Brockman’s Plan for Reynolds

Commentary

Now that Bob Brockman owns Reynolds and Reynolds Co., the question is what does it mean for dealers? This may be one of the most important questions for dealers in the next couple of years.

Brockman’s company, Universal Computer Systems Inc., a private firm in Texas, acquired the much larger and public Reynolds in October and promptly took it private. Brockman now controls the automotive-retail industry’s largest dealer-management system vendor.

Don’t stop reading, though, if your dealerships are on systems other than ones built by Reynolds or UCS, because this deal likely means you will be paying higher prices regardless of what system you use.

Also, the deal will affect which third-party applications – such as those providing services in customer-relationship management, parts, finance and insurance and service – will be able to access the data on your DMS.

So why will you be paying a higher price for your system in the near future? When Reynolds was public, it competed hard with ADP and often competed with it on price. Reynolds had to make sure its number of dealership clients remained fairly stable and even with ADP to keep Wall Street happy. But that also limited its profitability.

The fact Reynolds and ADP competed so hard helped keep a lid of sorts on what they charged dealers. At least savvy dealers were able to play the firms against one another into providing significant discounts when negotiating a new contract. But that dynamic no longer exists.

Brockman has no such problem. He can afford to lose several hundred, if not thousands of dealer customers and still make a lot of profit. It is a formula that worked at UCS. Even as the firm’s market share dwindled, Brockman was able to wring a reported $100 million in profit in 2005. In fact, it is not inconceivable Brockman plans on losing a large number of customers – especially customers that require a lot of support and generate little profit.

That scenario bodes well for ADP, which likely will gain significant market share in the next five years. Additionally, ADP, and even the next tier of vendors, Autosoft and Arkona, will be able to raise their prices without the specter of having to negotiate against Reynolds.

One thing Reynolds’ dealers should watch for is whether Brockman decides to build the servers in house, as he does for UCS dealers. Currently, Reynolds buys its servers from IBM, but there are reports from Dayton, OH, Reynolds’ headquarters, that may not continue.

Building the servers in house will provide Reynolds greater flexibility in what it can charge dealers, as well as greater ability to control who has access to the DMS.

The question of who controls access to the DMS will be a battle this year. Reynolds continues to maintain that is following through with its Reynolds Certified Interface program announced prior to the National Automobile Dealers Assn. convention last year. There has been some question whether the program would continue after the acquisition by UCS.

RCI is a modification of Reynolds’ earlier Path to Performance program. It promises to protect the dealers’ data residing on the DMS, by limiting and controlling access other applications providers have to the DMS. Several third-party companies, along with dealers, however, believe the program was conceived to drive profits for Reynolds by charging the third-party firms fees to access the DMS.

Dealers rightfully claim the data on the DMS is theirs and that they should have unfettered access. Reynolds’ position in pushing RCI is that the data is the dealers, but dealers because of legal and compliance issues, need help monitoring who is accessing it.

The program may be a moot point now. Several people familiar with RCI claim Reynolds has signed no contracts with third-party firms for RCI since the acquisition, which raises the question of whether Reynolds will continue the program.

For the most part, UCS maintained a strict policy not allowing other companies with competing applications access to the DMS. As a result, UCS had a reputation for being difficult – some say impossible – to work with. It is not a stretch to imagine Reynolds adopting a similar philosophy, which would might make RCI meaningless. The end result will be that dealers will find it much harder to access the data on their systems.

There are mixed signals coming from Dayton and Houston regarding how Brockman intends to handle the data security questions. It is true, however, there are indications that Brockman intends to play nicer with the industry than he did when he was just UCS. Brockman, at least, has conveyed that possibility to different people the last few months. Time will tell.

Another critical aspect to Brockman’s strategy is how he plans to position UCS’s Power system against Reynolds’ ERA platform. Reynolds likely will continue to support ERA for several years, but it also may try to create some greater disparity between the two systems. Power definitely will be the higher-line, more upscale system, while ERA is relegated to a lesser status.

It is possible Reynolds may eliminate some of ERA’s features and may even shut off some of the reporting capabilities to create that differentiation between the two systems.

Following the playbook from the old UCS, Reynolds already is beginning to require dealers on older versions of ERA to upgrade by March to more advanced versions or risk losing support for various functions. Meanwhile, at least 18 dealers now being required to upgrade their UCS Power system have filed a class-action lawsuit against Reynolds.

If you’re a dealer thinking Brockman will flip the company in a few years and plan on waiting him out, don’t hold your breath. The only end game Brockman has in mind is to be carried out with his boots on. The private investment firms that helped fund the deal are rumored to already have received their investment, leaving Brockman in complete control. Besides, Brockman loves this business too much to leave.

The other question is Finbarr O’Neill’s future with the company. Our guess is sometime between now and April 23, the 6-month anniversary of the acquisition, O’Neill will exit Reynolds.

One thing is certain: Dealers will feel the effects of this acquisition for years to come.

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