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Reduce DMS Expense- The Real Cost of Overpaying for Technology

Every year we update the table below for our clients and we are consistently amazed by how hard a dealer has to work to actually make money and pay the bills. This year’s changes, as reported by the NADA, are truly staggering. Not only did the average dealer’s margin on a new car slide from $1,442.00 to $1,257.00. (Used vehicles also slipped -from $ 1,778.00 to $1,633.00) but the margin of net profit to gross sales fell from 1.5% to 1% – a 33% decline!

If you look hard at your monthly financial statements, you can find nearly everything you need to know – but sometimes it’s easy to overlook important details. As they fight through this very tough year and position themselves for the recovery, dealers should heed the advice I once heard from a old friend who was one of the country’s first (and most successful) megadealers. He advised, “You must always run your business as if you are breaking even. If you act as though you are doing very well, you will waste money. Alternatively, if you act like you are losing money, you will miss opportunities”.

If you assume that a dollar saved has exactly the same effect on the bottom line as earning an extra dollar of gross profit, you are 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 computer expense! It turns out that a dollar saved actually has the same effect as earning $14.30 in gross profit.

The calculations below are based on the statistics that the NADA published for 2008. The table delineates exactly what the average dealer needs to earn so he can pay for any excessive DMS computer charges. Obviously, the numbers will also apply to any other recurring expense.

Five Year Effect of DMS Overpayments

Monthly overpaymentFive Year Total overpaymentGross Profit required to cover overpayment# of new vehicle sales required to cover overpayment
The above calculations are based on NADA 2008 dealer averages as published in Auto Executive Magazine – March 2009

In the normal course of our business, we frequently find that a dealer is paying $2000.00 a month too much for his computer system. As an example, that dealer would need to earn $1,716,000.00 in gross over the next five years to pay just for the computer overcharges! The first 1365 new cars they sell will go to pay just for the excess charges

  • not for their whole computer system – just the amount of the overcharges!There are only two ways to reduce DMS expense:
    1. Negotiate a better deal
    2. Buy less technology

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

What can a dealer do to reduce expense?

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 vendor relationships. You may need help with this from a professional familiar with DMS costs and vendor practices.

If your existing contract extends for several more years, a total renegotiation may not be an option at this point. Most 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 superfluous software and hardware if you can.
  2. Cancel unnecessary maintenance items wherever possible.

Many dealers are finding that their businesses have changed dramatically since they last agreed to a DMS contract. If you find that your current DMS 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 this 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 simple. You received a proposal and questioned whether everything you wanted was included. Then you negotiated the numbers. 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 way too competitive to allow that to happen. 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 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 more than he originally agreed to pay over five years! Can you imagine what happens over 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 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. 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 computer 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 confusedYou 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.

You should always feel free to give us a call (800-576-6959) 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. Thousands of dealers have relied on us to help with their technology acquisitions and you should too.