MONITORING PERFORMANCE AGAINST STANDARDS

Monitoring performance is not simply being aware of what the franchisee is doing. It involves checking the franchisee’s actions and activities against a series of previously prepared standards. These standards are typically defined in three key areas:

• the business plan, which identifies what is planned to be done;
• the franchise agreement, which states what must be done by both parties;
• the franchise operations manual, which states how it should be done.

It is important, therefore, to identify the standards that are contained within these documents that relate to the areas previously identified as requiring monitoring.

The business plan

The business plan contains two specific types of information that can be identified as possible standards for the purpose of monitoring performance:

• financial forecasts, with which actual financial performance can be compared;
• proposed business development activities such as marketing, identifying new target markets, asking for and following up referrals etc.

Perhaps the easiest and most productive of these to monitor are the financial forecasts.

Financial forecasts and achieved results

In the past, franchisors often had to rely on franchisees submitting a variety of reports before the franchisor had a clear picture of what was happening in the franchisee’s business. Now, with the increasing use of information technology, the franchisor can often have access to detailed information about a franchisee’s financial performance on a day-to-day or even hour-to-hour basis.

Typically the key financial information to be monitored with be:

• gross sales/income;
• achieved gross margin;
• costs/expenses;
• net profit;
• the level of the franchisee’s salary or drawings;
• stock or purchase levels;
• cash flow.

By regularly monitoring these areas the franchisor can often identify potential problems long before they might become a danger to the business. The financial performance can also act as an indicator to what other activities possibly need closer scrutiny.

• Gross sales/income. Perhaps the simplest and most crucial measure. If the franchisee is failing to achieve the sales forecasts contained within the business plan it is almost certain that they will not achieve the level of profitability originally forecast. Where sales are below those forecast it should give rise to further investigation to determine the cause for the discrepancy. This might highlight, for example, that the business development activities, marketing etc., are not being completed in the way outlined in the business plan and/or the franchise operations manual. If these marketing activities are lacking it provides the opportunity for the franchisor to investigate with the franchisee why they are not taking place. If all the marketing requirements are being fulfilled it may indicate that the franchisee is not as competent in sales techniques as he needs to be to make full use of the leads or enquiries generated by that marketing. It may be that the original forecasts simply prove to have been too optimistic for the territory. It may be that the franchisee is failing to record accurately all the sales he is making because his administration is not up to date. Or it may be that sales are being fraudulently under-declared. I put this possibility as the last in the list to emphasise that it is perhaps the least likely cause although a cynical franchisor might choose to believe this is the most likely option and spend time investigating that at the expense of time better spent considering the other possible causes. In any of these circumstances it is not sufficient simply to identify what the problem is: action must be taken to rectify it where possible. If the lower sales levels are the result of some form of inactivity on the part of the franchisee then the franchisor must encourage greater activity. If they result from the franchisee lacking skills then further training must be undertaken. If it appears that the forecasts were optimistic then consideration must be given to the forecast for the rest of the period and amendments made to the business plan. This may, in itself, then produce a need for further action to adjust other outcomes of the forecast, particularly in relation to cash flow and funding requirements.
• Achieved gross margin. Where the achieved gross margin, relative to the level of achieved sales, is lower than anticipated it may suggest that the franchisee is discounting the price of the product or service in an effort to increase sales. Where this is the case it immediately calls into question whether the sales levels being achieved, which might meet or exceed forecast, are commercially realistic or will fall when the product or service is sold at full margin. A reduced margin may also indicate that the franchisee is suffering from an unacceptable level of wastage or stock loss. In a restaurant or food service situation it may suggest the portion control is inadequate. Each franchisor will know from their own experience where these reductions in margin are most likely to be occurring and should start their investigations there. Once the reasons have been identified actions should be taken to rectify the situation.
• Cost/expenses. The profitability forecast will have identified likely and acceptable levels of each area of cost in the business as well as the profile of the timing of those expenses. These should be compared item by item with the amount and timing of the actual expenditure and where necessary remedial action be taken.
• Profit. Problems in any of the above three areas will produce a reduction in net profit. Not only will this have an effect on the return on the investment and the possible viability of the business but it might also have a detrimental effect on cash flow and therefore on the ability of the franchisee to pay their creditors and service any loan.
• Franchisee salary or drawings. I have stated previously that most franchisees are financially unaware or naive in business matters. I have seen examples of franchisees who, suddenly finding that they have substantial cash funds available in their bank, choose to increase their levels of drawings, or purchase that Porsche they have always wanted. They have clearly been unaware of (or have chosen to ignore) the fact that, for example, a large amount of the cash in the bank belongs not to them but to HM Customs and Excise for VAT, and is due to be paid in a few weeks’ time. In working with franchisees I have often encouraged them to distinguish between their salary and the profitability of the business. Their salary should be commensurate with the job they are doing. If they are managing a retail shop they should earn the going rate for such a manager. If they are selling directly business to business they should have a salary related to that of an employed salesperson in the same sector. This policy ensures that the profit generated by the business can be clearly identified and measured against the investment involved. While both profit and salary may belong to the franchise, the business should have first call on the profit.
• Stock or purchase levels. Where the franchisee purchases stock for resale to customers, if the levels of stock held and the purchases made vary from the norm, this can have a detrimental effect on the business. Insufficient stock and the business may not be able to satisfy the requirements of all its customers; too much stock and there will be a detrimental effect on the cash flow.
• Cash flow. This is perhaps the most critical item to be monitored, and the one which most often first raises awareness of issues in other areas. Cash availability falling below the forecast should immediately give cause for concern. It may result from reduced sales levels, lower margins, increased costs, increased drawings, overbuying – all the problems identified above. It may result from poor credit control where sales are made on credit. Equally it may result from the franchisee not having put the planned investment into the business or having withdrawn some of it at a later date. Poor cash flow provides probably one of the greatest risks to franchisee and franchisor.

Most franchises make provision in their franchise agreement for their franchisees to submit financial information in the form of regular management accounts and annual audited accounts. However, our experience tells us that they often fail to insist on the submission of this information in the early days of the franchise. They may fear alienating franchisees by requiring access to what they see as their personal financial information. They may not understand the importance of monitoring the financial performance of their franchisees, or worse still not be able to recognise the warning signs that such information could produce. They may simply be too busy trying to recruit more franchisees to worry much about those they have signed up. However, sooner or later, perhaps after a franchisee has got into financial difficulties, they recognise that they need the information to monitor the franchisees’ performance. At that point they almost invariably find it difficult, if not impossible, to get full compliance in this area as many of their franchisees will be reluctant to pass on the information when previously it has apparently not been needed.

Monitoring the detailed financial performance of franchisees is probably the most efficient way to identify areas of non-performance or non-compliance. Failure to do so will put both franchisee and franchisor at increased risk of financial problems or even failure.

Business development activities

In growing their core business franchisors will have identified those activities that produce the best results in terms of business growth. These will all have been systemised and included in the operations manual. In many cases there may be proven measures that can be applied to these activities. In businesses where sales are initially generated by cold-calling potential customers there are likely to be known ratios to measure this activity. For example x number of phone calls will produce y number of sales meetings that ought to produce z level of sales. In these types of business the failure to achieve forecast sales levels can almost always be identified as the result of insufficient activity at the first stage of the process.

One UK franchise has a key measure that gives them a clear indication of the activity of the franchisees and their likely levels of sales. Key to their marketing activity of winning new customers is to provide potential customers with a free sample of the product and then follow up with a call to see what the customer felt about the product. Their experience tells them that such activity results in a certain percentage of those trying the product becoming a customer and there is a high level of repeat business generated from each customer. They require their franchisees to report on how many free samples they have given in each trading period. This gives them a clear indication not only of the activity that the franchisee is putting into building the business but also the level of sales they are likely to achieve in the coming months. Such a simple measure but a powerful indicator of success.

The franchise agreement

The franchise agreement, like virtually all legal contracts, is written in a style and language that most people other than lawyers find hard to understand. Yet it is important that everyone connected with the franchise support team should know, in detail, what is contained within the agreement since it is one of the documents that contains standards against which you will wish to monitor performance. Equally you must remember that the agreement also contains details of the franchisor’s obligations to the franchisee and is therefore the standard against which your franchisees will monitor your performance.

Most of the day-to-day obligations of the franchisee will be contained within the franchise operations manual. Where performance issues need to be discussed it is, generally, far better for them to be discussed in the context of a franchisee not performing according to the manual rather than the fact that they are in breach of the agreement.

The agreement will contain details of the action to be taken if the franchisee breaches any aspect of the agreement. This may vary from their being given a number of days’ notice to remedy the breach where it is less serious, to an immediate dissolution of the contract for serious breaches. It can therefore be seen by the franchisee as a very authoritarian document, which imparts potentially extreme powers to the franchisor including the right to terminate the relationship.

The franchisee–franchisor relationship is such that any failure to perform should first be tackled by a process of persuasion and encouragement rather than by invoking the obligations contained within the agreement. Only where this process of persuasion has failed to produce a change in the franchisee’s performance should the franchise agreement be taken out of its drawer and dusted off. It is commonly agreed that by the time the franchise agreement is invoked the relationship with the franchisee has either broken down already or is about to do so.

The franchise operations manual

Whereas the franchise agreement is a document written in legalistic language and embodies a long-term, unchanging contract, the franchise operations manual should be written in a user-friendly language and is able to be revised and updated from time to time. It fulfils a number of purposes.

It is, first and foremost, the blueprint for how the business is to operate. It should contain detailed instructions and information about all aspects of the business. As such it becomes the operational guide and reference book for the franchisee. In doing so it also lays down standards against which the franchisee’s performance can be measured and provides the franchisor with the means to encourage the franchisee ‘to do the job properly’.

As with the franchise agreement, all of the franchisor’s staff who have any role in monitoring performance should be fully conversant with the contents of the operations manual.

HOW IS PERFORMANCE MONITORED AND BY WHOM?

It is important to establish clearly and unequivocally who, within the franchisor’s business, has the responsibility for monitoring performance. It is a key part of the franchise support function since it identifies those areas where a franchisee may be failing to deliver and so needs more guidance, support or direction. It is preferable, therefore, that the support manager allocated to any individual franchisee is responsible for the whole monitoring process, even if data for that process is generated by other sections within the franchisor’s business. For example the accounts department may collect and summarise financial data from the franchisee but it should also be passed to the relevant support manager for analysis and subsequent communication to the franchisee. This ensures that the information obtained from one monitoring process can be considered in the light of all the other information known about the franchisee and thus prioritised for action.

Each franchise will use different processes to monitor performance but some of the key procedures may include:

• reporting systems;
• field visits;
• customer satisfaction surveys;
• levels of customer complaints;
• levels of customer retention and repeat business;
• levels of referrals and recommendations;
• mystery shopper activities.

Reporting systems

Franchisors may set up a variety of reporting systems to assist them in monitoring franchisees’ performance. On the financial side these may range from simple reports on the levels of sales achieved to full monthly management accounts. Other reports may include details of marketing activity, a full list of current customers including the number of new customers generated within the period, sales detail by individual product or service etc.

This information will allow the franchisor to monitor the performance of individual franchisees but will also allow them to produce aggregated reports of the whole network’s activity. This will enable them to identify where franchisees are operating outside normal parameters and, if issued to the franchisees, will allow them to check their own performance against their peers’. Performance outside the norm may identify areas where a franchisee is failing but perhaps more importantly where a franchisee is overperforming against the norm. This then enables the franchisor to investigate what it is that the high-performing franchisee is doing, and to communicate the successful strategy to the rest of the network.

Field visits

Field visits by support managers allow the franchisor to see the franchisee in action in the workplace. (See Chapter 18 on getting the best from field visits.)

Customer satisfaction surveys

The results of customer satisfaction surveys can be a powerful way of identifying whether a franchisee is performing to the standards laid down in the franchise. Carefully worded surveys that seek information on the key attributes of the franchise are critical to the process. Bland questions such as ‘Was the service good?’ give no points of reference for the customer to provide an objective judgement. (See Chapter 20, page 197 for more on customer satisfaction surveys.)

Levels of customer complaints

Complaints from a dissatisfied customer will normally be addressed in the first instance to the franchisee. This may mean that, without a formal procedure requiring the franchisee to inform the franchisor of all customer complaints, the franchisor only hears about those complaints that the franchisee fails to resolve to the customer’s satisfaction. This will, hopefully, be only a fraction of the total number of complaints but that may hide the failures of a franchisee who continually underperforms in the eye of the customer but who nevertheless later puts the matter right to the customer’s satisfaction. It is a useful process, therefore, to require the franchisee to report all instances of dissatisfaction and also details of how the matter was resolved.

Levels of customer retention and repeat business

Analysis of customer records can produce information on customer retention and levels of repeat business. Both of these measures are powerful indicators of the quality of service, product and customer care. They are particularly easy to measure where the customer is clearly identified at the point of sale, for example by the issue of an invoice. However, even retailers can identify the number and level of purchases made by a customer if some form of loyalty programme is developed. The loyalty cards given by many of the large supermarkets may return a proportion of the purchase value to the customer although by its very nature this ‘discount’ will have to have been considered when setting the basic price of a product. The real value for the supermarket, however, is not the aid that it provides to customer retention but rather the information that can be gathered on the extent and type of the customer’s purchasing that might allow more direct marketing activity to that particular customer.

Levels of referrals and recommendations

In many businesses referrals and recommendations are a key way of generating new business. The simple process of asking existing customers for referrals and asking new customers about how they heard about the business can provide useful information on the standard of service provision and thus customer satisfaction.

Mystery shopper activities

While there are companies that specialise in providing mystery shopper services it is often possible to do such surveys in-house by the use of company staff with whom the franchisee or his staff may not be familiar. Visits to the franchise outlet will allow the mystery shopper to experience not only the service offered but also the ambience of the premises. Are they clean and attractive to the customer? Are the branding or promotional materials being used properly?