How to leverage the best of both worlds

More than a decade ago, chatter that Microsoft could enter the dealership management system space sparked interest from dealers around the country. Many hoped that a new product might shake up a market long dominated by Reynolds and Reynolds Co. and ADP Dealer Services, which later spun off into CDK Global.

Though pilot testing occurred at dealerships, and Microsoft unveiled the product at the National Automobile Dealers Association convention in 2009, the "Dealer Management System for Microsoft Dynamics AX" never hit the market.

"Here's the thing that Microsoft didn't know: The workflows are really complex and require data that's not easily accessible," said Phillip Battista, CEO of Darwin Automotive, a vendor of predictive F&I menu-selling tools. "Parts information, labor time guides, vehicle ordering status — all of these data touch points are needed to make the workflow work."

Microsoft, which was unavailable to comment, the market after spending several hundred million dollars, Battista added. "They were well-organized, well-funded and still could not break into this market."

Today, Microsoft's role in the market is to provide for dealership vendors, such as Dominion Dealer Solutions, a DMS provider.

In more recent years, tech startups have stampeded toward the auto retail space as it becomes more digital, but companies lacking automotive chops and the respect for the complexities of its retail operations tend to stall out, experts say.

The industry is sampling techniques and technology of other sectors with solutions they say will streamline the car-buying process and put customer needs in the driver's seat. For dealership fintech companies to be successful in a space where many entrepreneurs have failed, they must have the right mix of the new world and the old. A Silicon Valley mindset combined with traditional auto retail expertise could be a winning combination, experts say.

Tech companies that make their mark on the auto retail market have three key facets: an innovative product, a business plan that accounts for the complexities of dealership software workflow and widespread market penetration, said Battista, who worked in dealerships from the time he was 13 years old, washing cars. He eventually joined ADP, now CDK Global.

Having an innovative product is an important slice of the pie, but regardless of the capital at their disposal, Silicon Valley companies are more likely to fail at the second point — understanding dealership operations.

"I don't have anything against Silicon Valley guys. They brought solutions to the world that we use every day," Battista said. "But if you're truly going to innovate, you have to continue to innovate."

Understanding dealerships

George Angus, an F&I trainer for more than three decades and now president of F&I training firm Team One Group, says of all the technology companies he's seen enter the field, few have stood the test of time. The issue, he said, is a misunderstanding of how critically important F&I income is and how many legal and technical nuances need to be handled in the F&I office.

"They don't sell the F&I manager; they sell the dealer. Many times, the dealers buy into it because they think it looks jazzy," Angus said. "All you have to tell the dealer is, the industry is leaving you behind. So they buy it, and they force it down the throat of the F&I managers."

Some dealers say the Internet drives down gross profit, and adding more technology to profit centers could be a gamble they aren't ready to make, Angus said. If the technology increases profits, dealers will buy in, he added, but tech companies need to put in the work at dealerships before their solutions will be accepted.

Roadster, a California startup that created digital storefronts on dealership websites that allow consumers to buy vehicles online, broke through the status quo of the automotive retail space after more dealer input.

Roadster's initial product was a direct-to-consumer website for car buyers in California, with the entire purchase process on that website. Rebranding the process as a white-label dealership solution triggered growth for the startup, which has dealership partners in 37 states.

"We always lived in the dealers' shoes, and we came to appreciate the complexity of the transactions," Roadster COO Rudi Thun said. "Working with dealers improved the model, and that is our business at this point."

The legacies of effective F&I managers are built from years of experience, interpersonal skills and technical and legal savvy, said Angus. Replacing all of those qualities with a computer program is easier said than done.

"Oversimplifying that job is a big mistake," Angus said. "Trying to build a process without them is a monumental task."

Chernek: New tech products need buy-in.

F&I trainer Rebecca Chernek, president of Chernek Consulting in Atlanta, says some of these tech companies' products are eye-opening, but "the real world is at the dealership."

"Some dealers are pushing the idea behind this technology, and others are just not because they don't understand it," she said. "They don't have the buy-in. It doesn't fit within their culture."

Roadster broke through the status quo of the automotive retail space after more dealer input. "We always lived in the dealers' shoes, and we came to appreciate the complexity of the transactions," said COO Rudi Thun, left, with CEO Andy Moss.

Tech companies that pride themselves as the first to market a new idea face challenges if they haven't considered dealers' perspectives. Once a company proves it has staying power in the industry, it will earn the reputation and the capital to continue innovating.

Tech companies often have great ideas, typically driven by consumer trends, but new tech products require "in-dealership people to be able to embrace it and work with it," Chernek said. "Take the technology and embed it into the dealership culture, or you're dead in the water."

A vestige of that culture is keeping operations, particularly finance, inside the dealership at all times. Most dealerships keep pricing offline to protect profits, but experts agree that delaying the price conversation can make an already-complicated transaction more time-consuming in the store.

Thun says dealers should consider informing customers of F&I products ahead of time because knowledge of offerings — such as service contracts, maintenance programs and ancillary products — helps streamline what goes on in the F&I office.

Remote presentations

Educating and selling to customers off-site is also a worthy investment requiring digital tools, according to auto retail consultant Mark Rikess. As the desire for off-site car deliveries increases, technology that extends the reach of the F&I process can help dealerships maximize product penetration.

"The presentations have to be made remotely, and there [are a few systems] where they can do the entire transaction that way," Rikess said. "Smart dealers are going to do the whole transaction remotely."

Ironically, the automotive market is as highly susceptible to change as it is to resisting that change. Without an automotive background to understand the ebbs and flows of the market, a Silicon Valley startup without strong roots in the industry could fade away.

However, as the industry evolves, resistance to new technology and the companies that introduce it could alienate customers and reduce a dealership's market share.

So, what's a dealer to do?

"You have so many different companies. They all offer something different. The dealer really needs to understand that whatever technology they offer has to be incorporated into their everyday business practices," Battista said. "The smart dealerships today are making sure they're ready."