Preface

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.

WHAT HAS CHANGED DURING THE PAST TWENTY YEARS?

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?

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:

1. Lack of awareness of the problem
2. The sensitivity of the issue
3. Lack of skills

Lack of Awareness

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."

Sensitivity of the Issue

"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.

Lack of Skills

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."

NEED FOR A BOOK ON WARRANTY FRAUD

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.

FOCUS OF THE BOOK

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:

• What is the topology of the most common fraud scenarios, who are the actors, what are their motivations, and who are the victims?
• What are the methods to tackle the known and also the unknown scenarios?
• What are the building blocks required for structured warranty fraud management?
• How can organizations get started, and how can you implement a warranty fraud reduction initiative?

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.

TARGET AUDIENCE

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...