CDK's profit push has resulted in lawsuits from dealers, rivals
HOFFMAN ESTATES, Ill. — In three years as a stand-alone company, dealership software giant CDK Global Inc. has produced some eye-popping numbers for investors, who in turn pushed CDK’s stock to a record high this month. The company’s adjusted profit margin hit 32 percent in its 2017 fiscal year, and it’s targeting 40 percent for 2019, continuing a growth rate that its CEO has called “almost unprecedented” for a business of its size and type.
But CDK’s fast climb hasn’t been smooth. Its pursuit of splashy results has driven some customers into the arms of competitors. Four rival vendors, including the powerful Cox Automotive conglomerate, have sued CDK, accusing it of anti-competitive business practices. At least five dealers or dealership groups have filed class-action lawsuits against the company this year, alleging antitrust violations.
“They’re making it easier for us to win their business,” said Autosoft CEO Bryce Veon, whose company has signed more than 30 customers away from CDK in each of the last two years. “A lot of [dealers] call us, and they’re like, ‘We just want off of them as fast as we can.’ ”
CDK officials acknowledge the company needs to improve in some areas but insist that it has made big strides in many others and is making the right moves to prepare for radical changes in the automotive retailing business.
MacDonald: “We’re investing in the future” as retail changes.
“Our customer service has gotten better,” CDK CEO Brian MacDonald told Automotive News. “Our investment in r&d continues to be $200 million a year. We’re investing in the future; we’re investing in products; we’re investing in service.”
MacDonald laid out three pillars after he became CEO in March 2016 — “straight talk,” a “need for speed” and “results” — aimed at creating a productive flow of ideas within the company, better service for customers and prosperity for employees and shareholders.
Since its spinoff from Automatic Data Processing Inc. in 2014, CDK has brought in other fresh faces and invested big money in its infrastructure, but some rivals and dealers question whether the company has been too focused on building margins at the expense of customers.
CDK provides end-to-end retail services to support dealerships from the digital advertising phase to the moment shoppers are ready to buy — and even later, when it’s time for those buyers to come through the service lane. With more than 9,000 stores using its dealership management systems, CDK controls a huge chunk of the market.
The company, in this northwest Chicago suburb, also is planting its stake in the digitized future of car sales. Websites built on CDK’s platform, which draw 14 million monthly visitors, are becoming digital commerce hubs. Through its Connected Store platform that was developed in-house, consumers can get accurate price quotes and structure deals before going to dealerships, thus streamlining the buying process. The websites, which have around 7,000 users, have 12 endorsements from manufacturers such as Ford and Nissan.
The positives are there, but MacDonald says the company is realistic about where it falls short.
CDK’s customer service has been maligned by its vocal customer base. MacDonald, who came to CDK from Hertz Corp., admits the company’s billing system is overly complicated and inefficient. The company had too many offices operated by workers who had been dispersed throughout the country because of acquisitions during the ADP years. Plus, CDK has been losing DMS business among operations with one or two stores — and a top executive at one competitor says it’s not just small groups jumping ship.
“They’re definitely a better-run company” since the spinoff, said the executive, who spoke on condition of anonymity. “But I believe their strategies are too short-term focused.”
MacDonald has attempted to foster more open communication at CDK, encouraging staffers to approach him in the hallway or email him with suggestions to make the company better. MacDonald also holds “straight talk” sessions with employees.
Early in his tenure, MacDonald said, he got feedback on CDK’s customer-service pain points through this straight-talk atmosphere. He dug into the data and tasked his crew with making improvements. Now, CDK gives dealers a monthly report on all of their service interactions, including how long they had to wait and resolution times.
MacDonald also has leveraged CDK’s chat-based Service Connect for dealers in need of help. The technology was there before MacDonald arrived, but he said the company wasn’t taking advantage of it.
In his time there, MacDonald says, the company has improved customer service wait times by 90 to 95 percent and problem resolution times by 50 percent. This progress plays into his “need for speed” objective, too.
“In corporate America, they’ll tell you it’s a political environment. We don’t have honest conversations,” MacDonald said. “What straight talk does is it creates an environment to have honest conversations about where we have shortcomings as a company, what we need to be better at and which people aren’t living up to their expectations.”
MacDonald is upfront about another issue frustrating some dealerships: CDK’s billing system.
Dealers said billing has been too complicated, so CDK has invested more than $30 million into a new setup that MacDonald said generates bills that are easier to understand and have a more modern look. The system began rolling out in October.
Shannon Harper, COO of Harper Auto Square in Knoxville, Tenn., said billing issues were one of his gripes with CDK. The six-store group, which had been a CDK/ADP client for 35 years, this monthswitched its two remaining CDK DMS stores to Dealertrack. The other stores — three of which were former CDK DMS users — already were on Dealertrack.
“They have consistently overcharged through complex billing schemes that are too cumbersome to even attempt to understand,” Harper wrote Automotive News in an email. “So the average dealer just pays it because they’re apathetic to it and they have zero other choices.”
Speed and results
In MacDonald’s 30 years of business experience,he said, most problems were caused by issues not being fixed quickly enough. To keep up with a rapidly changing world, MacDonald believed CDK needed to move faster.
“It took us a long time to get product out of the door. Took us a long time to implement new technologies,” Bob Karp, CDK’s former president of retail solutions in North America, said in an October interview at the company’s headquarters. He left CDK on Dec. 1 after more than 20 years.
“Part of being a stand-alone public company is you have to stand behind your commitments to your investors,” Karp said. “You can’t hide. You have this sense of urgency that I think became an integral part of our culture.”
Then there’s MacDonald’s third point of emphasis, the one its investors like best: results.
He set the tone upfront that employees are there to get results for customers, shareholders and one another.
Karp said the spinoff gave CDK the chance to expand its “experiential diversity” by bringing in outsiders. For example, it hired a chief strategy officer, Ron Frey, who served in the same role at AutoNation Inc. and helped the nation’s largest dealership group develop sales initiatives outside the traditional store environment as part of AutoNation Direct.
Executives said the meshing of new voices with the company’s legacy knowledge has been a powerful combination.
After the spinoff, “We had the opportunity to take a fresh look at what we wanted to be, what we wanted our culture to be,” said Tony Graham, CDK’s chief customer experience officer. “We found we needed to bring in some new perspective.”
Despite criticism from competitors and customers, CDK isn’t hiding the fact that it wants to increase margins. MacDonald said in November that CDK, just like dealers, aims to be more efficient and profitable.
Speaking at a Robert W. Baird & Co. technology conference in June 2016, MacDonald laid out CDK’s financial goals. Through the 2018 fiscal year, he said, the company wanted to increase its adjusted annual revenue growth by 4 to 5 percent. In the same span, CDK said, it was targeting a 130 percent increase in its margins.
Among the ways to hit those goals was to lower headcount and operate fewer offices. The company closed 20 sites from September 2015 to June 2017. Some of the employees at the shuttered locations were engineers while others worked in customer service.
CEO Brian MacDonald says CDK is realistic about where it falls short, including complaints about customer service.
MacDonald said a lot of those staffers were offered the chance to relocate or work from home in areas besides customer service with career paths.
“We’re all in business to make money,” MacDonald told Automotive News. “I tell dealers, ‘Look, I’m making the company more efficient through reducing overhead functions and administrative functions and improving processes and systems in things that should matter to dealers.’ ”
As CDK streamlines operations and shores up weak spots, it has made an aggressive move to expand its reach among smaller dealerships with a deal to buy Auto/Mate, a DMS company that found its niche among operations with one or two stores.
For its fiscal first quarter that ended Sept. 30, net income rose 5.7 percent to $81.3 million as revenue increased 2.7 percent to $565.7 million.
Amid the financial gains, some DMS competitors assert CDK is providing openings for them to snag customers.
That’s partly due to CDK charging higher vendor integration fees, which often are passed along to dealers, as part of its third-party DMS data access program. Reliability also has been an issue for some dealers.
Michael Alf, general manager of St. Charles Toyota near Chicago, said he’s shopping for a provider to replace CDK after six system outages from June through October and several payroll delays. He said three nearby Toyota stores quit CDK recently.
“It’s hard to get ahold of people to get something fixed,” Alf said. “When we go down, I have a lot of customers outside the door. I can’t tell them my computers are down, go home. Having your DMS down is like one hand tied behind your back.”
CDK has said that most of its DMS customer defections have been smaller operations with one or two dealerships.
Smaller rivals have said they aren’t concerned about CDK’s Auto/Mate deal. They believe the acquisition could prompt existing Auto/Mate users to look at other providers. In their eyes, Auto/Mate’s 1,200-plus clients signed with that company to get away from a provider as big as CDK or Reynolds and Reynolds Co.
But some rivals — Cox, Authenticom, Motor Vehicle Software Corp. and Superior Integrated Solutions — are upset with CDK over what they say is collusion with Reynolds to destroy competition in the data integration services market. The lawsuits filed by those companies and some dealerships argue that CDK has unreasonably restricted dealership data to maintain its dominance and deter other service providers.
MacDonald said CDK is a “critical part of a critical industry.” He believes it’s CDK’s responsibility to help the car business transform as technology changes.
CDK says it has evolved with the industry. The consumer experience used to be confined to brick-and-mortar showrooms, but as more of the shopping process shifted to the digital space, CDK has had to expand its capabilities as well. CDK’s Connected Store, for instance, is a reaction to more customers wanting to handle much of the buying process online.
CDK has high hopes, but it knows it can’t offer best-in-class options for every dealership task out there. So it will pick the spots where it wants to compete, such as websites and CDK Service, a suite of tools that allows consumers to set appointments online and enables service managers to do walkarounds with tablets as the customer looks on, said Frey, the chief strategy officer.
CDK wants to bring more services for dealers into its ecosystem through the CDK Partner Program, a marketplace of approved companies that can integrate with its DMS and websites.
“We’re listening; we’re in tune; we are shifting with a changing marketplace, and we’re here to enable automotive commerce,” Frey said, “and I think we’re doing it in unique and powerful ways.”