Franchisors must face the challenges of greater transparency, more franchisee and stakeholder interaction, and adopting a culture of continuous improvement and change.
By: JP O'Brien

October 2010 Franchising World

Not so long ago, royalty payments were sent by franchisees through regular postal mail and accompanied by a single slip of paper, on which handwritten notes indicated the month’s revenue numbers and royalty amounts. Franchisees were on the honor-system, which was built on trust that the owners would record and report all sales, yet sales numbers were reported from non-conforming, disparate sources. Meanwhile, unnoticed deep within the real, veiled numbers were data that could tell a story about the business and would share the secrets of customer activity, marketing and sales effectiveness, and employee efficiency.

When we take a closer look, we realize a franchise is alive with data. This data is generated by a marketing campaign reaching a prospect, customers placing orders and employees providing services to customers. The more we understand data, the more answers we find. Patterns form, which in turn, drive new direction, decisions and priorities, resulting in increased sales, reduced costs and increased profits. In a smarter business, we can now analyze all the data we see to make the business work better.

Few companies have succeeded in implementing the processes and systems to gain access to these critical data, although not for a lack of trying. Many franchisors have endeavored to create and distribute well-intentioned dashboards in the form of complex spreadsheets. Unfortunately, these performed poorly in practice due to a lack of ability to collect the quality, breadth and depth of data needed to provide true actionable business intelligence for both franchisors and franchisees. The problem is two-fold: First, any change to a franchise network can be a significant effort, and secondly, there is the lack of a system to capture accurate data.

Implementing an automated royalty process requires extra care and planning since it affects your franchisees’ perceived cash flow. Start by creating a solid business case, both for the franchisor and the franchisees, to outline and illustrate the benefits of automation. If the benefits are weighted to one side, even if you have the contractual ability to implement a new policy, it will be a tough battle to implement your plan successfully, timely and on budget.

Regardless of the current state of a franchisor’s royalty payment process, automation brings tremendous benefit and instant return on investment: faster, more timely payments, less administration time and cost spent on collections, less policing and hand-holding of delinquent franchisees, and payment policy expectations are set and met.

Jonathan Barnett, Oxi Fresh Franchising Co. president and founder, states “By implementing our systemized reporting system which accurately calculates royalty fees, scheduling fees, and national advertising fees, our collections overhead went from over 30 hours per month down to less than eight hours, reducing the time required to collect amounts owed from franchisees by over 70 percent.”

The change to systemized and automated royalty payments is worth the effort creating accuracy and transparency of data, removing the issue of questioning what was really owed. However, there is so much more to gain to become a smarter business if done correctly. The true business case for this level of change is to create a smarter business, a business of transparency.

Transparency Makes You Smarter
When a business adopts true transparency, every process, activity and behavior is open for analysis. By encouraging the ongoing effort to gather and analyze data on current and future business conditions, the business becomes smarter. Those involved form a culture of asking “why” and “what if,” challenging the status quo, not simply reacting to gut reactions and misinformed direction. A set of reports, including a royalty report, are available to business leaders, with comparative key performance data and actionable information, that can be used to monitor, engage, evaluate and create authentic conversations between franchisor and franchisee, or even between different franchisees.

A well-established transparent business becomes instantly more competitive by being able to see and predict changes in customer buying behavior or industry shifts. When the next viral- or socialadvertising channel arrives, a transparent business can quickly test and validate return on investment, minimize the risk of unintended consequences, and effectively roll out the new advertising vehicle to the entire network with little to no push-back.

Meanwhile, the non-transparent business, even with a valid case study in hand, may receive tremendous push-back due to arguments supported by only subjective and anecdotal data and experience. Businesses striving to create a culture and foundation of transparency must be sure they have real-time, accurate data; perhaps the largest challenge to a true transparent culture is the cancer of bad data.

Garbage in, Garbage out
Bad data input, and thus inaccurate reports, will leave franchisees and franchise leaders frustrated and disillusioned about the prescriptive and predictive capacity of their data, key reports and dashboard. They will (and rightly so) start to question the validity of the royalty calculations since they differ from their own and may have legitimate reason to challenge an automated payment.
To eliminate the “garbage in” problem, a franchisor must implement a system wide, mandatory set of business processes and a systemized way to record the activities and outcome of each business entity and process.

Pillars of Business
Franchises should view their business as large functional, interlocking business processes. Every business, regardless of industry, size, customer segment, or distribution model has five core pillars.
A franchise is uniquely positioned to take advantage of this fact by first systemizing its best practices, then replicating those processes across all franchise units, and finally, continuously improving and enhancing the processes as markets and customers evolve.

The five pillars of business are:
• Lead Generation: Acquiring accurate, usable customer data and executing timely follow-up will lead to increased conversion rates and higher net revenues. Capturing and converting potential customers into new customers is the core of effective lead generation.
• Customer Relationship Management and Sales: Sales processes and tools help businesses anticipate the needs of customers, which will result in increased sales and improving the quality of customer relations.
• Service Delivery: Streamline and automate delivery processes so personnel can deliver on-time, quality services driving completed orders, repeat customers and referrals.
• Business Management: The day-to-day management of business operations using current data to easily track the performance of business success for one location or across their entire network.
• Business Intelligence: A toolset that brings together the relevant information businesses need to make the best decisions for growing revenues, improving operations and increasing profitability.

Selling it to Franchise Partners
The return on investment is demonstrable, the competitive advantage is unmistakable, and the value is quantifiable to the franchisees. But how does a franchise go about selling it to the network?
To start, don’t announce your new project as “automating royalty payments.” To make it work for you, build the case that the return on investment of the ensuing change will benefit your franchisees. Now the franchisor will now be able to deliver transparency and the accurate answers to the key performance indicators promised the franchisees when they bought a “baked business plan.” Beyond the benefits to the franchisor, which include current business reports, supported by accurate data, driven by everyday business activity, enabling automated royalty payments, it is most critical to exemplify that the franchise system will have the foundation to make its businesses smarter, work better and generate more profit.

Each franchisor has a franchise operations manual that is published and made available to its franchisees. Likewise, every franchisor needs to provide a franchise operating system to systemize and automate the five pillars that will replicate the key day-to-day workflows and protect brand consistency.

To successfully implement a franchise operating system, it is imperative to create a comprehensive communication plan to your franchisees. The plan should span three months with direct communications in weekly-to-semimonthly intervals, starting with awareness, promoting interest and leading to acceptance and impact analysis.

As with any marketing or communication effort, it is often an art more than a science, and there is no substitute for experience and prior success. Successful implementation by both large and small franchisors shows that it is critical to have support and leadership from key franchisees that will inevitably form to create yet another franchisee advisory group.

Building the right franchisee advisory group for this endeavor will help shepherd and champion the sale to the rest of the franchise owners. To find the right franchisees for the new group, segment the owners by business sophistication, technology competency and “team players” who closely follow the recommendations of the franchisor.

First, evaluate the level of business sophistication across the franchisees; a natural bell curve will form.
Ten percent of the franchisees will have significantly less experience and business acumen as compared to the average franchisee, while 10 percent will have significantly more. The trick is to recognize that the system’s processes must first fit the core 80 percent of franchisees, but can only be adopted by the entire franchise base if promoted and championed by the 10 percent deemed “more than others.”

Meanwhile, the project will be in great jeopardy if the “less than others” category has a louder or more respected voice to the core 80 percent group.
Next, by intersecting the remaining two bell curves of technology competency and team players, a franchisor can identify which partners should be a part of the leadership process, which need to be managed closely, and which 80 percent will likely follow the plan.

Many franchisors have tried and failed to launch similar business change, leaving resentment and distrust of future endeavors by franchise owners. For franchisors in this dilemma, it is best to leverage the success of third party implementers to regain trust and belief in the realization of a truly transparent business.

Opportunities and Dilemmas
Business is changing fast. In the past, franchisors lived in a structured and seemingly predictable world, but they now must cope with a continually-adaptive business environment, ever-more savvy franchise owners and end-customers, and competition that can rise up overnight to steal market share. This new world is one of freedom, yet franchisors have to confront a number of challenges: greater transparency increases franchisor accountability, more franchisee and stakeholder interaction leads to a larger volume of recommendations of new system-wide opportunities, and adopting a culture of continuous improvement and change may require personnel changes.

There are no quick solutions to these challenges, but franchisors who do not change and cannot implement networkwide, repeatable processes and systems, will not remain competitive. We should learn from the former CEO of General Electric, Jack Welch, who argued, “Willingness to change is a strength, even if it means plunging part of the company into total confusion for a while.”
The leadership team at Oxi Fresh embraced this change and navigated successfully through the uncertainty. The freedom has helped the company eliminate hurdles to growth and improved their industry rankings. Embrace this new freedom, it may revolutionize your franchise, your business, your brand and your industry.

JP O’Brien is CEO of SageFire, Inc., an integrated system that specializes in business management and business intelligence reporting. He can be reached at jp@sagefire.com   or 303-381-4610.