Waging War Against Service Abuse

Ram Manchi, president of the Alliance for Gray Market and Counterfeit Abatement & Peter Hlavnicka, Treasurer AGMA, explain how warranty and service abuse hurts sales and what can be done about it.

Most business leaders are at least familiar with the eroding effects of gray market, counterfeiting, and intellectual property theft. Not so many may be aware of another very potent threat - warranty and service abuse.

Warranty and service abuse can be defined as the unauthorized use of warranty, service and support. It is acquisition of product replacements, utilization of support or software without proper entitlement and often through a fraud.

Beyond the preventable revenue loss and swelling costs caused by the abuse of warranty and services, additional damage is inflicted on reputation and brand appreciation as well as to authorized business partners that now compete with businesses, groups or individuals who are unethical and use various fraudulent schemes to gain an unfair advantage.

Absence of countermeasures can cause a chain reaction that can destabilize businesses - and entire industries. Companies that counter these threats can generate enormous savings and create additional and enduring value for their business and customers.

In basic terms, warranty and service abuse refers to exploitation of services to obtain replacement products which the recipient is not entitled to or not covered for. The abuse can be simple (expired service plan) or very complex.

A costly proposition

Overall, warranty and service abuse cost businesses billions of dollars each year, according to the information gathered by PricewaterhouseCoopers (PwC) in the course of their study “Service with a smile: Effectively managing the billion dollar product support abuse threat”. The effects of service abuse have grown in importance over the last few years, according to nearly all respondents to the PwC survey.

Warranty and service fraud cases typically involve false or invalid warranty claims for the purpose of obtaining products subsequently resold on the gray or open market, false payments and credits claims for services not performed, or use of false identity or account information and falsified customer information.

The consequences of warranty and service abuse, besides loss of revenue and increased gray market activity, include decline in customer confidence and company reputation, preventable service costs, and increased R&D costs. The total cost of service abuse is difficult to quantify. Moreover, impacts to brand reputation, customer service, intellectual property, and other less tangible or quantifiable assets further complicate total loss estimates.

Impact on profitability

Service abuse can impact a company's profitability in a number of ways:

-- Under-coverage arises when a customer purchases a smaller number of service contracts or a contract that covers a specific quantity of products and attempts to overuse that coverage on more products without the same level of coverage.

-- Non-returns are the most common service abuse scam, and a significant source of gray marketing. Fraudsters submit requests for replacement products on existing service contracts (Return Merchandise Authorizations “RMA”), acquiring an inventory of product for free, and not returning anything, or returning different products, scrap, counterfeits, or unrelated items.

-- Service abuse also affects software, where poorly controlled web-enabled services can be exploited. For example, a company may purchase a software service agreement for one piece of software to gain system access, and download additional software for which no license has been purchased.

-- Third-party service providers buy a small number of valid service contracts and re-sell their own service agreement to several customers. Knowledgeable of the coverage and an OEM’s ability to identify and track the entitlement, they submit claims for the service work done on products that are not covered by service plans.

-- Just-In-Time coverage or purchase of service contracts after the product becomes defective and instantly claiming a service replacement.

Companies with broad service offerings should deploy internal controls and other detection mechanisms to prevent and detect abuse. Any successful protection program needs to be supported by three fundamental pillars – Discovery, Investigation, and Remedy.

Participation at the executive level is essential in getting the programs off the ground and sustaining them. It is critical to have clear short-term and long-term objectives supported by well defined deliverables and P&L statements.

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