Don't Be a Platypus!: Adjusting Sensibly to External Threats

An alligator looks about the same as it did 100 million years ago. However, it evolved into a smaller, quicker version as the world around it changed. On the other hand, I have to believe that some animals came about from a disruption of evolution. The platypus--an egg-laying, duck-billed, beaver-tailed, otter-footed mammal--comes to mind.

When external shocks are injected, unexpected consequences often follow. This is where we find ourselves with recent legislative and regulatory actions affecting the franchise business model. Outcomes from shocks alter the evolutionary process and are harder to predict. Let's try anyway.

There are 11 functional responsibilities that all franchisors are responsible for executing. Over time each of these functions evolves based on best practices and now, increasingly, performance standards. Left to evolve on their own, each of these functions has been refined a great deal, first from best practices and, more recently, with the development of some key performance standards that are important to the future of the business model. We are beginning to understand the relationship between franchisors' functional efforts, the costs of those efforts, and the effectiveness of those efforts in the outcomes they seek to achieve.

When confronted with major disruptions from legislative and regulatory actions, we unfortunately usually go down a reactionary path. The joint employer challenge to the business model is one major disruption. Another comes from the DOL's Wage and Hour Division, which has conducted nearly 4,000 investigations at the 20 largest fast-food brands during the Obama administration.

These potentially major disruptions are likely to create unintended consequences if the business model adjusts too quickly. We'll likely see this in several rather predictable phases. It will start with mutual uncertainty leading to legal advice to abruptly doing less. We already are seeing this in training and field support where franchisors are pulling back. We will start seeing the same thing in technology and marketing.

To be fair, from FRANdata's vantage point some of the business model practices over the past 20 years have swung toward much greater franchisor control over system activities. Like a pendulum, that movement goes past a balanced position unless natural forces or, in this instance, the hands of regulators and legislators, stop the momentum.

If the legal/legislative/regulatory actions are not too great, the adaptability hallmark of the franchise business model will adjust. However, the speed of adjustment that many feel is necessary may not lead to ideal solutions for both franchisors and franchisees. It is quite likely franchisors will pull back needed levels and types of support in reaction to NLRB and DOL threats if they continue. Stopping or reducing services that are needed and expected leaves a void. Who will fill it? Who will pay for the altered services? And how effective will the alternatives be? The model will adjust and survive, hopefully not in a seriously weakened state. This will depend on the speed and effectiveness of the transition.

The second phase of the transition will start with those advisors who have lots of answers. They will be quite visible. It's important to keep in mind that we are in a new environment and the "right" answers will evolve as more information is known about the threats and different approaches are tested. Best practices will pop up fairly quickly in this phase. It will take more time to understand the performance results, and therefore the effectiveness, of different approaches. Too much speed here will be more damaging than helpful. Change in business is always hard to adjust to because people are creatures of habit. When franchisees are accustomed to getting services and support in certain ways, any changes must be accompanied by evidence showing that the new results will be as good, or better, than before.

Having information on the outcomes that validates the neutrality or positive results of any changes will be critical to franchisee buy-in and system stability. We all want to avoid changes that diminish the legal/legislative/regulatory threat but that leave franchise systems weaker. This final phase will reveal itself when best practices and outcomes are understood. Franchising does have an advantage it needs to rely heavily on: a willingness to share such information. To benefit from this advantage, collectively we need to establish ways of explaining new approaches and costs. Most important, we need to explain effectiveness in franchisee terms, not just in external threat terms. A stronger business model depends on clarity with both.

If this pattern of adjustment is correct, the only remaining issue is timing. The faster we get to adjustments that address the threats--without risking performance damage to the business model--the better. I hope Franchise Update's magazines and next year's Leadership & Development and Consumer Marketing conferences produce best practice forums for sharing such transition results. FRANdata is putting a lot of emphasis on measuring the approaches, costs, and results across functional areas such as development, training, field support, compliance, technology, and marketing. This must be accelerated if we are to make an aggressive transition without ending up looking like a platypus.

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.