Warranty and Contract Management 2011

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1 Warranty and Contract Management 2011 Intersection of Revenue Creation and Customer Service October 2011 Aly Pinder Jr., Sumair Dutta

2 Page 2 Executive Summary In an economy where product margins continue to dry up, Best-in-Class service organizations are finding that warranties and service contracts can be a fruitful avenue to drive increased revenue streams. Past Aberdeen research on the topic of Service Revenue (January 2010), showed that existing service contracts drive 31% of overall service revenue with new contracts and warranties making up 15% and 7%, respectively; thus indicating the importance of these streams to driving revenue for the service organization. Not only are service contracts and warranties a means to gain a bigger portion of revenue, but these two channels are rapidly becoming a way to drive improved customer-facing gains in satisfaction and retention. Research Benchmark Aberdeen s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations Best-in-Class Performance In August and September 2011, Aberdeen Group surveyed over 140 service organizations. Those defined as Best-in-Class exhibited the following: 89% average customer retention rate (51% for all others - the Industry Average and Laggard companies combined) and 90% average current contract renewal rate (40% for all others) 7% average decrease in warranty claim processing time over the previous 12 months (3% average decrease among all others) 2% average decrease in warranty-related repair/return costs over the previous 12 months (1% increase for all others) Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics, including: 53% more likely (69% vs. 45%) than all others to have a dedicated team in place to manage end-to-end warranty workflow process 67% more likely (65% vs. 39%) than all others to have a centralized data warehouse for product performance and warranty/service contract information 35% more likely (54% vs. 40%) than all others to have manufacturing / design teams periodically review warranty data to improve product quality Required Actions Integrate the warranty and contract management organization with all service functions Provide visibility for sales into warranty and service contract performance Put a sales force in place to sell warranties and service contracts This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

3 Page 3 Table of Contents Executive Summary...2 Best-in-Class Performance...2 Competitive Maturity Assessment...2 Required Actions...2 Chapter One: Benchmarking the Best-in-Class...4 Business Context...4 The Maturity Class Framework...7 The Best-in-Class PACE Model...8 Best-in-Class Strategies...8 Chapter Two: Benchmarking Requirements for Success...12 Competitive Assessment...13 Capabilities and Enablers...14 Chapter Three: Required Actions...21 Laggard Steps to Success...21 Industry Average Steps to Success...21 Best-in-Class Steps to Success...22 Appendix A: Research Methodology...24 Appendix B: Related Aberdeen Research...26 Figures Figure 1: Pressures Impacting Warranties and Contracts...5 Figure 2: Top Goals for the Warranty Chain...6 Figure 3: Service Revenue Generation in the Next 12 Months...11 Figure 4: Who Sells Service (Contracts)?...16 Figure 5: Factors to Sell (More) Extended Warranties...16 Figure 6: The Fully-Automated Warranty Chain...18 Figure 7: Tracking Service Contract Renewals...19 Tables Table 1: Importance of Effective Warranty Management...4 Table 2: Top Performers Reach Best-in-Class Status...7 Table 3: The Best-in-Class PACE Framework...8 Table 4: Actions for Improved Warranty and Contract Performance...8 Table 5: The Competitive Framework...14 Table 6: Automation of Key Workflows Improve KPI...20 Table 7: The PACE Framework Key...25 Table 8: The Competitive Framework Key...25 Table 9: The Relationship Between PACE and the Competitive Framework...25

4 Page 4 Chapter One: Benchmarking the Best-in-Class Business Context The service function is continuing to transform and elevate in importance in relation to other aspects of the organization. Not only is service being perceived differently outside of the service group, but service is also being tasked with responsibilities beyond solely resolving a customer issue for the least possible cost. Past Aberdeen research on the State of Service Management 2011 (September 2010) showed that the top goal for the Chief Service Officer (CSO) in 2011 was to grow revenue (43% of respondents). With increased stress on the organization due to shrinking product margins due to a number of factors (i.e., commoditization of products, increased competition), the service organization's focus continues to be on the customer and satisfying their needs. The top pressure facing these organizations remains the customer's demand for improved service (54% of respondents) as seen in the State of Service research (September 2010). As cost cuts in response to the overall economy have taken their course, organizations are now down to their core value generating resources, and are therefore looking to these resources to produce sustainable and predictable revenue streams to help support margin initiatives while remaining focused on improving service and support. Top line growth from improved service revenue alone is not the sole focus of the service organization as seen in Aberdeen's 2010 Warranty Management: The Bridge to Future Revenue Creation report, where 43% of respondents indicated that the mandate to increase service profitability was a top market pressure. The warranty chain, similar to the broader service organization, is beginning to play a more significant role throughout the lifecycle of the customer and the product. With this increased importance to the business from a top and bottom line growth perspective, so too comes increased responsibility of the warranty chain to help improve key metrics highlighting successful service operations. In this year's research of 146 service professionals, the effective management of the warranty chain has been shown to have a direct positive impact on a number of Key Performance Indicators (KPIs) (Table 1). On a scale of 1 to 5, with 1 being a negative impact and 5 being a positive impact, respondents noted that effective warranty management can have the most positive impact on customer satisfaction and retention (4.1 and 3.9, respectively). Table 1: Importance of Effective Warranty Management Importance of Effective Warranty Management on KPIs Ranking (1 Negative Impact, 3 No Impact, 5 Positive Impact) Customer Satisfaction 4.1 Customer Retention 3.9 Product Quality 3.7 Fast Facts 59% of organizations indicate the top factor in delivering and / or selling extended warranties is the customer relationship / trust 9% increase in total service revenue for the Best-in-Class in the past 12 months as compared to a 3% increase for Laggards 55% of equipment/parts are under a service contract for the Best-in-Class as compared to 32% for all others 27% of an organization's equipment is sold with an extended warranty (warranty can be sold by organization or third-party) for the Best-in-Class as compared to 18% for all others Warranty Management - A Global Definition The broad definition of warranty management may include any of the following components: Warranty creation / structure / pricing Warranty sales Warranty administration Asset recovery Claims management Supplier recovery Customer management

5 Page 5 Importance of Effective Warranty Management on KPIs Ranking (1 Negative Impact, 3 No Impact, 5 Positive Impact) Service Revenue 3.7 Service Cost 3.5 Source: Aberdeen Group, September 2011 Effective management of the warranty chain can also have a positive impact on service profitability, even if it isn't the most impacted metric by warranties. Respondents noted that effective warranty management had a 3.7 score on service revenue and 3.5 score in regard to its impact on service costs. The impact of these factors together form the business case for any warranty and contract management strategy tied to the improvement of profitability, satisfaction and retention. Profiting from Success With increased concerns around operational and financial stability in this current economic landscape, it is no shock that the top two pressures facing service organizations in regard to warranty and contract management include a focus on increased service profitability and shrinking margins (Figure 1). More than half of all respondents (52%) surveyed have a mandate to increase service profitability; once again indicating that organizations are no longer solely focused on cost cutting, but are also looking toward the revenue-side of the equation. A satisfied customer not only keeps purchasing from you, they recommend you to others. Service profitability is a natural extension of a satisfied customer, as they will pay for this satisfaction, and peace of mind. ~ Senior Manager Customer Support, Manufacturer of Hardware and Software Figure 1: Pressures Impacting Warranties and Contracts Mandate to increase service profitability 52% Reduced margins on standard service operations 40% Reduction in new customer growth 37% Rising warranty repair costs Competitive pressure from other service organizations 33% 33% 0% 10% 20% 30% 40% 50% 60% Percent of Respondents, n = 146 Note: Respondents asked to select top three. Source: Aberdeen Group, September 2011 Not surprisingly, as organizations look to drive new revenue streams to the business (Figure 2), the ability to retain a customer base and ensure that they continue to purchase current / new offerings remains a concern for service organizations. This focus on revenue and the customer is a clear

6 Page 6 reaction to over a third of all respondents (37%) seeing a reduction in new customer growth (Figure 1). Not to be overlooked, rising warranty costs and competition have remained a taxing pressure on organizations (33% of respondents, respectively). As warranty costs continue to rise, service organizations are tasked with unearthing ways to make warranties and service contract management more efficient. Costs must remain a major concern in regard to service offerings (warranties and service contracts) to ensure the overall business remains viable (and profitable). Not only must service organizations remain mindful of warranty costs in order to stay in front of the profitability equation, but as increased competitive pressures mount, the service organization is tasked with finding ways to differentiate its products and services. Competition has not only led service organizations to focus generally on warranty and contract management from an efficiency perspective, but also 36% of organizations surveyed indicated that competitive pressures one of the top reasons for their focus on increased service revenue in the next 12 months (see sidebar). Reach for the Goal Line As service organizations continue to strive for improvements within the warranty chain and service contract management, a few areas are being targeted as top goals for future improvement. The top goal for all organizations surveyed is the need to improve customer satisfaction, with 38% of all organizations indicating that improving customer satisfaction is their top goal for the future (Figure 2). It should come as no surprise that customer satisfaction is a top goal as more service organizations are finding margins from products shrinking. Margin erosion is making it imperative for the service organization to keep current customers in the fold and satisfied. Top Reasons to Focus on Service Revenue Corporate goal of higher revenue - 71% Increasing costs of service resources - 46% Reduced product margins - 44% Competitive pressures from other service organizations - 36% Note: Respondents asked to select top three Figure 2: Top Goals for the Warranty Chain Percent of Respondents, n = % 30% 20% 10% 0% 38% 21% 18% In a world where customers are demanding quicker responses, 100% asset availability and cost effective solutions, it is important to align your logistics and operations to the service profit chain to ensure that parts and services are delivered to the customer at the right time, the right place, and a price that is acceptable. If you achieve this you don't always have to be the cheapest. ~ Darrin Leahy, Business Development Manager Aftermarket - Parker Hannifin Manufacturing Ltd 11% Improve customer satisfaction Increase revenue Cut costs Improve product quality Source: Aberdeen Group, September 2011 The positive impact of effectively managing warranties on service revenue and cost (Table 1) is important as organizations view these two areas as top

7 Page 7 goals for the future. More than a fifth of all organizations (21%) see increasing revenue from warranties as a top goal with another 18% targeting cost cutting efforts. These two goals further highlight the transition of the service organization towards more of a profit center for the organization. This trend is no longer new, as seen in Aberdeen's State of Service research where 61% of organizations managed the service operations as a profit center and another 18% were in transition to do so. Service organizations are not solely focused on profits, though this is a top concern. Organizations continue to improve the customer experience and profitability (i.e., reduction in costs tied to defects) through improvements in product quality, and find that the warranty chain can be a means to ensure that valuable customer / product information can be used to enhance product quality (11% of all respondents). Top Goals for the Best-in-Class Improve customer satisfaction - 42% Increase Revenue - 23% Cut Costs - 15% Improve Product Quality - 15% The Maturity Class Framework Conquering the challenges outlined earlier in Figure 1 is the litmus test for the identification of a Best-in-Class service organization. In the course of meeting and eclipsing the aforementioned market pressures, the Best-in- Class exhibit a number of exceptional characteristics in performance. Therefore, Aberdeen's framework to determine the Best-in-Class (Table 2) is based on four KPIs that further highlight excellence in customer, operational and financial measures. As shown below, organizations are measured in regard to not only current performance but also in their prowess at managing the business year over year. Table 2: Top Performers Reach Best-in-Class Status Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Industry Average: Middle 50% of aggregate performance scorers Laggard: Bottom 30% of aggregate performance scorers Mean Class Performance 89% Customer Retention Rate 90% Service Contract Renewal Rate 7% Decrease in length of time to process a warranty claim over the last 12 months 2% Decrease in warranty-related repair/return costs over the last 12 months 63% Customer Retention Rate 51% Service Contract Renewal Rate 4% Decrease in length of time to process a warranty claim over the last 12 months No Change in warranty-related repair/return costs over the last 12 months 31% Customer Retention Rate 22% Service Contract Renewal Rate 1% Decrease in length of time to process a warranty claim over the last 12 months 2% Increase in warranty-related repair/return costs over the last 12 months Source: Aberdeen Group, September 2011

8 Page 8 The Best-in-Class PACE Model Aberdeen s PACE framework is designed to highlight the key strategies and capabilities employed by organizations that attain Best-in-Class status through their excellence in meeting and overcoming internal or market pressures. The framework helps to provide a roadmap for organizations to implement the strategies enforced and capabilities developed by Best-in- Class organizations to improve their warranty and service contract management operations (Table 3). Table 3: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers Mandate to increase service profitability Integrate service organization more closely with design, manufacturing, marketing and sales Install processes to provide early warning of potential largescale product failures Best-in-Class Strategies Dedicated team to manage end-to-end workflow process in place to handle warranty claim and product return operation Warranty operational and financial information delivered to all relevant stakeholders Sales force in place to sell warranties and service contracts Manufacturing/design teams review warranty data to improve product quality Centralized data warehouse for product performance and warranty /service contract information The roadmap for the Best-in-Class to directly confront the pressures of shrinking margins, customer acquisition and competition is focused on a set of key strategies to manage and enhance warranty and service contract management within the service operations. The Best-in-Class have targeted better integration, visibility and automation for their roadmap for strategic change (Table 4). Table 4: Actions for Improved Warranty and Contract Performance Percent of Strategic Actions Respondents, n=146 Best-in- All Class Others Integrate service organization more closely with design, manufacturing, marketing and sales 54% 46% Install processes to provide early warning of potential large-scale product failures 50% 31% Increase visibility into end-to-end warranty or contract lifecycle 42% 43% Increase communication between manufacturing facility and rest of the organization (i.e., sales, service) 35% 41% Purchase and/or upgrade technology solutions to automate portions of warranty and service contracts management 35% 24% Source: Aberdeen Group, September 2011 Enterprise Resource Planning Solution Warranty Claims Processing System Warranty Reporting Solution Business Analytics Knowledge Management Solution Self-Service Warranty Claim System Source: Aberdeen Group, September 2011 It is integral that our service organization links the warranty and service contracts business with other service functions because it will have an impact on logistics requirements (e.g., stocking program; fulfillment rate; service levels etc), operations process and resources (e.g., response time commitments)." ~ Kim Hwa Choo, Acting AP Services Director/AP Services Marketing Manager Asia Pacific Services - Ingersoll Rand

9 Page 9 Given the importance of effective warranty and contract management to the generation of increased revenues and operational efficiencies, it should come as no shock that elevating the status and visibility of this side of the service business is integral to a successful service transformation. One strategy alone will not transform the service organization; but combined with internal capabilities and technologies, well executed strategies can lead to improved performance and profitability. The roadmap for the Best-in- Class revolves around three main strategies: Integration of the service organization. In past Aberdeen research on the State of Service Management 2011 (September 2010), 97% of top performing organizations indicated that it is imperative for the service team to be 'fully-connected' with other organizational units in order to drive improved operational and financial performance. In this research, over half of the Best-in-Class (54%) currently integrate their service organization with design, marketing and sales teams to improve product quality and better educate the customer of the valuable services that can be offered. Integrating silos within the business allows for better knowledge sharing, tying together the information loop that extends from the customer all the way back to the design team. This loop is closed when the customer feedback / service data is incorporated to improve the product. In Aberdeen's Service Intelligence research (April 2011), 58% of top performing organizations shared service performance data with manufacturing and engineering as compared to only 36% of all other organizations in order to ensure that changes/modifications could be made to enhance the offering to the customer. In order to facilitate this increased level of integration, service organizations are also increasing the level of communication between manufacturing and the rest of the organization (i.e., sales, service). Thirty-five percent (35%) of the Best-in-Class have improved communication between these aspects of the business, further enabling innovation in regard to changes to product design based on the knowledge gained from more customer-facing units of the organization (i.e., sales, service) by the manufacturing / design team. Increase visibility into the warranty chain and service contracts. Heightened visibility into workflows and processes is essential to providing all stakeholders with the insight into when things are working as they should or if it is time to make adjustments to improve efficiency. As seen in past Aberdeen research on the State of Service Management (September 2010), 50% of respondents indicated better data insight and analytics as the top organizational investment for In regard to warranties and service contracts, 42% of all organizations sampled have incorporated processes and solutions to improve visibility into the end-to-end warranty or contract lifecycle. Added visibility is an asset to decision making from a 'piece of mind' perspective for management, but it also provides key service / customer information to aid in strategy creation / implementation. Our service team has been successful in working cross functionally with many of the manufacturing, engineering, and support teams over the years. My assignment to the marketing team to create a strategic plan for service and warranty was the first major step to bridge the relationship between the service organization and sales/ marketing. The significance lies in the fact that we are actually spending time researching the space to create a strategy for profitability around it. ~ Manager, Large Global Consumer Durable Goods Company Overall, the metric that is most important to our organization when measuring warranty and service contract performance is cost of warranty failures for quality control. Also, [other important metrics are] the frequency of component/product failures during the warranty period to determine the reliability of the product [and] man hours to support warranty failures which adds to the overall cost of warranty. Resolution time to become fully operational is a measure of customer satisfaction and can improve customer retention. ~ Darrin Leahy, Business Development Manager Aftermarket - Parker Hannifin Manufacturing Ltd

10 Page 10 Automate warranty and contract processes. Technology can be a key to improving operations and remove costly errors in warranty and service contract delivery. Half of the Best-in-Class (50%) have implemented an early warning process to notify the organization of potential large scale product failures. Product failures of any extent have a negative impact on a number of areas; not least of which being customer satisfaction due to a defective unit, additional costs attached to replacing the product in the supply chain, and/or tying up resources (i.e., field tech, engineer) to fix the product. Therefore, it is important that checks be put in place to reduce the number of product failures to ensure that costs can be cut and the overall customer experience not be damaged. Also, over a third of the Best-in-Class (35%) have upgraded or purchased an automation tool for a portion of the warranty chain or service contract process to help speed the delivery of service and maximize the value of their offerings. Best-in-Class organizations are 17% more likely than all others to employ business analytic tools in relation to warranty and contract management (35% vs. 30%), with another 30% of the Best-in-Class looking to incorporate this level of analytical visibility in the future. These analytic tools will enable various stakeholders to gain further insight into the warranty workflow and performance of service contracts. The other tools used and processes that are currently automated to deliver warranties and contracts will be further discussed in Chapter Two. Aberdeen Insights The Future for Service Revenue The service organization has a number of ways that it can lead business transformation. Aberdeen's past research on the topic of the State of Service Management (September 2010) showed that revenue growth was the top goal for the CSO in The primary way in which organizations surveyed in this current 2011 warranty and contract management research are looking to begin the drive for increased revenue streams in the next 12 months is through the introduction of new service offerings for the customer (Figure 3). Forty-six percent (46%) of respondents see new service offerings (i.e., service contracts, extended warranties, non-contract related service) as a means to providing the organization with new revenues, but also see this as an opportunity to provide the customer with a variety of services that go beyond the initial product sale. When looking beyond new service offerings, organizations also target better contract management as a way to get a bigger portion of the revenue pie in the next 12 months. Thirty-seven percent (37%) of respondents are looking to improve both service contract attach and renewal rates in the coming months. Further highlighting the importance of better contract management, currently organizations sampled see a 26% contract attach rate at the point of sale. continued

11 Page 11 Aberdeen Insights The Future for Service Revenue But if they were able to increase the attach rate by only 5%, these organizations indicated that the increase in annual service revenue would be 10% higher. It is important to note, that the top two factors impacting the increase of contract attach rates as stated by the Best-in-Class are training for the sales force and having a dedicated sales force for service contracts (50% and 25% of the Best-in-Class, respectively). Ensuring that a sales force is in place to devote the right level of attention to customer needs thus creating an open channel of communication and feedback is the next step for top performing organizations. Not only must this line of communication be open, but it is integral that the sales team is adequately trained on warranties and service contracts to maximize cross-sell and up-sell opportunities as they become unearthed through customer conversations. Figure 3: Service Revenue Generation in the Next 12 Months We are currently implementing extended warranties on two of our product lines with a view to rolling this out to more product lines in the future. A customer isn't a customer until they have bought from you more than once, the aim of this program is to keep customers coming back by providing a service that adds value to the customers operation. ~ Darrin Leahy, Business Development Manager Aftermarket - Parker Hannifin Manufacturing Ltd Introduction of new service offerings (valueadded services) 46% Contract management (attach and renewal rates) 37% Service pricing and pricing optimization 35% Marketing and Promotion of service offerings (through service or via collaboration) 32% Cross-sell and up-sell of service offerings 29% 0% 10% 20% 30% 40% 50% Percent of Respondents, n = 146 Source: Aberdeen Group, September 2011 Beyond new service offerings and improving contract metrics of attach and renewal rates, service organizations have a number of ways to drive continued revenues to the business. In particular, service organizations, through pricing, promotions and cross-selling, are looking at identifying more revenues for the entire organization. Though not top two targets, these areas are added ways to drive increased revenues. Finding the right balance of offerings and price is key to increasing revenues from service. In the next chapter, we will see what the top performers are doing to achieve these gains.

12 Page 12 Chapter Two: Benchmarking Requirements for Success The transformation of the service organization into a profit center has become the accepted challenge for the Best-in-Class. Not only formalizing a path to drive revenue with warranties and service contracts but these organizations also maintain a keen eye on customer satisfaction. In turn, linking these two concerns, Best-in-Class organizations have trained their focus on the capabilities tied to increased collaboration, visibility and communication within the service organization. Case Study Stryker Stryker is one of the world s leading medical technology companies and is dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. The company offers a diverse array of innovative medical technologies, including reconstructive implants, medical and surgical equipment, and neurotechnology and spine products. Stryker serves customers globally with over 20,000 employees. In recent years, Stryker determined to transform its service organization to ensure the company could take great service to the field in every market served. As the company continued to grow rapidly and product lines became more diverse, so grew the need for heightened focus on service. Ron Simoes, Senior Service Manager at Stryker s Endoscopy division in San Jose, California said, You must first make sure that the internal process is capable of keeping up with the speed and quality that your customers expect and, of course, be scalable as your business grows. Without these key elements, your customers will look for better solutions from your competitors. In addition to the normal demands of providing world class service, Stryker had to maintain a keen focus on regulatory requirements tied to the medical device industry. To drive this initiative, Stryker focused on transforming service from a technology perspective. Service leaders built a business case in order to drive the needed internal changes that would provide the correct level of service and support for customers and products in the field. Stryker gradually increased the number of field technicians to service products in the field, as opposed to waiting for equipment to be shipped to a repair site and then returned to the customer. While technicians are out on a service call, mobile devices help ensure these techs have all the pertinent information necessary to resolve customer issues so hospitals are not forced to cancel medical procedures due to asset downtime. continued Fast Facts Performance of organizations with a dedicated team to manage warranties and product returns: 63% Customer Retention Rate 58% Warranty claims processed within SLA/accepted timeline Performance of organizations without a dedicated team to manage warranties and product returns: 54% Customer Retention Rate 34% Warranty claims processed within SLA/accepted timeline

13 Page 13 Case Study Stryker Stryker has also transformed their knowledgebase and internal processes to allow field-based techs the ability to review warranty entitlements on each service job. Not only did Stryker add field service technicians to manage field operations with added capabilities, but the company also ensured that internally the service organization was integrated with other aspects of the business. According to Drew Shubel, Director of Technical Services for Stryker Europe, One goal is excellent integration with sales, marketing, and engineering to ensure products not only meet customer needs, but are also easily maintained to help minimize total cost of ownership. Taking advantage of our increased capacity in field services, we are able to collect more field based information and have a greater impact on product improvements. The global service transformation is still in progress at Stryker, but it is having a measurable, positive impact in a number of areas. Stryker has been able to achieve improvements in customer engagement thanks to improved service performance. Besides improving customer satisfaction over the past couple of years, the company has also been able to improve repair turn times as much as 50% and dramatically decrease customer downtime. As Stryker continues down the path of service transformation, the company is investing in ERP upgrades as well as significantly improving and expanding CRM tools. These investments, combined with more skilled technicians in the field, will allow for enhanced service offerings and ultimately increase service contract attach rates. Stryker leads with quality, a customer first attitude, and innovation. Competitive Assessment Aberdeen Group analyzed the aggregate metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels (Table 2), each class also shared characteristics in five key categories: (1) process (the approaches taken to execute daily service operations in regard to warranty and contract management); (2) organization (corporate focus and collaboration among stakeholders in regard to efficiently managing warranties and service contracts); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of the appropriate tools and the effective deployment of those tools in regard to warranty and service contract management); and (5) performance management (the ability of the organization to measure its results to improve its business tied to service operations). These characteristics (identified in Table 5) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics.

14 Page 14 Table 5: The Competitive Framework Process Organization Knowledge Technology Performance Best-in-Class Average Laggards Manufacturing/design teams periodically review warranty data to improve product quality: 54% 44% 33% Early warning process in place to alert management to possible large scale and / or systemic product failures: 50% 32% 29% Dedicated team to manage end-to-end workflow process in place to handle warranty claims and product returns: 69% 48% 40% Sales force in place to sell warranties and contracts: 69% 49% 38% Centralized data warehouse for product performance and warranty / service contract information: 65% 41% 36% Warranty operational and financial information delivered to all relevant stakeholders: 54% 47% 27% Fully Automated Warranty Chain Processes: 38% Warranty Claim Tracking 31% Warranty Claim Registration 27% Warranty Claim Closure 25% Warranty Claim Tracking 21% Warranty Claim Registration 23% Warranty Claim Closure 18% Warranty Claim Tracking 29% Warranty Claim Registration 20% Warranty Claim Closure Contract Management Solution: 35% 31% 16% Visibility for sales force into warranty and service contract sales performance: 50% 31% 22% Tracking contract renewal rate by: 73% Product 58% Asset 50% Customer Segment 55% Product 32% Asset 28% Customer Segment 51% Product 18% Asset 27% Customer Segment Capabilities and Enablers Source: Aberdeen Group, September 2011 The Competitive Framework (Table 4) highlights that Best-in-Class performance is not a result of one factor but in fact the aggregation of a variety of internal capabilities and automation processes, as described in the sections to follow.

15 Page 15 Process Best-in-Class organizations have enabled their stakeholders with visibility and insight into warranty and contract management operations. Understanding how to reach this goal of heightened visibility is the key to reaching and maintaining top performance. In order to improve product quality, one of the top goals for service organizations, the Best-in-Class are 35% more likely than all others to have a periodic review by their manufacturing and design teams of warranty data to improve product quality. Providing this level of oversight from teams that can re-engineer a product based on spikes in returns allows for continuous opportunities to improve the product offering. In order to add this level of visibility into the warranty workflow, checks and alerts are necessary to warn management and stakeholders of impending (potentially catastrophic) issues. To this point, the Best-in-Class are 62% more likely than all others to have an early warning process in place to alert management to potential large scale or systemic product failures. The earlier the warning of a future product failure, the better prepared the entire service chain can be in ensuring that replacement units / parts can be stocked in inventory, and thus speed the time to eventual issue resolution for the customer. Service Parts Logistics 2011: Driving Improved Service Performance via Tighter Integration (May 2011) showed that 63% of organizations delivery timelines shrunk in regard to customer expectations further highlighting the need to have a high level of visibility into parts and potential failures. This alert system will also allow the service organization to stock the appropriate amount of inventory as management will have a heightened level of visibility into future demand and stresses on the supply chain. Organization In order to boost service revenue, one way the Best-in-Class have formalized their approach has been to implement a dedicated team to manage this aspect of the service operations (69% vs. 45% for all others). Having one point / team of contact responsible for the warranty operations streamlines oversight and ensures that efforts are not duplicated throughout the warranty and return chain, therefore allowing for the service organization to reallocate resources to areas of pressing need. With a dedicated team in place to manage warranties, it is then important to have a sales force to actually sell this new focus of the service organization. The Best-in-Class are 53% more likely than all others to have a sales force in place to sell contracts and warranties, ensuring that a knowledgeable sales force can accurately and effectively communicate the benefits and value of warranties and service contracts. Not only is a sales force important in the initial sale of the contract or service, but this team is integral in ensuring that all cross-sell and up-sell opportunities are maximized throughout the lifecycle of the customer (see sidebar on next page). "Succeeding during the warranty period is the best way to secure a maintenance contract. To perform excellence during warranty you need a good combination of: customer contact, technical support (remote and on-site) plus good spare parts logistics; the very same ingredient is require to succeed during the contract." ~ Philippe Audon EVP / SVP Customer Service IBA When a product fails in service it is often a great opportunity to show just how good your service operation is, if you recover well from these occurrences a customer is more inclined to keep buying from you. The cost of keeping customers is approximately 15% less than trying to find new ones so a well run warranty and contract management operation is a key differentiator and helps towards controlling costs. ~ Darrin Leahy, Business Development Manager Aftermarket - Parker Hannifin Manufacturing Ltd

16 Page 16 Percent of Respondents, n = 146 Establishing even greater importance on having a sales team, 77% of the Best-in-Class sell contracts through their service sales team (Figure 4). Fiftyeight percent (58%) of the Best-in-Class sell service contracts through their product sales team. These two sales teams account for the 'front line of offense' when it relates to service contract revenues. Figure 4: Who Sells Service (Contracts)? 100% 80% 60% 40% 20% 0% 77% 56% 58% 58% Service sales team Product sales team Best-in-Class 42% 36% Customer service representatives All Others 26% 19% Dealer network 4% 8% Outsourced partner Note: Respondents asked to select all that apply. Source: Aberdeen Group, September 2011 The role of a dedicated sales force tasked with maintaining relationships and ensuring that the customer is valued is made even more imperative to the success of this channel when looking at the factors of greatest impact to increased service contract sales. Fifty-five percent (55%) of respondents indicated that the customer relationship and trust have the greatest impact on additional sales opportunities (Figure 5). Research Facts: Organizations with a dedicated sales team: Percent of Service Revenue Under Contract - 44% Year-over-year improvement in Total Service Revenue - 8% Year-over-year improvement in Service Revenue from Existing Customers - 6% Organizations without a dedicated sales team: Percent of Service Revenue Under Contract - 32% Year-over-year improvement in Total Service Revenue - 6% Year-over-year improvement in Service Revenue from Existing Customers - 4% Figure 5: Factors to Sell (More) Extended Warranties Percent of Respondents, n = % 40% 20% 0% 55% Customer relationship / trust 45% Warranty price / cost 34% Providing incentives to sales team 14% Advanced customer data / insight 11% Senior leadership visibility into extended warranties sales performance Source: Aberdeen Group, September 2011

17 Page 17 No longer is price the sole determining factor when it comes to valueadded services for the customer. Relationships and the customer's need for a level of trust with the service organization is now what drive success. Price and cost will always play a role as both the customer and the service organization need to manage their bottom line, but other factors have come to the forefront in this exchange. Knowledge Management Access to better, more actionable information empowers stakeholders throughout the organization to proactively manage the warranty chain and make timely decisions in the delivery / renewal of service contracts. Almost two-thirds (65%) of the Best-in-Class have a centralized data warehouse for product performance and warranty / service contract information as compared to 39% of all others. Organizations that have a centralized data warehouse process 60% of claims within SLA timelines as compared to only 39% for those organizations without. Meeting and exceeding customer expectations is a way that the Best-in-Class lead the way in regard to delivering the appropriate levels of service / support to retain valued customers. In conjunction with storing service information in a centralized data warehouse, the Best-in-Class are 39% more likely that all others to deliver this information to all relevant stakeholders. The key to the use of this data is that it is both timely and accurate, as seen in previous Aberdeen research on Service Intelligence (April 2011) in which 91% of respondents indicated that these two factors were 'important' or 'very important' to the financial and operational success of the business. Ensuring that sales, engineering, design teams, and management have the 'right' information to adjust the product or service to the customer will enhance the customer experience and in turn drive increased revenues. In order to improve revenue opportunities in regard to warranties and service contracts the first step taken was to let the factory know the statistics of the problems we have had, so in this way they can try to correct them in factory. ~ General Manager Field Service, Small North American Computer Equipment, Hardware and Peripherals Company Technology Best-in-Class service organizations excel at linking automation with processes to create an efficient service chain, and when it comes to automated processes they outperform all other organizations in their level of fully-automated warranty processes. The Best-in-Class are 65% more likely than all others to have fully automated warranty claim tracking (38% vs. 23%) (Figure 6). Having insight into a warranty claim in real or near-real time allows service organizations the ability to begin the resolution process. Also, incorporating a level of automation in this process creates a validation checkpoint to 'weed out' costly (and time-consuming) false claims. These two factors lead directly back to the concerns of lowering warranty costs and speeding time to issue resolution in order to create this valuable customer experience. Top-performing organizations do not stop there; they continue to fully automate more processes within the warranty workflow than their counterparts.

18 Page 18 Figure 6: The Fully-Automated Warranty Chain Percent of Respondents, n = % 30% 20% 10% 0% 38% Best-in-Class All Others 31% 27% 27% 23% 24% 23% 22% Warranty claim Warranty claim Warranty claim Warranty claim tracking registration creation closure The steps our organization is prioritizing in the near future to improve performance is to measure, benchmark and [implement] improvement programs plus accountability (including suppliers). ~ Kim Hwa Choo, Acting AP Services Director/AP Services Marketing Manager Asia Pacific Services - Ingersoll Rand Source: Aberdeen Group, September 2011 Fully-automating all processes is not the path for all organizations. However, as seen earlier, currently over a third (35%) of Best-in-Class organizations have purchased or upgraded technology solution to automate at least a portion of their warranty process (Table 4). Performance Management As stated earlier, the Best-in-Class excel not only in a number of key metrics but also in key capabilities tied to performance. The Best-in-Class have formulated an organizational structure that has both a dedicated team managing the warranty and service contract process but also have created sales teams to increase the focus on the sale of service contracts and warranties. The Best-in-Class do not stop here; top-performing organizations are also 79% more likely than all others to provide visibility for the sales force into warranty and service contract sales performance (50% vs. 28%, respectively). Insight into sales performance allows the sales force to tweak methods / tactics while also focusing on top selling products that better serve the needs of a particular customer segment. The need to provide enhanced visibility for the sales staff into warranties and service contracts has led organizations to expand the scope of tracking beyond just the product. Products are still the most tracked when it comes to service contract renewals (57% of respondents) (Figure 7). Metrics Measured (Top Five) Total Warranty Expenditure Customer Satisfaction Warranty Costs per Product Warranty Incidents per Product In-warranty Product Return Rate

19 Page 19 Figure 7: Tracking Service Contract Renewals Percent of Respondents, n = % 60% 40% 20% 0% Yes No, but plans to track in the future 14% 15% 21% 22% 57% 21% 32% 32% 29% 21% Product Asset Customer Sales Channel Segment Channel Partner Source: Aberdeen Group, September 2011 However, service organizations are now beginning to track contract renewals for assets, individual customer segments, sales channels and channel partners. All of this information has enabled both the sales team and management to better predict revenue from contract renewals. Once again this added insight becomes a prime proactive alert for the sales team to identify opportunities to cross- and up-sell complimentary services and products. Aberdeen Insights Technology As more service organizations see a reduction in customer growth (Figure 1), the focus of streamlining internal processes to provide a better overall customer experience will continue to rise within the mindset of the organization. Automation of difficult processes can help remove human error and redundancies from the equation of the service workflow. Tabbed with reducing costs, speeding time to issue resolution and increasing total service revenue, organizations are beginning to look to increased levels of automation to outperform their peers. continued

20 Page 20 Aberdeen Insights Technology As seen earlier in Chapter One, Best-in-Class organizations have targeted automation of at least a portion of the warranty chain and contract management to improve business metrics (Table 4). Table 6: Automation of Key Workflows Improve KPI Impact on KPI Warranty claims processed within SLA / accepted timeline Warranty costs as a percent of total service operational costs Increase in Total Service Revenue in the previous 12 months Percent of Respondents, n = 146 Automate Portions of the Warranty and Service Contracts Workflow Don t Automate Portions of the Warranty and Service Contracts Workflow 60% 45% 13% 15% 9% 6% Source: Aberdeen Group, September 2011 Automation of key processes is not the sole driver of success, but it can be a major factor. As organizations continue to make processes more efficient by taking out errors and false claims from the warranty and service contract workflow gains will be seen in key metrics that are top of mind for management and the end customer (Table 6).

21 Page 21 Chapter Three: Required Actions Whether a company is trying to improve its service performance in regard to warranty and contract management from Laggard to Industry Average, or to Best-in-Class, the following actions will help spur the necessary performance improvements: Laggard Steps to Success Establish a dedicated team to manage the warranty claim and product return process. An increased focus on the warranty chain must come from the top of the organization. In order to solidify the importance of this channel, both for improved customer service and revenue gains, resources need to be secured to effectively transform the warranty process. Only 40% of Laggard organizations currently have a dedicated team in place to manage the warranty claim process as compared to 48% of Industry Average organizations. With the revenue impact detailed earlier on increases in warranty chain efficiencies, it is important the service organization provide their teams with the resources and mandate to streamline the warranty and return process. Provide warranty operational and financial information to relevant stakeholders. Information is one of the first steps necessary to make (informed) decisions. The next step is ensuring that the right people are getting the right information in a timely manner to make and execute on those decisions. Only 27% of Laggard organizations provide warranty operational and financial information to stakeholders that have the need for this data as compared to 47% of Industry Average organizations. Without this information it is difficult to imagine how these stakeholders will be able to improve processes tied to warranties or better tailor service contracts to match the needs of the customer. Fast Facts 62% of Best-in-Class organizations structure the warranty and contract management organization in order to integrate with all service functions (i.e., sales, service) when compared to 44% of Laggards 7% of Laggards service organizations don't track when service contracts are sold by their organization compared to 0% of Best-in- Class organizations 50% of the Best-in-Class incentivize their sales force to cross-sell and up-sell warranties and service contracts compared to a 28% performance for Industry Average organizations Industry Average Steps to Success Integrate the warranty and contract organization with service functions. Collaboration and information exchange throughout the organization in regard to warranties and service contracts is a top differentiator for top performing companies. Tying the success of the entire organization together to ensure the products are improved and the service provided to the customer is elevated to a high standard must be the goal for the all parties within the organization. Best-in-Class organizations are 17% more likely than the Industry Average to have this level of integration between the warranty / contract organization and service functions (62% vs. 53%). With the top driver for future revenue generation being new service offerings (Figure 3), it is important that the

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