Selecting Service Providers
All service providers should be subject to some level of due diligence and scrutiny before being hired. This is particularly important for service providers that will have access to dealership customers’ nonpublic personal information, dealership strategies, HR and benefit claims, or other confidential information.
Vet a service provider prior to hiring them. It is a best practice to identify multiple potential service providers and compare their respective track records in the industry and for the services you need. For example, there are numerous DMS providers. Which ones will best meet your needs in a way that minimizes complexity and is most user friendly? Which ones have the best safeguards protections for your customer information? Are there unique functions of a particular service provider that you find attractive?
Once you have identified several leading service providers, do “due diligence” on their industry history and performance. Has the service provider been subject to lawsuits from its clients receiving similar services? What is the service provider’s Better Business Bureau reputation? Has the service provider experienced a security breach and, if so, how did it address the breach and fix its systematic shortfalls? Try to get references from other dealers using the same services and speak to the references. The more important the service provider, the more you need to investigate.
Putting out an RFP (Request for Proposal) to several competing potential service providers is a good way to get information about them to vet and a way to have each service provider applying for your business on equal terms.
Contracting with Service Providers
A contract sets forth the terms for the services and, if properly drafted, provides you with important rights to manage the relationship with the service provider. A contract is more than a generic statement of services and the purchase price. It is critical that you take the time to get the contract language to your satisfaction It is not advisable to simply sign the vendor’s form contract.
A contract should provide a detailed description of the services to be provided, the payment terms, and the applicable performance standards. This requires attention to detail and should be specific to the nature of the services to be performed. Examples of performance standards are percentage of calls handled within a specific time frame, delivery dates, time for responding to calls for IT support, and qualifications of personnel assigned to perform.
Other provisions that should be included in all service provider agreements include:
- Relationship/Independent Contractor - You do not want the service provider or any of its employees to be deemed your employees. A well-drafted “independent contractor” clause is necessary to do this.
- Ownership of Work Product - The service provider’s work should be stated to be “work made for hire” under federal copyright laws which means that you will own the work product. This may not be possible for off-the-shelf or even customized software. In such a case you should obtain a perpetual, fully-paid-up, and irrevocable license to use the work.
- Confidentiality - The service provider should acknowledge the confidentiality of your information and the need to safeguard your customer information in accordance with the FTC Safeguards and Disposal Rules. If the vendor suffers a security breach or otherwise believes your information may have been compromised, they must notify you immediately.
- Representations and Warranties - The service provider should warrant that its work does not infringe or violate the rights of any person or entity. If a claim is made that the work does infringe, the vendor is obligated to develop a non-infringing workaround that performs the same functions.
- Indemnities - If you are sued because of any alleged wrongful act or omission of the service provider, the service provider should defend and indemnify you for any loss and expense. The same holds true for all claims and arbitration demands.
- Right of Audit - You should have the right to audit upon reasonable notice the vendor’s performance as well as their program for safeguarding customer information. If the service provider has access to customer or employee information, they should share penetration and vulnerability test results with you along with their plans to fix issues identified in such tests.
- Term and Termination - Depending on the vendor, a one-year contract with automatic renewal terms is often best. You may want to commit to a longer term to lock in pricing. For complex relationships with long ramp-up times such as DMS providers, you will want longer terms. You want the right to terminate for a material breach that is uncured for 30 days or immediately in the event of a financial failure or a takeover.
- Covenant of Cooperation Upon Termination - Whenever and however the service provider agreement terminates, you want a continuing covenant of cooperation in transitioning to a successor. This is particularly important for DMS providers.
- Dispute Resolution - Designate an informal dispute resolution process followed by an arbitration clause that will apply to all disputes except for seeking injunctive relief.
Managing Service Provider Relationships
Service provider relationships should be carefully managed to ensure you are getting the services you agreed to pay for. A best practice is to designate a dealer representative for each service provider, a relationship manager. This person is responsible for the service provider relationship day to day.
If a service provider is not performing in a satisfactory manner, it is important you take some action even if it means just going up the chain of command to the vendor’s manager who can address the shortfalls. Under the common law, parties can be held to have effectively amended their contract through “course of dealing.” The equitable doctrines of estoppel and laches may also operate to preclude you from exercising your contract rights if you have unreasonably delayed in questioning performance. Use your right of audit, even if you do a remote audit, to stay on top of what the service provider is doing and failing to do. Then take action.
Document your complaints in writing. Follow up in writing if the performance does not improve. Not every shortfall in performance will justify a contractual notice of default. Use informal means whenever possible. This will help preserve the relationship and may lead to formally amending the contract if an alternative resolution is necessary.
Do not threaten to exercise legal rights and then fail to do so. Apart from “course of dealing” risks, repeatedly threatening default generally does not help a relationship. But if doing so is necessary, such as in the event of a serious financial failure or a material uncured performance shortfall, do not wait to exercise your contract default rights.
Prior to doing so, you should be working to vet and be ready to hire a successor. Lining up a successor is not contractually prohibited. As noted above, the contract should have a covenant of cooperation in which the service provider being terminated agrees to work with the successor for a seamless transition. This cooperation is particularly necessary for vendors such as DMS providers and IT companies. The more complex the services, the more likely it will take the work of a predecessor provider to ensure the success of a new provider. One major DMS provider reportedly will not agree to assist a successor. This is a factor to consider when deciding to hire them in the first place. You want to avoid disruption to the business.
Vet all service providers and take the time to make sure your contracts reflect favorable terms. Manage the relationship and work with the service provider to improve. Always have a termination plan in mind and be ready to implement it once the contract ends, no matter why or how the relationship terminates.