In-House or Out?: Focus On Your Best and Outsource The Rest
By: Eddy Goldberg
Franchising is all about outsourcing. Someone comes up with a great concept and essentially outsources its growth to franchisees so corporate can focus on its core task of system development. Why not take that idea and apply it to your own multi-unit organization? After all, if the prevailing wisdom at larger companies is to focus on their core competencies and outsource the rest, why should it be any different for you?
"The important thing to remember is to take on the responsibility for the things you do best. Outsource the things that are time-consuming or a challenge for you, so that you can focus on strategy and growth," says Sean Falk, a multi-unit franchisee with 12 units in the food sector.
Key questions in making a decision to outsource include: What are your core competencies? Can you afford it at this stage of development, or are you still feeling you have to keep doing it yourself? What should you outsource, when, and for how long? And perhaps most important: Can you let go?
Smaller and younger companies often don't have the $150,000 to $175,000 to hire an in-house CFO, or an in-house sales person at $60,000 to $80,000 a year plus 5 percent of sales. "They don't have the deep pockets," says Dick Rennick, founder and CEO of Team Rennick.
"Infrastructure is usually just overhead with no significant income associated with it," says Falk. "When you add the overhead, you better have additional plans to grow from your current level. Otherwise, you cannot overcome the expense you just added to your business model."
Once operators feel they have enough units to support additional overhead, Falk suggests they start by considering the following positions for outsourcing: operations manager, regional manager, administrative assistant, marketing specialist, bookkeeper, and perhaps accounts receivable/payable.
"All of these choices depend on your situation, the needs that you have, and the things you excel at," says Falk, who offers another piece of hard-won advice: "Stay ahead of the growth. Don't hire an operations manager because you have grown so much that now operations are out of control. Hire them early so you can continue with your growth plan in an orderly way."
Executive as a service
"Each situation is different," says Andrea McKenna, who has worked in a marketing role with brands including Dunkin' Donuts (EVP, chief marketing officer) and Friendly's (director of advertising and sales promotion). She currently is working with a non-food franchise, which has chosen to outsource its marketing.
"They had a few people internally doing some good things, but realized they were at a place in their business growth where they couldn't afford to bring in a full-time person," she says. McKenna is working three days a week as a "fractional" CMO.
McKenna works with Chief Outsiders, a company that supplies chief marketing officers to companies that need them now, but only for a limited time, for example, to help them with projects such as reversing substantial traffic declines (Friendly's) or repositioning the brand with new product categories (Friendly's).
Once she begins working with a company, says McKenna, the scope may become larger than initially anticipated. If the client thinks more work is needed, or would like the rent-a-CMO to stay on longer to see the project through to completion, they have the option of renewing on a 30-day basis.
"Many of the companies we deal with can get a much higher-level person if they don't have to pay them full-time," says Art Saxby, founding principal of Chief Outsiders. "Instead of full-time temporary, go fractional," he says. "It's better to be part of a company for 6 or 12 months, sitting at the CEO's table. It's less expensive than hiring a full-time middle-level executive."
"A company needs to hire capabilities that they recognize can significantly differentiate themselves, which is something they're going to need forever," says Saxby. However, for situations where a campaign or initiative is time-limited, outsourcing the needed expertise is the way to go. "When major changes occur, you need it now, not forever." In those situations, he says, "You don't need someone to grow with the company, you need someone to supercharge your growth over the next six to nine months."
The "Executive-as-a-Service" professional becomes part of the leadership team, but only for a limited time. That, says Saxby, is where outsourcing the C-suite comes in: it allows a company to bring in an experienced leader who can work as part of the company leadership team to realign the company's vision, set up processes for future growth, or even create and execute strategies with your team.
In the marketing sphere, for example, if a franchisee is moving into a new market or targeting a new type of customer, the skill set is different from that needed to keep an existing function going. There's no need to hire a full-time person at a full-time salary. "It's different to create something new, rather than keep something growing. That may be a good time to outsource," says Saxby.
When evaluating potential outsourcing companies, he says, 1) be very specific on the skill sets required, don't just settle on someone who's out of work; and 2) it's critically important to get the right cultural fit, even more than the technical fit.
"Make sure that whoever you bring into your organization understands what's important to your culture," says McKenna. That person should also be a contributor and be able to ramp up quickly. "Make sure the person's a doer, not just a director or strategist," she says.
"We're focused on top-level marketing growth," says Saxby. "Everyone in my company is a seasoned C-level executive." He says they don't want to go back to Fortune 1000 boardrooms with their meetings, politics, and bureaucracy, and prefer to make a larger impact at a smaller firm. "People can learn great things at big companies, but it's really hard to double the size of a large company. That's the allure for them of small business. The 'I can make a difference' factor in small businesses is a huge pull."
Outsourcing with two hats
Brad Leath has seven Go Mini's territories in Western Tennessee, Western Kentucky, and Southern Indiana. He's also the brand's franchisor--or at least one of them--which puts him in an unusual role when it comes to outsourcing. "My territories are like the laboratory," he says. " I start my vendors at the local level and graduate them to corporate."
Previously, the moving and storage portable container company was a dealership model with about 220 dealerships. "A handful of us bought 80 percent of the company from the founder," he says. "The first thing we did was convert to a franchise model. We went from zero to 70 franchisees right out of the gate."
Before that, he says, "We were really over-outsourcing, with everyone using their own local vendors." After the company converted to a franchise model, he began searching for ways Go Mini's could take advantage of economies of scale and best practices.
"I try to outsource as much as I can," he says. "I don't want to spend my time becoming an expert in everything. If it's something extremely de-skilled or that doesn't require a lot of manpower, I can do it myself."
At the franchisor level, he's built a team of vendors, mainly to serve franchisees. "If a franchisor is doing their job right, they should be able to provide for the franchisee what they need cheaper than they could find it at the local level," he says.
However, that doesn't always work. Case in point: Leath has six territories open, but only four trucks to move his portable storage units. "The way I pull that off is that through outsourcing. I'm having someone else move their valuables. I think that because they move things professionally, they probably do a better job." But that's not a blanket solution. "In smaller cities, its better for me to have third parties move things around. In larger cities, I need to have my own trucks."
When it comes to the books, one of the critical challenges of running a business is knowing where you are on a cash flow basis in real time. "It's difficult, and here's why," he says. "I won't see March's numbers until into April. And that's how it works right now for me."
To remedy this, he's working with Bookkeeping Express (a franchise) and a company called Xero (online accounting software), who are developing what he calls a new kind of QuickBooks for use online. "Together they're coming up with a solution for me, my local franchise, to do my books," he says. "They connect directly into my software to see the income coming in, what bills are due, and update my books every single day. Most companies do it monthly."
David Oden is a financial executive who has worked in the restaurant business for more than 25 years. He joined InfoSync as president in 2004, attracted by the company's integration of basic financial services into one package.
"We believe it's a big advantage to acquire multiple services from one provider. You want your focus on the things that make you successful. Outsourcing bookkeeping, accounting, and payroll allows you to keep focused on your people and your customers, on operations, marketing, and HR--the main functions you have to take care of in your business."
InfoSync has clients who operate more than 6,000 restaurant locations, as well as a few in the senior living and hotel sectors, says Oden. They range from multi-unit operators with 5 to 10 locations to publicly held restaurant companies with up to 350 company-owned locations and nearly $1 billion in revenue.
"We've designed our outsourced accounting, payroll, and reporting solutions to provide them with the freedom to focus on running their restaurants, not on managing internal administrative departments--at a cost that is significantly less than doing it themselves," he says.
A franchisee with one, two, or three locations can keep up, he says, but adding locations, often farther and farther apart, requires a different set of expertise, as well as systems many smaller operators don't have or can't afford. "If you are a smaller franchisee, it is very difficult to have the people you need," says Oden says. With a fractional solution, he says, they can achieve the efficiency without having less or more than they need.
"All the clients need is to provide us with access to their historical information and tell us how they'd like it to work," he says. "The big piece is the automation." The software will not only connect to your books, POS system, labor, and all the data that feeds payroll or accounting, it also will link up with your vendors, providing a larger, more comprehensive perspective on the business.
The ongoing trends of franchisors refranchising and of larger multi-unit operators growing by acquisition and diversifying with new brands often requires additional infrastructure, along with its ongoing expense. "We see a lot of operators diversifying into multiple brands within their industry," says Oden. This increases the complexity for the franchisee, who now must manage multiple store systems, multiple formats for financial reporting, and different procedures and processes--which is where outsourcing comes in.
And don't forget the ongoing benefit of freeing up your time for what you do best. "As you grow, you don't really outgrow the benefits of outsourcing, and you retain the element of focus," says Oden.
Yes, technology too
"Outsourcing technology is very common in franchising," agrees Keith Gerson, president of FranConnect. "Until you get big enough, you're going to outsource." By definition, he says, anyone who enters into a franchise relationship is, to some extent, entering into an outsourced relationship, paying the franchisor to help train and support them and their employees.
Many of his franchisor customers use FranConnect's software and related technology instead of building it on their own. He notes that a lot more franchise systems are passing down the technology fee to their franchisees, $100 to 300 per month--a pittance compared with doing it themselves.
Multi-brand franchisees, however, face a different set of challenges. "As a franchisee organization gets larger or more complicated--especially with multiple brands--it can't rely on a single franchisor across its different brands." Can the software you're using be configured across your multiple brands, even your single brand? Do you have to hire someone to roll up the data and analytics for all of your locations?
Also, he says, as lead generation and brand building become increasingly automated and move online, many multi-unit operators are bringing in a marketing consultant, especially for mobile and digital, he says. "If I'm a multi-unit operator that's what I'm doing. They could not on an annualized basis do what those systems do for them," he says. "What do you want to do as a franchisee? Certainly not spend your time in an office doing analytics or keywords. It's a matter of getting your nose out of the books and the computer."
However, with the ever-increasing complexity of doing business in 2014, franchisees are seeing an increasing number of suppliers and vendors offering to solve their problems through outsourcing. But how do you perform due diligence in contracting with one? And how do you benchmark their performance in your company?
"When it comes to hiring outside consultants and vendors," he says, "franchising needs the equivalent of an Angie's List." One painful example of why this would be a good thing to have: "We had a client who turned to us because they used a supplier that was undercapitalized and failed after six months. The franchisees were in the process of integrating the solution and lost a lot of time when the supplier failed."
Finance--the human factor
"A major reason small businesses fail is financial performance. It's pretty much a universal reason," says Michael Sullivan at The Profit Experts, which provides automated financial reporting and management plus CFO-level expertise.
"There's nothing new why these companies fail. We're not equipped to do financials. Our brains aren't wired that way--otherwise we'd be a CFO," he says.
"I'm a very typical entrepreneur and small-business owner," says Sullivan, who has plenty of experience starting businesses of his own. However, when it comes to financial management, he says, "Most small-business owners are doing something, but it's not the right thing." His goal is to help them spend less time and do a better job.
At the recent IFA annual conference, his first, he says, "I would hear franchisors say, 'We send them financial forms and they won't fill them out.' I asked, 'Why do you think they don't?'" Beyond the forms often being too complicated, he thinks franchisors place unrealistic expectations on franchisees to do it all. "You're asking them to manage operations, new hires, marketing, social media, and by the way, financials. They don't have the skill set."
Another part of the problem, he says, is that small-business owners can get by for a while without outside help by using QuickBooks, an accountant, and a CPA. "They tell me, 'I've got a CPA, they do this.' No, they don't. They're compliance people and seven months a year they don't think about you," he says.
"Most people are on QuickBooks. Our software automatically uploads their data into the tool, populates the model for the CFO, and tells them what's missing," he says. "And every month we have a call. Primarily we talk off one dashboard, which even I can understand."
The dashboard shows cash flow by week going out 2 years, as well as the amount of cash they need in the bank so they can sleep at night. The monthly phone call also enforces accountability, since it includes a review of the previous 30 days and a check-in to see if the customer did what they said they'd do.
"One of the reasons we look out over that time frame (2 years versus 60 to 90 days) is that when a problem happens in the moment, you may not have enough time to fix it, versus being able to see it coming. Also, you may have eliminated the best solution," he says. "You have to manage to reality, not the way you wish things were, but the way they are. This is a means for them to be able to do that and have peace of mind."
Paying a monthly fee of $300 to $600 not only provides much-needed expertise, it also allows franchisees to acquire a broader perspective and develop financial discipline--if they want to. Sullivan says there's nothing they need to learn. "There's no webinar, no course, and they're immediately able to use this," he says. "And over time, they can get as smart as they want, at whatever level they want."
Says Sullivan, "It's interesting to me that small-business owners view paying for financial services as discretionary. As entrepreneurs, what drives us is generating revenue, but it doesn't go to cash flow. We are deadly focused on cash flow and profitability."
What Is Outsourcing?
Outsourcing is the process of delegating certain portions of your operation to an outside company with expertise in that area. It allows a company to engage another company for what would normally be considered an inside function, such as sales or marketing.
Outsourcing offers advantages over traditional franchise consulting and advisory services. The company in need is able to choose from a much larger and deeper pool of talent than what may be available locally; can target very specific areas of expertise where it is seeking additional resources; and is free from the base salaries, employee taxes, and other fees incurred through direct employment.
Perhaps most important, the outsourced team seamlessly integrates into the company, working with them on a day-to-day basis and becoming a true extension of the team. Companies can enhance both their team and their internal efforts through external sources.
An outsourcing solution can be implemented at any time, but is most effective with concepts that are relatively young, either from launch or within the first 2 years, in all sectors of business, and with a wide range of growth goals, anywhere from one to 10 units per month.
Another important aspect of the outsource solution is that it takes systems beyond the initial set-up phase and works with them for the first 9 to 12 months post-launch.
The outsource solution was deployed in response to the stage we are at in the lifecycle of franchising. More than 50 years into the era of modern franchising, traditional franchise consultants are still focused on showing franchisors how to start a franchise; and once all the legal, training, and operational documents are complete and the franchisor is ready to sell, the consultant walks away.
--Dick Rennick, Founder and CEO of Team Rennick
Outsourcing Financials To Boost Value
Outsourcing financial administrative functions is a strategic option that quickly reduces overhead costs and results in an increase in the market value of a multi-unit business. By outsourcing internal departments such as accounting and payroll, multi-unit business owners report saving as much as 35 percent versus their previous in-house operations--savings that are typically larger and realized more quickly than those generated by internal process improvement initiatives.
Outsourcing financial functions offers other strategic advantages as well. Thinking of selling a certain concept or certain geographic locations of your multi-unit business? Outsourcing provides a variable cost structure per location, per month that will immediately allow you to right-size your accounting and payroll processing costs for the concepts or locations of your business that you retain. This works for growing companies as well. The ability to increase the scalability of administrative functions overnight is a huge advantage to those firms growing by "leaps and bounds," usually through acquisition.
Outsourcing financial functions can also be an excellent way to provide a financial safety net by providing checks and balances by an independent third party.
Finally, using an outsourced financial service allows a company to benefit from state-of-the art technology without the obligation of constantly upgrading internal resources. Technology continues to provide greater efficiencies in operating a multi-unit business, but keeping up with and implementing the changes is time-consuming and costly. Using an outsourced third party can be a very efficient way to take advantage of the most up-to-date technology.
--Dean Zuccarello, CEO and founder of The Cypress Group
"Through outsourcing, business owners are able to achieve immediate measurable improvements in their company's G&A costs, financial systems, controls, administrative processes, and reporting, all without large capital investments. But the greatest benefit is the hardest to measure--the freedom of business owners and their executive teams to focus on business operations without the distraction of also managing the day-to-day activities of a financial administrative organization. The financial team of the business spends more time focusing on enhancing results and less time on processing data. This sharper focus on operations leads to bottom-line improvements that will further enhance the value of your business."
--David Oden, president of InfoSync Services
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