Warranty issues create new business opportunities

Warranty issues create new business opportunities

While the recent decision by three hard drive manufacturers to slash the warranty period for their desktop models may have upset a lot of resellers, for one group of companies it provides a new business proposition.

Third-party warranty suppliers are warming up to the opportunity to convince resellers that there are considerable revenues to be earned from offering extended warranties as a value-add to their machines.

These companies, generally underwritten by insurance companies, sign up thousands of resellers around the country who offer their warranty service when selling IT equipment. Most of the warranty suppliers then contract "premium dealer" companies to carry out any repair and services work that is required over the life of these warranties.

"There is a great opportunity for us to go to the reseller market," said Tim Mackenzie of EBS Consulting, a group that runs a computer reseller warranty business called IT Asset Care. "Their customers are looking for extended warranties, and the reseller if looking for a good way to raise margins."

Mackenzie believes resellers have an even better selling point for making these margins when manufacturers reduce their warranties.

Alan Brewis, director of Warranty Assistance Australia, said that the various components of the PC all have different warranty periods and conditions and paint a complicated picture for the consumer. Offering an extended two or three-year warranty through a third-party warranty provider, he said, is an opportunity for resellers to simplify the process and give their customers peace of mind.

While the growing reliability of computer components has not prevented hard drive manufacturers from reducing their warranties, third-party warranty providers are finding it can help them reduce their costs. "We have reduced our prices as of October 1," said Rolf Latzel, general manager of United Electrical Engineering. "We have been keeping tabs on the call rates we have been getting, and computer reliability on the whole is going up. We can absorb the hard drive manufacturer's warranty."

While market forces are making their offerings look all the more attractive, many resellers are still cautious about dealing with third-party warranty suppliers. The Australian IT channel has an ugly history of such companies dropping out of business, leaving resellers liable for their customers' warranties. Many in the IT channel continue to be cagey after being burnt by the failures of the likes of Warranty Works and Australia Wide Warranties.

There are several ways in which the surviving warranty companies are addressing this lack of confidence. The most obvious point they will advertise is whether they are underwritten by a credible insurance company. But even within this point of assurance there are issues and warning signs to watch out for. "Many of the guys that did fall over advertised that they were underwritten by an insurance company," said Mackenzie. "But that was only for their business, not for each policy."

Resellers also have to be careful about what other businesses their warranty provider is covering. It could be said in the case of several failed warranty businesses that their downfall has much less to do with some kind of scam, but simply that some of their more important customers fell over and dragged them down. It is known that the collapsed Z-Tek Computer business created considerable financial difficulties for Warranty Works just prior to it being pushed out of business.

United Electrical Engineering has come up with two ways of alleviating these concerns. UEE has decided to limit its exposure to resellers, wholesalers and manufacturers that have breakdown rates below 20 per cent. If any particular customer has a breakdown rate of any higher, UEE makes enquiries about quality control issues and if the situation does not improve, it will simply not cover the company any longer. "It's an insurance policy game," said Latzel. "If everything runs well, we all make a good quid out of it."

The warranty company offers small surge suppressors with every warranty it sells and claims this decision alone has resulted in 85 per cent fewer claims.

UEE has also organised trust accounts with several of its most valuable customers. Rather than pay upfront for a three-year warranty, it sets up trust accounts with two signatories: a representative from both UEE and its reseller customer. At the beginning of the warranty, UEE can draw 12 months worth, then at the 13th month take another third, and again at the 25th month and so on.

"If either we, the warranty provider or the reseller goes bust, the survivors get the rest of the money," Latzel said. "It's not just about protecting the reseller if we fall over, but also protecting us if they do," he said. "It's a two way street."

Tips for choosing a third-party warranty supplier* Make sure each individual policy is underwritten by a large, or several large, reputable authorised insurance companies.

* Be suspicious of any supplier that cannot provide you with a wealth of information on who their underwriters are and whether the policy itself is covered.

* Ensure that the name of the insurance company or companies involved is printed on each individual policy form.

* Check which companies will be contracted to carry out the repair and services work. Ensure you are not sending business to one of your closest competitors.

* Look for reputable businesses that have been in the market for several years.

* Choose a supplier that has checks and balances in place to ensure that their own business is not at risk by dealing with shonky resellers. Ensure that their client base is as solid and reputable as they are.

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