This post is first in a series of four addressing best practices in warranty and contract management. The best practices highlighted in the series, we believe, are core to better warranty and contract management, happier customers, and fatter profit margins.
In this installment, we’ll look at how top manufacturers are strategizing around warranty and contract management in order to outperform the competition.
In the past, it may have seemed enough for a manufacturer to ask of their service organization, “How can we streamline our warranty operations? How can we cut our warranty costs?” The company might then explore how to make improvements at an operational level, or even strictly at the departmental level of warranty management.
Not so today.
Manufacturers now increasingly view warranties and contracts as more than simply a cost burden, more than simply a service process to be made more efficient. With margins from product sales declining, manufacturers are looking to the service areas of their business for new revenue and profit opportunities. And they recognize the competitive advantages available to them through improved warranty and contract management.
Let’s look at warranties and contracts in terms of costs and gains:
- 7% – The world’s manufacturers spend anywhere from 0.5% to 7% of product revenue on warranty claims each year, according to an IDC Manufacturing Insights report.
- $50,000,000,000 – The same IDC report states that in the United States alone, manufacturers’ annual costs for warranty claims add up to approximately $23 billion in lost opportunity. According to BearingPoint Management & Technology Consultants, this cost totals to $50 billion or more worldwide.
- 30%+ – Yes, the costs of warranty claims are high. But service contracts and warranties also drive revenue gains. Industry research shows that they contribute about 31% of total service revenue for the world’s manufacturers today. With best-in-class service performance, the rate of revenue from service contracts and warranties can rise significantly more – and the costs of claims can drop substantially.
Recent industry research bears out management’s evolving perspectives. What was once largely thought of as a check-the-box requirement—the cost of doing business—today stands out as a prime strategy opportunity. Manufacturing executives now aim to use innovative better warranties and contracts to help differentiate their company’s offerings and stay ahead of the pack.
There’s greater pressure to be better.
Here, per the results of an Aberdeen Group survey, are the key factors driving service executives in manufacturing companies to invest in improving their warranty and contract management performance:
- 52% – Mandate to increase service profitability
- 40% – Reduced margins on standard service operations
- 37% – Reduction in new customer growth
- 33% – Rising warranty repair costs
- 33% – Competitive pressure from other service organizations
- 38% – Improve customer satisfaction
- 21% – Increase revenue
- 18% – Cut costs
- 11% – Improve product quality
As leading manufacturers are seeing, smarter handling of their warranty and contract management processes can provide the critical service and product insights needed to improve service and product outcomes and increase value to the customer.
How is your organization feeling the pressure to be better and what are you doing to address it?
Stay tuned for next week’s installment of the Warranty and Contract Management Best Practice Series to learn how to break down silos that divide warranty and contract processes.