What About Other Big Player?

I have to resist the temptation of again writing about Reynolds and Reynolds and the effects of the acquisition by Universal Computer Systems Inc. last fall. There is so much material from that takeover, it's hard to keep up with.

What about the other big player in the dealer-management system space, Automatic Data Processing Inc.'s Dealer Services Div.? If it makes the right calls, ADP conceivably could be in control of much of the market in the next five to 10 years.

Some analysts and experts speculated in recent years that ADP would sell its Dealer Services group. There were no real rumors floating that ADP was considering a sale, but the thinking made sense.

ADP has shed other business units. Profit from DMS sales were declining, in part, due to intense price competition with Reynolds.

If money was going to be made, it would come from the applications part of the business. And even that has become much more competitive as more third-party vendors came to market with strong products. So, a sale possibly would be attractive at the right price.

But now, it would be foolish to even think of a sale, and I'm guessing it's not even a thought at the parent company. The opportunity for significant growth likely is too much to pass up.

When tiny UCS acquired Reynolds last fall it completely destroyed the rules of the current market. Reynolds and ADP control nearly 80% of the DMS space, with numerous smaller firms competing for the other 20%.

One factor in the dealers' favor in recent years is that Reynolds competed vigorously on price and ADP had to follow suit to keep from losing business. Bob Brockman, the CEO and founder of UCS, and now the CEO of Reynolds, likely will not follow that pattern.

Brockman is a tough and difficult negotiator and says he expects dealers to honor their contracts. He already has played it hard with one of Reynolds' largest customers, refusing to renegotiate a contract that is up in 2008, even with the dealer promising to consolidate onto Reynolds system. Under the previous management, Reynolds would have locked up the contract already.

Chances are ADP could end up with the entire group by the end of the year, along with some other well-known dealers that have privately mentioned they are looking for other vendors once their current Reynolds' contracts are up.

Even before Brockman took over Reynolds, ADP was winning in the large dealer space. Four of the six public groups either have consolidated with ADP or are in the process.

Lithia Motors Inc. was the first to consolidate several years ago. Its CEO, Sidney DeBoer, recently told a group of investors at a Morgan Stanley conference that “ADP is one of the greatest technology partners.”

While there are no hard numbers, consultants tell me, Reynolds' dealers are leaving in significant numbers — many of whom are ending up in ADP's arms.

I wrote in February that this likely means dealers will be paying higher prices across the board for DMS services, and that ADP is in a position to charge higher prices now.

Although some ADP executives agreed with that assessment privately, Greg Smith, vice president of sales and marketing for the company, responded in a letter maintaining that is not the case.

He says competition is still fierce and that prices are not increasing. We'll see how that plays out.

Although ADP is in a good position now, it does have its challenges. One is keeping up with all of the new contracts. One executive mentioned during a reception at the National Automobile Dealers Assn.'s 2007 convention that ADP was booked solid through July of this year.

The company has to carefully manage its resources with migrating dealers to its system. Before signing with ADP, dealers should push the firm hard to prove that its resources are not all going to the consolidation of larger groups' systems.

Another challenge is the technology for its core DMS which is old, according to every consultant and expert in the field. It may be a good time, if the costs can be managed, to work on developing a DMS with current technology that allows for the easy and open, yet secure, integration of data with other systems.

ADP is trying to position itself as one of the good guys in the ongoing debate of data security and third-party access to the DMS.

At NADA it announced three levels of integration, giving dealers the choice of how to handle the security of their DMS. This is in contrast to Reynolds, which maintains it needs to limit access to protect dealers' interests.

The first level lets dealers decide for themselves which vendors they want to have access. It removes liability from ADP. The other two levels allow for deeper integration and the true movement of data back and forth.

ADP also is facing pressure on the application side of the business. Other firms, such as DealerTrack and JM Solutions, regularly are pushing out applications in the market that compete directly with ADP's offerings.

But ADP is well-positioned and aggressive on the application side. During NADA, the company announced it will start managing dealers' Internet-based phone systems in an ASP (application service provider) or hosted environment, much like it does for many of its DMS systems.

ADP is far ahead with its I.P. (Internet protocol) telephony, integrating it directly into the DMS.

In the next couple of years, you'll start seeing stories about radio frequency identification (RFID). One large auto maker is planning on putting RFID chips in all of its vehicles in the next three years. ADP has been developing a solution the last few years, and is the only DMS vendor even talking about it.

Potentially, RFID could become one of the primary ways dealers and OEMs manage inventory in the next five years.

Another area untapped is in human resources. ADP quietly is developing services to help dealers manage their employees throughout their entire employment beginning with the hiring process.

It also announced at the NADA convention the launch of a suite of digital marketing e-business solutions. Part of that suite includes the integration of the BZ platform (a website marketing firm ADP acquired last year) with ADP's current e-business platform.

This is one to be careful with. Some dealers report they are having a lot of problems with ADP's website solution. It's clear there are issues ADP has to fix. AutoNation is its biggest client, so chances are, the problems will be fixed quickly. Our advice is to let the AutoNations of the world be the guinea pigs for the digital marketing solutions.

We're not writing this to say ADP is the only alternative in the market now. There are other, lower-cost DMS vendors. And they are credible firms, but they are nowhere near the size, or have the scalability ADP has.

And we're not declaring the death of Reynolds. It's only six months after the acquisition, and it is too soon to really tell if Reynolds becomes a bigger UCS. There are signs that is happening, but Brockman claims that is not the case.

For dealers, the message here is pay attention to your DMS contracts. More than ever, it is important to have the right vendors and know who is in the best position to help you grow your business the next ten years.

High-Tech Tool Helps Sell Accessories

5square.com brings to market its version of software for selling vehicle accessories at dealerships.

The application is built into 5square's overall web-based sales-process system. Dealership personnel and customers can choose from a list of available accessories for a specific vehicle with direct links to images.

Each accessory can be directly linked to a URL and the sales person can bring up a picture and product description with all pricing information.

Skip Kinford, 5square.com president, says it helps dealers adjust the sales process to accommodate more vehicle accessory purchases. That way, he says, the consumer finances accessories with the dealer, “rather than putting it on a credit card at a detail shop.”

Kinford says the system integrates with both ADP and Reynolds and Reynolds dealer-management systems, and is web-based so dealers can concentrate on cars instead of computers.

Auto makers are searching for ways to allow customers to personalize their cars and trucks, trying to transform a niche business for aftermarket parts into a profit center.

Customers are spending more money on aftermarket parts — everything from add-on spoilers to back-up alarms and satellite radio. U.S. aftermarket sales rose 9% last year, to $39 billion.