Combating Questionable Warranty Claims With Data Analysis

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One of the least publicized but most expensive hidden costs within the consumer electronics industry is the abuse of service warranties.

In a tough economy in which claims have steadily escalated, and amid fierce competition and tight margins, no one can afford to pay for false warranty claims, but unfortunately virtually every company does. Service warranty fraud in CE is a quiet crisis, a problem badly in need of renewed focus and new tools.

For example, mobile device makers already spend nearly $15 billion annually on warranties, amounting to between 2 percent and 3.5 percent of their overall revenue. That’s money most companies willingly spend to maintain strong, positive relationships with customers. That same openness, though, can make fraud detection very difficult, and the resulting waste can be devastating. From hours lost recouping money when fraud is detected late, to time spent by network engineers to prevent abuse in the first place, it puts a severe strain on businesses that need to build customer loyalty, but also need to protect themselves from abuse.

While warranty repairs can be handled by a variety of providers ranging from extended-service- contract companies to retailers and manufacturers with servicing capabilities, CE warranty fraud in the U.S. is largely limited to the smaller independent servicers that handle returns. Typically, manufacturers pay these service providers based on the volume of claims they file. Unfortunately in today’s economic environment, some of these companies are tempted to take advantage of the system in order to increase their repair profits in what is essentially a low-margin business.

They do this in a variety of ways, such as reusing device serial numbers, bypassing or hacking device detectors in service software, failing to return modules or spare parts to the manufacturer, overstating repair expenses, or using fake proof-of-purchases to claim devices that are outside the equipment master warranty period.

To help uncover and prevent such fraud, IBM has launched a pilot program with a CE manufacturer that uses sophisticated analytics to detect warranty abuses. The program, which will be followed by wider rollouts later this year, is based on IBM’s Fraud Abuse Management System (FAMS), which is already being used to help the medical insurance industry combat fraudulent clams, and by governments to zero in on tax cheats.

The system compares service providers in a specific specialty and geography to determine which ones may be behaving oddly. Through this analysis of incoming warranty claims, the system finds patterns and suspicious behavior that can be an indication of fraud or abuse.

The ability to glean insights from oceans of data can help CE companies reduce the risk of warranty fraud. Such advances in computational power and algorithmic modeling are providing new ways to see who is up to old tricks, and who may be inventing new ones.

Shaun Barry heads IBM’s Global Business Services Fraud and Risk Management practice, and can be reached at shbarry@us.ibm.com.

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