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From Necessity to Strategic Driver Market Trends and Challenges in After Sales & Reverse Logistics

From Necessity to Strategic Driver Market Trends and Challenges in After Sales & Reverse Logistics

Contents

3 Foreword 4 Methodology 6 10 13 14 15 18 20 21 24 26 28 29 30 Market Trends and Key Challenges Strategy & Target Picture Solutions, Processes & Initiatives Customer Interaction & Satisfaction Return Management Logistics & Repair Cross- & Up-selling Warranty Management Monitoring & Transparency KPI Overview Conclusion & Outlook About Deloitte About arvato

Foreword

When looking at current market developments, the after sales and reverse logistics function faces several challenges: increasing return volumes due to more complex devices and changing shopping patterns; ever higher pressure on process efciency and costs per incident to contribute to internal cost cutting programs; rising importance as a core customer touch point shaping brand perception and customer experience; increasing need to efciently steer outsourcing partners in order to optimize outsourcing benets; to name just a few. To successfully master these challenges, after sales and reverse logistics will require greater managerial, even CxO, attention in future. The strategic focus will have to be reviewed, with the strategic transformation of after sales into a prot center as a major development occurring today. Additionally, an integrated end-to-end perspective needs to be in place, providing transparency for reporting and monitoring, to accommodate for increasing customer needs and facilitate an efcient steering and operations model in the whole after sales and reverse logistics chain. Deloitte as the largest professional services rm in the world and arvato as one of the leading supply chain outsourcing partners in after sales and reverse logistics have therefore teamed up to assess the current status as well as aspirations of after sales and reverse logistics at high tech companies. We have asked 25 global players for extensive personal interviews to derive a comprehensive picture and outline priorities. Our survey assesses two key imperatives to determine the direction high tech companies are heading today when it comes to their after sales services and reverse logistics: the strategic perspective as well as the operational measures to realize the formulated strategy. We have been asking specically for previously implemented initiatives as well as initiatives planned for the future to derive a comprehensive picture at each of the interviewed companies. We hope you nd the results interesting and they will lead to discussions about your own path in after sales. Please do not hesitate to get in contact with us to discuss these topics on a broader scale.

After sales has long been just an afterthought to sales and marketing but today more and more OEMs have started to realize its real strategic impact

After Sales: From Necessity to Strategic Driver

Methodology

Sample and Interview Design In total, 25 high tech companies across Europe were interviewed by Deloitte, mainly B2C-focused OEMs in sub-segments covering IT hardware (48%), imaging (14%), household appliances (19%) and audio (19%) (g. 1). Interviewees were invited to participate based on their end-to-end responsibility in after sales and reverse logistics. This enabled us to discuss back ofce as well as customer facing topics. Questions were posed to both understand strategic direction and to provide operational insights. The questionnaire comprised open and closed questions, from subjective assessments of own performance to maturity evaluations. The interviews of 90 to 120 minutes were conducted face-to-face.

Survey Framework and Structure The survey has been structured into four sections, covering perceived trends and challenges (to determine current hot topics and themes) after sales strategy (to analyze the varying strategies pursued by participants) after sales processes (to assess which initiatives are in place to reach set goals) and Key Performance Indicators (KPIs) (to determine to which extent a need for change in strategy and processes exists)

Fig. 1 Interview coverage by industry (in % of participants)

19%

48% 19%

14%

Audio Household appliances

Imaging IT Hardware after two years

In order to ensure a holistic view on relevant services, we developed a detailed after sales and reverse logistics value map which served as a roadmap for the interviews. The value map follows the basic returns process, from the end customer via customer service interactions
Fig. 2 Key returns processes (simplied illustration)

to logistics services that transport a device to a repair center. Once repaired, the product is shipped back to the end customer (or restocked in logistics warehouses in other instances) (g. 2).

End Customer

Customer Service (via web/CC/POS) Issue identication RMA creation Routing decision

Logistics Hub Release SWAP or Consolidate into bulk shipment

Repair Center

Technical assistance Transportation options (send-in/pick-up) Track & trace Replenish SWAP pool or De-consolidate bulk shipment, kitting & send to EC

Repair

For the purpose of this study, these process steps were further detailed within the after sales and reverse logistics conguration map, describing all main processes and process congurations along the returns process.
Fig. 3 After sales conguration map
Customer Service
Front End Services Tech service RMA creation Status updates Back End Services Content management Payment handling Channels Online Portal Call Center Shop

Each of these steps was then evaluated in greater detail regarding current status and importance, challenges and ongoing or planned initiatives (g. 3).

Logistics Hub
Screening DOA/OOW check Issue identication/ NFF screening

Repair Center
Repair Planning & Management Decision about repair/asset recovery Spare parts management Repair Repairs/ Refurbishment Quality control

Shipping Routing to appropriate repair center Shipment building Tracking

End Customer with Device Issue

Transportation
Collection & Delivery Swap service Express service Service Options Send in Drop off Pick up On site repair

Warehousing Swap stock management Inventory management Hub Conguration Collection hubs Central hubs Level 1 repair

Asset Recovery Scrapping/ Recycling Second usage/ Resale Repair Level Level 2 repair

Management Services
Warranty Management Warranty claims management OOW management Revenue Generation Cross-/up-selling Additional service offerings Product Management Product lifecycle management Feedback to product design Reporting Reporting IT integration Network/ provider managememt (across countries)

Monitoring/Reporting/Systems

After Sales: From Necessity to Strategic Driver

Market Trends and Key Challenges

Market Trends After sales and reverse logistics cover a broad spectrum of connected capabilities, and also depend greatly on overarching industry- and sub-industry trends. Therefore, when asked about general industry trends, participants provided a large variety of answers. With 24% the most often mentioned trend in after sales was the trend for replacements or swap instead of repair, driven by both declining product prices in most consumer electronics/ IT sectors together with increasing transportation and process costs for repairs. This trend can also be seen in generally reduced repair volumes as well as in the ratio of in-warranty repairs versus out-of-warranty repairs growing for several participants, as out-of-warranty repair becomes less and less economic compared to purchasing a new product. Another broad trend is the rising importance of social media, which a large number of participants plans to integrate into their after sales channel conguration however, no clear best practice has yet emerged as to how to make best use of social media. Examples for using social media in after sales include using user communities to perform rst-level support tasks (i.e. giving technical advice) amongst themselves, or offering facebook or twitter as a communication channel with end customers. Changing consumer behavior also affects after sales, manifested e.g. for smartphones or laptops in increased usage of devices (e.g. bring your own device for work) and therefore higher fault rates than before. In parallel, the increasing saturation of daily life with (mobile) electronic products and their increasing degree of interconnectivity is leading to higher dependency on them, making repairs a more urgent and more involved affair for end users (e.g. emotional value of mobile phone repair with many individually congured apps, personal photos, etc.).

It is not possible to identify a small number of key trends rather, there is a broad range of topics with relevancy for after sales and reverse logistics.
In line with the general conscience becoming more aware of environmental conservation, this also applies for after sales. Many corporations already have included green objectives into their corporate target structure, therefore including e.g. environmentally conscious disposal of products or resource-efcient shipment and repair as priorities for after sales operations. On the other hand, these trends are also driven by respective legislation and policies (g. 4).

Fig. 4 Major after sales and reverse logistics trends Question: Which trends in after sales and reverse logistics would you regard as the 3 most important ones? Increasing customer awareness and expectations
Improvemet of customer satisfaction
Customization of warranties Standardization of policies with retailers

Price erosion
Avoiding returns

Improvement of service quality

Decentralization of logistic hubs

Replacement/swap instead of repair


Emerging Markets
Centralizaion of return/repair

Increasing complexity of after sales

Rising importance of social media


Digitalization of products for error analysis

Increasing costs of service


New players changing the "game"

Changing customer behaviour

Speed of service

Focus on environment and waste management

Improving product quality

Adjusting after sales to new user behaviour

Rising logistics cost

Pain Points & Barriers When asked about their current pain points, the most often mentioned challenge is related to the rising importance of emerging markets. For the EMEA region, after sales and reverse logistics operations in Western and Central European countries are in most cases already well established. The challenge, however, is how to build up and organize after sales in new countries like Russia, Turkey, the Middle East or Africa. Here, previously unknown challenges appear while business is growing in those markets, creating an urgency to establish efcient after sales operations. Finding new, reliable partners in these markets as well as establishing an efcient network in light of different legal, tax and customs regulations creates a major headache for after sales executives. Another often mentioned pain point is spare parts. Fast and efcient delivery of spare parts is generally important, but especially crucial in more B2B-like relationships as pressure to x products quickly without further interrupting the customers business is high. Ensuring availability of spare parts for products with a long product lifetime and appropriate spare parts pricing are further concerns in this area. Since keeping inventories with spare parts is a major cost item for after sales operations, forecasting and optimizing spare parts usage are capabilities that are extensively sought after (g. 5).

Setting up and managing after sales and reverse logistics operations in emerging markets is amongst the key pain points.

Fig. 5 Key pain points in after sales Question: Which are the main pain points when thinking of after sales and reverse logistics at your company? 30% 25% 20% 15% 10% 5% 0% Emerging markets Spare part delivery Speed of service (e.g. TAT, lead times) Management of transnational processes Business with non-EU countries Costs Pressure by retailers

25% 20% 20% 15% 10% 10% 10%

After Sales: From Necessity to Strategic Driver

When asked about major barriers that prevent from tackling these and other after sales and reverse logistics pain points, the lack of respective nancial resources was mentioned most often. However, there are a number of barriers related to the standing of after sales in the overall organization that prevent some of the pain points to be solved, be it the organizational set-up (e.g. as a cost center instead of a prot center with correspondingly less responsibilities, or the set-up of local subsidiaries with separate P&L responsibility, therefore limiting the inuence of central after sales departments on processes and policies for a cross-national optimization), internal systems or capabilities, or general lack of internal recognition and awareness. Additionally, in many companies after sales-related responsibilities are separated across different organizational units, therefore in the worst case creating several silos with different goals and objectives instead of one dedicated after sales unit (g. 6).

Fig. 6 Major barriers to tackle after sales pain points Question: What are the biggest barriers to tackle these pain points? (internally as well as externally)

Financial resources Customs, tax and legal issues across countries Controlling approach (cost-center) Lack of internal awareness Dependence on parent company Low product price (repair not justied) Country differences Complex supply chain (because of outsourcing, growth) Interaction between call-center and repair Complex market structure (number of players) Finding new partners Insufcient capabilities of call-centers (e.g. new channels) Insufcient IT-systems Power of retailers 0% 6% 6% 6% 6% 6% 6% 6% 6% 6% 5% 10% 15% 20% 25% 13% 13% 13% 19%

31%

30%

35%

Management Awareness When asked directly for the degree of management awareness for after sales and reverse logistics, most respondents feel that their function gets only moderate attention. Respondents where after sales gets some or full awareness are generally more satised with their after sales operations and are also more successfully measured by key after sales KPIs. Reasons for the rather low awareness are that after sales is still associated as a cost factor rather than a tool to drive customer satisfaction and create additional revenues, reected conversely also in the dominance of sales in most OEM organizations. As long as after sales processes run smoothly and no major problems arise, after sales is viewed as a lower priority (g. 7).

Fig. 7 Top management awareness Question: What is the level of awareness and support from your top management in after sales and reverse logistics? 50% 44%

40%

30% 25% 20% 13% 0% No awareness Little Moderate Some Full awareness 19%

10% 0%

After Sales: From Necessity to Strategic Driver

Strategy & Target Picture

Customer satisfaction is the most important objective in after sales, clearly leading before cost efficiencies.
Targets and Objectives While in the past years a cost focus was prevailing for after sales and reverse logistics, this has now been changed in favor of a means to improve customer satisfaction (assessed overall as very important by interviewees). More and more companies realize that after sales holds an important lever to shape customer experience and brand awareness. With customer retention being less costly than new customer acquisition, after sales can contribute signicantly to assure direct customer contact and steer the customer lifecycle (g. 8). On the second rank of importance we nd after sales services as a means to differentiate the core product. Due to the fact that most product features are nowadays easy to imitate in the considered industries, it has become difcult to create a lasting competitive advantage by the products themselves. Value-added services come into the focus, and with service still often being people business, it is harder to imitate.

Cost savings still remain high on the agenda of the interviewed high tech companies. Outsourcing initiatives and web-based solutions offer signicant potential to lower cost in after sales and increase efciency. Budgets need to be kept under control, generating the need for innovative cost-cutting measures. Two objectives which receive only moderate attention are revenue generation as well as exibility and scalability of the after sales function. Revenue generation in after sales is mainly extended warranties, additional service packages as well as cross- and up-selling (in out of warranty cases). However, potential conicts with retail partners still limit direct activities of OEMs towards end customers. With retailers often being the most important sales and after sales channel, and often the only one with a direct access to the end customer, their power to put pressure on OEMs is large. Nevertheless, via the sale of accessories (often an unattractive business for retailers due to limited volumes) and increased focus on direct end customer contact (e.g. via incentivized registration of products), we will see revenue generation becoming an ever more important target in future. The importance of being able to quickly ex up or down after sales operations receives markedly different ratings between large manufacturers compared to mid-sized ones. The more products are in the market, the higher the risk of a massive impact on after sales when product failures and recalls occur. For large manufacturers this tends to be the reason why e.g. call center and repair capacities can be adjusted within short time to quickly respond to demand.

Fig. 8 Importance of targets for after sales strategy (scale 1 very unimportant to 5 very important) Question: Which are the targets/objectives you are pursuing in after sales? 5 4.7 4 3 4.3 4.2 3.4 3.0

0 Customer satisfaction Mean (total) Product differentiation Cost savings Flexibility/ scalability Revenue generation

10

Strategic Picture for After Sales When asking for strategic priorities for concrete after sales improvements in the participating companies in the next three years, two topics show up most frequently: the interlink with product management and improvement of process management. The rst one relates to a stronger relationship and information ow between after sales and product lifecycle management to create service-oriented product design, and integrate valuable customer information for continuous product improvement. Furthermore participants mention that a strong product management is the best means to avoid product returns, with an investment leading to a better return in product management than in after sales. The second strategic topic relates to process improvements, mainly to achieve cost efciencies, but also to support customer satisfaction measures and contribute to the effectiveness of the organization (g. 9).

Interlink with product management and improved process management are frequent elements of the after sales target picture.
Further importance is given to customer facing elements including direct customer interactions (e.g. extending e-channel services) as well as expansion in service offerings (e.g. differentiated service levels which might also be charged for). Due to an increasing price pressure companies strongly emphasize cost efciency as a major goal which is also inherent in issues like product quality (reduction of costs of non-quality). IT investments planned by the participants have different objectives, ranging from an enhanced customer data collection to a general system consolidation to optimize IT usage.

Fig. 9 Strategic target picture elements mentioned by survey participants (in % of answers) Question: What does your target picture for after sales services for the next years look like?

Strengthen product management Improve process management Expand service offerings Extend direct end-customer channel Improve product quality Cost efciency IT investments (internally) Increase customer satisfaction Organizational change Improve customer experience IT investments (ext.) 0% 5% 5% 10% 15% 20% 25% 10% 14% 19% 19% 19% 19% 24% 24%

29% 29%

30%

35%

After Sales: From Necessity to Strategic Driver 11

Deloitte Point of View Strategic Picture After Sales Service In many cases the efforts to professionalize after sales service business are signicantly underestimated. The starting point of a successful transition is the adjustment of current business strategy and its underlying value delivery model. Depending on the selected value delivery model and extent of performing after sales service internally the impact on related enterprise functions varies. Nevertheless, major barriers to implement are the organizational as well as the cultural shift required (g. 10).
Fig. 10 Value Delivery Framework
Service as a Bolt-on Ability of services to drive value Service as a Business Service is the Business Adaptive Segment Management Standalone Transitional Embedded Model 1 Model 2 Model 3 Model 4 Model 5 Solutions protability is the major driver of organizational value Both Products and Services are leveraged to deliver Solutions Operating model is structured around Solution types some are more Productoriented in nature, others are Servicesoriented

Product sales are the major driver of organizational value Services predominantly leveraged to enhance product sales/extension Virtual or subservient Services P&Ls Operating model structured around product-oriented core

Services protability is a major driver of organizational value Services holds true P&L accountability and control Operating model structured around services-oriented core

Project Case Recently, a US machinery manufacturer, operating a standalone after sales service business unit bought a competitor with an embedded value delivery model. The successful integration of the acquired after sales service business resulting in improved on-time delivery performance by 30% and reduced spare parts backorders by 25% was achieved by: Adjusted business strategy, re-defined value delivery model and its underlying steering model by adding and tracking service related performance and incentive targets Separated after sales service-related functions, changed organizational set-up and intensive change management activities to shift culture on all levels Differentiated value delivery processes to consider different speed of business between prime and after sales service products

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Solutions, Processes & Initiatives

We asked for an assessment of different parts of the after sales and reverse logistics value chain, both regarding importance of this area and own performance in this area. Customer interaction processes are rated as most important. While participants own performance is already seen as high, this eld still yields the highest relative gap between importance and performance next to monitoring & transparency. Other key processes of return qualication & routing and reverse logistics & repair are also seen as important, but their performance does not drop signicantly below the importance rating. In general, this picture shows that across the complete value chain, perceived performance lags behind importance of after sales process elements, which reveals signicant potential for improvement (g. 11).

Fig. 11 Importance and performance assessment along the after sales value chain Question: Please rate the following topics in after sales regarding their importance for your company. What is the current performance/status of your company in these areas compared to your competition? Very 5 important 4 3 2 1 Very un0 important Below average -15% -22% 4.7 4.0 4.3 3.3 -8% 4.0 -11% 3.9 3.5 -7% 3.9 -13% 3.0 2.6 Best practice

3.7

3.6

Average

Customer interaction & satisfaction Gap Importance Performance

Monitoring & transparency

Return qualication & routing

Reverse logistics & repair

Warranty policies

Cross- and up-selling

After Sales: From Necessity to Strategic Driver 13

This improvement potential is also reected in dedicated initiatives within some of these areas, in order to reach strategic goals or mitigate market challenges or pain points. These initiatives range from e.g. improving the channel mix in customer interactions to changing the set-up of logistics and repair networks. Other initiatives span across multiple parts of the after sales value chain to reach higher integration and transparency of the process, to achieve a holistic customer view and more (cost-)efcient processes (g. 12). Customer Interaction & Satisfaction Customer Satisfaction As seen in the strategic objectives before, customer satisfaction and interaction have the highest priority in after sales among survey participants. Additionally, they see signicant improvement potential in this eld. One of the biggest areas of concern and activities is the direct customer contact via an online channel and social media in particular. While a high degree of responsibility with the online channel is seen in the after sales organization, the social media strategy lies with general management. This is due to the fact that today, social media affects nearly all areas of a company and needs proper internal policies as well as adequate monitoring

and reporting tools. After sales management should nevertheless seek an active stake in the denition of this strategy, as customers demand and highly benet from state-of-the-art interaction with OEMs. Another topic often raised during interviews is the evaluation of centralization possibilities for regional call centers. While for easy-to-handle customer inquiries it is basically regardless where a call center is located, for more complex issues participants experiences show that well-trained staff is essential and often hard to obtain. Additionally, the insufcient coverage of languages at most call center operators makes it often necessary to remain with a more fragmented call center structure.

To further improve and integrate customer interaction possibilities, companies increase their efforts regarding echannels and social media solutions.

Fig. 12 Important after sales initiatives of market players

Strengthening online-self-support solutions incl. social media Identifying ways to exploit up-/cross-selling potential without risking relationships with dealers Centralization of regional call centers
Customer service Repair

Establishing central distribution centers or parts warehouses Improvement in collaboration with partners to provide additional services (E2E customer experience) Improve track & trace transparency
After Sales Initiatives Transportation/logistics Management services

NFF reduction initiatives that optimize current procedures from a technical point of view (early identication, diagnostics also training) as well as better educating the consumer about product use Evaluation of swap-models Centralization of repair centers

Actively generating and using customer after sales information to facilitate client lifetime view as well as linking & utilizing consumer information across the company Improve interfaces to partner systems Expansion of warranty-buy-out solution

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Return Management Returns via Retailers versus Direct Returns Conguration of the return channel is crucial for most efciency improvements in after sales only channels that can be inuenced by the OEM can be improved to t better into the overall after sales process. While it differs signicantly between product groups and the conguration of an OEMs forward supply chain, the majority of high tech manufacturers depend greatly on retail as their most important return channel (51% of returns from participants come via retailers, versus 33% direct returns). Advantages of this set-up are that retailers are taking over responsibility to register and bundle returns from end customers, therefore relieving OEMs from the burden of establishing extensive customer contact center and pick-up solutions. However, this means also losing direct contact to end customers and being less exible in optimizing the returns process. Participants are condent that their direct-to-customer processes are both faster and achieve higher customer satisfaction than processes that include channel partners. This explains that more than 40% of participants indicate that they would prefer to change their return channel to receiving more direct returns from end customers.

Gaining control over the return process as early as possible helps to manage the process more efficiently.
For retailers, on the other hand, serving as a service channel is often seen as generating non-protable efforts and tying up resources. However, many retailers also see the benets of generating additional footfall in their stores and creating additional customer touch points, which can in turn be used to generate more sales. Therefore, attempts at increasing the share of direct returns by OEMs are often met with resistance by retailers (g. 13).

Fig. 13 Share per return channel and desired changes Question: What are the key returns processes in your business (share in %) and do you see any need to change those shares? Share per return channel 5% 10% Directly from end-users Through retail 33%

Through distribution Other


52%

Desired changes

43% 57%

Change towards direct returns desirable No immediate change required

After Sales: From Necessity to Strategic Driver 15

Screening Along the Return Process One of the key benets of having more control over the return channel is the ability to set up additional screening checkpoints. With NFF rates (Non Failure Found) between 1% and 45%, there is still signicant potential for early screening of returned products to sort out non-faulty devices and therefore reduce transportation and process costs. The great majority of participants do have screening processes in place; however their position within the return process differs signicantly. In case of direct end customer returns, contact centers of most OEMs do try to solve the problem directly to eliminate the need for an actual return shipment. In case of retailer returns, there is often no screening established at the point of sale, but only further down the process when rst transportation

costs have already occurred. However, some OEMs have been successful in setting up partnerships with retailers to train point of sale (POS) staff in problem identication and resolution, so that smaller issues (e.g. rmware updates) can be realized on site. Regarding the set-up of screening gates within the reverse logistics chain, participants use different strategies of either having decentralized gates to identify NFF returns as early as possible, or having centralized gates (mostly together with their repair operations) to reduce the complexity of the network and the number of screening facilities. Best performing manufacturers usually have at least some elements of early screening, be it at the retailer site or in the rst logistics hub (g. 14).

Fig. 14 Screening process Question: What check points and (NFF screening) processes have you implemented to reduce your returns? How important is that to you? Implementation of screening processes 100% Approach to screening 6% Differences by product Central

80%

39%

No 14%

Yes 86%

60%

40%

33%

Hybrid

20% 22% 0% Decentral

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Deloitte Point of View Return Management Return management experience plays a key role in shaping overall customer satisfaction, brand loyalty, and future purchase decisions. Studies show that only every second company is able to fully reap the hidden benets of returns to lower costs and increase revenue. Industry best practices illustrate that it is essential to measure, track and manage return management performance. Various project examples prove that managing returns actively right from the beginning promises the most cost saving potential. Therefore processes built consequently around mechanisms such as RMAs (Return Material Authorization) successfully streamline return management processes, reduce turnaround times for repairs and keep unnecessary organizational costs at a minimum. Project Case In 2011 a US high tech company reviewed its reverse supply chain practices to improve after sales services, costs and time to increase customer satisfaction. Due to eco life cycle and disposal regulations the number of returns increased. Improvement potentials such as reduction of cost of doing repairs by 15% and reduction of repair throughput times by 35% were found and realized in the return management process. Main project steps to improve were: Understand individual customer expectations and re-define return policies and guidelines accordingly Identify preferred channel of support (low touch/high touch) and re-define frontend customer support channel and processes. Introduce RMA mechanisms to optimize return processes and also trace back nancial implications. Develop customized return IT module Re-design organizational structure of return management department and allow only trained service staff to handle customer facing activities

After Sales: From Necessity to Strategic Driver 17

Repair infrastructure is caught between the contradictory goals of excellent customer service versus cost reductions.
Logistics & Repair Infrastructure Set-up For most interview partners the decision on repair facilities is a very important and equally difcult one. Declining sales in economically difcult times, rising labor costs, falling sales prices, an extension of low-end product categories for emerging markets all of these developments lead to lower repair volumes making efcient repair centers at locations close to the customer a challenge. Therefore it is not surprising that 42% of the respondents state a hybrid model for their EMEA operations depending on the repair demand in each country, existing infrastructure, cost of logistics, tax and customs issues, as well as customer expectations. The latter is actively shaped by

some companies, who e.g. announce turnaround times of 10 days, but manage to deliver a product back to their customer within 6 or 7 days. This way they exceed expectations and avoid dissatisfaction by customers (g. 15). Due to the developments given above, respondents expect a shift towards a more central approach of repair. However, co-operation models with competitors are also stated as a way to create value for all involved parties. Successful models are not reported yet, also not regarding spare parts which are a capital-intensive facet of the repair business. There is still a long way to go in this respect. Nevertheless, depending on the specic product, the choice between central or decentral approaches can be easier. In general, the larger and more difcult to move a product is, the more decentral the repair approach will be. Companies which have to rely on a decentral approach report back difculties in nding cross-regional outsourcing partners, as margins are still falling. In the case of low-value products, swapping at the POS prevails, with no need to maintain decentral repair facilities. More and more companies think about swapping with refurbished ware, which highly depends on customer acceptance (and educating the customer respectively), however.

Fig. 15 Approach to repair (in % of answers) Question: Does your repair infrastructure follow a central or decentral approach? 100%

5% 32%

Differences by product Central

80%

60% 42% Hybrid

40%

20% 21% 0% Decentral

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Deloitte Point of View Logistics & Repair After sales logistics excellence is the process of planning and aligning service parts inventories, resources, and processes to ensure optimal customer service and response with minimal risk and cost. Key success factor in the repair management business is the right balance between repair labor costs and transportation as well as material or swap costs. Based on project experience, historically grown repair networks often cannot efciently cope with rapidly changing market requirements and product innovation cycles. An efcient repair network requires exible front end (troubleshooting/break-x) solutions and an aligned backend structure with the right skills and capacities at the right network level (g. 16).
Fig. 16 Deloitte Parts & Service Management Framework

Results Execution Processes Enablers Foundations Product Data Management

Supplier Management Network Design

Remanufacturing

Spare Parts Logistics Chain

Inventory Management

PA R

TS

SE

RV

IC

Reverse Logistics Distribution Operations

Order Management

Project Case An equipment manufacturer assessed its spare parts supply chain and repair network. Considerable optimization potential was found in improving on-time delivery performance by 20%, a reduction of non-moving inventory by 20% and in relatively high repair costs due to a decentralized repair network. Key development actions were: Re-design warehouse network structure and inventory ownership to consider customers lead time requirements and optimize inventory, warehousing and transportation costs Develop strategic repair network to cover market and technology requirements at an optimum of repair costs. Consolidate repair activities accordingly Link spare parts and repair demand planning with inventory and repair capacity planning. Integrate inventory planning where item categorization includes criticality and part failure rates to differentiate customer service levels to optimize end-to-end and repair costs

After Sales: From Necessity to Strategic Driver 19

Cross- and up-selling can be a major revenue driver but lacking capabilities and potential channel conflicts are currently keeping it out of focus.
Cross- & Up-selling Exploiting Customer Interactions After sales is one of the few instances during a customer life cycle where there is a direct contact between OEM and end customer. Therefore, it is crucial for OEMs to use this interaction not only to improve brand perception and customer satisfaction, but also to exploit potential to generate additional revenue. There are four basic possibilities to employ cross- and up-selling during after sales transactions: Service upgrades: Sell upgrades for the service incident, e.g. faster turnaround times, more convenient shipping options like home-pickup (for in-warranty repairs, there are legal restrictions in some countries as to how to design such offers) Accessories and consumables: Use the product-related interaction to offer product accessories (e.g. cases) or consumables (e.g. batteries, ink) Product upgrades: Especially for out of warranty cases, offer to upgrade to a new (or better) product instead of repair Other sales: Use the customer interaction to sell products unrelated to the specic service incident due to a lack of CRM data however it is hard for most OEMs to create relevant offers for end customers, and without such capabilities this cross-sell approach can easily lead to a rather negative customer experience However, there are several factors that lead to a very reserved approach to cross- and up-selling amongst the majority of participants (g. 17). One is the lack of internal capabilities. Contact center staff at OEMs is mainly trained to provide technical assistance, whereas sales requires very different skills from agents. Additionally, several participants mentioned that their contact center systems do not support sales activities, e.g. missing interfaces to billing solutions or CRM capabilities to generate customer-specic offers. Also,
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in a number of companies the after sales interaction is not seen as the appropriate channel to pursue sales, for fear of alienating customers in a critical situation. However, examples of other companies show that with a more sensitive approach to cross- and up-selling this can actually be perceived as bringing additional value to the interaction, especially when offers match customer needs. Channel Conicts Another major factor is the intention to avoid channel conicts with retailers. Most retailers have a very critical view on OEMs trying to establish direct sales channels with end customers. Especially in an after sales situation when the OEM is providing service to a customer who originally bought at a retailer, employing cross- and up-selling can easily be seen as an affront to retailers. Therefore, fearing retaliation (e.g. de-listing of certain products) leads to a very conservative approach to cross- and up-selling of most OEMs, mentioned by 44% of respondents. The exception from this are service upgrades or accessories and consumables, which are often not carried by retailers and therefore dont create a direct competition.

Fig. 17 Exploitation of cross- and up-sale opportunities Question: To which extent do you leverage after sales contacts with customers for cross- and up-sale opportunities? What potential do you see in that? 0% 7%

36% 29%

29%

Always Often

Moderate Rarely Never

However, in light of the changing retail landscape most manufacturers are also getting ready for a time when established retailers will have less power due to the increasing importance of online channels, which also facilitates direct sales to end customers. Therefore, 25% of participants mention that they would like to increase cross- and up-sale activities in the future, both to generate additional revenue and to gain more end customer contact. Direct contact with end customers is seen as crucial in order to generate customer insights, drive customer loyalty and facilitate re-purchasing decisions. Therefore, building up internal CRM capabilities and increasing the number of customer interactions along their life cycle are key strategic goals for leading OEMs, which will undoubtedly also lead to an increased signicance of cross- and up-selling in after sales. Warranty Management Potential and Risk in Warranty Buy-out More than half of the survey participants see risks in their out of warranty business today. This is especially due to the fact that they have no or only very limited control over it: Third party repair providers decide on price setting and repair handling individually, bearing the risk of compromising customers based on their behavior. There is only limited visibility of out of warranty repairs for OEMs, as reporting and monitoring is often not xed in outsourcing contracts. If done in-house, some respondents state that out of warranty repairs could become major cost factors, because spare parts need to be kept to ensure repair capabilities even after the product lifecycle might have ended (g. 18). On the other side, a majority of participants sees a large potential for their out of warranty business. While only few offer out of warranty repairs to facilitate customer satisfaction and retention, others use or want to use it to support overall protability of their business. However, this can only be achieved in markets with a high relative product investment, where customers have a vivid interest in prolonging the lifetime of broken products. Additionally, warranty extensions are either a source for additional revenues or can be used as an incentive for end customers to register directly at OEMs. By doing so, the emerging potential for keeping the customer informed about product and service innovations triggers cross- and up-selling, too. With retailers exploiting the warranty and service extension business, too, possible channel conicts are arising.

To set up a profitable out of warranty business, several challenges need to be overcome.


Warranty buy-out models Warranty buy-out has been discussed internally in nearly all of the interviewed companies so far. However, only 10% have warranty buy-out models in place yet. They are mostly undertaken in emerging or small markets with a distributor channel only. Additionally, at times retailers address OEMs with the request for lower product prices, with warranty claims then taken over by them.

Fig. 18 Perceived risk in out of warranty business (in % of answers) Question: Which risks and potentials do you see regarding your out of warranty business?

Loss of control No major risks 44% Some risks 56% Limited visibility Unsatised customers Major cost factor

After Sales: From Necessity to Strategic Driver 21

More than half of the respondents expressed no general interest or a reserved attitude towards warranty buy-out. Main reasons given are: After sales and warranty management are seen as core competencies of the company, with no interest in outsourcing and consequently losing customer access; The non-existence of large enough, reliable and financially stable outsourcing partners who are unlikely to get into nancial troubles and eventually go bankrupt, leaving immense problems for customers and the OEM itself; The threat of buy-out partners delivering inadequate service or even directing customers back to the OEM; The problem of how to share benefits for outsourcing providers when major investments into product quality are undertaken (g. 19). It shows that one core problem lies in the fact that most companies are not yet familiar with gain share models to use for such complex outsourcing relationships like full warranty buy-out. Today, the absolute majority still makes use of traditional price models in their outsourcing contracts like transaction-based fees or a variable fee based on actual efforts (often with high-value products where quality of repair is seen as a high priority) (g. 20). Gain sharing requires full transparency on the operational performance for all involved parties, but makes it possible for the OEM as well as outsourcing or other partners to benet from their individual efforts in improving quality or efciencies (g. 21).

Fig. 19 Attitude towards warranty buy-out (in % of answers) Question: Is a complete warranty buy-out to a third party provider a commercial model that would answer your needs? Warranty buy-out in place Attitude towards warranty buy-out

Yes 11%

No 89%

Open 44%

Not interested 56%

Fig. 20 Usage of commercial models in outsourcing (in % of answers) Question: Regarding commercial models for outsourcing services: Which price models ale you currently committed to and why? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Transaction based Fixed/variable fee Rate-based 15% 8% Gain share 0% Cost-plus 54% 85%

Fig. 21 Price model overview

Cost-plus A contractor is paid for all its resp. expenses to a set limit plus additional payment to allow for a prot Transaction-based Provider receives a specied rate per transaction/incident Fixed/variable fee Partners agree on a xed fee per period plus variable adjustments due to unplanned variances in quantities, quality, scope etc. Rate-based Provider receives predetermined rates for utilized resources Gain share principle Contractual structure where the organization and its service provider agree to share nancial gains as a result of continuous improvement or innovation. Used as an incentive scheme for service providers

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Deloitte Point of View Warranty Management Warranty management has been widely neglected in the past although it has signicant bottom line effects. Efcient and effective warranty management reduces cost and improves customer satisfaction by streamlining business processes and leveraging latest technologies. Other potential benets are improved revenue streams through sales of extended warranties and additional related products. Additionally, a higher level of quality through improved information ow about root causes of product defects can be achieved. Offering better customer relationship results in improved customer loyalty and continued sales (g. 22).
Fig. 22 Warranty Management 2.0 Next Generation

Warranty Management Solution Strategy Service Strategy Service Channel Strategy Service Pricing Service Marketing and Sales Contract Management Warranty Management Fleet Management Service Offerings Parts Management Line Maintenance Repair Professional Services ERP Analytics

Support Operations

CRM

PLM

Next generation warranty management comprises an integrated combination of CRM, ERP, PLM and advanced analytics capabilities. Interlinking these capabilities with an advanced IT solution will allow after sales service organizations to optimize and even pro-actively manage after sales service business. Market leaders in the printing solution industry can be seen as innovation leaders in next generation of warranty management. Integrating customer printing environments into their warranty management system allows them to anticipate preventive maintenance and accurately forecast spare parts demand based on real time data to keep warranty costs at an optimum level.

After Sales: From Necessity to Strategic Driver 23

Best-run after sales operations are based on fully integrated IT solutions and end-to-end process transparency.
Monitoring & Transparency IT Support of After Sales Processes Having an integrated IT system that supports the complete after sales value chain is one of the most important factors to explain the success of after sales operations. Participants with a high degree of systems integration and resulting process transparency were generally more successful regarding customer satisfaction as well as cost efciencies. Especially regarding the latter, having process transparency is a prerequisite for knowing costs for separate process steps and being able to identify, improve and monitor cost improvement levers more effectively (g. 23). Since the after sales process usually includes a number of external parties, e.g. for call centers, transportation, warehousing and repair, they also need to be included into an after sales IT landscape. Most participants are using interfaces to relay basic process information to and from partners. This creates limited transparency but still leaves black holes for example within repair operations regarding the exact status of a repair or repair reasons. Few more advanced respondents therefore dont rely on interfaces, but provide their IT system to all their partners, thus being able to represent the complete process on one system. Since creating and maintaining such an integrated IT system also represents a major investment, this example can be found only with larger OEMs.

Fig. 23 Status of transparency and IT systems support IT systems support the after sales process ( 3,6) Transparency on costs and performance in after sales ( 3,6) Transparency of after sales budget

17% 33% 8% 8% 18% 33% Very low Low Very low Low 18% 33% 27% 40% 60%

Yes No

Moderate High Very high

Moderate High Very high

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End-to-end Transparency The highest degree of system integration with partners is implemented with call center providers followed by transportation and repair center providers. However, 60% of respondents see end-to-end processes in after sales as very important which also requires end-to-end systems to support and steer these processes (g. 24). The major advantages seen for seamless end-to-end processes are mainly transparency and process optimization, therefore emphasizing operational efciencies. However, some participants also see the potential of end-to-end management in after sales for customer relationships, which is facilitated e.g. in online track-andtrace applications and respective status updates by SMS for end customers. However, end-to-end is a topic that is associated with major investments, while benets are hard to calculate in a business case. Therefore several respondents also state that they do not plan a further integration of their processes (g. 25).

Fig. 24 End-to-end processes Question: Which role do end-to-end processes play for your after sales business today?

10%

20%

60% 10%

Very important

Important Moderate Unimportant


Very unimportant

Fig. 25 Advantages of end-to-end Question: What advantages do you see in an end-to-end integration of after sales/reverse logistics processes?

Transparency Process optimization Efciency Closer/direct customer relationship Efcient partner management 0% 15% 15% 15% 20% 31%

46%

40%

60%

After Sales: From Necessity to Strategic Driver 25

KPI Overview

Key Performance Indicators in After Sales and Reverse Logistics During the interviews we also asked for the most important KPIs that are used to steer the after sales and reverse logistics business today. Of the numerous indicators reported back, only ve are commonly used by a larger number of interviewees: turnaround times (TAT), customer satisfaction and Net Promoter Score (NPS), costs, lead time, cost per incident (g. 26).

Performance in After Sales and Reverse Logistics Neither costs nor revenues emerging from after sales services account for a large percentage of overall revenue. This fact may also be a reason why after sales is not high on the top management agenda. On average, after sales costs and revenues even each other out this is plausible, as most companies treat after sales as a cost center, reducing the incentive to engage in cross- and up-selling or to create additional business (g. 27 + 28).

Fig. 26 Most important Key Performance Indicators (in % of answers) Question: Which are the three most important KPIs by which you steer your after sales and reverse logistics business? 50%

40%

42%

30%

32%

32%

20%

21%

21%

10%

11%

0% TAT Customer satisfaction Costs Lead time Cost per incident (e.g. repair) Net promoter Score (NPS)

Fig. 27 After sales/reverse logistics costs in relation to revenues/sales 10%

Max: 10%

8%

6%
Max: 5%

4% 2,8%
Min: 1% Min: 0,1% Max: 1%

2%

2,4%

0% After sales service costs (in % of renevue) Average (all)

0,5%

Min: 0,1%

After sales service revenues (in % of renevue)

Reverse logistics costs (in % of sales)

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Fig. 28 Average return cycle time, non-failure found rate, recovery rate and value reclaimed in % of original value
Max: 100% Min: 10%

66% 42%
Max: 60% Min: 1%

32%
Max: 15 Min: 0,5 Max: 45% Min: 1%

5,8 days

14%

Average return cycle of time

No failure found rate

Recovery rate

Percentage of original value reclaimed

Average (all)

The values for return cycle times, NFF rates, recovery rates and percentage of original value reclaimed differ greatly from company to company. Return cycle times depend on customer demand and also the product category the more important a device is in daily life (e.g. a smart phone or notebook), the higher the expectations from customers. The range of NFF rates reaches from 1% to 45%. The numbers correlate with different aspects like overall product quality, share of online sales, share of direct customer interaction, screening infrastructure, etc. While indeed some participants state to recover all of their returns (100%), the overall average recovery rate comes up to 66%.

After Sales: From Necessity to Strategic Driver 27

Conclusion & Outlook

Over the past years, focus in after sales and reverse logistics has been on increasing efciency of processes and driving down associated costs, including for example smarter returns screening and routing procedures. However, process and cost efciency alone will not be the road to success for after sales operations in the future anymore many market players have realized this and adjusted their strategic perspectives to focus more on the customer side of after sales, supporting a full lifecycle view of the customer. Multiple marketplace developments place further challenges on high tech OEMs after sales strategies. Especially the changing relationship with retailers will require exible solutions for after sales and reverse logistics, but also offer signicant opportunities for further process optimization and revenue generation. This includes directing a larger share of customer to OEM-owned return channels for increased process control, as well as increased activities regarding cross- and up-selling. Currently these elds are not yet in focus, but market players need to have their strategies in place in order to react to the changing retail landscape. Another common theme in after sales and reverse logistics is to identify strategies how to best cater to emerging markets, since their share is continuously growing in relation to the mature European core markets. Numerous operational challenges remain here, making this a key priority for after sales managers and a eld becoming more relevant for warranty buy-out solutions. The results of this survey show how these challenges are seen and met, and give examples for new strategies and initiatives to effectively counter them. Best practices of individual market players and new end-to-end after sales solutions promise signicant improvements for the after sales and reverse logistics function regarding costs, revenues and customer experience.

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About Deloitte

Deloitte More than 200,000 professionals at Deloitte globally offer a unique breadth of services. As part of one of the largest professional services rms worldwide, 17 Deloitte ofces in Germany offer integrated services. Deloitte offers its clients a multidimensional approach to addressing their issues. We use a combination of audit and advisory, enterprise risk services, tax, nancial advisory and consulting to understand and evaluate client issues in a big picture context. Deloitte Consulting Deloitte consultants can help you plan, grow and structure your business. We are known for our straightforward approach to solving our clients most complex business challenges. We have deep industry expertise, having served more than one-third of the companies in the Fortune 500 and hundreds of middle-market clients around the world. Our services include Human Capital, Strategy and Operations and Technology consulting. With our unique, collaborative approach, we work closely with clients to improve performance, drive shareholder value and create a competitive, sustainable advantage, regardless of where in the world your business takes you. Deloittes Strategy professionals are uniquely positioned to help companies in their efforts to achieve superior performance and meaningful growth by developing insights that help them to set and realize the right strategic direction, from corporate strategy and restructuring to go-to-market and customer management strategies. Deloittes Operations professionals goal is to increase prot and efciency along the clients supply chain, by delivering enduring value through a holistic offering including analysis, planning as well as optimization of the value chain and covering all areas from strategy to technology implementation. Technology, Media & Telecommunication Industry Deep industry expertise ensures that the advice we provide to clients is tailored to that particular sectors needs. With more than 7,000 senior professionals worldwide, Deloitte works for 92% of the Fortune Global 500 TMT companies. More than 60 consulting TMT experts in Germany support technology, media and telecommunication clients from strategy to implementation.

Deloittes After Sales and Reverse Logistics Capabilities Deloitte is routinely ranked as the top management practice in the world by leading analysts. We offer an end-to-end approach to implementing the entire spectrum of after sales and reverse logistics capabilities, not just bits and pieces along the way. Strategy. Process improvement. Organization design. Transaction analysis. Technology selection and implementation. Change management. We put it all to work together to help some of the worlds most successful companies become even more competitive by means of improvements in after sales strategies, processes, and capabilities.

After Sales: From Necessity to Strategic Driver 29

About arvato

arvato arvato AG is a leading global Business Process Outsourcing provider. More than 68,000 employees in over 30 countries work to bring daily success to business customers by implementing and managing tailor-made BPO & SCM solutions. These include all services related to customer care, after sales, supply chain management, digital storage media, digital distribution, nancial services, qualied and custom IT services. With operative excellence, innovation and great exibility, arvatos business units develop peerless outsourcing solutions for customers from a diverse range of sectors. arvato Hightech The division arvato Hightech is a global leader for outsourced Supply Chain and After Sales Solutions in the High Tech & Electronics industry. Leveraging a global network of warehouses & logistics depots, a globally integrated SAP-based WMS- and TMS-platform, as well as more than 50 years of expertise, arvato delivers proven and cost-efcient service solutions. The service portfolio encompasses: 1. Supply Chain Services (Packaging & Postponement, Conguration & Assembly) 2. Logistics Services (Warehousing & Distribution, Service Parts Distribution, Transportation Management) 3. After Sales Services (Reverse Logistics, Repair, TechSupport) 4. E-Commerce (Online Store Management, eFulllment) This broad service portfolio from a single provider, enables arvato clients to reduce their total supply chain costs and increase shareholder value by innovating and improving entire business processes, rather than just individual elements.

arvatos After Sales and Reverse Logistics Capabilities arvato provides outsourced after sales solutions for global IT & CE companies. Our solutions comprise of reverse logistics, repair services and technical support as well as fully integrated RMA and self-help IT solutions. Arvatos integrated approach focuses on streamlining the end-user experience and reducing NFF (no-failurefound) returns as well as average handling time. Our clients benet from improved customer satisfaction and NPS levels and from reduced total costs of ownership in after sales and warranty management.

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arvato locations

Corporate Headquarters Germany 33442 Herzebrock-Clarholz Dieselstrae 64-72 Phone: +49 5241 80 74457 Europe Germany 52353 Dueren Willi-Bleicher-Strae 36 Phone: +49 5241 80 74457 The Netherlands 5804 AM Venray Smakterweg 116 Phone: +31 88 8878 519 United Kingdom MK10 0AT, Milton Keynes Chippenham Drive Kingston Phone: +44 844 846 0800 France 54700 Atton Zac dAtton Phone: +33 3 83 87 82 30 Czech Republic 273 03 Stochov Osvobozen 535 Phone: +420 312 560181 Russia 150029 Yaroslavl ul. Dekabristov 3 Phone: +7 4852 672776 North America USA Valencia, CA 91355 29011 Commerce Center Drive Phone: +1 800-223-1478 Pleasant Prairie, WI 53158 11500 80th Avenue Phone: +1 262-947-0800 Weaverville, NC 28787-9442 108 Monticello Road Phone: +1 800-223-1478 Duncan, SC 29334 112 Hidden Lake Circle Phone: +1 864-486-5214 Canada Ontario N2G 4N5 Kitchener 235 King Street East Phone: +1 519 570-031 Latin America Brazil So Paulo, SP ZIP 01140-030 Av. Dr. Edgar Theotonio Santana n 351, Barra Funda Phone: +55 11 3383 4500 Hortolandia, SP ZIP 13185-324 Av. Papa Joo Paulo II 4 Galpo 4 Jd.Rossolen Phone: +55 19 3845 3090 Peru Bellavista, Callao Avenida Mariscal scar R. Benavides 3866 Phone: +51 984 155 779 Asia Singapore Singapore 738068 2 Woodlands Sector 1 #01-14 Woodlands East Industrial Estate Phone: + 65 6319 9100 China Shenzhen B-1-2F, Xing Hong Science & Technology Industrial Park Phone: +86 755 338 618 66 999077 Hong Kong 9 Dai Hei Street Tai Po Industrial Estate N.T. Phone: +852 2665 0101 20042 Shanghai 20F Cloud Nine Tower 1018 Chang Ning Road Phone: +86 21 616 118 66 330029 Nanchang Layer 2 698 Jingdong Road, High-tech Zone of Zhejiang University Science Park Area C Phone: +85 791 82068923 100016 Beijing Jiuxianqiao East Road, Chaoyang District, Beijing, the A2 the 9th Floor Phone: +86 10 84798888

Deloitte locations in Germany

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Deloitte Touche Tohmatsu Limited is represented by member rms in more than 150 countries

Authors & Contact

For further information regarding detailed survey results, please contact us: Deloitte Steffen Legler Customer, Channel & Digital, TMT Tel: +49 (0)69 97137 340 slegler@deloitte.de Erich Gampenrieder Operations Tel: +49 (0)89 29036 7981 egampenrieder@deloitte.de arvato Marcus Karten Tel: +49 (0)173 7045514 marcus.karten@arvato.com

Thilo Tbbens Customer, Channel & Digital, TMT Tel: +49 (0)211 8772 3299 ttoebbens@deloitte.de Wolfgang Kurz Customer, Channel & Digital, TMT Tel: +49 (0)69 97137 357 wkurz@deloitte.de

Ken Taylor Tel: +49 (0)173 2908058 ken.taylor@arvato.com

For more information please visit our websites at www.deloitte.com/de and www.arvato-hightech.eu

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