Christy Frostrom saved her dealership money by doing what for years was unthinkable.
Frostrom, controller of Frostrom Jeep-Subaru in Pocomoke, Md., ended her 14-year relationship with one of the two dominant suppliers of dealer management systems and signed a new contract with a small Clifton, N.Y., software vendor.
The dealership used to pay $3,200 a month for equipment rental, technical support and systems maintenance for an ADP Dealer Services Group management system. Frostrom Jeep-Subaru also paid a few cents for each business form it printed on the laser printer it leased from ADP, a unit of Automatic Data Processing Inc. But now that the store is doing business with Auto/Mate Inc., monthly expenses have dropped to $2,101 - even though the dealership still is paying off the ADP lease. When the lease expires in a year and eight months, monthly expenses will be only $1,215.
Frostrom is an example of a small but growing number of dealerships that are leaving the major computer vendors. Smaller vendors are courting dealers with drastically lower prices for hardware, software and maintenance. And for some small and mid-sized dealers, those systems are inviting. The dealers are willing to give up their luxury model for an econobox, to forgo some services in exchange for a lower price.
Still, the big players dominate the dealer computer systems arena.
Two vendors - ADP, of Hoffman Estates, Ill. and Reynolds and Reynolds Co. of Dayton, Ohio - are on top. Universal Computer Systems of Houston ranks a distant third.
In general, larger dealerships and dealer groups are sticking with those major vendors. They offer reliability, sophistication and vast field support. Their long track record is reassuring.
'Dealers don't mind paying a price if they perceive a value,' explains Paul MacDonald, a Hays, Kan., computer consultant who works with the National Automobile Dealers Association.
The big players say they're not threatened by the upstarts. But one, ADP, has been offering a cut-rate product to compete head-on with the smaller vendors. And it's just now beginning to promote it.
Second-tier vendors would not have a crack at dealership business without approval from the automakers.
In the past two years, some manufacturers have expanded the number of vendors approved for dealer communications systems. Before, manufacturers typically certified only ADP, Reynolds and Universal Computer Systems for dealer computer systems. Now, for example, General Motors dealers have more than a dozen options.
Part of the push is coming from NADA, which has formed a committee developing ways to encourage competition in the dealer systems business and to educate dealers on how to shop for computer technology.
Factory support is critical. If a vendor is not approved for the dealer communication system, the dealer has to use a separate, approved system just for communications with the factory. That means the store faces double charges for computer equipment, support and maintenance. Naturally, most dealers want to stick with one vendor for their dealer management and dealer communication systems needs.
The increase in vendor certifications has been a boon to second-tier vendors. For example:
AutoSoft International of West Middlesex, Pa., is adding about 25 customers a month. The software company, which offers a Windows-based system, supplies dealer management systems to about 1,000 dealers.
PBS Financial Systems Inc. of Calgary, Alberta, has seen an annual growth rate of 15 percent in dealer accounts and 35 percent in annual revenue. PBS supplies 1,200 dealers in the United States and Canada.
Adam Systems of Daphne, Ala., which supplies more than 1,000 dealer customers, has seen its customer base grow 22 percent a year for the past four years.
Dubuque Data Services of Dubuque, Iowa, has gone from no dealership customers to 145 in two years.
Auto/Mate Inc. of Clifton Park, N.Y., supplies 150 dealers. It is seeing annual revenue increases of 30 percent.
Both ADP and Reynolds claim they have not lost business to second-tier vendors.
'We are gaining market share at record rates,' says Kurt Lieberman, general manager of Reynolds' retail management solutions division. 'We are not seeing a lot of increased competition.'
But smaller vendors say most of their new business is from ADP and Reynolds customers.
There is evidence ADP and Reynolds are feeling the heat. They deny making concessions, but dealers say the big companies will come down on their up-front hardware and software prices when a smaller competitor enters the arena.
PRICING AN ISSUE
Dick Merideth, general manager of Parkway Buick in Daphne, Ala., found that Reynolds cut its up-front hardware and software price in half when it discovered Adam Systems was bidding on the account.
'They started out at $150,000 to $160,000 for hardware and software, then dropped their quote to $70,000,' Merideth says.
Though Adam's up-front price was $45,000, Reynolds' negotiated price was in line with some of the other smaller vendors on up-front cost. It didn't budge on monthly fees, which remained comparatively high.
'We pay Adam $500 a month,' Merideth says. Reynolds would have charged the dealership $4,000 in monthly fees. 'Reynolds and ADP are the Cadillac' of the dealer computer business. 'They give you more bells and whistles. But for what we do, the small guys are fine.'
Two years ago, ADP developed a product that would compete head-on with the smaller vendors. The Alliance dealer management system, which is designed for dealerships that sell up to 80 new and used vehicles a month and up to 25 workstations, has 400 users.
'Our strategy is based on the success of some of the regional providers,' says John Stough, director of marketing for the Alliance section of ADP Dealer Services. 'Our prices are competitive with the regional PC-based competitors.'
The Alliance system is a Windows-based local area network product. The monthly support fees are in line with the most aggressive prices of second-tier competitors at $560 for four applications: accounting, parts, service, and finance and insurance.
While dealers on ADP's high-end Elite dealer management system have to buy hardware from ADP, the company is more flexible when it comes to the Alliance system. The dealer has to buy only the first personal computer from ADP - the rest can be purchased off the shelf, or the dealer can use the personal computers already in operation.
Though the Alliance lacks the higher-priced features dealers get with the Elite system - such as data storage disk archiving and electronic repair orders - Stough believes many dealers will find the Alliance appealing. When its current customers fit the target market of the Alliance, ADP is offering to convert them to Alliance from the Elite system.
'One of the biggest problems with the Alliance system is that dealers aren't aware of it,' Stough says.
But ADP is just now promoting the product through ads in trade magazines, he says.
Price is the most frequently mentioned benefit offered by the second-tier software vendors. The smaller companies' pricing is also simpler - generally a flat support fee that includes system upgrades.
Larger vendors often roll in a variety of fees that jack up the monthly support and equipment charges. For example, dealers might pay a 'click' charge on each form they print on a laser printer. Dealers can be charged port fees, which amount to a fee per user. And in addition to an up-front charge for hardware and software, dealers may pay equipment-rental fees.
'We use a printer we can buy at the Office Depot for $300,' says Parkway Buick's Merideth, whose dealership is a customer of Adam Systems. One of the major vendors would have charged him $50 a month per printer.
Some of the smaller vendors offer Windows-based systems, which have open architecture. That means their systems are compatible with off-the-shelf hardware and software, making it cheaper for dealers to operate and to add new technology.
Although the larger vendors are making changes that give their systems more flexibility, they have been providing proprietary systems that have more difficulty interfacing with outside software and hardware products. Dealers are locked into buying hardware from a sole supplier and unable to shop for a better deal.
'We looked for a PC network, a Microsoft-based system, because that made the architecture open and interactive,' says Dave Pilcher, vice president of Smith Motors in Brazil, Ind. Smith Motors converted from an older Reynolds system.
'We were serious about providing our own hardware,' Pilcher says. 'We did not want to be strung along by a vendor that says we have to take its hardware with the software. We wanted control over our hardware cost.'
Smaller vendors also have more flexible supply contracts. Most are on month-to-month agreements, while the larger vendors typically require dealers to sign five- to seven-year agreements.
No matter when the contract expires, changing vendors is no small feat. It involves the cost and trouble of retraining employees to use the new system, as well as the potential cost of buying new hardware and software.
But dealers still like having the ability to cancel a contract they are dissatisfied within 30 days.
And some smaller dealers find the second-tier vendors more responsive when they need technical assistance. Though larger vendors have armies of field support staff, some smaller dealers complain the big guys are impersonal.
'Auto/Mate is a more people-oriented company,' says Frost-rom, of Frostrom Jeep-Subaru.
Despite the pluses, some dealers also spot some minuses in switching to a second-tier vendor.
Some fear the smaller vendors lack the staying power of the larger, more established vendors. The small companies could go out of business or get swallowed by a larger company.
Just this year, Dealer Solutions, a promising new company offering a Windows-based system, was acquired by ADP.
Dave Bradley, president of PBS Financial Systems, is assuring dealers that the Dealer Solutions sale was an isolated incident.
'Dealer Solutions was totally funded by venture capital money. They had huge debt,' Bradley explains. 'The rest of us pulled ourselves up by our bootstraps without debt.'
Even so, David Boatman, chief information officer for Sonic Automotive Inc. in Charlotte, N.C., says he prefers the stability of ADP and Reynolds. The publicly held dealership group uses both Reynolds and ADP systems.
'Because of their scale and their ability to service us in many locations geographically spread across the U.S., they have the resources and knowledge of the industry we believe is important to support us and to understand our needs,' Boatman says. 'ADP, Reynolds and UCS in our opinion are behind in technology, but what they have works.'
Sonic, which will own more than 110 dealerships by year end, also would not consider ending its supply agreement because the cost to replace the systems would be astronomical, Boatman adds.
He also says he believes the big vendors in time will catch up with the technology of their smaller, more agile competitors.
THE BIG SQUEEZE
Even some small dealerships that have converted to second-tier vendors miss all that the large vendors have to offer.
Lynn Fugitt, controller of Paso Robles Ford-Lincoln-Mercury in Paso Robles, Calif., says she dropped ADP for Dubuque Data Services strictly because of price. The ADP system was costing the dealership $4,500 to $5,000 a month, while Dubuque's system costs $990 a month.
Fugitt has worked for several dealerships and is familiar with the systems used by ADP, Reynolds and Universal Computer Systems. She believes the more sophisticated systems are more responsive, likes the special reports they offer and misses the ease of document retrieval.
But she says her dealership - and many others - simply cannot afford the flashy systems.
Says Fugitt: 'The larger vendors are going to have to come down in the price. If they don't, a lot of dealers will go to companies like Dubuque.'