August 10, 2004

Microsoft Automotive to enter the warranty claims processing business through partnerships with Active Web Services, Capgemini, and others.

Microsoft Corp. is becoming a warranty vendor. Having turned its attention to manufacturers as opposed to just desktop office workers, and having identified automotive manufacturers as a sales target for its industrial automation solutions, Microsoft has discovered a new world: warranty claims processing automation.

It couldn't remain a secret forever. Ignored by the major software vendors for decades, warranty has now taken its place as a strategic business process worthy of their attention. With upwards of $25 billion sloshing around in warranty claims each year, the business case is easy to make in just dollar terms. But what's particularly evident lately in the automotive world is how warranty is becoming part of the brand image, conveying in a few numbers a compact message of brand quality and reliability: 10 years, 100,000 miles.

Microsoft is of course well-known as the developer of Windows and the office applications that run atop that operating system. On the Web it's the operator of Hotmail and MSN, and on television it's General Electric's partner in the MSNBC cable news channel. But Microsoft isn't too well-known in terms of industrial applications, shop-floor computing, or vehicle telematics.

Warranty Partnerships

Now that's about to change. Kyle Solomon, Microsoft's industry manager for automotive industrial equipment, recently briefed Warranty Week about plans the company has to forge partnerships with both warranty software vendors and warranty issuers within the automotive market. Specifically, Active Web Services LLC and the Capgemini Group are going to become Microsoft's "big bets" in terms of claims processing software and systems integration, and the Center for Automotive Research is going to conduct industry-wide studies about warranty "pain points."

"We're not new to the automotive industry," Solomon said. One Microsoft business unit already focuses on in-vehicle telematics, navigation, and other emerging technologies. Microsoft products in this class already are part of 27 different vehicles built by 10 different OEMs, he stated. Fiat S.p.A. has recently made a major commitment to Microsoft in-vehicle technology, but there are several others who haven't yet sought any publicity.

Meanwhile, the MSN business unit provides online services such as MSN Autos, which includes new and used auto reviews, pricing guides, and for-sale notices. It also provides online access to State Farm insurance quotes and Experian credit reports. And most crucially, it provides an advertising platform to leading brands such as Lexus and Ford. During one recent promotion surrounding the relaunch of the Ford F-150 truck, Solomon said around 6% of the orders came in off the MSN Web site.

Another Microsoft business unit focuses on automotive industrial equipment in such areas as warranty management, lean manufacturing, Six Sigma, product development and collaboration, and supply chain management. This business unit's goal is to build on top of the existing Microsoft products such as Windows and Office and Outlook that already permeate most enterprise desktops, and leverage them into additional enterprise-wide server applications. And this is where Solomon and his group fit.

Solomon said he's been in the automotive industry for 18 years and at Microsoft for about eight months. Virtually since he arrived, he's been researching the possible "pain points" in the automotive industry. "Warranty certainly becomes top of mind, based upon the numbers that are out there from the standpoint of warranty reserves and warranty payout," he said. "We definitely see it as an area to focus in on."

He breaks up the automotive warranty business process into three different sections:

  1. Dealer-to-OEM -- managing the claims, checking for completeness and for fraud
  2. Claims analysis -- early warning reports and business analytics
  3. Integration into product development -- cause analysis, improving product design

Of these, most manufacturers are best-acquainted with the first section. Be it on paper or radio frequency handhelds, every manufacturer that issues product warranties is somehow processing claims. Perhaps it's a homegrown mainframe application developed decades ago that still does its job reasonably well, given that nobody knows how it works. Or perhaps it's one of the latest offshoots of a PLM, CRM, SCM, or another acronymic industrial management (AIM) system.

Thanks to government mandates such as the TREAD Act and the efforts of perhaps a dozen business analytics vendors, manufacturers are now moving into the second section, looking through their claims data for interesting patterns and anomalies. Soon, they'll want to move into the third section, where they can actually put those insights to work, creating better products that fail less often.

We would suggest there's even a fourth section, where warranty becomes a competitive weapon in the hands of the sales department. Just as 0% financing has become a promotional tool that can help clear out excess inventory over a long weekend, so perhaps can special "double your warranty" offers. And the positive sales effect of Hyundai/Suzuki/Mitsubishi/Chrysler claims to provide "America's best warranty" are now so well-known that it's doubtful any marketing executives are still unaware of warranty's potential impact on brand image.

There might even be a fifth section, for extended warranties and service contracts. It's not uncommon for dealers to make more on the sale of a service contract than on the sale of the vehicle it insures. The new frontier for manufacturers is going to be their own direct sale and possibly the administration of extended warranty contracts, which could place them into competition with the very retailers upon which they depend. This kind of effort will require much more than the simple packing of a postage-paid warranty registration card inside the box.

Entrenched Competition

The problem for Microsoft is that it's entering a hundred-year-old manufacturing industry that was issuing product warranties long before computers were invented. It's going to find itself competing or partnering with companies such as the Reynolds and Reynolds Co. that claim to have retail management systems in place at upwards of 90% of North American auto dealers.

Solomon said solutions such as those sold by Reynolds and Reynolds to automotive dealers are not going to compete with what Microsoft plans to offer. Microsoft, he said, is going to concentrate on the inter-enterprise aspects of warranty management, such as communications between the dealer and the OEM, or between the OEM and its suppliers. "Really, the space that we see is when the handoff of the claim occurs," he said.

"Things like the TREAD Act have put some suppliers at risk, based upon them shipping products that they don't have specifically identified: which lots, which serial numbers were shipped during the timeframe," Solomon said. This is where Active Web Services comes into play. AWS already has a solution aimed at TREAD Act compliance and warranty analysis, and it just so happens to be built on top of a Microsoft .Net and Windows architecture.

"We went through a process with our partner development group," Solomon said. Microsoft looked at all the warranty claims processing solutions out there, he said, "and Active Web services was one that came highly regarded from a number of industry bodies out there. We were interested in what they've done in aligned industries such as motorcycle and trailer manufacturing. And they were actively engaged in some sales efforts in some of our automotive accounts. So there's some potential pending news coming."

J2EE vs. Microsoft's .Net

He said Microsoft had discussions with others such as (Warranty Week sponsor) Entigo Corp., but the final choice came down a question of platforms. Entigo's application is built on top of the Java 2 Enterprise Edition, while AWS is using Microsoft protocols.

"When you look at comparative architectures, Active Web Services has definitely embraced the Microsoft Web Services/.Net architecture," Solomon said. "And that's been something we certainly feel is a significant value to customers deploying a Web Services-enabled architecture versus potentially a J2EE or other type of architecture."

Ron Ezsak, vice president of sales and marketing at AWS, said the company's choice of .Net was made for far less strategic reasons. In the kinds of customers that AWS traditionally serves, IT staff in general and Java programmers in specific are not so widely available. J2EE may be a better environment for the sophisticated developer, but .Net is easier for the small and medium-sized business to work with. And AWS has always targeted the business owners and managers rather than the IT staff.

"Microsoft has done something interesting," Ezsak said. "What they've done is take some of their very best people and identified a specific vertical -- in this case what they call the automotive and industrial equipment group -- and they've made it a dedicated vertical team. And as part of that strategy, they needed to identify a small group of ISVs to be what they call their 'big bets.'"

They also needed to bring in people intimately familiar with the automotive industry -- people who could talk with the business decision makers at the OEMs and Tier 1 suppliers and not just their IT staff. It's a philosophical change for Microsoft from selling very horizontal applications such as Office and SQL to selling very narrow applications such as warranty claims processing solutions for vehicle manufacturers. And oh, by the way, those narrow vertical applications are built atop a Microsoft architecture and make heavy use of components such as Outlook and Excel.

"Microsoft is determined, via .Net, to win technology battles," Ezsak said. "This is as much about Microsoft competing at the server software level, the portal level, and the philosophical level as it is with anything else."

Microsoft has targeted 60 specific companies with which it wants to talk about warranty claims processing. On some sales calls, AWS people will come along, while on others Microsoft will do the presenting. At the Auto-Tech 2004 show later this month in Detroit, Microsoft and AWS are going to formally announce their new partnership and talk about it with anybody who happens by the booth. For the rest of the year and into next, Microsoft is going to help AWS spread the gospel of warranty claims processing automation and its benefits.

"We have built the rocket, and now we're lighting the fuse," Ezsak said.

Account Control

Nick Shelness, chief technology officer for Entigo Corp., said that while there's a technology component to the J2EE vs. .Net debate, what it really boils down to is account control. "With .Net, you're really buying into the entire Microsoft stack, for better or for worse," he said.

Before J2EE came along, applications had to be programmed for each computer instruction set and/or operating system API set. Applications therefore were tied to a particular computer instruction set and operating system, and by extension, to a particular hardware manufacturer. In the case of Microsoft's Windows operating systems, the binding to a particular hardware manufacturer (e.g., IBM, HP, Dell, etc.) has been relaxed, but not the binding to a particular computer instruction set (Intel) and operating system API set.

This situation is not quite as bleak as it might initially seem. If applications are written in a high level language such as C, C++, Pascal, Fortran, etc., a compiler can re-target a program for different computer instruction sets. Sadly, this process is far from perfect, and developers usually have to maintain multiple programs variants -- one for each target computer. Similarly, developers can either restrict their use of operating system APIs to a very narrow common denominator, or code a shim layer for each target operating system, that maps from a common set of pseudo-APIs to a set of operating system specific APIs for each target operating system. Large software vendors usually are willing to take on this burden, but smaller software vendors and internal IT organizations often find it too onerous.

This is where Java 2 Enterprise Edition comes in. A J2EE platform provides a single common applications environment across multiple computer instruction sets and operating systems. J2EE platform vendors have mapped application programs onto both a set of different underlying computer instruction sets and a set of different underlying operating systems. Thus an application developer only has to write and maintain one J2EE application, which can then be deployed to a J2EE platform, which in turn runs atop many different computer instruction sets and operating systems. It is for this reason that J2EE has become so popular with both software vendors and internal IT departments.

The success of J2EE has prompted Microsoft to develop their own equivalent platform called .Net, but one that is currently restricted to only running atop the Windows operating system, and atop Windows-supported Intel and AMD computer instruction sets. While the .Net platform is very attractive to those vendors and IT organizations that have committed to an "all Microsoft" strategy, it does nothing for those who wish to keep their options open.

Two of the better-known J2EE platforms are WebLogic from BEA Systems Inc. and WebSphere from IBM Corp. Both promise computer instruction set and operating system independence, but ironically each accuses the other of locking customers into their respective J2EE platforms through the use of proprietary tools and extensions.

Shelness said Entigo has avoided these traps, so that its warranty processing applications will run on either WebLogic or WebSphere, in addition to others such as the open source JBoss J2EE platform. "So it runs on Solaris; it runs on AIX; it runs on Linux. And for that matter, it runs on Windows too," Shelness said. "Entigo has a customer that runs WebLogic on top of Windows. There's nothing that precludes you from running a J2EE platform on top of Windows. But it's no longer under the control of Microsoft, as is the .Net platform."

There is a slight performance difference between an application written to run atop J2EE as opposed to one running directly atop a specific operating system, Shelness said, but thanks to today's faster processors this doesn't usually impact overall performance of the system. "The real difference, I think is do you want to develop on a platform tied to a particular vendor and a particular operating system, or do you want to develop in an environment that's operating system-independent. That's really what it comes down to."

Playing Monopoly

Of course, Microsoft has a long history of court battles with the likes of Sun Microsystems Inc., Netscape Inc., and Oracle Corp., not to mention the whole Clinton Justice Department and the European Commission, over allegations that it established and then misused its desktop dominance. Some might say that in certain circles there's even an anti-Microsoft bias. But whether it's Java, Web browsers, or operating system licensing deals, it always comes back to the same reality: Microsoft usually ends up with a formidable market share in most of the markets it enters. Whether that dominance of the desktop can translate into enterprise-wide applications, and whether a focus on verticals such as automotive and business processes such as warranty will produce results remains to be seen.

This just might turn out to be the moment when warranty becomes a big business. Its $25 billion heft already dwarfs areas such as CRM in terms of cash flow. But its mindshare has until now been lightweight. Take a look at the warranty offerings of companies such as SAP or IBM. They're mere bullet points within a much more comprehensive application suite. Then along comes Microsoft, saying that automotive warranty claims processing is a big deal worthy of a major marketing effort. We predict that within a year or two, warranty will move from being a bullet point to being the product name.

It's not that Microsoft is entering the warranty market with something so compelling or so revolutionary that everyone else will take notice. Indeed, it's taking on as a partner a company that has until now thrived on solving the warranty problems of small and medium-sized manufacturers. And it's far from certain that any commercial application based upon a Microsoft architecture is going to be able to handle 10,000 claims a day for the major OEMs. But what Microsoft is doing is shining the spotlight on warranty, and its competitors are going to have to respond.

Microsoft's not really rolling out a complete solution either. Going back to Solomon's three sections, there's nothing here yet in terms of integration with product development, production, or engineering. And even if most OEMs aren't yet ready for that step, there needs to be a solution in the mix that's aimed at extended warranties and service contracts. If nothing else, these are major money-makers for their sales agents, administrators, and insurance underwriters.

Solomon didn't have much to say about Microsoft's strategy in terms of extended warranties, except to note that the company already has strong relationships with dealer-oriented vendors such as Reynolds and Reynolds and ADP Inc. Ezsak added that Active Web Services can manage extended warranties within its application now. "We don't do the insurance side of it, or the financial side of it, but we do everything else that those who desire to offer extended warranties do," he said.

Warranty Study Planned

Microsoft also announced a relationship with the Center for Automotive Research, under which the latter has been contracted to produce eight research studies focused on the automotive industry. Microsoft is funding all eight studies, which when completed will be published as a free download on the CAR Web site. No specific timetable was offered, but it is hoped the first study will be completed during the winter of 2005.

Dr. Richard Gerth, assistant director of CAR's Manufacturing Systems Group, said Microsoft chose warranty to be the first topic. That's right, of all the possible topics one could conceivably research in-depth within the automotive industry, Microsoft chose warranty to be first. "I think they view it as a major cost issue within the industry, that's probably an avoidable cost, and one where significant savings can be had without significant development of technology," Gerth said.

CAR plans to do two studies per year over the next four years. Microsoft will provide the funding, and CAR will leverage its existing contacts within the automotive industry to produce the data. "We have good relationships with not just the Big Three but also all the transplants as well as many of the international companies," Gerth said. "And we have a strong background in manufacturing economics. So just building on those strengths, I think we're one of the few organizations that can do these kinds of things."

Many of CAR's other recent publications have been funded by universities and government agencies, or by regional or national business associations. CAR itself used to be part of the University of Michigan's Office for the Study of Automotive Transportation. But a few studies have been sponsored by specific manufacturers such as the Robert Bosch Corp. Gerth said that no matter who's the sponsor, CAR's not-for-profit structure usually means that its research will be publicly released.

"We're certainly very pleased that they came to see us. When people come in that you've never worked with before, and raise the question as to whether you can work with them, it's always a nice surprise," Gerth said. But he added that Microsoft isn't the first software company to approach CAR. Last year, the group announced an auto body development project with UGS PLM Solutions, the product lifecycle management subsidiary of Electronic Data Systems. The so-called Digital Body Development System (DBDS) project also involves the Ford Motor Co.; General Motors; the Altarum Institute; American Tooling Center; Atlas Tool; Autodie International; Cognitens; ComauPico; Perceptron; Riviera Tool Company; Sekely Industries; Thunder Bay Pattern Works; the University of Michigan; and Wayne State University.


In the Aug. 3 column, Warranty Week incorrectly stated that 10-inch floppy drives were once the storage standard for desktop PCs. In fact, a reader working for Seagate Technology, the former home of inventor Alan Shugart, wrote in to note that the floppy drives in question were actually eight inches in size.

Shugart invented the inexpensive eight-inch floppy drive in 1975, producing a unit that surpassed earlier models he designed for IBM in terms of both price and capacity. Shugart's floppy drive breakthrough found its way into early personal computers such as the MITS Altair 8800 and the Tandy TRS-80 Model II, replacing cassettes as a data storage medium. But after complaints from customers such as Wang Labs that the drive was too large for what were then called microcomputers, Shugart Associates invented the 5-¼-inch floppy drive, which was used in the Texas Instruments TI-99/4, the Apple III, the Osborne 1, and numerous other early models. In 1980, Sony debuted the 3-½-inch format, chosen for its ability to fit into a shirt pocket.

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Entigo, founding sponsor of Warranty Week
Entigo, founding sponsor of Warranty Week