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Thursday, October 20, 2011

The Franchise: A Flawed Arrangement

The franchise arrangement combines the reach (and efficiency) of central advertising with the ability to respond to local differences. I suspect that the benefit from local flexibility is typically overdrawn, such that the value of the franchise arrangement itself is overstated. Meanwhile, the downside in local autonomy is, I suspect, understated. That downside includes the propensity to engage unethically based in part on lack of character-virtues and on the accurate perception of weak accountability within the franchise arrangement. The downside also comes into greater play than perhaps is realized because management on the local level can be rather bad in quality (from a managerial standpoint). In other words, slim pickings with regard to managerial talent can be a factor at the local level. Without mechanisms of accountability from “higher up,” front-line managers can get away with an astonishing amount of bad (and unethical) managing.

For example, I stopped into a Papa John’s franchise on a weekday at 2:30p.m. to buy a slice of pizza. The employee told me that during mid-afternoons, he offers two for one slice at the regular price. So I bought two-for-one. The slices were terrible—the cheese almost non-existent. The next day, I happened to be passing the same establishment and thought I would see if the pizza was any better. I told the same employee that I wanted the same two-for-one. “I’m not doing that today,” he replied. “The pizza is fresher.” So apparently the two-for-one at the regular price is a matter of employee discretion, rather than being something a customer can count on. I was astonished because his manager was standing next to him as the employee spoke. As I was saying that I would pass on ordering anything, the manager suggested I order cheese-sticks instead. I just looked at him. He was utterly indifferent as to whether his employee had misled me, and yet that manager was in a position of authority sans accountability. There is probably nothing worse to a customer than an employee or manager going back on his or her word with the sense of impunity. I suspect that this is a common pattern in franchise businesses.


I have experienced local managers of Best Western, Motel 6, and Days Inns hotels/motels going back on their word, only for the corporations’ respective “customer service” employees to tell me that the managers at franchise properties can do whatever they want. In one such case, I later learned that the local police department had had so many complaints from customers about the local hotel’s manager that the chief had called the corporation only to be told that the buck stops with the local manager! The corporation could do nothing (apparently). At the very least, a conflict of interest exists in turning over a complaint against a manager to the manager himself, yet this ethical issue is apparently a casualty of the franchise arrangement; accountability regarding unethical local managers simply does not exist where the franchisee owner looks the other way. I suspect that the squalid managers know when they can get away with cheating customers for short-term financial gain. Such managers can thus easily exploit one of the downsides of the franchise arrangement itself, with the customers having little recourse.

We can perhaps generalize to say that the managerial skill (and ethical conduct) at the local-franchise level is insufficient to justify the looseness in the franchise-arrangement’s mechanism of accountability on managers and employees (and even franchise owners). That is to say, the franchise arrangement itself is flawed because it does not permit mechanisms that are sufficient to correct bad and unethical local managers—or at the very least to give those winners the sense that there could be such accountability exerted on them. 

In fact, the franchise arrangement is flawed even apart from local managerial decadence and incompetence. For example, particular Subway franchises do not honor the specials advertised by Subway. In fact, next to the Papa John’s franchise location that I walked away from, a Subway franchise was selling subs, only without the month’s specials. Here, the problem is not managerial ineptitude or unethical conduct; rather, the fault lies in the franchise agreement itself, wherein individual franchisees can opt-out of particular advertised-specials. This loophole enables the possibility wherein a customer drives to a subway expecting to be able to purchase a special only to 1) be informed that there is no special there and 2) go home empty-handed. A potential customer in that situation would not be wrong in feeling misled even if it is not technically false-advertising (given the ads’ fine print). Franchisees should be required to honor and fulfill anything promised in the corporation’s advertisements. Otherwise, the arrangement itself is inherently unfair to customers. Again, the structure of the arrangement is found wanting and should be tightened, both for reasons of effectiveness and ethics. 

The weakness inherent in the franchise arrangement can be grasped by situating it along a spectrum running from a confederal alliance to (modern) federal government. I contend that the franchise arrangement is too close to the confederal arrangement in the case of managerial and employee accountability. Whereas the polity members of a confederation hold all of the sovereignty in the confederal system, both the members and the government at the federal level are semi-sovereign in modern federalism. Also, whereas the confederal level can only reach its member polities, a federal government can reach the individuals inside the member polities. A federal government thus has more authority to hold citizens accountable even within their respective states (state governments do too). Where a state government looks the other way on racial violence, the FBI can step in and arrest the KKK individuals. In a confederation, this would not be possible; the state government alone reaches the citizens, and the authority at the confederal level is typically very limited and subject to support from all or a supermajority of the polities in the confederation. 

The franchise arrangement evinces “dual-sovereignty” by analogy because the contract gives the franchisees autonomy to run their businesses as they see fit while subjecting them to specific requirements (e.g., products, signage, furnishings) that represent the “unity.” However, even though it is technically “modern federalism,” the arrangement resembles a confederation as regards managerial and employee accountability. That is, they requirements do not typically include managerial standards and accountability mechanisms; these are left to the “state governments.” As long as they adhere to the specific requirements, franchisee owners are largely autonomous in terms of how they have their businesses managed internally, or “domestically.” If there is a violation of one of the specific requirements in the franchise agreement, the corporation treats the franchisee business as a unit and holds the franchisee-owner to account. In this sense, the arrangement functions like a confederation. I submit that local management (and staffing) is typically not sufficiently capable (and forthright) to justify this. Therefore, to remedy the problem, an additional transfer of “sovereignty” to the corporation should be made such that a “check” or accountability mechanism can exist at the corporate level and reach directly to the franchisee’s managers and employees, even without respect to the franchisee-owner. By analogy, the FBI can arrest individuals at a KKK rally without checking with the governor of the particular state. Otherwise, inept or unethical franchisee owners will be able to cover for their hires. Indeed, “bad” employees may simply be doing an owner’s dirty work.

In conclusion, effective and ethical management does not extend as far locally as we, the general public, tend to assume (particularly in the food and hotel/motel industries). Corporations utilizing the franchise legal arrangement should strengthen their ability, in the legal documents, to hold local managers (and their employees) accountable. Customers would appreciate an employee in customer service actually going to bat for us, rather than giving us the quotidian “apology” only to say they can’t actually do anything about the problem because the buck stops with the local managers on X. We should not have to accept bad or dishonest business practitioners simply because they are numerous and the franchise arrangement itself is inadequate. Furthermore, just because certain customers can indeed be quite rude does not mean that holding managers and employees accountable for going back on their word is somehow excessive because serving the public is difficult. I suspect that American consumers in particular put up with much more crap at the retail level than necessary. In other words, the business of America could be done a lot better, yet for some reason we tend to assume that the status quo is unavoidable. We may even have convinced ourselves that efficiency justifies “a few bad apples.” Business itself would benefit were accountability mechanisms strengthened, and you and I would not suffer so many fools holding leverage over us on account of their positions. We need not be utterly frustrated with a dishonest, “my way or the highway” rigid and self-centered manager or employee. Life is too. So we do not have to accept the franchise arrangement in our business system and society simply because franchising is convenient to corporations. I contend that the arrangement only seems to be in their financial and strategic interests. The corporate executives are overstating the quality and honesty of their franchisee-owners and their hires. Sadly, uprooting even a putrid tree can be an exercise in futility if the sordid roots are deep and entrenched with vested interests. 

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