Benefits of Benchmarking for Franchises

by Kate on October 25, 2011

Benefits of BenchmarkingWhile most people in franchising agree benchmarking is a good idea, not every franchise system does it. Even in those which do, some franchisees don’t participate or make the most of the information that is presented.

Benchmarking is an important part of franchise support, and I’ve been a strong advocate for years.  Non-franchised businesses have the opportunity to measure and assess performance at the unit level – and this is critical for success and franchises need a mechanism for this too. In addition, franchisors need information to help them with strategic planning.

A thoughtfully constructed and well executed benchmark process helps sustain strong performance for franchisees and franchisor and is one of the most powerful ways to support franchisees. It’s worth a discussion if your franchise isn’t already benchmarking, or isn’t getting the most from it.

This article looks at benefits of benchmarking for franchisee and franchisor. In subsequent posts I’ll consider some of the challenges and how to make the best use of benchmarks.

What is benchmarking?

In franchises, benchmarking usually refers the process and outcome of collecting sales and expense results of individual businesses, compiling averages and ranking results. It’s a good way to get a picture of how a network and individual franchisees are performing.

Significant benefit can be obtained when this information leads to understanding the different processes and practices of top performers and establishing ways to share these insights and support continued performance improvement.

Incidentally, Xerox were pioneers of benchmarking in the 1980′s. It was a time when profit, market share and return on assets had fallen dramatically following years very strong results. For Xerox, benchmarking was ‘the process of measuring its products, services, and practices against its toughest competitors, identifying the gaps and establishing goals.’

Problems that benchmarking solves

Without adequate attention to broad business metrics, and a program to address performance, franchises can face serious adverse consequences that will threaten their survival, and the wealth of franchisees and franchisor. Here are some examples

Over time, even the best performing businesses slip from their peak performance, threatening survival and the wealth of owners. For example, upward pressure on cost of goods sold and labour costs will erode profits unless noticed and addressed through business improvements.

Without a mechanism to look at broad financial and non-financial measures, sales can become the primary measure of success and focus of attention. Sales results are important but sales alone are no guarantee of profit and cash flow.

Gaps between expectation and performance can lead to disputes. These are costly for both franchisee and franchisor. Because franchising amplifies the effect of poor performanceIt makes good sense to keep an eye on the overall financial performance and have a means to address deficiencies.

Inadequate franchisee profit can restrict access to funding, hamper ability to reinvest, and compromise customer service through operational cut backs. Financial stress can also reduce franchisee satisfaction and advocacy. This can diminish the brand and make it harder to attract franchisees. It can also result in poor cash flow for the franchisor and stress for owners and staff.

Benefits for franchisees

  1. Identify goals: Comparisons such as benchmarks are a great help to identify realistic goals and opportunities for improvement. An owner’s own cost structure, past results and financial needs should also be considered when setting targets.
  2. Motivation: Because most people are competitive to some degree, appropriately communicated performance rankings can be a source of motivation for owners and their staff. For financial health, it’s important to provide cost and profit information in addition to sales.
  3. Business review: The cycle of benchmarking provides a focus for business review. Hopefully franchisees review results compared to goals each month and it’s also a good idea to take a ‘big picture’ look each year or quarter when benchmarks are produced. Well constructed reports and planning tools will prompt inquiry and action.

Benefits for franchisor

  1. Identify top performers and “Alert Stores”: Sales, profit and balance sheet benchmarking enables franchisors to identifying top performers from whom to learn, and those who may be struggling who could benefit from extra support.
  2. Franchisee recruitment: The performance profile of existing franchise can help prospects make decisions, plan and set budgets. This information can also help achieve and maintain bank accreditation for franchise lending. Care is needed with risk management, including appropriate legal advice and disclaimers.
  3. Strategic planning: The trends for margins, business mix, costs and productivity provide valuable insights and information for strategic planning and to track the results of business initiatives. Reporting on franchisee financial results also helps align the goals of corporate staff and maintain focus on results.

Effective benchmarking is of increasing importance and benefit as public scrutiny and demands for transparency increase and with the ongoing challenges of attracting franchisees and obtaining finance.

What results does your franchise system benchmark?

What benefits have you seen for franchisor and franchisees?

 

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