Wait…Wait! Don’t Sign It!
Guest writer John Anderson is back, with a word of caution this week, in “Wait…Wait! Don’t Sign It!”
Well at the very least let’s think about it first. Given all the changes in Dealer Systems over the past few years, you will no doubt be looking to either renew your existing services with a supplier or perhaps move to a new supplier in the upcoming year. The world has changed, and the balance of power has shifted to you, the customer, but nobody realizes it. The contracting process is your chance to exercise your newfound wisdom.
Whether it’s a hosted SaaS model as described by Greg Greedy in last week’s blog or server onsite from 2015, why do you need a contract beyond one year with a Dealer System provider? We know the barriers to change are great enough that you are unlikely to jump from system to system without some significant benefit. We know the rate of innovation is slow enough that a one-year contract won’t leave you in dust. Pricing remains competitive and there is no resource constraint that will drive prices up, like fuel or food. So why the need to sign a contract longer than one year? The purpose of the contract should be to lay out the terms of service, the “who does what” and how much. It should be used to cement expectations, establish remediation options, and even deal with ownership of data issues. None of these requires extended contracts.
With Dealer Management Systems you absorb the cost of installation and training up front. The underlying development has been done and recouped many times over. The infrastructure for hosted solutions is already in place and data centers are plentiful. You will be paying for the hardware and networking separate from the software contract. Most suppliers will chase you and apply extreme pressure to sign a multiyear contract but why? Why the need to lock you in. As I have said before the Equipment Distribution marketplace is at least 5 years behind the outside world.
Just 5 years ago if you bought a cell phone you did it under contract. That contract started at 3 years and was very penalty laden if you wanted out. As consumers felt they were being held hostage the government and upstarts entered the picture and now options range from monthly prepaid, to simple no contract month to month. The original premise was the providers needed the guaranteed revenue to be able to invest in the infrastructure but that is no longer the case.
Home and business internet was like telephone services and required a long-term commitment for the same reason. Companies like SpaceX have changed the game. Through offers like Starlink they only ask for a 30-day commitment. Gone are the 2- or 4-year covenants that made it impossible to change.
Dealer systems are no different. There is absolutely no reason a multi-year contract should be required. The recent influx of equity partners makes it truly clear from a supplier perspective. If all the existing customer base sign a 3-year contract and they already know what their profit margins are, it’s a slam dunk to sell the company or show stable growth to potential investors. A few PowerPoint slides with a projected growth target and you have an investor’s dream. What they want to do is mitigate the risk and accentuate the revenue opportunity by showing they have the market “locked up” for three years. No need to worry about performance or innovation. No risk of a new upstart with the next best thing for at least 3 years. The revenue is fixed, the risk is eliminated and a couple quick wins to show some more opportunity is all it will take to drive the value up of the software supplier for either share price or acquisition.
It is time to push back. If they need a three contract it better have a good escape clause. It should be performance driven. It should provide more than just price protection; it should offer innovation guarantees and development commitments. A good contract serves both parties. If a supplier really backs themselves and believes they are going to provide you with excellent value for the money spent, they will not require a 3-year locked in contract. Read the contract carefully and see what it provides for your business. Don’t just ask a lawyer to read it, absorb the spirit of the contract and see what it offers your business.
I say it every day, the world is changing. Business is changing. Your customer’s expectations are changing. It is time you contributed to the change. Take the time to read your contracts. Ask yourself what it provides for you. Ask why some suppliers have open 1-year contracts and others require heavily weighted 3-year contracts. Ask why it may have multiple renewal dates rather than a simple inclusion of services. Ask what both parties’ obligations to ongoing development are. Ask how you get out.
I have yet to jump from an airplane, but I check the location of the emergency exits every time I fly. Check your exits and the services before you find yourself at 30,000 feet for 3 years.