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The Ins of Outsourcing Warranty Administration


Letting someone else process warranty claims can ease the burden on a fixed ops department.

By Tyler Nathan

March 2007 Fixed Ops Magazine p. 26

It could come down to a matter of survival. Now more than ever in today\\\'s business world, we need to investigate all avenues thoroughly and secure all revenues due to our companies. There is no good reason to continue to try to do something you know little about in house when you can outsource it to professionals at less expense and for larger returns; Warranty Administration is exactly that.

Since the late 1990s, many of the nation\\\'s more successful companies have been improving processes and profitability by determining their key business functions and focusing on them. They found that by eliminating and outsourcing certain skilled processes, they became more focused on key profit-related tasks and were better able to react to market changes. The service department in any dealership is an incredibly complex business that combines technical procedures and processes, building customer relations and trust, as well as relations with the manufacturer.

This situation creates the necessity for great care and attention from management and has four key elements:

  • A good shop needs qualified professional technicians to quickly diagnose, isolate and make repairs. To keep up with the continually changing automobiles of today, the service department must hire and train competent personnel, schedule ongoing technical training, and make available technical bulletins and information.
  • In order to remain competitive, a dealer must keep those high-cost, hard-to-find employees producing consistent billable hours. Each repair is different, and profit will vary considerably depending on whether or not you have the right tech on the job. Techniques for keeping the shop-loaded range from performance-related pay plans to complex scheduling systems.
  • Service sales are just as complicated. Customers rarely understand the complexities of the procedures, the necessity of maintenance and the costliness of repairs. The mechanics may service the vehicle perfectly and the dealership may charge the customer fairly, but it does little good unless the communication process leaves the customer feeling satisfied.
  • There is the biggest customer of the service department - the manufacturer. The manufacturer does not pay for incorrect repairs, and unusual warranty trends will most likely lead to costly audits. In the manufacturers\\\' constant pursuit of monitoring and lowering warranty expense, they have created sophisticated systems to track and manage warranty expenses. Unfortunately for the dealer, the cost of administering those systems has been transferred to the service department.

In summary, this adds up to a very complicated, high-maintenance business that can quickly end up in the red. Most good managers know that finding and keeping qualified mechanics, loading the shop with work, handling customers, and managing relations with the manufacturer are the four key elements of service. This is where a quality warranty administration service can be an excellent tool to reduce distractions and help service focus on those very key elements.

Inside jobs

Many times the in-house warranty administrator becomes far more knowledgeable about warranty submission than the service manager, creating the impression that the administrator\\\'s work does not need to be reviewed by the manager. This leads to two major mistakes. The first is the assumption that the warranty schedule is the only indicator that a warranty administrator is doing his or her job well. Watching the schedule will help a dealer avoid painful, out-of-date warranty write-offs, but it does nothing to avoid audit liability or missed opportunities due to omissions in the closing of the claims.

During in-house warranty reviews, it is common for a quality claims processing service to find that well over 2 percent of a dealer\\\'s total warranty revenue was missed due to lack of submission, and that an additional 15 percent is likely to be reversed in an audit. That\\\'s practically 20 percent of your warranty dollars at high risk! Based on these numbers, for a dealer collecting $100,000 per month in warranty revenue, being audited would mean an annual loss of $168,000 (using one popular IRS-approved extrapolation method).

To avoid these pitfalls, the manager must review a portion of the claims on a frequent basis, or periodically hire a third party to review samples of claims. This takes valuable time and attention away from daily managerial focus and tasks.

The second major mistake is to empower the warranty administrator with the ability to make journal entries to the warranty schedule. This may seem efficient, but it is extremely negligent. For example, one dealership actually had its warranty administrator journal away out-of-date unpaid claims with credits from current paid claims. Needless to say, this eventually caught up with the individual. It cost the dealership thousands of dollars and damaged the trust between the dealer and the manufacturer-and no one can put a price on that.

One might ask: Why all the fuss over warranty administration? Who cares if I miss a little, or if the manufacturer charges back a few claims? The truth is, depending on the make of vehicles you service, warranty could be as much as 50 percent of your total sales in your service department. Considering that a many shops profit only 2 percent annually, these losses could be the difference between black and red on a financial statement.

Maintaining control

When you outsource your claims to a company that uses an Internet scanner, the company will not have to ask for them again because they will always be on file.

A large warranty processing staff is a definite must. Or you could end up with the same situation you face handling them in house. And be sure that the people processing your claims are mechanically knowledgeable.

Good communication is essential. Just as when you hire an individual for your team, you must let the company know about any of your \\\"hot spots\\\" that you expect them to watch out for, such as straight-time claiming, payroll deadlines or repair restrictions, just to name a few.

Management reports are another plus that a good warranty administration company offers. This can allow you to see via the Web what is going on while the claim is in process.

Other things to look for:

Warranty trend review: Be sure the company regularly gets a copy of your warranty trends and reviews it with your service management.

Follow-up: Following up on unpaid claims and assisting in warranty schedule clean-up through electronic data made available via Internet.

Innovation: How is the company working to continue the quality of its service in the future?

Stop putting out fires and start preventing them. Consider how much better your bottom line could be if you spent more of your time and resources on building those four key elements of service.

Tyler Nathan is vice president of Warranty Processing Inc.