Its soon-to-be competitors say the market is too well populated for a new dealer management system (DMS) provider. But the debate over data access has certainly made its venture relative. This month, F&I magazine’s Gregory Arroyo talks to John Reed, Microsoft’s director of automobile retail solutions, about the company’s strategy, data access and more.

Q: Technology was certainly a top-of-mind topic at the National Automobile Dealers Association (NADA) Convention, especially with respect to data access. Would you agree?

A: There are underlying issues causing technology to be partially relevant, and that’s one of the key reasons why Microsoft is getting into the market. We hear globally a pretty significant focus by manufacturers and retailers on improving the customer experience and operations, and that’s not just in the automobile industry. And once you peel back the layers on that, that really looks like focusing on optimizing various aspects of business processes, such as F&I, as well as responding to changes in consumer preference — which I think is testing the capabilities of a lot of the solutions that are already in dealerships.

Q: Well, it appears like Microsoft couldn’t have picked a better time to launch this new initiative. However, I understand this isn’t the first time Microsoft has made an attempt at building a DMS.

A: You’re right, we’ve been in the automotive market since Microsoft started. Car companies, big dealer groups and importers have been pretty large consumers of Microsoft technology. But let me preface my answer by saying that this is really Microsoft’s first direct entry into the market. So when we became involved in the North American market in the past, it was with Reynolds and Reynolds, which didn’t yield the market penetration Microsoft and Reynolds had hoped. So what we announced last July was a direct approach, which would have a product shipped under a Microsoft brand, off of a Microsoft price list, and with a Microsoft warranty. A key element of that strategy — from a third-party standpoint — was getting the third parties involved with the project, which led to that announcement in early February.

On the distribution and service side, we haven’t made public what our plans are, but we would expect to work with some resellers and service providers that would be closely aligned with Microsoft.

Q: Tell me a little bit more about your past effort with Reynolds?

A: We went through some efforts beginning in the late ’90s with a couple of DMS providers to get a portfolio of new solutions into the market. That worked out pretty well in certain areas, like Europe, but Microsoft didn’t really see the rate of new development in the North American market the way we had hoped. As a consequence, we’re taking a bit more of a direct route this time. We’re still going to be very partner centric in the sense that we’re working with a number of the large firms, but we think the underlying DMS is a key area for dealerships and one where a direct effort from Microsoft is warranted given the criticality of that for the industry.

Q: This is going to be one heck of an undertaking for Microsoft. This is a market segment that hasn’t changed much, and is already filled with some very well-entrenched solutions.

A: Our approach was to think of it from the dealer’s perspective. And from that perspective, the key question is going to be, ‘How does this improve revenue, decrease cost, or maybe make customers happier?’ Behind the scenes, if there are some benefits to making systems more secure and manageable, I think those things are relevant. But on the other hand, you hope that whatever investments are being made to address those issues will ultimately yield a better financial picture for the dealer. Dealers are certainly cognizant of the compliance and security issues, but at the same time they’re asking us the question, ‘Well, if we put all this plumbing in, how is that going to help us sell more?’ And I think that’s where we’ve tried to place a lot of our attention.

Q: Going back to data access, the debate has centered on the divide between Reynolds and Open Secure Access. However, I know Reynolds isn’t the only company that’s come under fire for guarding access to its system. To me, it sounds like the industry is in need of further standards. Is that your feeling?

A: The short answer to your question is yes. I think there seems to be some movement, at least based on the volume of discussion.

Beyond marketing, I think the key question for dealers is, ‘What is really available to dealers?’ I think it’s pretty easy for a company to put a good marketing effort around third-party integration and data access, but again, what’s available to the dealer? It’s going to be a combination of a couple different factors to get to the answer, but we still see a lot of requests coming from dealerships to Microsoft around DMS solutions, but even more critically, dealers wanting to know how they can use Excel or other reporting tools to get a better handle on a multi-store organization. I think we still have a ways to go in providing dealers with what they need in that area.

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Q: So do you think data access is only an issue with the bigger dealership groups?

A: We’ve run across just single-point dealerships that are just kind of asking to do, for reporting purposes, what they see their peers doing in other industries. It was kind of funny, when I was at the DealerTrack conference in November, I was on a panel where data access was a topic. And it’s interesting to see that this is really the only industry in the world where the question of access to a dealer’s own data is an issue. Customers will often ask for better reports or better tools, but the kind of things the dealers are asking for are just fundamental operational information that a business in the 21st century just needs to have in order to survive. I think a lot of the organizations that are out there at the moment are struggling with that, and that’s an area of focus for Microsoft, because there are good low-cost tools that are available.

Q: Going back to your approach, you talk about creating a platform to cultivate an industry ecosystem. What do you exactly mean by that?

A: We took a look at what dealers were asking for and there have just been so many very vocal requests — not only from the U.S. market, but globally — that Microsoft really needed to make a bet on a new DMS application. Then the question is how do we go to market with that? We recognized that there are a lot of firms out there that are doing really innovative work, are very smart about their side of the business and just need the right kind of DMS to plug into. And that’s where we see our opportunity to enter this market — that working with those third parties collaboratively was just the right way to go. And it is very consistent with how Microsoft works in any other market.

Q: What about custom packages? I know there are several dealers out there that require tailored systems. Will Microsoft be able to accommodate them?

A: Absolutely, and what we see from dealers is two somewhat conflicting points of view. On one hand, we hear dealers say, ‘We want a packaged end-to-end solution that is easy to operate, fully integrated, and doesn’t require you to enter customer data at multiple points in the process.’ On the other side, we hear dealers say, ‘Yes, we want that integrated, but we would like it done with our preferred set of third-party applications, and we also want to be able to tailor sales, F&I, or parts and services processes toward the way we prefer to manage our business.’ With that said, I think a key advantage Microsoft brings to the market is that we can accommodate very deep integration on one hand, but on the other, we can retain a very high degree of openness and flexibility.

Q: Dealers, I’m sure, will like the sound of that. So what’s next?

A: We’ll be announcing some additional partners over the next quarter or two in some other areas of the dealer business that are pretty relevant. And just so you know — and I can’t quote official numbers — we received many customer leads as well as partner requests coming out of NADA. So partners are one area. Second is we’ve been in the process of forming customer advisory groups, a subset of which would be pilot customers. We’re targeting our pilot program for the second half of ’07. After that we’ll also be making announcements in the next couple of quarters around solutions that would integrate with existing retail systems. And those add-on solutions will come from a number of our announced partners, and will integrate into Microsoft’s DMS.

Q: So the ultimate vision of this initiative will be an actual Microsoft piece? This is Microsoft coming into the market.

A: Exactly, and, as noted in the press release, the product name is the Dealer Management System for Microsoft Dynamics AX, or MSDMS. That’s the product around which Microsoft is focusing its efforts on, and also the product where we’re working to develop these extensive third-party integrations.

Q: I’ve also seen several releases from companies such as MPK, publicizing their ongoing relationships with Microsoft.

A: Now, this is a key element of our strategy: We recognize that the market, particularly when you look at big dealer groups or organizations on a global scale, really needed to have a Microsoft-branded and Microsoft-supported DMS product. At the same time, there are some partners in the market, globally, in the U.S and in Canada, which have built DMS products on Microsoft technologies. So we didn’t want to discourage dealers from considering those solutions at the same time that they might be looking at the Microsoft-branded product. So while it’s probably complicating our messaging a little bit, it was very important for us to say to dealers that there will be a Microsoft-branded DMS, but there are also great products from companies like MPK, Quorum, and PBS in the North American market.

Q: So will companies like MPK be able to offer Microsoft’s DMS as an option to their current product lines?

A: Those discussions are currently underway. The one we’ve formalized at NADA was with Quorum Information Systems, a Canadian firm that was one of GM’s selected DMS partners. What Quorum is doing with us is they’re providing us with some parts of the DMS, some aspects of design for the Microsoft product. In turn, we are also helping them extend the features they have in their existing XSELLERATOR product. They will also have the option to distribute the Microsoft DMS when it comes to market. We will have a number of ongoing development projects with these other DMS providers that will have some similar characteristics, the most important one of which is helping them identify features they can add, based on some of the things you’re going to see in the Microsoft DMS.

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