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Copyright © 2016 by Matti Kurvinen, Ilkka Toyryla, and D.N. Prabhakar Murthy.
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Dedicated to
Sirpa, Joni, Saila, and Niina, I love you all, and the memory of Marko, I miss you — MK
Susanna, Markus, and Sonja, for their understanding during the long hours it took to complete this book — IT
Jayashree for her support — DNPM
As warranty management has seen a significant evolution over the last 25 years—from a purely reactive/administrative task toward a strategic component within the product life cycle, and nowadays even more as an essential part of how to manage the customer experience in the customer/consumer purchase-to-repurchase cycle—it is surprising how limited the available literature on warranty management and fraud avoidance is.
Matti Kurvinen, Ilkka Törylä, and D.N. Prabhakar Murthy have now written an important book about this topic. They are addressing all major points of warranty (fraud) management and explaining many important topics and interdependencies. As it provides many practicable samples and a very pragmatic approach to many theories, this book is the perfect reading for everybody who has to deal with warranty management, either looking for new insights or as an excellent holistic overview for those who are new in the business.
The first few chapters focus on explaining the general area of warranty and associated terminology and influencing levers. In Chapter 2, there are essential insights about products and warranty concepts. The authors describe the correlation between product performance, failures, and product reliability, followed by an explanation of the nature of warranty and different types and classification of warranties.
After a general description of the topic and clarification of core terminology, Chapter 3 describes the warranty servicing process, channels and parties in a warranty service network, and associated contracts. As warranty cost is the most critical metric for most warranty owners, Chapter 4 concentrates on this topic. It describes critical factors underlying warranty costs, warranty cost metrics, and warranty cost forecasting and management.
With Chapter 5 the authors are going beyond the core descriptions and explanations. From my perspective, this chapter touches one of the most important areas, which—unfortunately—is not really managed well in most companies, as it requires true holistic business understanding and associated mandate to influence entire processes and business models. This chapter looks at end-to-end warranty management from a product life-cycle perspective, including critical key decisions to be made at different stages of product life cycle. As soon as the preparation determinations are made during the product creation stage, the focus must change toward the service life-cycle perspective and how to manage the warranty process from bringing a product to market and to customers, to how to provide warranty service, to subsequently managing the claims process and related invoicing and payments within the service delivery ecosystem.
Chapter 6 goes into details of potential fraud variants with many useful samples and cases. It introduces the different forms of warranty fraud and a structure looking at the actors, victims, motivations, and methods for fraud. Especially when looking at how to improve warranty (fraud) management in your organization, there is a holistic perspective of what could go wrong. In addition, the chapter highlights several aspects that are addressing the motivation and root cause for fraud attempts, such as underpay by original equipment manufacturers or too-high investments in required infrastructure, tools, and certification.
Although all attempts are to a certain extent unethical, there should be a difference between intentionally driven (criminal), opportunistic, using gaps in the system (criminal), and unconscious (unaware and missing knowledge) motivation. The chapter provides a deeper insight into what root cause has been “created” by the warranty provider itself or brings weaknesses of service delivery ecosystem to the surface.
As soon as warranty owners understand motivation and applied methods of warranty fraud, they are reasonably prepared and can make the first step toward initiatives on how to fight against it. Chapters 7 to 10 provide insights on how to manage or even avoid fraud, including many examples. The authors provide core understanding for how to create a basic structure for a manufacturing company, how to manage warranty fraud and more specific methods for customer fraud avoidance, and opportunities for fraud detection and management. Methods for fraud avoidance and management are given from many different perspectives and directed at all parties of a holistic warranty service delivery ecosystem. Based on their own experience and expertise, the authors share practical ways to direct focus to start initiatives against warranty fraud.
Very often, warranty (fraud) management is established as a functional entity within the service organization, with limited access and mandate to improve or change relevant processes or business models. The sphere of influence of warranty (fraud) management owners is very small and realistically restricted to information gathering, analytics, and reporting. In order to drive significant changes, they are dependent on many other stakeholders and business owners outside of their influence. Chapter 11 takes a holistic view of the customer service process and service organization—what are the mechanisms, when and where to influence warranty management in general and warranty fraud management in particular. By understanding the end-to-end picture and the associated levers where to tackle warranty fraud most effectively, this chapter gives excellent input for organization design and associated governance principles.
Closely linked to organization design, processes, and governance are the underlying capabilities for organizations, which are described in Chapter 12. Here the authors lay out an initiative to improve warranty fraud management capabilities. They describe the key considerations from understanding the as-is situation through laying the foundation for improved warranty control and developing critical capabilities and how to implement these.
Finally, Chapter 13 gives an interesting outlook toward new approaches and potential impact of new technologies.
Overall, I highly recommend you read the book if you are directly or indirectly responsible for reducing warranty fraud and improving the warranty management process in your business. There are many ways that you can positively impact the bottom-line success of your company by taking this topic seriously and approaching it in a holistic way. The shared expertise of the authors will help you avoid mistakes and improve the overall approach to warranty (fraud) management.
Maximilian Kammerer
Altaussee, Austria, December 2015
A multinational manufacturer made an after-sales process assessment to evaluate its performance and compare it with leading practices across comparable industries. The initial focus was on operations in Europe. One of the findings was that the warranty costs across countries within the company were not consistent, taking into account the general cost levels and sales volumes per country. A closer study revealed further inconsistencies and bigger anomalies, comparing different service agents inside each country.
That triggered the need to initiate activities to understand what was going on and ways to detect problems (such as fraud) and reduce the amount of warranty costs, starting with a few pilot countries. The results were almost instant. Many service agents had, over the years, learned to work around the seemingly loose controls of the manufacturer, and significant levels of fraud were detected. The manufacturer decided to accelerate the work and widen the focus to other European countries, which yielded similar results.
After the successful European implementation, the regional service heads of the manufacturer were approached for targeting the same improvements at the global level. There was a high level of skepticism, as indicated by the statement of one of the senior managers: “Yes, the European results were impressive, but Europe was crap. You are welcome here, but you won't find anything. We know our service agents, and our controls are watertight.”
After less than two weeks of analytics on the regional data in another region, there was enough evidence of fraud (and high warranty costs) leading to the implementation of improvement programs similar to that in Europe. This was then followed up with other regions of the globe. During the implementation, many of the local customer service managers were shocked when they noticed the scale of fraudulent activities done by their long-term partners. “I have been playing golf with this guy every Sunday for the past five years. I can't believe he has been doing this to me,” said one customer service manager. Not to talk about the incidents, where the employees of the company were also part of the scheme, working in collusion with the local service agents.
The first two authors have seen a number of similar cases and diverse ways that fraud occurred in the servicing of warranties and maintenance service contracts as part of their consulting activities. The imagination and ruthlessness of some of these companies/individuals in creating fraud has been very impressive—sadly, their behavior can only be described as unethical and antisocial. The surprising thing is, we have seen and heard many similar stories when working and discussing with our clients. The strategic importance of warranty management and the general maturity of the warranty profession in the industry have improved during the past 20 years. In the same way, the development of technology (mobility, cloud, analytics, social media, industrial Internet) has enabled new and more effective information system support for warranty management. Still, one hears and reads about people or companies (often accidentally) getting caught for cheating leading global brands. In the client discussions, the two most common statements are still (i) we believe there might be something wrong, but we don't know who, where, and what is the scale of the problem, and (ii) this is not a problem with us. Depending on the source, the estimates of warranty fraud are between 3 and 15 percent of the warranty costs. At the low end of the range, this translates to several billion US dollars globally.
Why is it so difficult for companies to recognize or do something about it? Why do we see the same gaps in control and same tricks applied we saw 15 years ago? In our opinion there are three fundamental reasons:
If you don't have the right tools, processes, and skills to manage warranty fraud, you typically won't detect it. In many cases, the first two authors have seen companies having these in place at the high level, but the small flaws in the details have a critical impact. When you don't detect fraud, you think it is not a problem, or if you believe it is a problem, you don't have a picture of the magnitude of the problem.
A magazine article explaining that this is an industrywide issue won't necessarily convince companies that it is their issue as well.
This leads to the vicious circle—not believing it is an issue leads to not investing in the capabilities, which leads to the issue staying under the radar. Although huge amounts of money are lost, it stays as a part of the total warranty expenditure and “the mandatory cost of doing business.”
“We don't want to talk about warranty fraud, since the term fraud implies intent, which is an overly harsh statement,” said one client executive. Although the methods discussed in this book are also effective in detecting and avoiding incidents resulting from sloppy procedures or unintentional mistakes, the main focus is on warranty fraud with criminal intent.
It is a challenging topic because people want to believe the best in others. Someone's word is generally respected, so accusing the other party of fraud or even asking for further evidence to clarify unclear issues is very difficult for most people.
Also, as the matter is so sensitive, companies are not willing to discuss it in public, so people can't hear and learn from the experiences of others. For this same reason, we have chosen to keep every case example anonymous (in many cases, that has also been a specific request from the people interviewed) unless the case example originates from a publicly available source.
Typically, most of warranty management training happens by participating in conferences, seminars, workshops, and learning on the job. All three authors have lectured at various conferences and conducted several workshops around the world. One of our interviewees (responsible for a global warranty management team in a global industrial equipment manufacturer) was quite frustrated about the lack of a solid training curriculum for a warranty management professional. “I am not looking for a one-day intro on a warranty management topic, but something more comprehensive—something like the PMI (Project Management Institute) certificate on warranty management. If I could have that, I would instantly sign-up my whole team.”
There is vast literature on warranty management topics, but very little on warranty fraud management. The first two authors had been thinking about writing a book on warranty fraud since April 2014. In October 2014, they contacted the third author (as he had written four books and edited one on various aspects of warranty) to explore the possibility of writing a book jointly. The motivation for this was to combine the deep understanding of warranty management and warranty fraud of the first two authors with the broader perspective of warranty of the third. In addition, it brought two different perspectives—theoretical and practical—together. This is important, as theory and practice are two sides of the same coin.
During that time, we also teamed up with Bill Roberts from SAS Institute and Maximilian Kammerer from Barkawi Management Consultants and 1492:\\ The Collective Intelligence.
The focus of the book is to assist manufacturers and other extended warranty (maintenance service contract) providers to effectively manage warranty fraud through detection and avoidance.
As mentioned earlier, the topic is sensitive and will stay sensitive. Our objective is to demonstrate the ways of dealing with this topic without offending honest business partners (which should be the majority) while still being fact based and determined to identify dishonest partners and initiate actions to improve.
Our focus is to provide practical ways to control warranty fraud through effective detection and avoidance methods. The book aims to develop the skills of warranty professionals working in this area. More specifically, it addresses the following issues:
We hope that this book will increase awareness of the topic. We also hope that the practical examples and methods described will help warranty professionals to analyze their data and processes from the fraud perspective, thus finding concrete evidence and facts of the situation in their own company and using that to increase the awareness, where necessary.
This book is primarily intended for after-sales professionals in general and warranty management practitioners in particular. Due to the scale and impact of the problem, it could be of interest to finance and control professionals as well. As a secondary target group, we see the academic community and hope that this book will serve as a bridge to reduce the gap between academia and industry and for the blending of theory with practice. The book can also be used as a reference book for graduate-level programs in various areas such as operations research, operations management, supply chain management, and after-sales services.
Many people and companies have contributed in this effort. We thank Maximilian Kammerer for his insight and comments across the book, and his contributions to Chapter 11 and the Foreword, and Bill Roberts for his insight on advanced warranty analytics and for establishing contact with John Wiley & Sons. We would also like to thank Eric Arnum from Warranty Week for his insights on warranty costs and fraud, Kim Vestman from Wärtsilä Corporation and Marko Niinistö from Philips HealthCare for their insight and experiences shared, Mark Nagelvoort from PCMI on updates on warranty management software capabilities, and Marko Ylä-Autio for his advice on warranty cost management. We thank Springer Verlag for granting the permission to use material in Appendices B and C. We also want to thank the many people whom the first two authors interviewed who have chosen to stay anonymous.
Espoo, Finland: Matti Kurvinen
Klaukkala, Finland: Ilkka Töyrylä
Brisbane, Australia: D. N. Prabhakar Murthy
Matti Kurvinen (Espoo, Finland) is a management consultant focusing on service strategy and operations, warranty management, installed base management, and product/component traceability as key enablers of new industrial Internet-based service offerings. Prior to starting his own consulting company, he had a 23-year career with Accenture, where he has held various leadership positions (leading the Finnish Management Consulting practice 2009–2014, Global Lead of the Accenture Warranty Management offering 2006–2014) and worked as the responsible project director or content expert in several supply chain and warranty cost reduction initiatives across clients in industrial equipment, automotive and electronics, and hi-tech industries. He holds an M.Sc. (Industrial Engineering and Management) degree from Aalto University/Helsinki University of Technology. Matti Kurvinen can be reached through LinkedIn at fi.linkedin.com/in/kurvinen.
Ilkka Töyrylä (Espoo, Finland) is a management consultant with over 20 years of experience from Nokia, Accenture, and Midagon. Service operations, outsourcing, warranty management and traceability are among his key areas of expertise. He has managed and/or been a subject matter expert in various warranty cost reduction projects. At Accenture, he was one of the key global subject matter experts in warranty management and fraud reduction. He is a coinventor in the US patent on Warranty Management System and Method issued to Accenture in 2011. The patent includes proven methods to identify fraud in warranty repair data. For the last seven years, Ilkka Töyrylä has been a visiting lecturer at Aalto University, Helsinki, on warranty chain management and fraud reduction. He holds Dr.Sc. (Industrial Management) from Aalto University/Helsinki University of Technology and M.Sc. (Economics) from Helsinki School of Economics. His doctoral thesis on traceability studied utilization of serial number data, warranty management being one of the application areas. He can be reached through LinkedIn at fi.linkedin.com/in/ilkkatoyryla.
D. N. Prabhakar Murthy is an Emeritus Professor in the School of Mechanical and Mining Engineering at The University of Queensland. He has held visiting appointments at 15 universities in the United States, Europe, and Asia and has carried out joint research with several research groups around the world. He has researched various aspects of reliability, maintenance, warranties, and service contracts over the last 40 years. He has authored or co-authored 25 book chapters, 170 journal papers, and 150 conference papers, and co-authored 10, and co-edited 3, books. He has given several keynote lectures at various international conferences and given over 200 research seminars at several universities around the world. He has served on the advisory boards for 30 international conferences on reliability and technology management, on the editorial boards for 12 journals, and reviewed papers for over 30 international journals. He has consulted for several businesses in Australia, Europe, and the United States on various topics on warranty and reliability. He obtained B.E. and M.E. degrees from Jabalpur University and the Indian Institute of Science and M.S. & Ph.D. degrees from Harvard University.