WHITE PAPER: Warranty Self-Administration — Why a Cost-Reduction Focus Costs MoreAugust 18, 2015
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It is certainly a common practice (and desire) among builders to want to control costs relating to warranty administration. Some believe the best path to savings is through in-house administration as it eliminates dependence on external partners, providing greater control and efficiency through direct program oversight. Others, in the majority, prefer an outsourced model as it preserves third-party servicing and reputational credibility and does not require additional staff and infrastructure investments. The real question is: which provides the most beneficial and cost effective solution for builders?
In our experience, a focus primarily on cost reduction for warranty administration ultimately costs more long-term – not just in dollars expended but in business consequences that can negatively impact a builder’s overall strategy, market position and product sales.
Regardless of the approach, it is critical this service be performed in the most expeditious and cost effective manner possible. To ensure the best outcome for both the builder and its home buyers, it requires consideration (and mitigation) of several risk factors – besides cost – when evaluating warranty administration models including: (1) reputational risk; (2) litigation and regulatory risk; (3) personnel and management risk; and (4) technology and infrastructure risk.
Will homeowners believe they will be able to obtain a fair and unbiased resolution to issues and/or complaints via a self-administered warranty program? If not, where do they go and what do they do?
What is the potential cost to the business if there is an increase in homeowners publicly expressing their frustrations to neighbors, friends and colleagues?
How prepared are you to manage negative social media posts which may result due to homeowners feeling they are not being heard and treated fairly?
What is the monetization of these issues in terms of your market reputation?
Litigation and Regulatory Risk
What if plaintiffs’ attorneys see an increased opportunity for litigation?
What if a court finds that the process to resolve issues and complaints is unfavorable to the homeowner and biased for the builder?
What happens if mandatory binding arbitration is not required or not enforceable?
What is the totality of the financial risk/exposure (i.e. increasing in-house legal resources, external attorney fees, settlement costs, etc.) for defending the company and its warranty administration processes?
How much legal time and effort will be required to develop a warranty for each state in which the builder operates, making sure that it is consistent with any specific judicial, legislative or jurisdictional requirements?
How much effort (time, money, and people) will be required to consistently monitor activities in each state to ensure that the warranty document remains compliant and reflects the latest judicial and legislative landscape, decisions and trends?
Personnel and Management Risk
Are all of the necessary functions required to bring warranty administration in-house understood and do you have personnel available with the requisite expertise?
How can existing staff handle all of the additional responsibilities associated with warranty self-administration in addition to their current tasks if they are currently fully utilized?
What additional training is required on alternative dispute resolution for in-house staff and what will it cost?
Who will manage the warranty self-administration transition and process going forward, what will their salary, benefits, and other costs be, and are you diverting potential revenue generators/protectors to a cost center?
How difficult will it be to control and manage personnel and related costs associated with self-administration?
Technology and Infrastructure Risk
Are the technology and infrastructure specifications/requirements for creating and maintaining a self-administered warranty program defined and clearly understood?
What is the process, timeline, and cost for developing a system to track: (1) every homeowner (and subsequent homeowner); (2) the type of financing, sales price and all warranty related documents/addendums provided to homeowners (including state specific information); (3) all subsequent contacts with homeowners and the nature of those contacts; and (4) the resolution process including information requests, complaints/issues and arbitrations?
Warranty Administration Cost Savings Analysis
The decision to self-administer or outsource a warranty administration program requires evaluation of several financial, reputational, organizational and technology factors (as the aforementioned considerations demonstrate) – with each contributing significantly to the true cost of administration. In our experience, companies who have conducted a comprehensive analysis ultimately determine outsourcing better protects their bottom line and mitigates risk.
For those who still wish to evaluate primarily on the basis of cost, the areas of costs that should be addressed are additional required personnel related costs for staff and management, including salaries, benefits, payroll taxes, space and supply, equipment, and training, along with legal and information technology costs. Recognize that these costs, especially personnel costs, are variable and may be more difficult to manage and control. It is unlikely that a builder would consider warranty administration to be a core competency, although customer service is involved. If that is the case, then why would a builder want to devote time, effort, and money to doing this? Warranty administration extends beyond standard customer service into the area of alternative dispute resolution, and these skills are something that are acquired over time with significant investment in training and experience. You would also find that the information technology requirements relating to warranty administration are much more in depth and complicated than it may appear and would require the internal creation of a software system or substantial customization of some sort of relationship based software product. The variability of in-house program administration costs are eliminated via an all-inclusive fee structure which remains constant regardless of the number of homes sold. The third-party costs are predictable and allow for the greater cost control builders desire.
While there will most likely be other issues and/or considerations unique to each builder that will need to be addressed, third-party providers have been performing warranty administration successfully for many years, understand all of the issues associated with this process, and have the experienced staff, support systems and proven track record to address them in the most operationally efficient and cost effective manner possible.
By Gale F. Sommers
PWSC, President & CEO
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