Global sandwich chain, Subway, has been making headlines for all the wrong reasons recently for franchising infractions. StrategicRISK sat down with industry stalwart, Patrick Smith of Acumen Advisory, to get his thoughts on this risky business model.

What risks should groups operating a franchisee model factor in? 

My view is that, in the main, the risks to be managed in a franchise model are no different to an owned operator organisation. That said, the key difference can be the difference in culture between the brand owner and franchisee.

Mitigating the risk of a franchise network has three components:

  • Due diligence; how is the culture of the franchisee assessed at the get-go? It is critical to adequately assess this alongside the commercial aspects of franchisee selection
  • Operating model; do the policies, procedures and service contracts adequately reflect the behaviours of the business, service culture and treatment of internal and external customers?
  • Governance; are the processes used to oversee the business really adequate (such as audit, mystery shopping, incident/threat reporting, self-audit, NPS and service monitoring, staff feedback and monitoring) and are there appropriate consequences to poor or inappropriate behaviours? 

In effect, the failure to manage these risks are a threat to reputation which can have serious and long-lasting damage to the organisation and its value.  

How important is managing reputation risk in franchising?

From a PR/communications perspective, the skill of world-class franchising is that the customer does not look past the brand and that consumer trust is gained by consistent user-experience, wherever and however delivered. Failure to provide this consistency, at an appropriate standard, whether there are internal issues (such as employee treatment) or more direct service issues (such as customer handling or product quality) is hugely damaging.

Lastly, in a world of blogging, influencing and social media it is virtually impossible to avoid issues being published. The speed and escalation of issues allow rapid escalation and viral spread and, the bigger the brand the greater the newsworthiness. In truth, no matter how good the skill of post-incident PR and communications, it is very difficult to quickly quash reputational downturn where there is the suspicion of systemic cultural issues or misalignment between the values of the brand and the franchise owner.

Can insurance cover any of the risk? 

In my view, insurance is not the answer and would simply scratch the surface of the reputational risk, if crystallised. Reputational Risk products might help the cost and accessibility to an effective post-event public relations effort, but is unlikely to go much further. From a risk perspective, it would be inappropriate to seek insurance remedy to solve the issue; albeit that the insurance market is keen to develop and evolve products. Proactive and preventative risk measures are needed. Blindness to the cultural and behavioural risks of the franchisee should be identified in organisations that fail to look beyond the commercial attributes of the arrangement.

 

Patrick Smith, director of Acumen Advisory, and principal of Airmic Academy. He can be contacted here: patrick@acumen-advisory.com

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