July 5, 2006
Editor's Note:
This column by IBM's Joseph Ciulla is
the latest in a series of contributed editorial columns. Readers
interested in authoring future contributed columns can click here
to see the Guidelines for Editorial Submissions page.



Transforming a Warranty Program:

IBM drives warranty service quality improvements through a Business Partners network. Its new Service Advisory Council suggests paying bonuses for achieving certain performance metrics.


By Joe Ciulla, Worldwide Warranty Manager, IBM Retail Store Solutions

Across many industries, manufacturers distribute their products through single- or multi-tier reseller networks, and count on those same dealers to perform warranty service. The case and principles described here are from the IBM's Personal Computer Division (now part of the Lenovo Corporation), but may be applied to any "vendor/dealer" network to achieve improved dealer relationships and service quality overall.

First, let's make an important distinction: "Vendors" sell peanuts at baseball games and "Dealers" distribute playing cards in Las Vegas (and usually take my money). Let's start by thinking "Business Partners" instead. Business Partners collaborate to mutual advantage and deliver more to a customer by working together.

Our goal here is to convey the lessons learned and knowledge gained from spending five years building and rebuilding IBM's Business Partner Warranty program. Throughout these five years, we learned principles and practices that were critical to building a successful warranty program. Along the way we also dispelled a few myths regarding warranty service -- those are highlighted in this paper.

The Basics

A basic warranty program requires electronic or paper interfaces to allow Business Partners and manufacturers to settle on entitlement, parts distribution and labor payment. It should also provide requisite training and technical materials.

A better warranty program provides all of these features in a manner which allows business partners to easily transact warranty claims, and provides all of the incentives and controls to drive the best possible service results.

The best possible results must be quantifiable, achievable, and flexible enough to "raise the bar" over time. IBM had the following objectives for its program:

  1. Improved warranty customer satisfaction,
  2. Improved service quality and first-time fix, reduced cost and parts use, and
  3. Improved Business Partner satisfaction.

There are two critical issues in building the warranty program that will be embraced by Business Partners and drive the desired results. First, adequate data must exist to calculate the company's starting point, and second, a representative sample of partners must be engaged in determining the right measurements, rules and objectives.

Myth #1: Business Partners won't talk.
False. Business Partners want to help manufacturers develop their warranty program. They're most pleased when their suggestions are at least considered, and thrilled, when implemented.

IBM started with almost 2,000 Business Partners serving very small business accounts, large enterprise, and everything in between. A Service Advisory Council (SAC) was established with Business Partner service executives representing overall channel demographics.

Our SAC members were eager to help us understand where our processes and systems prevented them from delivering the best service, and where our competitors' offerings were ahead of us.

Another key principle was positioning ourselves to have an accepted and objective source of customer satisfaction data and benchmarks.

Working through an industry trade association, IBM and many direct competitors agreed on a standard survey question set and measurement process. A key success factor was the up front consensus on survey questions and their order. Surveys were conducted by telephone, as it was found that phone interviews were less expensive and faster than Web-based or mailed surveys. Most important, because samples could be managed, it was found that the resulting data was most accurate and thus accepted.

Each company began to send its warranty transaction data to SERVICE 800, a company that specializes in real time service quality and customer satisfaction measurement. IBM and each of the participating companies began to receive private reports on their own customer satisfaction data, and comparisons to aggregated benchmarks. These benchmarks were recognized as fair representations of industry service levels and became an important and accepted metric upon which IBM and other companies could base service objectives.

Show Them the Money

The more commoditized industries become, the more Business Partners must rely on profit sources beyond hardware to build a sustainable business. In the computer industry, several multi-billion dollar companies without this foresight or speed of execution went bankrupt or were forced into fire sale merger deals.

For manufacturers, warranty service has become an important differentiator, both because it builds customer loyalty and because it helps maintain margins through improved cost management.

Therefore, IBM changed its Business Partner payment model from one of cost recovery to one which would allow the best service providers to make a healthy profit on warranty transactions and at the same time, put poor performers in a position where they would struggle to recover costs.

With input from our SAC members, we created a graduated Pay-for-Performance (PFP) plan which graded every partner on the following warranty metrics:

  1. Customer satisfaction,
  2. Survey participation,
  3. First time fix (percent of service calls not requiring second claim within 30 days), and
  4. Parts per machine serviced (parts used per machine requiring parts over a 30-day period).

A four-tiered bonus program was created using on these metrics, with awards applied as a percentage of base warranty reimbursement. Base reimbursements were a flat per-incident rate, not calculated hourly. Uplifts were between 0% (for companies not achieving minimum performance levels across the four metrics) to 60% (for companies exceeding top objectives across all criteria). Monthly IBM warranty performance reports were distributed to partners and the results were tallied quarterly.

This would mean that compared to the Business Partners that performed poorly, those that performed well could earn a whopping 60% more. Without fail, all Business Partners began to pay serious attention to the program.

Of all the metrics, survey participation was the most controversial. At the beginning, 100% of customers were surveyed but only 6% provided responses. Given the amount of money at stake, it was felt that the greater bonus payments should be substantiated with the best customer data. It was found that partners could influence participation by providing accurate customer data, and by conditioning customers to the survey process.

Within two quarters of launching this program, we saw outstanding improvement on every metric. Interestingly, the largest improvement was in survey participation, which increased from 6% to 25%.

Myth #2: Money talks.
False: Money screams.

Initial bonus targets were set using baseline performance and a realistic view of short-term, achievable performance levels.

We expected that larger Business Partners with mature service delivery systems would be the majority beneficiaries of the bonus program. However, we found that smaller companies held their own, too. For example, one of our better-performing partners was a small company in the Midwest serving local farm companies -- they sold and serviced personal computers, irrigation equipment and John Deere tractors.

Myth #3: For the best service, look to a large company.
False. Quality service is about company attitude, regardless of size.

Drawing the Line

Throughout the first year of the PFP program, IBM saw dramatic improvement across all service indices. Most partners embraced the program and began to look at warranty work as a dependable source of revenue and potential profit. Some companies went as far as integrating achievement of warranty bonus levels into their service managers' performance plans.

At the same time, there were other companies whose performance lagged significantly behind channel averages. In some cases their service was bad enough to impact IBM's warranty financial performance, and worse, impact IBM's brand in the marketplace. To address this, we created minimum performance standards which were based on the same metrics used in PFP, but set at what we felt was the lowest acceptable level.

IBM's territory representatives personally engaged these companies to understand why results were far short of expectations, and to build a "get well" plan. In most cases, partners got back on track. In some cases, IBM was forced to make the difficult decision to de-authorize them from providing warranty service. Most companies who were de-authorized subsequently decided to discontinue sales of IBM product, but often their customers would switch Business Partners to stay with IBM brand.

Taking these actions brought some unexpected reactions from our other partners. Overwhelmingly, they were pleased that we were removing companies who were giving the channel a bad name.

Raising the Bar

Throughout the next years, IBM continued to refine and improve the program. Every year or so we raised PFP criteria, and also raised bonus opportunities -- ultimately offering up to 100% bonuses for the top performers.

During this time, our competitors in the personal computer industry were developing similar programs. Rather than basing performance bonuses on absolute criteria that were periodically adjusted, some of these companies took a "rank and spank" approach, in which total channel results were tabulated quarterly and partner bonuses were determined based on combined performance. Our impression from partners was they preferred focusing on their own numbers, measuring and challenging themselves to improve throughout the quarter.

Ultimately we evolved to a tiered warranty program which primarily considered PFP results in assigning Business Partners to one of three levels.

The Basic level allowed partners to participate in PFP, but provided few benefits beyond the basics of training materials, measurements reports, and electronic and telephone support. These partners did not receive a discount on annual authorization fees.

Our Intermediate level included basic level benefits plus direct access to higher level telephone support, service referrals, and a discount on annual authorization fees.

IBM's top, or Premier level, included intermediate-level benefits, waiver of authorization fees, and eligibility to be invited to our company's annual partner training and recognition event.

Each year, IBM Business Partners whose performance was in the top 100 were invited to send one service manager and one technician to IBM's Premier Training & Recognition Conference. Costs for air travel, lodging, meals and recreation were taken care of by IBM. (Note: Hosting this event at a Florida resort in April did a lot to sweeten the pot.)

This event proved to be a significant motivator which, coupled with PFP earnings, drove intense commitment to succeed in our Warranty program. In most territory visits with partners, the question was asked: "What do we have to do to qualify for IBM's conference?" Invitation to this event became a source of pride for Business Partners, and repeat invitees received special recognition. A number of companies participating were inspired to publish press releases or print advertisements in their local areas, generating loyalty in their existing customer base, and interest from other potential clients.

Myth #4: Only revenue and earnings get people's attention.
False. Never underestimate the power of a little prestige and a free trip to Florida.

How is it possible to afford to make such an investment in the channel? It's pretty simple. IBM developed a set of Business Partners that were highly efficient at delivering service, and made the funding decision easy given what they saved us in reduced parts and labor costs. These same partners drove a 96% customer satisfaction level: almost unheard of in the world of Warranty. The customer loyalty and brand equity benefits far exceeded the cost of the event.

Crawl Before You Walk

We had a lot of success with our warranty program, but could not have taken even the first steps toward building it without having a sound infrastructure in place.

Fundamental foundation elements we started with and refined along the way based on Business Partner input and changes in the business included:

  1. Parts Support. Business Partners cannot succeed without excellent availability and quality of service parts. If commitments for parts can't be met, bonuses are lost and interest in the program fades.

  2. Electronic Claims Portal. There's little chance of building a successful PFP program if claims are still being filed on paper, impacting timely and accurate data analysis. The best portal provides a partner with "one-stop shopping" for entitlement, claims processing, technician training, and other service-related transactions.

  3. Training. Partners want concise training, delivered electronically whenever possible. Some complex products require classroom/lab training. For others, delivery of training by Web/CD/DVD allows partners to keep their technicians in the field and avoid travel and tuition costs.

Another key foundation element is an effective telephone technical support organization. In IBM's program, technical support is available to all partners. Upper tier partners dial directly into higher level support. Given proper training and diagnostic tools, partners can be expected to do a quality job of call screening and call determination. Forcing calls to go through a manufacturer's help center only adds costs and disgruntles partners and their customers.

Myth #5: Manufacturer call screening drives down cost.
False. Call screening drives costs up. A better approach is to provide the right tools and training, the right incentives, and get out of the way.

Summary

Building a successful warranty program requires a long-term commitment. It takes time, valid data and solid analyses to develop the business case to support funding processes, bonuses and conferences. In addition, investing in Business Partner relationships is crucial to a winning program.

A good warranty program is not the result of a one-day planning session. It is built from a continually evolving set of business priorities, Business Partner input, and good old-fashioned trial and error.

In IBM's case, the commitment paid off. Warranty costs were substantially improved, customer satisfaction was better than hoped for, and IBM developed a loyal corps of partners who led with the IBM brand. This was at least partly due to a warranty program that was as good for them as it was for IBM.

With the right analyses, committed management and strong partner relationships, the approach described can radically transform Warranty. The old program that was a hit to the bottom line can become the program that significantly decreases cost, increases Business Partner and customer loyalty, and buoys the success of the manufacturer.


Joe Ciulla has worked at IBM for 23 years, holding positions in development, manufacturing, finance and service (warranty). He has been a member of the Computing Technology Industry Association for eight years, and led the CompTIA Executive Council for four of them. Currently, Joe manages Warranty Service for IBM's Retail Store Solutions Division including channel programs, depot operations and warranty spending. Questions or comments? Please contact Joe Ciulla at ciulla@us.ibm.com.




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