My partner and I have been presenting our new solution franchise flywheel to the franchise community. It is truly cutting edge. Most of all its so affordable and provides a series of capabilities that many ZORS could only dream about. We’ve been fortunate to speak to some very reputable and accomplished franchise professionals about our solution. Commonly they love it. However, a call last week with one very accomplished person really brought home a tough question for me. Are some ZORS worried about the wrong things?
Like most people we speak to, this organization is using spreadsheets, outlook, old versions of ACT and other fragmented tools to run their business. In reality many of these folks cannot tell “come here” from “sic ‘em” without involving many hours of effort and people’s time. There is no 360 view of the business. There is no coordination of communication, orchstrated work flows and as a result there are many more people being employed to do mundane things. Even more obviously, what those folks ARE DOING is not nearly as productive as it could be. This is usually acknowledged by the people we talk to and then, as in our call last week, comes THE DISCUSSION. What’s the price ?
Now price is an important variable and its an important question. I mean you have to deliver value for the dollar. We understand that and really see this as our primary advantage. For this ZOR the price would be a mere one hundred and fifty dollars a month. That’s right $150 a month. What was surprising is that THIS WAS OBJECTIONABLE. Can you believe it ? I can’t. $150 a month is a mere $1,800 a year to have something that actually helps you MANAGE your business instead of it managing you. $150 a month is what many companies spend on a single mobile telephone bill per executive manager. It’s a single dinner with a franchise prospect. It is less than 10% of the average franchise unit fee. How is that objectionable?
Do you think franchising generally has ignored the benefits that technology and systems offer? What can explain this type of thinking? We continue to mine for the insightful ZORS who can see the value in the franchise flywheel. Can you help us find some more evolved ZORS to speak with?
As a distribution model, franchising is certainly a proven method, contributing significantly to GDP, employment and brand expansion across the globe. Given its past achievement however, the industry is in the midst of an era of great change and as a result its future is unclear. What is clear, is that organizations who focus on innovation and reject the status-quo will have a better chance than those who do not. Question is what franchise systems will be able to adapt to the changes and which ones will not.
Franchising is tough right now. Its not just that lending has dried up for many franchise concepts. It isn’t just a function of the recent recession in general that is increasing economic pressures on franchises. The fundamental environment most companies face is becoming exceedingly difficult overall, requiring core changes to business concepts. These changes don’t just pertain to the franchise company itself but as importantly to the business models they promote and franchisees operate. Some key trends make it unclear wether many established and growing franchise systems are sustainable, as shocking as that sounds. The following four factors are providing most of the impetus for fundamental changes that franchise systems must make:
Increased competition
Advancements in technology;
Evolving consumer needs and wants; and
A more complex and demanding legal environment.
Increased competition
Competition is intensifying in many industries. An example is the fast food market where the most established franchise brands reside. As illustrated by tough competition in the U.S. pizza market, increased competition is resulting in flat to lower sales and discounting as companies attempt to protect or build market share. Ultimately this exercise is unproductive and will inevitably erode profit and sustainability.
Smart companies operating in highly competitive environments work hard to improve efficiencies and differentiate themselves. McDonald’s, for example, has been rapidly evolving its menu, operations, and offering of new services like wireless Internet access. The chain is also focusing more on quality to differentiate itself from others. But this is McDonald’s, the giant of the industry and a true exception. What will franchise systems a fraction of their size, which represents the clear majority of franchises today, be able to do ?
Curiously, more US franchisees have left the McDonald’s system in the past twelve months than in the previous five years. This is a telling trend and may be a clue for other franchise brands with lesser brand leverage and resources who attempt to respond to change. It just will not be an easy environment for franchise systems to navigate or survive.
Technology advancements
Advancements in technology is also increasingly impacting franchises. For example, the ubiquity of the Internet is radically shifting how smart competitors market their products or services. Conversely, the Internet has spawned new competition, like Amazon.com, which competes with traditional bricks and mortar operations. Other advancements, like inventory management systems, cloud based CRM systems, GPS devices and digital closed circuit television provide franchised operations with opportunities for improved efficiencies, security, and more sales. However, these tools also require effort and expertise for successful implementation throughout a franchise. They also require additional capital investments. Something many systems are incapable of or without.
Evolving Consumers & Legal Environment
Consumer needs are shifting rapidly posing a real problem for franchised operations. Coupled with the threat of lawsuits and legislation, an increased number of consumers watching their weight has resulted in radical changes to restaurant menus. As a result McDonald’s has introduced fruit, salads and wraps and Subway has introduced Kid Packs which substitute fruit for cookies and 100% juice for soft drinks.
There are obviously a number of trends and changes that must be considered by prospective and existing franchisors and franchisees. Some of these trends require quite fundamental changes to the way businesses operate. Navigating this change requires huge patience and resources to gain acceptance and implement. When applied to multiple business owners with limited resources and whom are dealing with great frustration this is quite problematic.
Bottom line is the SOP is not going to likely work for most franchise systems given the degree of change going on. If you are a manager, executive or franchisee, how aware are you of these pressures and do you concur with the analysis that your business models are feeling significant and greater pressures requiring fundamental change ?
I take for granted that many people understand what “Cloud Computing” is. Speaking at different events and talking with clients in franchising and other industries, I’ve become more aware that many don’t truly understand what the term “Cloud Computing” means.
At the Flywheel Group this has made us stop and think, given all the potential that the cloud offers clients particularly in franchising, that we need to do a better job of sharing more about what the “Cloud” really is.
Its really important for people in any organization to grasp the concept of the “Cloud” because it is going to touch everything in our lives and organizations, if it hasn’t already started to. Franchise executives and managers should take a moment to catch up on the basics with this quick video which is an excellent and short explanation of how Virtualization, Utility Computing and Software as a Service are converging to make Cloud Computing an important aspect of franchising today. Watch !
Let’s say you’re like many small to medium sized companies with information systems comprised of a variety of pieces. You have one or two in-house servers, a number of laptops and PC’s, a Microsoft operating system, desktop applications like word processing, spreadsheets, Outlook and perhaps a third party proprietary Intranet application accessed over the Internet. This is common for many small to large sized franchise organizations.
Trouble is, if you take a moment to calculate what the cost of all this technology and maintenance is for your company you might be surprised. Upgrades, hardware maintenance, software licenses all add up. Don’t even mention that you are unable to really manage what folks are up to on a day to day basis.
To make this more challenging your people aren’t able to take full advantage of things like their smart phones, mobile internet access while they are on the go or at home, social media, and other advancing technologies. These tools would help them be more productive in serving customers or developing new business.
What is even more troubling is if you are relying on a third party vendor, which might have financial issues you are unaware of given today’s environment, to manage and host your Intranet content or business systems based on a proprietary infrastructure. You may have some real trouble ahead. What happens if they fold ? What upgrades are they making to integrate new tools ? What is your “exit” strategy ?
You have a problem. The good news is there is a solution. You just need to gather the will to understand the tremendous risk and opportunity that all organizations face today around their information systems.
With all of the advancements in technology available to organizations today, particularly with the cloud, you really really have to sit down and take account of how you are using your IT and strongly consider shifting your strategy to the cloud….Entirely to the cloud. Sooner not later would be a very good idea.
Watch Mark Benioff CEO of salesforce.com explain the cloud, technology and what is happening and why you should jump in. Don’t wait and let your competitors beat you to the punch.
With the surge in more affordable and flexible cloud based information systems, like salesforce.com, many intelligent organizations are evaluating changing their information systems. This is particularly true for franchise organizations, whose unique business models offer an opportunity to improve productivity significantly via the wise adoption of well crafted solutions like franchiseflywheel.com .
Unfortunately some organizations attempting to make significant changes in their information systems never realize their true potential. Often the “system” or technology is blamed as the reason. While there are flawed systems out there, they are rarely the key cause.
Putting aside the pros and cons of alternative IT solutions on the market, several barriers exist to realizing the opportunity information technology systems offer. A key one is the potential a system can deliver as opposed to what people actually do in their day to day functions. These two worlds are most often quite varied. The trick is understanding this gap and wisely designing an implementation plan that takes into account some important and practical considerations. This can be a painful and time consuming process, but failing to embark on the effort often leads to poor outcomes. The technology works great but goes unused.
People don’t like change, so no matter the opportunity change offers, it is rarely the technology and more often how people are included as part of a solution in tandem with a thoughtful plan that results in a system being more successful. Therefore, some key disciplines should be applied when implementing new information system technologies:
1. Identification of a single person in charge of the project;
2. Involvement of all user departments;
3. Documentation of extant business practice and process;
4. Documentation of the ideal process outcomes of a new system;
5. An assessment of staff skills as it pertains to the new technology;
6. Identification of specific steps required to shift from the extant practices to the new practices;
7. Identification of resources required for extra work and time involved in making the switch;
8. A training plan for staff to upgrade their technology skill and use of the new systems; and
9. Establishing a realistic time line with implementation phased in by appropriate functions.
Getting organizational buy-in is key. People need to understand what the opportunity is and feel they are part of its adoption. Also, having an implementation plan is crucial. However, adhering to the nine disciplines above is difficult. Often businesses are going through change which heightens the need for improved business process that IT facilitates. The solution is needed sooner than later and its common to let the details get “figured out later” when one has a general conception of how things might be, particularly when based on slick new potential that technologies offer.
To illustrate how important some of the nine disciplines are consider one: the documentation of extant business process and practice. If you are upgrading to a new system why should you be concerned about understanding the details of the existing system ? It is common for management to believe they understand present methods being employed in their own companies. After all they work there and often had a hand in designing processes. However, the devil is in the details, so while many an executive will tell you they know how existing processes are working today, many times they do not intimately understand them. Turnover, inattention to an area, or other factors may be the cause. Regardless of the reason, understanding how things are really being done is a critical first step in both identifying the greatest areas of opportunity but also in reducing the number of unanticipated gaps that may emerge in implementing a new solution. The painful reconciliation of the present to a glorious future is critical and people are often surprised at the outcome of the process. The discipline also serves to illustrate important aspects of a culture that may be impeding implementation; if an existing system is not working today because employees refuse to adopt tools or have not been trained, there will be a similar failure of adoption with any new system.
Another example of why the nine point are important can be demonstrated by contemplating this one: documentation of the ideal process outcomes of a new system. Specific outcomes are important to identify what the result should be. There is a difference between the general notion of an outcome and clear identification of exactly what will occur. It also important to know what exact requirements are part of the outcome. For example, if certain data or functions aren’t being performed reports won’t be generated. That wouldn’t be a failure of the system. It is often assumed the “system” alone is the solution; it is unfortunately not. The solution is a wise and integrated application of technology tools with an important understanding that people are its users. Just as a quality franchise concept can fail in the hands of a poorly oriented franchisee, so can a quality information system fail in the hands of an unthoughtful adopter. Achieving fantastic IT outcomes is as much about having a disciplined organization that understands its application and is using the tool. Again, the system is only a tool, it is not THE solution.
In closing, adoption of these 9 disciplines might require more time but is well worth the effort and critical to success. The next time you are considering the adoption of a new IT solution, keep these important points in mind.
Many franchisors utilize Twitter to communicate their products and services to would-be customers. But how do you know if your social media efforts are paying off? Can you pull up a real-time report to see just how many new leads you’ve created over the past week? If you find an interesting conversation taking place about your franchise opportunity, are you able to effectively get a business development rep involved and respond in real-time?
We’ve posted this video to demonstrate the powerful functionality that’s created by integrating Salesforce and Twitter together in your franchise lead generation process.
In the past few years the fallout from aggressive brand consolidation plays in franchising is becoming more clear.
Mrs. Fields Famous Brands recently warned that it will file Chapter 11 within the next two months if it cannot persuade note holders to cut $145 million in debt by the end of June. The Salt Lake City-based franchisor of both Mrs. Fields cookies and frozen yogurt retailer, TCBY, has an annual interest debt-load of over $200 million.
Another franchise brand consolidator, NexCen Brands, announced in 2008 that it managed to stave off immediate bankruptcy proceedings after an interest payment on a sizable loan came due. NexCen, a franchisor of Great American Cookie, Pretzel maker, The Athlete’s Foot, and others declared in May that it had discovered the sizable loan’s unfavorable terms and realized it had insufficient funds to pay it. Its CEO warned it faced a severe cash squeeze and had “substantial doubt” that the firm would remain in business. Recent interviews From November 2006 through January 2008 NexCen went on a shopping spree, buying nine brands in 14 months. In the end, NexCen choked after the acquisition of the Great American Cookie franchise chain, when the interest on its debt was so large that it placed the company on the edge of insolvency. The firm’s new chief executive officer, Ken Hall, and his team miraculously managed to turn the franchising conglomerate from a $38 million net loss in Q3 of 2008 to a $1 million net loss in Q3 of 2009 but the Company still faces significant challenges.
These aren’t the only brand “consolidation” plays feeling pressure as a number of firms remain in the hands of private equity: with no means to exit in the foreseeable future.
Ted Pearce, general counsel of Meineke Car Care Centers, wrote the following in a May 2008 Franchising World article titled Post-Purchase Synergies: They Come in All Types:
“As franchise markets began to mature and there were more and more similar franchise systems co-existing within a market, franchisors found ways to further leverage their ability to gain market share by co-branding with complementary brands to capture a market segment that the systems felt they were missing. The present-day franchising world finds itself further consolidating under a common umbrella in an attempt to build efficiencies within a franchise concept and to realize synergies between these multiple systems.”
Efficiency is a great idea. Problem is most mergers don’t generate it. Here are some facts:
“70 percent of mergers fail to achieve their anticipated value…” – WEEKLY CORPORATE GROWTH REPORT
“Most mergers fail to add shareholder value-indeed, post-merger, two-thirds of the newly formed companies perform well below the industry average.” – HARVARD MANAGEMENT UPDATE
“A Towers Perrin study of 150 mergers of financial-services firms found that 30% of deals substantially eroded shareholder value, and another 20% eroded shareholder value somewhat…” – BEST’S REVIEW/PROPERTY-CASUALTY INSURANCE EDITION
“despite the well-publicized, much-analyzed fact that many of these mergers — up to 70%, according to some estimates — failed to create value, it seems clear that the end is not yet in sight.” – FINANCIAL EXECUTIVE
I was in franchise finance for a number of years and actually was involved in one of the earliest and largest merger acquisitions in food service history: Church’s and Popeye’s. I learned some valuable lessons first hand. While mergers might look good on paper, companies often fail to recognize the specific actions necessary to make two separate organizations behave like one. And the reasons for this are straightforward.
First, the people who focus on the acquisition are skilled in strategy, the industry and in finance. They have a very clear picture of the desired objectives of the acquisition, and understand how the new organization should return business efficiencies. But given the time demands of the pre-purchase activities, and their tendencies to focus on financial and business issues, the “people” and “systems” issues don’t receive the attention they should.
Second, the idea behind an acquisition or merger is to create shareholder value; to grow the business. Bottom line is many of these transactions are cover for a franchise system that has inherent problems which management believes growth can solve. But it doesn’t. Clarity around processes, systems and people are not achieved through economies of scale. In fact the problems created by operating multiple brands often outweigh the benefits.
Third, people most affected by the merger, employees of the purchased organization, do not know the business objectives, see change as a threat, have no real influence over the events, and wonder immediately how they will be affected personally. Not surprisingly, the focus and priorities of the two groups are likely to diverge starkly.
The main reason why more than 70 percent of business combinations fail is inattention to the messy, detailed, nuts-and-bolts issues. If management truly had their hands around those details they might not need to acquire their way to success in the first place. Facts are that even “smart” “experienced” franchise brand managers are not as capable as they might think at dealing with the nuts-and-bolts. Having consulted with a variety of franchise executives, many whom have been touted in industry rags as being gurus, I can say that few possess deep understanding of their own franchise system let alone the ability to ascertain the workings of another they are thinking of acquiring. Therefore, to the extent consolidations continue as a strategy reflective of a maturing franchise marketplace, folks should remain highly skeptical of mergers as a means to realize efficiencies that create value.