“Even as some segments of the economy bounce back, the lagging pace of improvement in the real-estate market continues to hamper owners’ efforts at landing credit. “As the big guys are doing better, people ask, why not the smaller firms? Well, this is a huge part of the reason,” says William Dennis, Jr., a senior research fellow at the National Federation of Independent Business in Washington.

Because business owners used real estate to support financing endeavors in a variety of ways, the subprime crisis hit Main Street particularly hard as it rippled through the credit markets. Before the real-estate bubble burst, home and business properties were a reliable source of collateral for many businesses.”

Franchisors, who rely on and had relied upon easily available credit in the recent past for franchisees to expand, are going to have to reconsider their growth plans for the forseeable future as collateral values aren’t going up anytime soon. That is why it is critical for franchise systems to use this opportunity to sharpen their swords. Improving internal systems, methods and support to really help existing franchises achieve greater profit and stability is more important than ever. Franchise flywheel represents the type of tools ZOR’s should be adopting to put an emphasis on improving core capabilities until the damper on growth passes.

Like most people we speak to, this organization is using spreadsheets, outlook, old versions of ACT and other fragmented tools to run their business. In reality many of these folks cannot tell “come here” from “sic ‘em” without involving many hours of effort and people’s time. There is no 360 view of the business. There is no coordination of communication, orchstrated work flows and as a result there are many more people being employed to do mundane things. Even more obviously, what those folks ARE DOING is not nearly as productive as it could be. This is usually acknowledged by the people we talk to and then, as in our call last week, comes THE DISCUSSION. What’s the price ?

Now price is an important variable and its an important question. I mean you have to deliver value for the dollar. We understand that and really see this as our primary advantage. For this ZOR the price would be a mere one hundred and fifty dollars a month. That’s right $150 a month. What was surprising is that THIS WAS OBJECTIONABLE. Can you believe it ? I can’t. $150 a month is a mere $1,800 a year to have something that actually helps you MANAGE your business instead of it managing you. $150 a month is what many companies spend on a single mobile telephone bill per executive manager. It’s a single dinner with a franchise prospect. It is less than 10% of the average franchise unit fee. How is that objectionable?

Do you think franchising generally has ignored the benefits that technology and systems offer? What can explain this type of thinking? We continue to mine for the insightful ZORS who can see the value in the franchise flywheel. Can you help us find some more evolved ZORS to speak with?

Franchising is tough right now. Its not just that lending has dried up for many franchise concepts. It isn’t just a function of the recent recession in general that is increasing economic pressures on franchises. The fundamental environment most companies face is becoming exceedingly difficult overall, requiring core changes to business concepts. These changes don’t just pertain to the franchise company itself but as importantly to the business models they promote and franchisees operate. Some key trends make it unclear wether many established and growing franchise systems are sustainable, as shocking as that sounds. The following four factors are providing most of the impetus for fundamental changes that franchise systems must make:

Increased competition
Advancements in technology;
Evolving consumer needs and wants; and
A more complex and demanding legal environment.

Increased competition

Competition is intensifying in many industries. An example is the fast food market where the most established franchise brands reside. As illustrated by tough competition in the U.S. pizza market, increased competition is resulting in flat to lower sales and discounting as companies attempt to protect or build market share. Ultimately this exercise is unproductive and will inevitably erode profit and sustainability.

Smart companies operating in highly competitive environments work hard to improve efficiencies and differentiate themselves. McDonald’s, for example, has been rapidly evolving its menu, operations, and offering of new services like wireless Internet access. The chain is also focusing more on quality to differentiate itself from others. But this is McDonald’s, the giant of the industry and a true exception. What will franchise systems a fraction of their size, which represents the clear majority of franchises today, be able to do ?

Curiously, more US franchisees have left the McDonald’s system in the past twelve months than in the previous five years. This is a telling trend and may be a clue for other franchise brands with lesser brand leverage and resources who attempt to respond to change. It just will not be an easy environment for franchise systems to navigate or survive.

Technology advancements

Advancements in technology is also increasingly impacting franchises. For example, the ubiquity of the Internet is radically shifting how smart competitors market their products or services. Conversely, the Internet has spawned new competition, like Amazon.com, which competes with traditional bricks and mortar operations. Other advancements, like inventory management systems, cloud based CRM systems, GPS devices and digital closed circuit television provide franchised operations with opportunities for improved efficiencies, security, and more sales. However, these tools also require effort and expertise for successful implementation throughout a franchise. They also require additional capital investments. Something many systems are incapable of or without.

Evolving Consumers & Legal Environment

Consumer needs are shifting rapidly posing a real problem for franchised operations. Coupled with the threat of lawsuits and legislation, an increased number of consumers watching their weight has resulted in radical changes to restaurant menus. As a result McDonald’s has introduced fruit, salads and wraps and Subway has introduced Kid Packs which substitute fruit for cookies and 100% juice for soft drinks.

There are obviously a number of trends and changes that must be considered by prospective and existing franchisors and franchisees. Some of these trends require quite fundamental changes to the way businesses operate. Navigating this change requires huge patience and resources to gain acceptance and implement. When applied to multiple business owners with limited resources and whom are dealing with great frustration this is quite problematic.

Bottom line is the SOP is not going to likely work for most franchise systems given the degree of change going on. If you are a manager, executive or franchisee, how aware are you of these pressures and do you concur with the analysis that your business models are feeling significant and greater pressures requiring fundamental change ?

Most businesses seeking to franchise a concept do so with the belief that it is a proven way to expand their company successfully. However, its not nearly as easy as many statistics might lead you to believe. A handful of brands comprise the clear majority of successful franchises and thousands of smaller franchise systems experience a very different life cycle when compared to their few larger counterparts.

For example, a study focusing on franchisor success rates, over a twelve year period, was published in 1998 by Francine LaFontaine and Kathryn Shaw. The findings concluded that only 28.6% of franchisors were still in business after a 12 year period. During their study period 1,941 of the 2,524 companies that began franchising quit franchising: a nearly 77% attrition rate. These findings are largely counter to the main stream statistics promoted by the franchise industry.

A recent White Paper entitled, “Franchising: Disparity in Numbers” written by my colleague Clint Lee of the Flywheel Group (you can obtain a copy here) shows detailed research on the reality of franchising today. The key point is that success in franchising is obtained like it is in most industries: a combination of competent people, a sound and proven business model, and continuous process improvements. Interestingly, these often aren’t the most emphasized disciplines you would hear among many “experts”. Visit the Flywheel Group and learn more about our Franchise Flywheel philosophy. There is an answer to quality franchise system management and it isn’t what most “experts” would tell you.

The consultant gets on the telephone to the office trying to understand what had happened before, trying to get some guidance on what to do as he witnesses major problems before his eyes. Its a mess.

Imagine the alternative. Using his iPhone the consultant instantly pulls up the entire history of interactions with the managers and franchisee. He sees the last series of communication from marketing and operations on his device. There are notes from past visits and qc scores for operations.  He sees that the franchise contract is about to mature in the next 3 years and handily notes his visit in the device. He has a 360 degree view and is much more effective without having to copy hard files or call people at the office to try to understand what had been going on before.

Watch the video below and learn how salesforce.com mobility integrated into solutions like the Franchise Flywheel enable franchise field consultants to achieve results when they need it the most. On the ground.

While Darrell was right about credit restricting growth, he missed a few important points – many of which he is likely aware of and might agree with.

It is highly unlikely franchisors are going to convince the banking community to change their ways anytime soon. Educating bankers about the “industry” isn’t the answer in the near term. In fact “educating bankers” might result in LESS lending to franchisees. Why ? The fact is that default rates on franchise loans are TERRIBLE, approaching 1 in 5 deals with some systems experiencing over 50% defaults. This fact reflects that many franchisors have not managed their systems in a manner that lends to REAL success. In many instances, franchise business models are unsustainable.

Instead of hoping for a miracle, like lowered underwriting standards, franchisors should focus on 4 fundamental things:

1. Improve REAL profitability and the balance sheet by cutting overhead;

2. Enhance the franchise business model and UNIT ECONOMICS;

3. Start identifying and recruiting QUALITY prospects to develop; and

4. Weed out poor franchisees who are draining the system’s resources.

The answer to the growth challenge is not easier lending standards. Hardly. It is the need for most franchisors to run their business better by doing some fundamental things. The industry for too long kept emphasizing unit growth as a measure of success and in the short term it isn’t. That is why quality and AFFORDABLE tools like Franchise Flywheel are quite relevant to achieving the fundamentals. You can’t really accomplish the 4 items above, getting back to basics, without the tools and a philosophy that really get you there.

The next time a consultant advises you that educating lenders is the answer to your core growth problems, think again.

Having worked in IT and franchising for over 25 years, I only wish the “Cloud” was around a few decades ago like it is today. I remember it well, dealing with IT people, and hardware and software infrastructure that required many resources and delivered little in the way of quality solutions in a reasonable time frame. Mobility – wishful thinking or perhaps impossible unless you had a budget the size of the national debt. Does anyone recall IBM’s RPG code ?

Amid rapid technological change, investments in hardware and software development left executives like dogs chasing their tails: as soon as you thought you had the answer, a new technology brought into question the investment. As a result, quality IT solutions didn’t receive a lot of attention in franchising. Many that did failed. This was particularly true for small to mid sized companies with limited resources.

As an early adopter of the “Franchise Intranet”, I’ve always had a great appreciation for what technology’s promise offered the franchising world. But alas, providing field consultants with a detailed 360 degree view on a smart phone was not an option in that past. Monitoring social media chatter or using it to handle franchise or customer support was even more of a fantasy. Thankfully there is a whole new world and a better opportunity to deliver solutions that can make a difference in today’s world.

When you think about what IT should be for franchisors, a way to make a REAL impact to how the business functions by lowering costs, and improving efficiency, you’re thinking of the Cloud. The Cloud helps deliver this with little consideration for the software and hardware investment obstacles that use to impede progress. It also does this in record time, with little need for overly technical developers and at an unbelievably inexpensive cost. Locking in with a third party proprietary solution that holds you over a barrel for the rest of your organization’s days – forget about it. Yes its that good.

In this day of limited resources, the need to use technologies to generate REAL business results is essential to successful franchise companies. Ironically, many franchisors aren’t using open system cloud solutions like they could. They are over paying for software or worse off in the hands of a closed proprietary system that keeps them from realizing huge benefits. This is where salesforce.com can and franchise flywheel can deliver tremendous options to revolutionize a franchise business model.

Watch this video (see below) about the power of the Cloud and salesforce.com here and learn how the Franchise Flywheel could make a big difference for your franchise system.