The neglected component of franchising

• The neglected component of franchising.pdf

The neglected component of franchising.pdf

The focus of franchising and the foundation of its success is the ability to bring a committed owner operator, with a capital commitment, into a business to drive customer service, revenues, and micro manage costs. Why has this become a successful business model?

There is no single reason. The improved understanding of the franchise business model, introduction of the Franchise Code of Conduct, the willingness of franchisees to invest, the sophistication of the banks approach to franchise lending, or the awareness that franchising is about granting the rights to operate a quality business rather than “selling’ franchises to unsuspecting individuals, have all contributed to the success of franchising.

What is the neglected component of franchising? I am adamant that any business utilising the franchise business model should include a mix of company-owned and franchised operations within its network.  Dig deeper and here, in my view, is one of the most neglected components of franchising: company-owned operations.

There are four primary reasons to include company-owned operations within the network.

• The cash flow and profitability
• The ability to continually understand the customer end of the business
• The ability to rationalise and stay in touch with the franchisees business
• Proof of concept in the early stages of developing the business

Experience suggests that in a significant number of Australia’s franchise networks, franchise operations outperform the majority of company-owned operations in terms of revenue and net profit. It is recognised that there are a number of top quality company-owned operations that perform strongly, often securing the top position in the network.

The general trend of a franchised operation outperforming a company-owned operation, all other attributes remaining equal, is practically one of the key reasons franchising has been so successful. The franchise business model recognises what a capital commitment will do to inspire an individual and addresses the challenge associated with managing increasing numbers of employees.

Pay for performance not existence?

The focus of this article is not the lack of existence of company-owned operations, but rather the absence of a sense of ownership in many employees within company-owned operations based on the experience of DC Strategy. 

In franchised systems there is often an inequality in terms of the focus of management with employees as distinct to franchisees. Whether it be by intent or not, many company-owned operations fail to maximise their outcome due to an inability to create a sense of ownership in an employee.

There are significant non-franchised networks such as Flight Centre and Michael Hill Jeweller that have some of the most widely respected performance incentive schemes in existence that have formed a key part of their success.

Consider for a moment the respective challenges of achieving $100,000 uplift in net income to a franchisor in a retail store network where the key costs of labour and rent are generally fixed, and a moderate cost of goods sold exists.

Experience suggests there is significant latent potential for increases in financial performance in most company-owned networks. The key enabler for an increase in financial performance is creating a sense of ownership in employees by successfully implementing a performance incentive scheme that recognises, motivates, and drives performance. The franchise operations in a network may still outperform the company-owned, but the real opportunity is creating a performance-orientated culture, that continually drives super performance.

The practical reality suggests most organisations either resort to commission structures or there are no incentives in place at all.  Detailed below is a summary of the key advantages, mistakes and practical insights of performance incentive schemes that in the experience of DC Strategy have proved to be very consistent.

Key advantages of performance incentive schemes

• Developing a sense of ownership with key people in the organisation
• Creating a performance orientated culture
• Retaining people for longer periods of time
• Enabling the business to keep people and survive during periods of reduced economic activity by operating from a lower fixed cost base

Top 6 mistakes of performance incentive schemes

• Lacks structure and is poorly communicated to employees
• Too short term and commission focused
• Head office employees are not included or recognised
• Insignificant alignment with the key performance drivers
• Pay existing people more for doing the same
• Incentive program repeatedly changed

Practical insights of performance incentive schemes

• Ensure the scheme is meaningful, inclusive and transparent
• Balance financial, non-financial, individual and team rewards
• Think medium to long term rather than month to month
• Seek objective external input from people with expertise
• Trust people, incentivisation is a win-win situation

It is absolutely critical that there is a strong and sustainable strategy for any performance incentive scheme. The ability to develop a short term focus or destroy morale is actually the more common scenario. Experience has suggested too many performance incentive schemes actually demotivate people or they simply pay people more for the same level of performance.

The right people are an organisations best asset and if there is an opportunity to create a sense of ownership in any person it will likely be a win-win over the duration of the relationship.

DCS Consulting is your business growth specialist. For more information in relation to our quality business analysis, please contact:

Level 5, 530 Collins Street,
Melbourne VIC 3000 Australia
growth@dcstrategy.com
+61 (0)3 8102 9200