When a customer walks into a franchise location in Seattle, Washington, does the customer have the same experience as it would when it visits a location in Miami, Florida? What about Lincoln, Nebraska? One of the hallmarks of franchising is that each franchisee is expected to operate in accordance with brand standards and deliver the same signature goods or services.

Sometimes that ideal can conflict with another important business principle – innovation. When a participant in the franchise system – whether a franchisee or the franchisor – has an improvement that can benefit each franchisee’s business, how is the idea implemented across the system? In this post we analyze how franchise systems can find a balance between consistency and innovation.

  1. The value of consistency.

All franchise agreements are at their core trademark license agreements. Under trademark laws, a licensor must ensure that users of the mark implement the same quality of good or service. In this sense, a brand must enjoy a certain level of consistency across franchise locations. Consistency contributes to its intangible value and customer recognition of the brand.

Consistency also benefits the franchise system internally. Consistency means (i) the best practices can become brand standards, (ii) the business model can be systematized and replicated, and (iii) key performance indicators can be developed and used by all to benchmark and improve performance.

  1. Franchisees are a powerful source of innovation.

Franchisees can develop keen insights from operating the business day in and day out and across different markets. These insights about how to improve the business processes, goods and service offerings, and branding can be invaluable.  For example, iconic menu items in some of the most successful food franchise systems were developed by franchisees: the Big Mac, Egg McMuffin, Blizzard, and $5 Footlong sub. Other franchisee innovations can be subtler but just as important: a new, more efficient way of managing service appointment logistics, an improvement to the sales process, or a marketing campaign that has significant ROI. (The value that franchisee innovations can add to a brand is a reason that all your franchise agreements need clauses that assign franchisee inventions and improvements automatically to the franchisor so they can be implemented brand-wide.)

Innovation is not the same as constantly challenging the business model. We have heard franchisors comment that they want new franchisees to focus for the first few years on learning the franchisor’s model. Then once the franchisee is a strong operator, the franchisee will be better equipped to identify genuine innovations and improvements.

  1. Strategies for recognizing and implementing franchisee-driven innovation.
  • Have key performance indicators to benchmark success. Pay attention to what high performing franchisees are doing and why they are successful.
  • Train franchise field operations people to notice good ideas that originate with franchisees.
  • Develop a method where franchisees can provide their suggestions to the franchisor.
  • For ideas that have strong potential and are consistent with the overall brand, create opportunities for them to be tested by other franchisees or corporate units.
  • Implement innovations through updated brand standards. Provide training and abundant communications about the value of the innovation to the other franchisee’s businesses.

Having a franchisee advisory council or subcommittees are ways that many franchise brands accomplish items C and D above.

  1. Implementing technology.

One of the most rapidly evolving market forces is technology. Cloud products. Point of sale systems. Smartphone apps. Artificial intelligence tools. Each can disrupt the industry your franchise system is in. The franchisor has the responsibility of leading the brand successfully through these market changes. That may require changes in technology even if franchisees are initially hesitant to make changes or incur additional costs.

The franchisor is often the party with the time and resources to evaluate what technologies to implement. Technology can change rapidly, and options have proliferated, so careful research and testing by the franchisor is essential. The most successful technology roll outs in franchise systems have been the product of: (i) research and testing so the franchisor can confidently demonstrate that the technology will improve the franchisee’s business, (ii) strong, clear, and repeated communication about the change and its rationale, and (iii) franchisees who have vetted and validated the technology who help drive the change.

  1. Set the boundaries for consistency and innovation.

The franchise agreement provides the boundaries for both franchisor and franchisee-driven innovation and helps to strike the balance between consistency and innovation. The degree of change a franchisor can require is on a spectrum and highly fact-specific. In general, fundamental changes to the system cannot be made unless the franchisee consents or is required to sign a new franchise agreement at renewal (even so, there are court cases that challenge limits of what changes can be required in new agreements). Other changes, even major changes, are well-supported by provisions in the franchise agreement and can be successfully implemented through updates to the brand standards manual. Generally, franchisors are limited in the kinds of new fees they require franchisees to pay to the franchisor or its affiliates. The consensus in the franchise community is that the best kinds of changes are the ones that franchisees willingly adopt because they see the way the change will increase their profitability.

To discuss whether your franchise agreement adequately accounts for both consistency and innovation or to discuss changes you want to make in your franchise system, contact Carlie Smith or one of Manning Fulton’s franchise attorneys.