The Dark Side of Warranty Management
Significant extra burden often goes unnoticed
Warranty fraud is a major cost-control issue for most companies, but the sensitive nature of the topic leaves most reluctant to share their experiences and divulge their strategies. The stories from the field go beyond imagination:
- The number of iPhones “accidentally broken” seems to always double when a new model is released
- Certain service agents regularly charged a compressor manufacturer 5-10 liters of an expensive lubricant oil, when the actual repair should require only one liter
- Field engineer removed warranty tags from customers’ water heaters and turning in false claims to obtain free replacement units from manufacturers
- Contact center agent, service agent employee and a fake customer worked in collusion to generate and approve bogus warranty claims and spare parts orders, selling the replacement parts further, once received
- An industrial company swapped defect parts from out-of-warranty products to in-warranty products and tried to get them replaced under warranty
The list could go on endlessly. So what is wrong with the industry?
Actually, I don’t think there is anything more honest or dis-honest in the aftermarket and warranty services, than in any other field of life. Depending on the source, the level of warranty fraud is between 3 and 15 percent of the total warranty cost, which is comparable with other business contexts. According to a 2014 survey carried out by the Association of Certified Fraud Examiners a typical business loses 5% of revenues each year to fraud. If there is an opportunity with
- significant financial or other benefits to be gained
- a limited risk of getting caught and
- acceptable consequences of getting caught,
there are always some people and organizations, who try to take advantage of the opportunity resulting in fraud. Often the only consequence of issuing a fraudulent warranty claim is, that the claim is rejected. This provides an incentive for some people to try fraud, since there is only upside, if the fraud is successful and the worst case scenario is equal to not doing anything. In other cases, the consequences can be more severe – termination of service contract or employment, sanctions or criminal charges – creating a much higher hurdle for fraudulent behavior.
By its nature, fraud is hidden and its exact scale unknown, both at the global level and within an individual company. We have been surprised, how often our clients are unaware of the problem (“yes, warranty fraud in general is an issue, but not in our business”) or accept it (“yes, we know there is fraud, but it remains at an acceptable level and is a part of the cost of doing business”). Then, if the true amounts are uncovered, there is a lot of disbelief, disappointment and anger.
Warranty fraud covers the whole spectrum from individual customers trying to get an out-of-warranty service done free-of-charge to systematic criminal activities. In a recent public example, the fraudsters hacked into Fitbit user files, stole the user identity and claimed replacement products for the product the original user had purchased (SC Magazine, January 08, 2016). “Fitbit users’ details were being traded on the internet for as little as 50 cents each, according to fraudsters who say hundreds of accounts have been affected during a recent spate of attacks” (BuzzFeedNews, January 26, 2016). In another case the police uncovered a nationwide fraud and money laundering scam relating to fraudulent mobile phone warranty applications in the UK.
Photo credit: West Midlands Police
There are different actors, victims, motivations and methods
In our book we have created a framework for warranty fraud, looking at the actors, victims, motivations and methods of fraud.
- Actors committing fraud can include any parties in the warranty chain either alone or in collusion with other parties, typically customers, service agents or warranty providers
- Victims of fraud can also include any parties, typically warranty providers and customers
- The motivations fall broadly into two categories – service cost avoidance (I have a faulty product and want to get it repaired free-of-charge) and revenue increase (claiming and re-selling parts or products, excess charging of existing or non-existing warranty service)
- The methods are numerous – new methods are invented as old methods are uncovered and blocked.
Understanding these combinations helps out in defining the processes and procedures to detect and avoid warranty fraud. In our book we go through over 50 methods of warranty fraud and over 100 entitlement checks, validation rules and analytics methods to detect and prevent fraud.
Why is it so difficult?
Why is it so difficult for companies to recognize warranty fraud or do something about it? By its nature, fraud is hidden and its exact scale unknown, so many companies are simply not aware of the problem. Some fraud cases are clear – claim data is not correctly filled or a validation rule is violated. However, it is always possible to create an individual fraudulent claim, which can’t be caught by looking at the individual claim alone. With analytics you can identify suspect claims and also notice patterns and anomalies, suggesting fraud. For many companies there is quite a big hurdle from that initial suspicion and seeing something really strange in warranty data (something you only see with large scale fraud) to really believe something is wrong and take confident action.
Also, it is a very sensitive topic. “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. “Yes, the numbers from this dealer look really peculiar, but I cannot go and accuse them of being dis-honest”, said another. People don’t want to upset their customers or business partners and are reluctant to asking questions implying they suspect something. Understandably, companies do not want to go public if they have been victims of fraud. Therefore, the issue remains under the radar for other companies.
The third reason we have seen in many clients is simply the lack of focus, skills and discipline in warranty transactions and analytics. On the high level all processes and policies — validation rules, claim process, statistical data analysis, customer entitlement — you name it, seem to be in a good shape, but the devil is in the details. When you dig a bit deeper, you notice big holes here and there. Warranty control is often a part time role and the last activity between the person responsible and the weekend. High turnover of and limited induction to the validators often leads to a situation, where the processes and controls are defined, but not followed properly. Issues with timeliness and quality of warranty data. Issues with warranty data analysis and identifying fraud related anomalies.
The combination of the sensitive nature and the difficulty to produce water-tight evidence keeps companies hesitant to take action. This keeps them vulnerable and some individuals or companies are ruthlessly taking advantage of the situation.
How about you? What type of examples have you come across and what methods have you found effective in tackling warranty fraud? Please comment and drop in your examples.