Improve warranty program financial performance: uncover excess costs, hidden profits and next steps

If an external administrator runs your warranty program, your organization could be funding its margin without seeing it clearly. While there may be no cause for concern, but when the people who report the numbers on profits, costs and pricing also control how you see them, issues can creep in unnoticed.

What happens if you were to treat warranty administration more like any other spend or procurement arrangement? This article shows you that by empowering CFOs with analytics and setting a review cycle characterized by analytically driven questions, clear definitions and KPIs, you can stay in the driving seat of program profitability.

What questions should CFOs ask themselves to stop warranty profit leakage?

The first step is to understand the depth of your analytical view on your warranty program. That’s because having detailed analysis, taking your program beyond a spreadsheet to a deeper analysis, is the only way you can be sure there are no blind spots where profits can leak.

For example, if your administrator groups products together through aggregate analysis, they could be overlooking segments that are undermining the overall financial performance of your warranty program.

Ask yourself these key questions:

• Do you know what your administrator earns and what drives its margins across specific segments?
• Do you have an analytical view on your program’s exposures and associated product maintenance and repair costs?
• Can you reconcile sales, claims, fees, reserves and profit share in one analytical reporting view?

On top of these questions, you’ll also want to challenge yourself on whether you know the market norm for administrator fees and profit shares for a program like yours. You need to be confident that you understand the clauses that define your external administrator’s fees, profit share and allowable costs.

Once you have an idea of what you do and don’t know on program profitability and the activities of your administrators, you’ll be prepared to review what your administrator charges and delivers.

What questions can uncover profit leakage from warranty program administrators?

As a CFO, you should not accept the headlines, but push for numbers across segments and clearly defined expectations for continual improvement.

Your core questions to warranty program managers and administrators include:

• How much profit do you take from our program each year in total and by segment?
• Where in the contract do you define fees, profit share and allowable costs and how did that apply in our last reporting cycle?
• What five changes could you deliver to improve margin or reduce expenses, and how would you expect the numbers to move?

How do you review a legacy arrangement with a warranty program administrator?

We understand you may have inherited a program administration contract and could face challenges in unwinding long-term contracts. But when you still own the outcome, you’ll want to lead routine financial hygiene and look for ways to improve performance.

Some practical tactics to make this happen include asking your administrator for a detailed, analytical reporting standard pack that includes monthly reconciliations informed by agreed definitions.

Getting a fixed, quarterly rhythm for pricing and reserving reviews can help you here, as can benchmark checks for fees and profit share, plus setting KPIs and continual improvement expectations.

By re-establishing governance and accountability around your warranty program, whether you’ve outsourced warranty administration or not, you can keep more value inside your business and cut the chances of unpleasant surprises.

Need a second opinion on your warranty program’s profitability? Get in touch with our warranty analytics specialists.