Measuring Outcomes: Strengthening the Franchise Business Model

The franchise community, along with media, politicians, regulators, and others, are beginning to understand the importance of measuring outcomes in franchising as a basis for understanding a brand's performance.

Outcome measures have been led by lenders who assumed that a franchise system's credit risk could, in large part, be predicted by measuring specific outcomes. Terms such as continuity rates, historical unit success rates, and recurring revenue self-sufficiency are becoming commonly used. This focus is having a profound impact on how franchise brands are being evaluated. That's a good thing for the long-term strengthening of the franchise business model. After all, if we can't measure outcomes, how do we improve them?

Measuring outcomes is an essential first step. By using decades of performance information to develop, test, and refine definitions and create range standards, we're making good progress in defining and measuring the right metrics. The next step is to begin to understand what causes outcomes to be better for one franchise brand than another.

For instance, take two franchise brands operating in the same industry with similar products, unit investment levels, and so forth. Why do they have different historical unit success rates? An outcome doesn't just happen. A number of factors influence that result. What are they, and which are more influential in achieving good outcomes?

To begin to answer these questions, let's look at the functions franchisors are responsible for overseeing from a brand management perspective. Regardless of industry, if a brand is operating under a franchise model, it is responsible for certain functions that are common to every franchisor. Organizationally, franchisors may group them in different ways, but the functions are similar. The relevance is not in the groupings, but in the functions themselves and how they influence outcomes.

Some franchisor functions involve interaction with the franchisee as owner (in other words, the person, not the franchisee entity). These include development, training, perhaps site selection, pre- and post-opening support, ongoing field support, and relationship management (including information sharing within the system). Some franchisor functions focus on the franchisee unit, including outward-facing marketing and internal-facing system operations. Finally, there are functions the franchisor must do for its own purposes, including finance, legal/regulatory, and administration.

Most, if not all, of these functions influence franchise system outcomes. The question, of course, is what does good franchisor functional performance look like? One could argue answering that question can be done only with a substantial dose of subjectivity. For instance, what does a "good" development or training function look like? Isn't the only practical way to answer that more subjective than objective? Further, even if performance metrics could be developed for a function, how much influence does one function actually have in a particular outcome measure?

We think a lot about these questions because our franchisor clients ask us for answers. Combining research skills and a mountain of franchise information does start to bring some clarity. We are getting pretty sophisticated in measuring franchise brand performance outcomes, and we are now beginning to understand the impact the functions noted above have on those outcomes.

Let's explore the development and training functions a little further. Typically, it takes at least 7 years of franchising and at least 30 to 50 units, depending on the pace of development, to create analysis value from a brand's historical unit success rate (HUSR). A higher HUSR not only benefits franchisees, it also provides a greater return to the franchisor, whereas a lower HUSR costs both the franchisee and the franchisor time and resources in addressing underperforming units.

An HUSR has many functional influences, starting with development. Franchisors have to learn what a "qualified" (and therefore a more likely successful franchisee) looks like, which is what the development function is all about. Some franchisors know this before they start franchising, but most learn by trial and error. By tracing back HUSR outcomes to the qualification process, a pattern emerges. If the training function is aligned with that pattern, you typically see a better HUSR.

I have just described a best practice, but more can be done. Cause (development and training functions, for instance) and effect (HUSR) can be measured in time and resources. The relationship can be established so that when a franchisor wants to know whether their training program is effective, and what they are getting for the incremental dollars they are contemplating in the training function, measurable answers can be developed based on comparisons to many other brands.

Franchise brands increasingly are being evaluated based on measures of standardized outcomes. This is not only helpful, but necessary for the long-term strengthening of the franchise business model. The next logical evolutionary progression will focus on causes, and that will help franchisors to be smarter, stronger and better--if we measure the right things the right ways. We all should be committed to that goal.

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.