January 15, 2009

The Value of Warranty Expertise:

Is warranty management merely a clerical skill, or is there more to it than just paperwork? Some see warranty as not only a leading indicator of product quality but also a major chance to impress a customer. However, that conversation can only take place if the warranty professional is trained to do more than merely process and pay claims.

Last week's newsletter on warranty work spawned some questions about value, specifically questions about the perceived value of warranty expertise to an employer.

One subscriber asked if it's ever been measured or quantified. Another asked how its value can best be demonstrated to senior management, many of whom still see warranty as purely a cost of doing business that can be performed in the back office by clerical staff. And if the cost of claims can't be cut, the staff certainly can.

It reminds one of a statement a very high-ranking warranty professional once said regarding a competitor that was known to arbitrarily deny claims, lose paperwork, and generally frustrate customers. "If we wanted to cut our warranty expense by that much, we could just stop answering the phones," he said. Never mind what would happen to customer satisfaction levels or brand loyalty. If the customers can't make claims, claims won't be paid, and the claims rate will plummet.

Charles Naselli, president of Global Recruiters of Greenville, set off many of these questions when he told Warranty Week about a prospect he worked with last year who was emphasizing his quality credentials but underplaying his warranty expertise. In a follow-up conversation this week, Naselli made the point that he sees a clear difference between a warranty professional that merely moves paperwork and a warranty professional that makes strategic decisions.

"If all you want to do is transactional warranty work, then absolutely, it's back office work," and anyone can do it, he said. With a bit of automation, some of the people can be replaced by computers that automatically reject incomplete paperwork and automatically process the rest. But is automation followed by staff reduction the right solution?

Naselli compares it to the purchasing function. Twenty years ago, most companies trained a relatively low-level person to always get three quotes, then choose the lowest bid. Now we have sophisticated supplier management processes, staffed by mid- to high-level professionals, that take into account quality, delivery, cost, and the supplier's capability to continuously improve those metrics over time.

"If the extent of your warranty management is processing claims, then anybody can do it," he said. "If I were to put together a presentation on 'What is world-class warranty management?' it would include claims data collection, analysis and reporting. It would include corrective actions based on the warranty data that fed back into operations, product development, and the supply base. It also includes customer care, which includes field failure analysis, repair and replacement, and management of the customer-facing commercial relationships such as distribution partners."

Brand Ambassadors

That latter point bears repeating. Customer relationship management can often become entwined with warranty management, simply because the customer is the one that will be pleased (or not) with the repair or replacement, and often the business partners are the ones doing the repairs or replacements.

"When you put people into the field, and they have contact with either your business partner customers or your end user customers, that's not just anybody," Naselli added. "If you're a reputable organization, that person is a brand ambassador. So there's a great amount of skill involved -- not just technical knowledge, but also business knowledge and interpersonal skills -- that has to go into that field work."

Then there is the purely financial aspect of warranty, which means not only paying claims but also helping to accurately predict future costs, including setting the appropriate level of warranty reserves. "A person who's genuinely a world-class warranty manager is going to have a pretty strong conversation going with the CFO of the organization, as well as with business unit presidents and probably the sales and marketing people."

Such a person may be asked to occasionally make concessions for a "good customer," allowing claims to be paid after the warranty is expired. They might also have to occasionally make an unpopular decision about pushing specific warranty costs back onto a channel partner or supplier, potentially affecting that business relationship.

"There are consequential monetary decisions that are going to be made in conjunction with the relevant business leaders," Naselli said. Those are not clerical matters. And they can't be automated. "World-class warranty management is a fully-featured business leader position, with interfaces at just about every part of the business."

Warranty Communications

Bob BaxendaleBob Baxendale, a senior manager in BearingPoint�s Automotive practice, said the greatest value comes from the warranty professional who understands all the moving parts, and how they all work together. "Anybody can do the back office operational process -- pay the claim, approve a payment, and all that kind of stuff," he said. "But I think there is significant value in somebody who understands the overall warranty process, and the impact it has on the business."

There are a lot of practitioners who can handle the warranty claims, he added, but they really don't know the processes behind it. "You have to have some of those people, obviously. But you certainly do need some people who understand why things are being done the way they are, and the impact of a warranty claim on the service organization -- what they do, why they do it, how they should be handling those warranty issues, the value of the warranty information, and how it can be used to improve the process and more importantly, improve the product," Baxendale said.

"If you don't build a culture into the warranty organization that understands the true importance and the critical business needs of it, you lose a lot of that information because people don't recognize it as having value," he said. If their job is to process paperwork, then that's what they will do.

Last year, BearingPoint's Automotive Practice teamed with the Automotive Industry Action Group, the Original Equipment Suppliers Association, the European Association of Automotive Suppliers (CLEPA), and Warranty Week to study warranty management challenges in the auto industry by means of a global online survey. More than 200 automotive warranty professionals took part in the survey, which was summarized in a 40-page report that is still available online at www.bearingpoint.com/warrantyreport.

One of the main conclusions of that report was that although the paperwork has by now been mostly automated, the process still falters because of a lack of communication. "A lot of people that we talked to said that because warranty hasn't been truly centralized and structured within the business, they didn't have the level of coordination and expertise that was needed. And a lot of the things that happened were the result of day to day operations where people didn't look at how processes should be handled or how things could be improved, because they were too distributed and decentralized," Baxendale said.

It's not so much that warranty professionals are underselling their skills, he said, as it is the indifference of others as to why the warranty skills should be recognized as being valuable. "I think it's more of an organizational issue than an individual issue," he said. "When the individual goes looking for a job, he finds that those skills are not typically compensated and challenged the same way" as more readily identifiable skills such as quality management.

Deal Management

Then there are the companies that "get it," that involve their warranty professionals not only in the aftermarket and back office functions, but also in the pre-sale phase. William Eliason, the global warranty finance manager at Sun Microsystems Inc., said that because he has an accurate picture of warranty costs, he often helps the company with price quotes. "We know what it costs us to service our products," he said, "and it allows us to be a little more aggressive when pursuing new business if we know what the costs are."

Warranty management skills, he said, "seem to be very valued within our company. I end up doing a lot of presentations internally -- not just at the conferences -- and in going around internally, I think people value [knowing about] warranty cost accounting, cause and effect, and understanding what's driving the business."

If it were seen as just a clerical operation, then financial people such as Eliason would not be as deeply involved in deal management, helping the sales force to understand the costs so they can then set the appropriate price. Instead, warranty would just be a cost -- a claim that needs to be paid.

"I think it's a lot of analytical as well as statistical [skill]," Eliason said. It's not just about predicting the chances of a failure, but also predicting when that failure is most likely to happen. "You have to have that statistical knowledge, that cost accounting, and financial -- you need to have all those skills."

In times like these, Eliason added, careful cost accounting and conservative projections have helped Sun immensely. And he's been on the opposite side with past employers, who were somewhat sloppy and careless, and paid the price when the bad times hit. "But I won't mention any specific names," he said.

The value of warranty expertise, it seems, is directly linked to the value a company places on not only the warranty data, but also the value a company places on the use of that data to do more than just pay claims. Paul Swenson, president of Fulcrum Analytics (and a sponsor of this newsletter), said he sees warranty as a major opportunity to strengthen customer relationships.

Paul Swenson"It's not just about money. It shouldn't be," Swenson said. "And it's not just about understanding the cost. But that's the way it's generally looked at. If I'm going to do warranty analytics, whether it's limited warranty or service contracts, I want to understand the processes and the costs involved in each step, so I can put in method improvements.

"But that's only a little piece of the picture," he added. "One of the things we strongly believe is that warranty analytics isn't just about understanding the product experience -- how often does it fail, what's my frequency and severity? The real power comes from combining a deep understanding of that product failure experience and cost with a highly modeled understanding of consumer behavior."

Customer Loyalty

Swenson said that once you add considerations of the customer's experience into the mix, "it opens up a whole new world of optimization, not just about profits, but also about customer loyalty and customer value. To me, that is the real trick here: to combine those disciplines of finance and marketing around the warranty experience."

Also, he noted that it's very important to link the basic and extended warranty functions, which immediately turns warranty management into much more than a merely clerical skill. One must know how to leverage that customer relationship, not only to increase future sales, but also to drive sales of add-ons and accessories.

"It drives more of a purchase-to-purchase view," he said. "Through an understanding of consumer behavior, how can I drive added value through parts, accessories, and consumables?" For instance, they buy my boat, then they buy my water skis and my trolling motors. Then they buy my fish finders and GPS navigation gear. And eventually, they come back and buy another boat. All the while, warranty is a means to stay connected with the customer, to keep the relationship current.

Ask any warranty professional and they'll probably tell you that warranty is a part of everything. But there's a noticeable difference between how warranty professionals on the inside appraise their own value and how those on the outside see it. Despite its complexity and its interconnectivity, the warranty process is still seen from the outside as simply a cost that needs to be reduced.

One of the big reasons Naselli's jobseeker didn't highlight his warranty expertise is because so few employment openings are written that way. They look for reliability engineers, reverse logistics experience, or perhaps quality assurance, with a deep understanding of the warranty process. In other words, they're looking for a warranty professional but they don't call it that. Could a training program that results in recognition of a person as a Certified Warranty Chain Management Professional (CWCMP) help bring some visibility to the vocation?

Conducting the Orchestra

Bob Mueller, principal of RHM Consultants and one of the prime movers behind the efforts of the Institute of Warranty Chain Management to launch a professional certification program for warranty, readily admits that from the perspective of most companies, warranty is still merely an issue of cost. "But the value of somebody with experience in warranty is when they understand all the business processes -- R&D, deployment, support, and everything else -- that drive that warranty cost," he added. "So it's the cost, but more importantly, it's the drivers. Do you understand how all of these complex processes interact?"

While anyone can process claims and cut checks, he said, it takes a higher level of skill to identify the reasons behind something like a rise in labor costs for repairs of a particular type of product. It also takes a higher level of skill to explain those reasons to others and to then affect a change in that elevated labor rate, perhaps by convincing others to redesign the product to make it easier to repair. So it's not just the components of cost that need to be understood, but also how they interact.

"It's like the difference between a conductor and a musician," Mueller said. "Conductors know how the sections play together. Musicians know how to play within that space. There's a difference."

"I think that the people that are really experienced in warranty -- the gurus of this -- understand that role as a conductor: how the pieces play together, and how to get the impact and the result of warranty cost reduction."

Professional Certification

The road to certification as a warranty chain management professional is scheduled to open in just a few months, with the first training courses to be offered in conjunction with the Warranty Chain Management Conference in Orlando in March. And an explanation of how all these different moving parts work together is going to be a central theme of the coursework.

"What we want is a curriculum that shows you how these complex pieces play together in the warranty value chain. By definition, it is both depth and breadth training," Mueller said.

"Our goal as an institute is to be sure that the certified person has sufficient knowledge to effectively design and drive cross-business warranty improvement processes," he added. For instance, a person certified by the institute as a warranty professional should be able to set up complementary factory warranty and extended warranty processes that not only meet internal goals but also meet the expectations of customers and regulators. "I'd need to know how to design those and deploy those, cost-effectively," he said. "And that's no simple job."

Baxendale said the emphasis on communication skills will be a welcome focus of the certification process. But, he added, certification merely conveys the completion of training, not the acquisition of experience.

"I'd have to say it wouldn't hurt," he said, "but you have to be careful." Baxendale said he's been involved with other organizations that grant certifications when one passes the required tests, but that doesn't mean much when it comes to the real world. "It gives you that acronym at the end of your name," he said, "but there are a lot of certified people that I wouldn't let in the door of my factory."

Baxendale said there's certainly going to be value in certification, "but you have to value it appropriately, in that the person made the effort, and he understands the basic body of knowledge and the concepts. But to be able to apply it is the more important thing."

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