When profitable products come back to bite

Michael Going. (Photo: abcg)

The most expensive product in your portfolio may be the one your accounts still call a success.

At launch, everything looked right – strong net present value (NPV), good market timing, reliability targets met. But fast forward a few years and warranty claims are running hot, a design flaw has triggered litigation, and the real economics have shifted dramatically. Yet much of that cost may never appear against the product line itself which is still considered a success.

Which means the business case was not necessarily wrong, but it was incomplete.

When testing misses the real world

In mature product organizations, quality and warranty aren’t missing from the business case. Indeed, every new product typically carries a reliability target, validated through dedicated testing, and warranty is built into product cost as a per-unit charge. The weakness is in the inputs.

Reliability testing validates against a company’s history of how machines get used and what damages them. Where testing becomes less reliable is with genuinely new technology, particularly when that technology changes the way an operator uses the machine.

Early Tier 4 Interim engine emissions systems, across several OEMs, proved more prone to failure under extended light-load use than the hard use engines are traditionally tested against – the opposite of conventional thinking.

Production ramp-up also adds a further, temporary, rise in failures that testing rarely anticipates. And the warranty reserve charge is generally not risk-adjusted for how novel the product is or how much validation has actually reduced that risk – a carryover component and a first-of-its-kind system get charged the same way.

The bill nobody sends back

A separate and often larger gap is where liability, penalty and compliance costs are accounted for once they occur. A familiar pattern is for a control or safety feature to work as intended but fail to account for foreseeable misuse or the presence of bystanders. If that leads to an injury, the result can be a major liability judgment followed by further claims once the issue becomes widely known.

Costs like these are typically absorbed as general corporate litigation expense rather than attributed back to the specific product line that generated them. The result is that the product line’s reported profitability never reflects its true economics, and the design decision that created the exposure is never revisited with the real cost in view.

Better numbers = better decisions

Neither gap requires a new capability. It requires two functions already in place – reliability engineering and legal/claims – feeding the business case with numbers that reflect actual risk rather than historical averages. And it requires a mechanism to trace litigation, penalty and recall costs back to the actual product that caused them, even years after the fact.

Get both right and the business case starts to drive better decisions. Novel systems receive more validation, control and safety designs face closer scrutiny and products are judged on what they earn once all their downstream costs are included and not just on how profitable they looked at launch.

Having spent three decades inside the general counsel’s seat at global equipment manufacturers, I’ve watched both gaps play out from the inside. All too often, the products that look most profitable to start with were just those whose real costs simply hadn’t caught up with them yet.

About the author: Michael Going is a partner at agricultural, construction and commercial truck advisory firm abcg AB. As an attorney, he has designed and led global legal and compliance organizations, partnering closely with business leaders to achieve strategic and commercial objectives while managing legal risk.