • Customer Relationship Management (CRM/ ILM)
  • HR & Payroll
  • Digital & Web Marketing
  • Data Management
  • Reporting/ MIS/BI/Big Data
  • Equity & Data Mining
  • Messaging & Texting
  • Vehicle Control, Auctions & Inventory
  • F&I Menu
  • eContracting /Credit & Compliance
  • Aftermarket & Accessories
  • Desking

It’s easy for a busy dealer to be confused, duplicate functionality and spend too much. At the Gillrie Institute, we track nearly 15,000 items from over 300 vendors – and all of them are constantly changing! And then there are phone systems which present an entirely different set of challenges. Vendors of every stripe offer a dizzying range of hardware, software and services.

What can a dealer do to reduce costs?

Unfortunately the answers are not as obvious as you would expect. The first step is to carefully analyze your position by examining a detailed comparative analysis of your monthly billing and each of your vendor relationships. You may need help with this from a professional familiar with DMS and third party vendor costs and practices.

If your existing contract extends for a several more years, a total renegotiation may not be an option at this point. Many vendors will work with you, even mid-contract, to reduce costs if you have a specific plan of attack. We have seen some vendors make good will adjustments but the strategies most likely to produce savings are:

  1. Identify and cancel any software and hardware that is not being utilized
  2. Cancel unnecessary maintenance items

Some dealers may also find that their businesses have changed very dramatically since they last agreed to a DMS (or other tech) contract. If you find that your current situation is so grossly out of line with your current needs that it appears untenable, you may want to consider more drastic steps to reach your goal. In these cases, you may want to begin negotiating before your contract is over. Often you can find common ground with your current vendor if you are prepared to agree to trade a new or extended contract for reduced costs. This is a dangerous strategy if you are not totally prepared for the negotiations. You will almost always need outside help to formulate a plan that leads to real, long-term success.

If you decide to negotiate either because your contract is almost over or because you feel a cost reduction is the only viable option, remember that the tech market has changed and the method you used the last time didn’t really work that well or you wouldn’t be in this position. You can’t expect different results if you do the same thing again.

Remember: You can’t have a successful negotiation when you don’t know exactly what you are bargaining for or how much it should cost.

Years ago negotiating with your computer vendor was pretty straightforward. You received a proposal and questioned whether everything you wanted was included. Then negotiating the numbers began. The only thing you didn’t know was how much you should pay. You just didn’t want to pay more than other dealers. The car business now is too competitive to operate that way any longer. You can’t guess and get it “almost” right.

It’s just not that simple anymore.

Contracts have recently become longer and more restrictive. Many factors that no one had even considered in the past are now central issues. Vendors sell many different solutions and they all sound alike to the dealer who only looks at them every five or six years. Costs have shifted from “upfront” and become “variable”. A dealer’s monthly bill can easily be double what he expects it to be after he has concluded his “successful negotiations”.  He will often find himself beginning a new round of negotiations to resolve outstanding issues and add items that were overlooked – this time with no leverage because the vendor already has the dealer “locked up” under contract.

Want proof? Take a look at that deal you signed a few years ago and then look at all your current billing from your vendor and their related companies. You may find that the monthly amount you thought you agreed on is just a fraction of what you are really paying now. We recently checked a deal just three months after it was signed and found charges that would have cost the dealer over $90,000.00 more than he originally agreed to pay over five years! Can you imagine what happens in time to dealers who never audit the bill against their contract?

We regularly hear from dealers who were confident that they did a good job negotiating for a new system but now discover it’s not quite over. The final contract (which may not appear until months after an agreement is in place), can bear little resemblance to the deal the dealer thought he negotiated. The dealer, who has moved on to other projects, either accepts it blindly or is forced to regroup and try to renegotiate. Soon it is hard to remember what was important and how much it was supposed to cost. Sometimes the problem arises at the time of installation. Some features that were demonstrated as much as a year earlier are now not actually included, but available at extra cost. Now deadlines loom and the dealer again is without leverage. Who has the advantage? The vendor does.

Confused and worn out by the process, some dealers throw up their hands and give up. They haven’t received the best deal they could have and they may not have acquired the technology they really needed but they just agree to the last minute changes and live with the consequences for the next five years or so. Then the whole process begins again.

A few simple rules in every dealership technology negotiation

Never negotiate without having all of the information in front of you.  It is important to get all the details before you negotiate a deal.  Do NOT waste your time with “summary” proposals. Ask yourself why a vendor would avoid giving you a full disclosure of what you are buying. The answer is pretty obvious – an informed buyer always get a better deal.

Never make a decision if you are confused. You should know exactly what equipment and solutions are included, the right price for everything you are buying and exactly what contracts you will be asked to sign before you agree to buy or lease anything, If, at any time, you find yourself confused or frustrated, STOP and get the information or help you need before proceeding. It’s easy to fix a problem now, often it’s impossible later. Even when an honest effort is made by each of the parties, this stuff can be really difficult to decipher. Don’t let it cost you money, time or aggravation!

Don’t buy into artificial time constraints. The deal that is available today will usually still be there tomorrow. It is always okay to slow the process down and get any clarification you need to be comfortable. Many times we see the focus of a meeting change from finalizing a deal, to getting the information or terms that a dealer wants before he agrees to part with his very hard-earned money. This can be frustrating to a dealer who is tired and wants to put this whole project behind him, but if you understand that a mistake here is one you will live with for 5 years (or more), you will take all the time you need to get everything right before you sign.

Get professional help. You wouldn’t go to court or face the IRS without your attorney or CPA. Don’t go it alone in these negotiations that can also involve millions. You should always feel free to give us a call at the PGI at any stage of the process. Most times we can clarify an issue or get you the information you need right away.

Since 1992, thousands of dealers have relied on us to help with their technology acquisitions and you should too. We can help you with any tech negotiation – DMS, CRM, Phone systems and any other third party technology vendor!