Rajiv K. Trivedi writes an interesting article on Compliance in the September 2009 issue of Franchising World, which is a publication of the IFA (International Franchise Association), an association of franchisors.
An effective compliance management program starts at the first meeting, embraces reasonable discretion and promotes creative solutions.
Compliance with system standards is an essential component of a franchised system. System standards define a brand on many levels, and ultimately, are a strong contributor to success, for the franchisor and franchisee alike. Standards define what the brand is, how it is perceived and who it competes with. They define what customers can expect, in look, feel and quality. Standards are also implemented to enforce consistency across the franchise system, and guarantee the least amount of differentiation among units. Without consistency, consumers become confused, making it difficult for a franchisor to measure customer satisfaction and the quality of its brand to any reasonable degree. For all these reasons, it is imperative that franchisors have an effective program for managing compliance with system standards and that franchisees understand that compliance is in their interest, as well as the interest of the brand. A strong program of compliance should begin long before a franchise agreement is ever concluded.
Qualification: Are You Right For Me?
The first step toward an effective compliance management program begins with proper qualification. Both the franchisor and franchisee should evaluate one another carefully, before launching a long-term relationship.
For the franchisor, there are several key questions to consider: Is the prospect experienced in the industry? What is the franchisee’s operational history? Does the prospect have adequate financial resources? Is the proposed market for development a right fit for the brand? Who will be the brand’s main competitors in this market?
The franchisee must ask some key questions as well: What markets are the brand in? What opinion do existing franchisees have of the brand? Does the franchisor have performance representations? Will the brand standards be consistently implemented? And how are competitive brands performing in the market?
Proper qualification serves to provide both parties, franchisee and franchisor, with a clear understanding of what is expected of one another. An educated decision decreases the likelihood of non-compliance with brand requirements as the relationship between the franchisor and franchisee matures.
Proper Professional Representation
The second step toward an effective compliance management program is proper legal and financial representation. It is imperative that both franchisor and franchisee retain suitable professional assistance at the outset. For franchisors this is typically not a problem, but franchisees may sometimes need to recruit and retain adequate advisors. Qualified professional advice is best found by referral. Franchisors can often provide franchisees with referrals to appropriate professionals. A referral from the franchisor may result in cost savings to the franchisee because the recommended professional will be familiar with the franchisor’s materials and standards, eliminating a “learning curve,” and may know generally what points the franchisor will negotiate.
Qualified professionals will clarify the understanding of what is expected of each party to a franchise agreement, allowing for educated decision-making. A franchisee who is fully informed of his legal and financial rights and obligations prior to endeavoring to execute a franchise agreement, will be less likely to be surprised by brand expectations.
Mutual Commitment: Monitoring the Vow
Once the parties have “qualified” one another, and the professionals have done their work, the success of the fledgling relationship becomes dependent on a mutual commitment to quality, consistency and consumer satisfaction. Both the franchisee and the franchisor should monitor one another—the franchisor to assure compliance with system standards, and the franchisee, to confirm enforcement of system standards by the franchisor. The franchisee is paying the franchisor to enforce consistency; the franchisor is placing the goodwill of its brand in the hands of the franchisee. A successful compliance management program therefore depends upon the parties mutually agreeing to the standards and committing to adhere to the enforcement of and compliance with those standards, short term, as well as long term.
The longevity of a brand depends on its ability to ebb and flow with consumer demand. Brand image is not stagnant, but rather susceptible to change based on a multitude of controlling dynamics. Franchisors and franchisees need to be aware of these dynamics at all times, and must be prepared to embrace change in response.
In modifying the image of a brand to meet consumer expectations, a franchisor must be cognizant of the implications any change could bring to the system. While it may seem necessary to require franchisees to conform to new standards, the franchisor should be prepared to prove what value change will bring. If a modification brings more expense than value, it could result in the franchisor being faced with multiple non-compliance issues, even with system unrest, and this could result in a negative outcome for the brand overall.
While a franchisor typically has sole discretion over changes to system standards, material changes should not be made without some system of consultation with the franchisees. This can be accomplished by addressing proposed modifications with a franchisee advisory board or other similar franchisee representative body. By doing so, the franchisor can ascertain the level of resistance it may encounter to a proposed change within the franchising community. If disagreement is likely, the franchisor can then assess proper incentives that may make the change more palatable to the franchising community.
The bottom line is that reasonable and responsible decisions are not made in a vacuum. They are made with an understanding of who those decisions impact. Ultimately, a franchisor’s bottom line is dependent on the success of its franchisees. Change without proper consideration of its effect, and ultimate value, will only result in a lose-lose scenario for the entire franchise system.
Despite qualification, professional advice, written commitment and reasonable analysis of brand change, franchise compliance will sometimes be violated by an uncooperative or non-responsive franchisee. These may be franchisees who either will not or cannot find the resources to become compliant with system standards. Typically, a franchise agreement will provide a clear cut solution to this problem, but many times the situation is much more complicated than simply exercising a contractual remedy.
Franchisors need to consider noncompliance with system standards on a case-by-case basis. Why is the franchisee not compliant? Are there financial difficulties? Is the brand delivering acceptable performance in the market? What are the franchisee’s other financial obligations? Is additional training needed? Franchisors must be willing to admit that occasionally fault is a two-way street, and that may call for creative solutions. Litigation is time consuming, expensive and, despite a winning verdict, often everyone loses financially. It is essential that the franchisor’s attorney embrace the concept that litigation is a last resort, best employed only after all other efforts are entirely exhausted. It is far better to work with a franchisee in a manner that will result in eventual compliance than to lose a unit from the system and pay legal fees to collect damages that may never materialize.
Franchisees should also lean on their counterparts and their resources to help them resolve compliance issues, rather than going it alone. There should be trust and relationship between the two parties, which allows open and direct communication to resolve matters with respect.
Read more at: Franchising World