Former Intel head looks to grow and transform CDK's work

CHICAGO — CDK Global Inc. isn't the kind of company that attracts much attention in Silicon Valley. In fact, the maker of dealership software is largely unknown in its suburban Chicago hometown. So why would the former CEO of one of the Valley's original icons, Intel, sign on there?

"I've always been a car guy," said Brian Krzanich, a 58-year-old chemical engineer who spent most of his career keeping factories humming for the world's largest computer-chip maker before landing Intel's top job in 2013. "I love mechanical things, older cars especially."

His garage features a Porsche 356, the predecessor to the classic 911. He's got a 50th anniversary Shelby Cobra and is awaiting delivery of a Ford GT in January. "To do this [job], you have to spend time with the dealers. Dealers can tell right away if you're a car person or not."

Second question: So why would a software company recruit a hardware guy as CEO?

"In today's world, you can't ship hardware without software," Krzanich said. "A lot of our work at Intel was on the automotive side: in the head unit, engine and brake controllers."

CDK doesn't need an overhaul, but it definitely could use a tuneup. CDK, which was spun out of payroll software company ADP in 2014, lowered its profit forecast a month ago for the current fiscal year, mostly due to a recent acquisition. It also has to reckon with a slump in auto advertising, which accounts for 13 percent of its $2.27 billion annual revenue, and a plateau in the auto sales cycle. There's continued consolidation, moreover, among smaller dealers who make up a third of its business. And CDK faces an antitrust lawsuit, which a federal judge in Chicago recently declined to dismiss.

Little wonder that CDK's share price has dropped 34 percent since mid-January, when it hit a multiyear high of $76.04.

"The market is going to take a wait-and-see approach to whether or not the company can re-accelerate growth," Wells Fargo analyst Tim Willi wrote when he downgraded the stock to "market perform" Nov. 8, the day after CDK revised its outlook and, coincidentally, announced Krzanich would take over as chief executive from Brian MacDonald, who had been in the role since 2016. "A new CEO, while bringing a strong track record, presents a scenario where the market may expect a shift in strategy and additional movement on the management team, creating uncertainty."

Krzanich, who resigned from Intel in June for having a relationship with an employee, in violation of company policy, says he was looking at traditional tech jobs, from startups to larger companies, in sectors as varied as artificial intelligence and rocketry, when he got a call from a CDK board member he knew: Stephen Miles, a former headhunter at Heidrick & Struggles who runs Miles Group, a boutique executive-coaching firm.

"When I started thinking about what's next, I assumed it would be in the Bay Area or Western U.S.," Krzanich acknowledged.

But CDK "was the right combination, the right size — big, but not too big," said Krzanich, who will commute from Silicon Valley to Chicago while his daughter finishes high school. "This has a great core business with a lot more potential."

Car dealers use CDK's software for everything from tracking inventory and sales to finance and service. Dealers and competitors have something of a love-hate relationship with CDK and Reynolds and Reynolds, its main rival.

"It's like the brain box of a dealership. When the system goes down, it is crippling," said John Hennessy, owner of River View Ford in Oswego, Ill., who uses Reynolds, of Dayton, Ohio. Changing a store's dealership management system can put employees in an uproar, he said.

The technology is expensive, and the two companies rule the industry, with about 40 percent market share each. Cox Automotive is among several competitors suing CDK and Reynolds, accusing them of anti-competitive behavior. Some dealership groups have defected, but the pain points of switching to a new system often keep dealers with their legacy system.

Michael Alf, general manager and co-owner at St. Charles Toyota, near Chicago, resigned with CDK in August, though he'd shopped around for a replacement provider. Alf said his dealership relies heavily on CDK in the service lane because it is the only provider to offer a seamless, paperless operation. Still, he said CDK's software generally appears to be running on a platform built in the 1970s, with the company just "putting Band-Aids and patching it to make it work."

Alf likens it to a mansion being built over an outhouse. "Really, you got to burn the house down and start from scratch," he said.

So what could a new CEO do?

"He needs to abandon the current platform and move forward to a web-based system but still keep the functionality of the old one," said Alf, a computer science major who built his dealership's customer relationship management software.

Krzanich says he is focused on the upside at CDK. After a four-year cost-cutting campaign, which included layoffs that have bruised morale and shrunk the staff at its Hoffman Estates, Ill., headquarters to around 500 people, CDK needs growth. The company's goal is to increase revenue 4 to 5 percent annually. In the fiscal year ended June 30, revenue was up 2.4 percent, but it declined 2 percent in the most recent quarter. The company employs 8,500, down from 8,900 a year ago and 9,000 in 2014, the year of the spinoff.

During Krzanich's five-year run at Intel, revenue rose by a third, to a forecasted $71.3 billion this year. Profit was nearly flat until this year — it is predicted to reach $20.7 billion, more than doubling from Krzanich's first year.

Roger Kay, a longtime computer industry analyst who runs Endpoint Technologies Associates near Boston, says Krzanich's record at Intel was mixed. "Financially, they turned in billions in additional revenue but got behind on process-manufacturing technology," Kay said. "The server business did well under his tenure; but he missed" the Internet of Things.

Krzanich's plan for CDK includes more interaction with the car buyer.

"Ninety percent of people do research on the Internet before they buy," he said. "The minute they enter the dealership, that experience stops, and it's no longer digital. We should make it such that you can schedule the test drive online. There are people who know what they want. They should be able to negotiate price, financing and most of the trade-in work needed before they come in.

"It will require a certain amount of transformation," Krzanich added. "We're going to need to add consumer software skills over time."

He also wants to play up CDK's data analytics capabilities, giving dealers such information as how many people visit a dealer website but leave without making an appointment or inquiry.

"There's huge opportunity for growth in the services and solutions we can provide," Krzanich said.

But that's just a start.

"I'm a firm believer that autonomous driving is coming," Krzanich said. "CDK is going to be part of that transition. Cars may become more and more of a service; how you think about maintenance is going to shift. We can make that a smoother, profitable transition for the industry."

Heath Thompson, general manager and vice president at Ronnie Thompson Ford in East Ellijay, Ga., doesn't know much yet about CDK's new CEO.

"There's stuff that can be improved upon, and I think there's stuff he can screw up if he wants to," said Thompson, whose store switched from Reynolds to CDK's DMS five years ago.

Alf said he hopes Krzanich puts time and money into moving CDK further into the future.

"Will he have the courage to move to a new platform and put the resources behind it, knowing that it will take years to pay off?" Alf said. "That will be the test of the CEO."

David Muller contributed to this report.