Improve Warranty Processing, Improve Revenue

Automated warranty processing platform WarrCloud recently nabbed $20 million in a Series B fundraising round. Investors are attracted to WarrCloud because it solves a “significant problem no one was working on” for dealerships, founder and CEO Jim Roche tells WardsAuto.

To be sure, warranty processing is complex. Each state has its own set of rules, as does each auto manufacturer. At the same time, warranty reimbursement is a major source of parts and service income for dealerships.  

As their profitability comes down from the stratospheric levels of the past few years, dealers are looking for new areas to bolster their bottom line. Warranty reimbursement is an area ripe for finding more money.

Dealership revenue from warranty work is growing. According to the NADA Data 2024 Mid-Year Report, dealership service labor warranty revenue hit $6.32 billion in the first half of 2024, up from $5.33 billion in the same period last year. Warranty revenue in the parts department was $6.97 billion, up from $6.35 billion in 2023.

Yet money is being left on the table. Foundation Automotive Corp., a 26-rooftop group based in Houston, has grown rapidly through acquisitions in recent years. It found that newly acquired stores “had no real process in claiming warranty work,” Justin Pomeroy, Foundation’s executive vice president of operations, tells WardsAuto.

Staff internally processed warranty work and “they closed repair orders without anyone catching (that) they weren’t going to get paid” because of incorrect filing, Pomeroy says. “There was a lot of shrinkage.”

Foundation began using WarrCloud’s software in late 2021. The software’s artificial intelligence “makes sure you get every code out there on a claim to be paid,” Pomeroy says. “A warranty clerk in the store may not know about those” codes.

He figures using an AI-based platform to process repair orders saves Foundation up to $4,000 a month in some stores. The number of orders Foundation’s stores process ranges from 600 to 3,000 monthly, Pomeroy says.

In a large store, the group pays $7,000 or $8,000 a month to use WarrCloud; it would have to pay up to $12,000 for a person to process the claims, he says.

And that’s if Foundation could find someone who knew how to work with warranties. “Processing warranties is kind of a lost skill,” Pomeroy says.

The complexity of warranty processing attracted Centana Growth Partners to invest in WarrCloud, Centana partner Eric Byunn tells WardsAuto. His firm led the most recent fundraising round.

“There are many complex processes within the F&I office,” Byunn says, “and the warranty claim is probably higher (in complexity) than any other element. Each OEM has its own regulations and code, which must be translated from the tech story into the codes and processes. This is not the highest value add of some (dealership) employee.”

Still Room for the Human Element

That very complexity means the human element can add value to processing warranty claims, Frank O’Brien, a partner with CPA firm Withum, tells WardsAuto.

Withum assists dealers with warranty rate submissions with manufacturers. The firm does around 600 submissions annually, earning $3 million. That is growing, he says.

“Our growth is coming from dealers that were doing it themselves and are realizing they were leaving money on the table,” O’Brien says.

Each state has its own franchise law, which includes warranty reimbursement clauses granting individual dealers certain rights relating to warranty reimbursement, O’Brien says. Each automotive manufacturer also has a method for determining the reimbursement rate.

Dealers may be choosing the easier manufacturer’s method rather than the more labor-intensive state method, he says, which could leave money on the table.

The laws require that the rates manufacturers set for warranty work reimbursement must be the same retail rate the dealer charges customers, O’Brien says. Rates are determined by analyzing 100 non-warranty customer-pay repair orders, taking the average customer pay rate and applying it to future warranty submissions, he says.

State statutes can yield higher rates because they often exclude lower-cost, frequently performed maintenance repairs from the calculation to determine the reimbursement rate, O’Brien says.

“A retail repair (rate) can vary greatly,” O’Brien says. “If you get a true mechanical or Engine Control Unit goes down problem, those can yield much higher rates.”

The firm saved a 15-rooftop New Jersey-based dealership group that was doing its warranty reimbursement processing, using the manufacturer’s rates of $4.5 million by considering the state statute rates, O’Brien says.

Figuring out which data subset to use also comes into play.

Accessing the dealer management system, Withum’s software analyzes the full data population and finds the subset of 100 orders to yield the highest rate, thus boosting the dealership’s warranty reimbursement income, O’Brien says.

“If a service manager performs a labor rate submission on their own, they are shooting in the dark,” he says. “We are taking a data analytical approach.”

The human element enters the equation when Withum goes through repair orders to determine which qualifies for reimbursement. Software can’t always make that determination, O’Brien says.

“An AI application doesn’t take into account some of the technician’s writeups and notes. There is no spellcheck (and) sometimes the words aren’t totally written in the best grammatical form,” he says.