February 26, 2015

WCM Conference Keynotes:

The technology is changing. The need for repairs is changing. Even the concept of ownership is changing. And the way people shop is changing. Two industry experts describe how they see these changes impacting warranty and service contracts.

At this year's Warranty Chain Management Conference, attendees are immediately going to be challenged to face the changes that new technology is forcing upon our industry.

It's going to be a bit upsetting, especially to those who like the status quo. Rather than hearing about the latest best practices in the break/fix business, and how everything is slowly going to get incrementally better, attendees are going to be told how driverless vehicles will challenge the whole idea of automobile ownership, and how comparison shopping apps that seek out the lowest prices have made it tough to earn a living in retail.

A pair of warranty industry experts will deliver a one-two punch of keynote presentations at the WCM Conference on March 11 in Miami, about the impact of disruptive technologies upon warranty. We spoke with both of them this week about their presentations.

John Estrada opens the morning session with a talk about how driverless transportation will change warranty and service contracts, followed by AMT Warranty's Sean Stapleton talking about how warranty and service contracts can help save retail from its downward spiral, by making value and customer relationships as important as low prices.

Survival of the Fittest

It's long been a theory that it's not always the biggest, strongest, or smartest that survive in a changing environment. It's those who can adapt to the changes who do best in the long run. And at this year's WCM Conference, the changes caused by new technologies are going to be a major theme.

John Estrada

Estrada co-founded the company that would become ServiceBench Inc. in November 1995, turning it into a pioneering data communications hub for appliance companies such as Frigidaire and Whirlpool, their repair networks, and the third-party administrators and retailers that sold appliance service contracts to consumers.

ServiceBench was acquired by NEW Customer Service Companies Inc. in early 2008, and Estrada left NEW in 2009. Ever since, he's been partners with Michael Dering in a consulting company called Dering & Estrada Inc., which has provided management support to a variety of emerging companies. And since earlier this year, Estrada said he's partnered with consultant Michael Bailey in the SC Services Group, to help manufacturers and retailers better understand their extended warranty programs. He's also continued to consult on warranty-related topics for some of the retailers, manufacturers, and administrators that were in the ServiceBench orbit.

So how did he get from decades in the management of warranty and service contract networks into driverless transportation, and then back into warranty as the keynote speaker of the 2015 WCM Conference? Estrada said that in April 2013, he was looking to launch a new project related to driverless cars, so he began reading all the articles on the subject that he could find. By that summer, he and his colleagues had collected enough articles to put together a website.

"We started tracking articles, and I thought maybe we'd find a couple of articles a week," he said. "But instead of two or three a week, we were finding two or three a day. At that point we realized that while it may be five or 10 years before a fully autonomous vehicle runs on any road anywhere, there are lots of things happening now."

Driverless Transportation Website

So they decided to launch a media hub for the driverless transportation industry, with a mission "to provide the premier location for information and insights on the industry." There's a website at DriverlessTransportation.com and a weekly email newsletter that Estrada said currently has about 4,500 recipients. The website now carries original articles, a collection of links to articles from other publications, a list of upcoming events, and even its own stock index.

"We wanted to start tracking how the industry is doing," he said, "so we made what we call the D20. We took what we felt were the 20 most influential publicly traded companies, and we started tracking them last August." Now they're midway through a series of in-depth articles about each of the 20 companies.

Now he's the keynote speaker at WCM, delivering a 45-minute presentation he entitled, "The Impact of Driverless Transportation on the Warranty Industry." Estrada said he sees the technology having widespread and far-reaching impacts on not only the automobile industry, but also the insurance industry and even the taxicab industry.

For instance, today there's a clear line between a vehicle service contract and personal automobile insurance. One covers defects and breakdowns, and the other covers accidents and collisions. But in a driverless car, a collision might very well be caused by a defect. Which coverage takes precedence?

From a warranty point of view, Estrada said the technology is changing so fast that it's highly likely a driverless car will come back frequently for a refresh and an update. And that almost makes it a new car. How will that work in terms of warranty duration? Will different components be on different schedules, or will each refresh cause a reset of the warranty term?

"You have a six-year-old car, and you get a brand new version of the software, but it doesn't work right," he said. "How does that impact the warranty?"

Disrupting Other Industries

And then there are the impacts the technology will have on other industries. For instance, in the major urban areas, there are car rental services such as Zipcar Inc. and car hire services such as Uber. However, out in the rural areas (and even in some suburbs), you can't get an Uber driver to come pick you up, and the nearest Zipcar is parked too far away. But what if you could summon a driverless car to come get you, anywhere you are in the world?

Estrada said that on average, around 57% of the cost of a taxi is the salary of its driver. So what happens to the cost of a taxi when it has no driver? And again getting back to the question of insurance, how will a carrier price the coverage of a commercial vehicle that nobody in particular will operate? Meanwhile, at least in the big cities, why own a car at all? Why worry about parking, insurance, fuel, repairs, and all the other costs of car ownership when a car can be ordered like Chinese take-out?

"Ownership of vehicles is going to change pretty dramatically," Estrada said. "It will go from less consumer to more fleet owner."

The impact on warranty is obvious. If consumers don't own the vehicle, they won't need a warranty or a vehicle service contract. The vehicle will still need service, but that will be covered by the fleet managers, business-to-business service contracts, and commercial vehicle repair shops. Those vehicles are going to be used constantly, and will wear out quickly. But that's a problem for the fleet owner, not the passenger.

Driverless technology is going to impact municipal bus and train fleets as well. The thought of driverless buses on city streets may generate some scary scenarios, but already there are numerous airports served by driverless trains and terminal shuttles.

Now imagine, instead of courtesy shuttles to the car rental agencies, the driverless cars arrive with their passenger's name in the window. The way those car rental fleets are managed, and the way they already process warranty claims and purchase service contracts or hire in-house mechanics, will become a template for how the private driverless fleets approach the business in the future.

Even those freedom-loving consumers who insist on owning something will change their decision-making process when they make a purchase. For instance, Estrada said he recently bought a big vehicle so he could drive his family around on the weekends. But then he found himself driving that big vehicle alone to work during the week.

"You buy the biggest car you need occasionally," he said. "What a waste."

In the future, he could see himself hiring a small single-passenger driverless car to take him to work, and then hiring a big SUV to shuttle the family around on the weekends. He'd buy a subscription with a rental fleet manager of some kind, and tell them what size vehicle he needs each day. But he wouldn't own any of them, nor would he need to worry about repairs or service. They'd simply arrive when they're needed.


Figure 1
The Driverless Vehicle

Driverless Vehicle


Estrada said some of the articles his website is clipping are predicting that driverless cars will cause an 80% reduction in the number of vehicles on the streets -- not because those vehicles will be used less but because they'll be less idle. "Your car sits idle about 95% of the time," he said. In the future, that will flip, to where a shared driverless vehicle fleet's managers aim for their rentals to be idle less than 5% of the time.

WCM's Morning Schedule

Estrada's survey of the driverless transportation industry will be immediately followed by a second plenary session delivered by Sean Stapleton, president and CEO of AMT Warranty Corp., a longtime sponsor of this newsletter. And then Stapleton's presentation will be followed by the announcement by Terry Hawkins of the Global Warranty and Service Contract Association Award winners, then by a short networking break.

Following that break, at 10:30am, Estrada will chair a wide-ranging panel discussion entitled, "The Impact of Driverless Transportation on Warranties & Service Contracts," where he and other experts will dive even deeper into the subject. Joining Estrada on the panel are James Mostofi of AIG Warranty, Gregory Petrowski of GPW and Associates, Michael Bailey of Superior Warranty Consulting Services, and Stephen McDaniel of the Service Contract Industry Council and the law firm Meenan P.A.

After 20 years of commercial Internet usage, we're well accustomed to new technologies and new companies coming in and disrupting all sorts of industries. Just as Uber and Zipcar have disrupted the transportation industry, and just as Airbnb Inc. has disrupted the hotel industry, so too are a variety of apps and services now disrupting the retail industry.

But while driverless transportation technology is going to shift the importance of warranty away from the consumer and towards the fleet operator, a lot of the new shopping technology may end up reinforcing the importance of warranty in terms of helping manufacturers and retailers maintain a relationship with the consumer. The WCM's second keynote speaker is going to spell that out in detail.

Sean Stapleton

In the WCM program, Stapleton's 45-minute presentation is called "Combating the Retail Pandemic," a title he said he came up with a few months ago when the Ebola scare reached the United States. They're by no means the same thing, but in economic terms, the current state of the retail environment provokes a comparable level of fear for many veteran merchants whose iconic organizations are facing possible extinction.

"I certainly wanted to grab everyone's attention, but more importantly I felt that the title set the stage for a discussion about a very serious and widespread situation for retailers and manufacturers," he said. "A pandemic is a disease that has a disastrous impact felt both locally and globally." And he said that many colleagues and friends in the retail industry are dealing with a profound change in both customers and the marketplace where a low price seems to be the main determining factor for product purchases. So either they lose the sale, or they get the sale but lose money anyway.

In other words, the sales slump that's hurting many of them comes not just in terms of revenue but also in terms of profitability. "Margin erosion has impacted retailers in ways never seen before," he said. Price will always be a factor when a product is purchased, he added. This is nothing new -- the modern difference is the ease by which customers can obtain pricing comparisons and make purchases through multiple sources.

The Great Recession

Stapleton said some people blame the current retail challenges on the lingering effects of the Great Recession -- the decline of household income, aging baby boomers, rising unemployment, or falling home values. Others say it's the lack of innovation, or the lack of exciting new "must-have" products.

"The reality is that there has been product innovation: smartphones, 4K and Ultra HD, wearables, advanced car tech, and highly functional tablets. You look at the growth the CEA expects for these segments, and it's tremendous. So the innovative products do exist."

Meanwhile, the economy may not be as strong as we would all like, but it's not as bad as some people make it out to be, he said. The U.S. Census Bureau pegs the January-to-January sales gain at 3.3%, which isn't great but also isn't dismal. Total retail sales for the November-to-January holiday period were up 3.8% from the same period a year ago. The U.S. unemployment rate is now down to 5.7% and the median price of existing home sales is up 6.2% since last year. So what is it?

Ironically, he said, in an era where retailers are perhaps more connected with their customers than ever before, thanks to social media and big data, those connections are more superficial than ever.

"The heart of what I'm going to discuss is that many retailers and manufacturers are just not achieving a high level of loyalty and commitment from their customers," he said. "Part of the problem is that we're living in the 'Age of Like.' We see this play out on Facebook every day, with users happily clicking the thumbs up icon for just about anything they see. However, that's where the customer commitment often ends. 'Like' should not be our collective goal. To be successful we need to aspire to win the love of our customers. The reality is that overall we aren't seeing the same level of affinity for brands that we used to enjoy."

For instance, Stapleton said, his father always bought Kenmore appliances. "He loved his Kenmore appliances because, in his mind, they earned his trust and loyalty year after year" he said. "He wouldn't dare shop for another brand. Sadly, we don't have that kind of an environment anymore."

"As warranty and service contract professionals, we have a unique opportunity to affect customer loyalty," he said. "We have the ability to turn a negative experience into a powerful trust building moment with customers. Customers recognize and accept that product breakdowns can happen to even the most reliable products. The customer's perception of the product issues are more often driven by our responses."

Stapleton further noted that one of the greatest challenges with service contract programs arises when a customer's claim isn't covered under the contract, whether as a result of an expired contract or other reasons. "In such situations, there is still an opportunity to turn a negative into a positive."

He suggested that there are plenty of instances when no coverage exists, but accommodation can still be made to assist the customer and provide them value. Accommodations may take the shape of providing a product replacement or repair outside the service contract. However, there are other solutions that are less frequently utilized that can have a major positive effect with minimal financial impact.

For instance, Stapleton noted that broken products not covered under a plan can be purchased back from customers based on the products core value. Additionally, discounts on replacement products can be provided or even gift cards with token values which can be applied to future purchases can be offered to customers. The actual cash value is less important than the act of going the extra mile for a customer.

Discount Repair Services

Stapleton proposed another low-cost marketing idea: leveraging a claims administrator's repair network by making it available to customers who have a non-covered product issue. Why not offer loyal customers discounts on repairs for their customer-pay jobs related to these types of product issues, or even for other products they own?

"Here's how I see it: Warranty and service contract programs are developed by operations groups. However, the marketing departments of the retailers or manufacturers are rarely involved in the development of these programs. And I think that creates a level of disconnect. I see service contracts and warranty programs as one of the most powerful loyalty solutions out there. It actually is a game changer," he said.

Manufacturers and retailers might not know the name and address of every single customer, but they certainly have that data for those who needed warranty work or who made claims under their service contracts. With this information, a critical segment of their customer base can be identified and hopefully saved.

Stapleton suggests that marketing departments utilize claims data to establish a loyalty campaign tailored toward these affected customers. "The fact is that some of these customers may have been your best customers in the past. The data currently residing in a company's system can provide them the ability to know how and when a customer's perception of them soured. Moreover, that data combined with a strong retention plan can help return the customer to their former loyalist status. Further, this type of strategy can prevent the impacted customers from becoming one of your net detractors." He noted that with the power of social media, disenfranchised have the ability to shape an enormous population of existing and potential customers' views of your product or company.

Ultimately, he said, when structured and executed appropriately, warranty programs build trust and loyalty. Stapleton said it is inexcusable to allow one claim to impact a lifetime relationship with an existing customer. "Instead of spending the majority of available marketing resources to bring in new customers, let's keep the ones you have. Let's prevent them from getting out into social media and destroying your reputation based on one poor claim event."

The first step, Stapleton suggests, is to change the whole image of warranty within the retail industry. "If you want to change the perception of warranties and service contracts for customers, you have to change it internally first. We can't allow warranties and service contracts claims to be viewed as an unfortunate expense. We need to view them as a marketing opportunity that can potentially save a customer thereby leading to countless future purchases and maybe even a means to evoke positive customer emotions that go beyond 'like.'"





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