The value of measuring cost to serve

Given the value it provides, it is surprising that many franchisors don’t measure and evaluate the comparative profitability of their franchisees on a cost to serve basis. Many believe the whole process is either too hard or not of high enough priority.

However, it is entirely possible that some franchisees consume support resources in excess of the royalties and other revenue they contribute to the franchisor. By measuring and reporting cost to serve, franchisors can see which franchisees contribute to bottom line performance and which do not.

Establishing such a system is not difficult if you adopt four key principles:

1. Don’t over engineer. Starting with the biggest contributor to franchisee support expense, allocate it to franchisees. Then move onto the next biggest expense contributor. Only worry about the expenses contributing to about 70% of total expense. Usually, the last 30% (typically corporate overhead) can’t be easily allocated with any reasonable accuracy.
2. Focus on consumption. The allocation method should reflect the consumption of the resource. For Area Managers, ask questions like how much time does each franchisee consume?
3. Consider the whole. Always consider the whole expense, e.g. travel time to and from the franchisee, follow-up time on a phone call, etc.
4. Aim for incremental improvement. Always look for ways to more accurately allocate expenses or include more expenses in the overall calculation. Over time, it may become easier to measure some expenses due to changes in systems or processes.