Outsourcing the International Development Function
March 2010 Franchising World
The benefits of going down the outsource route—certainly in the early days of a franchisor’s international expansion—make it an attractive option.
By Iain Martin
If you have a successful domestic franchise operation and are yet to franchise abroad, or if you’re finding moving into international markets challenging, then this article is for you.
Although the major thrust of what follows is about tactics you can employ to facilitate successful international development, I think it’s worth making a number of points about strategy, which in my experience are relevant, irrespective of any specific tactical approach adopted.
Successful international expansion is always part of a franchisor’s strategic development plan. This may sound obvious, but I am still surprised by the number of franchisors who have sold international development rights to an enquirer who has found them on the Web, and likes the idea of owning the rights in their country. Occasionally, international associations birthed in this way, do result in great franchise partners; however, in the majority of cases, they do not. There are many reasons for this, but three of the more common are:
As a result of inadequate market entry planning, the concept which worked so well in the domestic market, fails to take off in the new market. This could be as a result of cultural differences, differences in commercial practices, real estate costs etc.
If the major criteria for assessing the suitability of an international partner is the size of their bank balance, and adequate thought has not been given to other desirable attributes, the chances are that by the time you realise what’s missing, damage may have been done to your brand in that specific country.
If inadequate thought has been given to the financial model for international development, the result may be that there are insufficient funds available to provide an appropriate level of support to your new Master Franchisee—which can lead either to failure of the concept or major deviations from the franchise model.
Cheaper Isn’t Better
You can’t do it “on the cheap.” If international development is appropriate for your franchise, then a fully-costed business plan should be prepared which will include:
The cost of developing a robust international infrastructure, including sales and marketing materials, a master franchisee operations manual (developing and running a national network of franchisees is a different business from running one or more unit franchises), training and support programmes, and legal documentation.
The commercial framework, which will include a rationale for determining the initial master franchise fee (which is likely to vary dependent on country potential), and ongoing fees.
Support to be provided by the franchisor, which could include marketing materials, Web site, intranet, training programmes, product supply/sourcing etc.
Marketing programme, including a rationale for which countries to target (and in which order), together with a preferred partnering model, i.e. master franchise, area development, joint venture, direct franchising.
A three to five year profit and loss forecast, which will show that any meaningful return on investment is unlikely to occur until well into this period. International development is a long-term earner if done right.
International development is not always the right strategy for a franchisor who has a successful, mature domestic business. A franchisor in this category will have proven his ability to recruit, train, motivate and manage a network of franchisees, in a commercial environment that they understand. Therefore, one alternative to international development would be to develop another national franchise business (possibly a master franchise) which leverages existing knowledge, expertise and head office infrastructure.
From the foregoing, you will appreciate that successful international development involves a lot more than just placing an ad on a Web site or attending an exhibition. There’s a lot of work to be done prior to letting the world know you’re ready to award your franchise rights internationally. This requires relevant expertise, as will implementation of the plan once it has been developed. So what are the relative merits of doing it ‘in-house’ or outsourcing?
Whether in-house or outsourced, there must be ownership of the strategy at the highest level. Normally this would mean the president or CEO. In due course an international vice president or executive vice president may be appointed, but the key point is that international development is part of the business’s strategic development plan.
Whilst some franchisors may have relevant international development expertise within their existing management team, most will not. Therefore an executive needs to be hired with the relevant skills and experience. This could be on a consultancy/interim basis, pending completion of a feasibility study on international development, and production of a business plan; once the implications are understood, and a budget allocated, the role of international development manager can be firmed up, and an appointment made.
The advantage of this approach is that knowledge and expertise associated with international development is acquired and retained in-house—in effect as an asset of the business—and the people involved are focused totally on achieving the company’s strategic goals in this area.
The disadvantages include the cost of an appropriate person. Even with a package which includes a hefty performance payment, there will be a noticeable increase in a franchisor’s fixed cost base. In addition, by definition, in-house staff will tend to have a uni-dimensional view of the world, i.e. from the perspective of working for one franchisor; this may result in missed opportunities. Thirdly, its unlikely that any one individual will have all of the knowledge or skill required to put in place all of the elements described above. Therefore the necessity of “buying in” relevant expertise is almost inevitable, especially related to specific country knowledge, cultural issues or franchise environment.
The Outsource Option
Outsourcing doesn’t have to be “all or nothing.” Some franchisors operate both a full outsource, and a partial outsource equally successfully. Consider the partial outsource option first. Typically, in this scenario, an experienced executive with good international development experience is recruited as part of a franchisor’s management team. In practise, I would recommend that this step be taken following completion of the feasibility study, development planning or budgeting. Both parties then know exactly what they’re getting into, the associated costs, timescales and planned outcomes. It will often make commercial sense to have this initial work undertaken by a consultancy firm which specialises in international development.
In a typical development plan, a franchisor may have identified their top-10 target countries. In a partial outsource, the franchisor will identify a local franchise brokerage or consultancy in each country, whose brief and role is firstly to identify appropriate partners, and possibly also to provide an element of support to the new partner once development rights have been awarded. Since a normal timeframe for identifying a partner and awarding rights is around a year, in any 12-month period, a franchisor may have active arrangements in four or five different countries from their target list.
This approach can be very cost-effective, since many international brokers will include a significant contingency element in their fee structures. A good broker will produce a costed, pro-active marketing plan (which should go beyond an ad in one or two magazines or Web sites), advise on the production of relevant local marketing materials, and manage the candidate appraisal process through to Discovery Day in the United States, and negotiation of the commercial terms. In addition to lower fixed costs, a franchisor is benefiting hugely from the up-to-date local market knowledge provided by the broker, which should result in a successful outcome within a 12-month time-frame. Most brokers will want exclusivity for this period.
Once franchise rights have been awarded, a franchisor will be required to provide appropriate training and development support. Whilst the former is normally best undertaken at head office, in-country support is just that. Given that part of the initial fee paid is designed to cover such support, there’s no reason why key elements shouldn’t be provided from a competent local third party. This could be especially relevant if a new master franchisee has no previous franchise experience—the “outsourced” element of the support would be all elements relating to franchising in general, leaving the franchisor to handle brand-specific elements.
Consider the “full” outsource option. Assume that a franchisor has determined that international development is an appropriate growth strategy, and the only issue is how best to achieve it. The strategy is “owned” by the president and CEO, and the decision taken to outsource the following aspects of implementation to a competent third-party organisation:
• Refinement of all aspects of the international development plan. If the outsource organisation was involved in producing the plan, this may not be necessary. If not, it’s vital that both franchisor and outsource company believe in and are committed to achieving the agreed goals, and that the appropriate budget has been allocated.
• Development of marketing strategies for target countries. Typically, a proactive plan is prepared for perhaps six countries, with the expectation that two or three of these will result in the appointment of a master franchisee in a 12-month period. Such strategies could (and often do) involve working with brokerage/consultancy organisations, as described in the partial outsource option, but with the process being managed by the outsource company.
• Management of all enquiries about master franchise ownership from anywhere outside of the domestic market, which is likely to include non-target countries. In respect of the latter, should an outstanding party be identified, then the plan can be modified accordingly.
• Qualification, briefing and evaluation of enquiries, and where appropriate arranging and managing the Discovery Day visit.
• Managing the negotiation process post Discovery Day, and advising on all commercial aspects of the master franchise agreement, normally in conjunction with a franchise lawyer.
• “Hand-holding” candidates through to signing of the master franchise agreement.
• Advising the franchisor on all aspects of master franchisee training and support.
This leaves the franchisor’s involvement to Discovery Day meetings, post Discovery Day negotiations and provision of training and support once the agreements are signed and initial fees paid.
The advantages of a full outsource are: Firstly the franchisor is able to take advantage of the knowledge, experience and contacts of the outsource company, at a fraction of the cost of bringing these elements in-house.
Secondly, since the outsource company is recruiting master franchisees on a regular basis, the franchisor will benefit directly from potential “spin-off” from past or current campaigns for other franchisors, together with their practical knowledge of what is working best in a particular country or market.
And thirdly, the whole programme should be self-financing, since the costs associated with the outsource programme will be recouped in the initial fees charged to master franchisees, and so the franchisor just has to “prime the pump” with sufficient cash to meet the budget requirements prior to the award of the first Master.
How do you decide which route is best for your business? In my opinion, investment in the initial feasibility or development plan should be mandatory. Whatever the cost, it’s likely to be significantly lower than that associated with getting it wrong. In the process of taking this first step, the decision on whether to outsource or handle in-house will need to be taken. As a generalisation, I believe the benefits of going down the outsource route—certainly in the early days of a franchisor’s international expansion—make it an attractive option. After all, you’re not making a long-term commitment to increased fixed overheads, and should everything go to plan, you still have the option to bring the programme in-house at any stage. In a sense, it’s the safest route, since you have the guidance of a competent third party who’s as committed to the same outcomes as you are, not least because a significant part of their reward will be linked to the payment of master franchise fees.
Iain Martin is the director of the International Franchising Centre. He can be reached +44 (0) 7946 401139 or firstname.lastname@example.org .