By Michael Seid, Managing Director, MSA Worldwide
Many of our clients have proven to be remarkably resilient during recessions, and yet there are others that have come to us for advice that have not fared as well. And while each difficult situation is different, there is frequently a clear and avoidable thread that runs though each troubled system we have seen.
Successful executives, whether in franchising or not, intuitively understand that becoming great companies requires that they meet a basic three-point test:
- Do they maintain brand standards at each location?
- Are they able to intelligently achieve scale in markets to ensure brand recognition?
- Are they able to achieve economies of scale and, by doing so, improve the financial performance throughout the system?
The difference between those that are doing well and those that are struggling stems from whether management understood these very basic issues and how well they managed to achieve a passing grade.
It’s a unique business relationship defined by legal requirements
The lesson of the Leaning Tower of Pisa is that no matter how attractive the building, you first have to first get the foundation right. And understanding that lesson is equally important for franchisors, as many of the problems we see stem from the way the franchise system was originally designed and developed.
Emerging franchisors, and some lawyers, driven by the legal realities of franchising, often have an inaccurate perception that franchising can be a formula-driven model requiring merely twenty-two disclosures and a receipt. Those twenty-two disclosures, for good or bad, create constraints on the future management of the business. When system determination are based on “best practices” (an overused and abused excuse for not thinking about your unique business), and when fees are based on industry averages that treat franchisors as if they were fungible from one company to another, franchisors and franchisees suffer the consequences.
Too many franchise strategies are built first from a viewpoint of what it takes to sell a franchise and, unfortunately, not on what it takes to make the franchise system viable for the long haul. Even in this difficult economic climate it is far easier to sell a franchise than to sustain a franchise system.
Because managing a franchise system is difficult, the twenty-two disclosures need to be based on a strategy designed to meet the three-point test in a way that can support and deliver consistently on the franchisor’s Brand Promise, to every end user consumers, at every location. This is essential. With variations in franchisee profiles, brand positions, real estate requirements, investment, training, brand support, supply chain, technology, marketing, and a hundred other variables, a one-size-fits-all model does not work. Making critical decisions based on averages and other systems’ best practices fails to ensure that an appropriate franchise system structure, strategy, and capabilities are in place.
Still, even in franchise systems that have invested in developing a strategic plan, we find an overriding focus on selling franchises as the driver of the strategy. No doubt growth is essential, but when growth is the overriding focus of a franchisor’s strategy, and the needs of the franchise salespeople override the needs of operations management to meet the three-point test, problems occur and system sustainability is put into jeopardy. This is especially true in an economic climate like we find ourselves in today, when franchise sales are not robust.
Franchise systems need to have a balanced approach, and that means fees need to be set to allow for the proper training, support, brand evolution, relationship development, and return on investment that management feels is required to deliver a consistent Brand Promise to consumers. Franchisees today may require additional or different support than traditionally provided, new product development to meet consumer demand, and brand marketing to achieve their financial goals. Equally important, decisions made based purely on a franchise salesperson’s desire to overcome prospective franchisees’ concerns can put long-term stress on the system. Balancing marketability with the needs of the unit operations is an essential part of the decisions to be reviewed in ensuring sustainability at each level.
If you don’t measure it, it must not be important
Ask a franchise executive “How’s business?” and you are likely to get one or two answers. Experienced franchisors will begin to talk about same-store sales, franchisee performance, new product development, and issues that are focused on system sustainability. Less experienced franchisors will generally talk about the number of franchise sales in the pipeline and frequently, when probed, do not know anything about the unit economics at the franchisee level.
When asked about how frequently a franchisee is visited, inexperienced franchisors will measure frequency by the calendar, while experienced management will talk about a visitation schedule based on unit performance measures, the requirements of ensuring quality operations, and the plan in place for each unit visit.
It is essential that you measure system and unit performance and manage your business based on Key Performance or Success Indicators. KPIs or KSIs are measurements that enable you to determine whether or not your system is meeting its organizational goals at every level. If you don’t measure a performance, there is really no way to know if you are performing well.
Experienced franchisors have KPIs in place for each element of their business. Field visits and the purpose of those visits are scheduled based on the needs of the franchisee’s ongoing performance, rather than whether or not a particular franchisee was visited this week or month. KPIs that measure performance criteria such as same-store sales, cost of goods, labor percentages, sales calls, new and repeat customer percentages, etc., are what drives effective field support. Determining the ten to twenty key measurements that drive your business at the unit level will enable you to monitor franchisees’ performance, benchmark them against other operators, and provide franchisees with focused support customized for their needs. In addition to improving unit performance and providing beneficial services to your franchisees, KPIs enable you to increase the span of control for your field staff and lower your overall cost for supporting the franchise system.
But KPIs are not simply tools for franchisee support. Used in franchise development, for example, KPIs allow you to monitor franchise sales performance and new store development. It is a tool used to measure single and multi-unit franchise sales, multi-unit pipeline performance, lease negotiations and execution of leases by franchisees, contractor engagement and build-out performance, equipment and supply ordering, scheduling for training and marketing, etc. By establishing and using a complete set of KPIs, franchisors can effectively and efficiently manage the business and rapidly react to the anticipated forward-looking indicators.
Take a step back from the immediate issues your franchise system is facing today and look closely at the reasons underlying your problems – not just the symptoms. Recognize that some of the issues are caused by structural decisions made in the past that need to be corrected, and that many of those decisions were caused by a focus on growth and not on the needs of sustainable growth management. Include your franchisees in the process, as their support in executing change will be essential. Focusing on meeting the three-point test will allow you to understand the unique requirements of your businesses and enable you to modify your strategies appropriately. Using KPIs to measure and manage performance will provide you with the tools needed to manage to your system’s goals and objectives.
Do you have further questions about improving your franchise business?
MSA can provide expert guidance on how to properly develop a successful and sustainable franchise system.