Adaptability: The New Keyword; Focusing On The New Realities

The U.S. economy is on the rise. While the world economy will be fortunate to realize a 3 percent growth rate in 2012 (less than 2 percent and we'll see a global recession, something too close to call at the moment), most of the domestic indicators are signaling a positive outlook for next year. Yes, Europe is a mess, China is slowing down, and Japan is close to returning to the economy of its lost decade. With most other economies substantially smaller, there aren't any foreign engines of growth to get the world humming again.

Despite all that, the U.S. gives us some reasons for optimism. We're still in the aftermath of the decade of indulgence. The period from 2002 to 2008 was marked with unprecedented consumer and government spending. Consumers spent too much using the all-too-easy credit access known as home equity, ATMs, and credit cards; and the government managed to expand its spending across all continents and categories. Until both consumer and government debt get back to more affordable levels, the hangover will continue. It is going to take years, and it's not at all clear whether the government has the fortitude to deal with its portion of the tab and, if so, how it will do it. That uncertainty will further constrain business and consumer spending.

In economic terms, the period from 1985 to 2007 could be considered the Great Moderation in business cycles, when dips were few and far between. Compare that with 1799 to 1929, when nearly 90 percent of U.S. expansions lasted three years or less. With the Fed out of high-caliber ammunition and the political climate anything but conducive for a cooperative solution, it seems likely we're returning to the historical norm of more frequent and dramatic swings in economic activity.

So how can this backdrop portend a good business outlook? Let's start with a look at the S&P 500. Do you know when more than half of those companies started? Good guess: during economic downturns. And the stock market is signaling some strong buy messages. Corporate America has the lowest collective debt and highest cash reserves in decades. American business culture is built on entrepreneurialism, and the next wave of great companies has already been started. They're all around us. Bully for American business! But for many of you with growing or mature brands, that just adds to the challenge. Even now we see new franchise brands being started, on average, every three days.

That leads me to a key driver for almost every company in the U.S. and certainly every franchisor: adaptability. In the economic turbulence ahead, companies are focused on the bottom line, not the top line. Corporate America has carefully grown the top line and substantially improved the bottom line during the past four years by focusing on measures that account for the new realities. What they have done gives the franchise community a good road map for the next few years.

Whether for marketing, franchise development, training, operations, or compliance, franchisors must be confident they are spending smartly and effectively. Picking the next area to develop will be made with forecasts of local, city, and county growth patterns 5 and 10 years from now, when your franchisees will still be running the businesses. Training will have more business-level skill development and information sharing to strengthen the franchisee overall. Support will find ways to overcome traditional legal barriers to do what's right and necessary with franchisees. And all of this will be benchmarked, not only internally but across brands and sectors. Adaptability to what the changing market and demographics suggest will be a distinction that successful brands will embrace.

We're seeing the power of this today with Bank Credit Reports (BCRs), a specialized form of benchmarking. BCRs compare brands within franchising on factors relevant for bank credit decisions. Many of the measures used in BCRs are new to franchisors and even to many banks. Yet they are relevant in these economic times--and they are establishing performance measures that will lead to greater access to capital for brands with good outcomes. Their real power is that they provide a level of credit risk forecasting for banks that are shifting capital away from independent businesses (where banks struggle to have any predictive credit risk ability) toward franchising (which has a lot of credit risk predictability).

In uncertain times, the winners will be banks, franchise companies, and companies in general that can suffer amnesia for what worked 10 years ago and adapt operations and measurements that focus on the things that matter in this multi-year period of greater economic swings.

Darrell Johnson is CEO of FRANdata, an independent research company supplying information and analysis for the franchising sector since 1989. He can be reached at 703-740-4700 or djohnson@frandata.com.