Is ignorance bliss? Managing franchise compliance
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Control means responsibility. As a franchisor whose franchisees encounter all the risks of doing business and the requirements to follow the law, how much do you want to share in the risk? Depending on the type of business, franchisees are responsible for dealing with occupational safety regulators, health inspectors, environmental regulators or others, and they’re all expected to comply with financial laws. If franchisors cross the line to take direct control, and begin issuing “thou shalts and thou shalt nots,” they may be assuming more responsibility and risk than intended.
One extreme is to provide guidance, drive good choices—and share in the consequences. The other is to take a hands-off approach and let each franchisee deal independently with regulators. A middle path that offers support while avoiding risk, may be desirable, but harder to define.
Set against the backdrop of basic principles, the regulatory environment that influences these decisions is changing. The US Department of Justice recently issued a “statement of expectations” regarding third-party audit programs. In franchise relationships, this change may shift more responsibility for certain types of compliance to franchisors. This, in turn, could introduce new risks that need to be managed by the franchisor.
Compliance management should certainly not come down to willful blindness, no matter how risk-averse the franchisor is. You’ll want to keep an eye on things. Tracking day-to-day performance at franchise locations is a high bar; it may be just as important to keep track of the franchisees’ interactions with inspectors. Do they visit on a regular schedule? If a certain location were attracting extra visits from inspectors, how would that fact reach the franchisor, and how would the franchisor handle that situation?
The franchisor has options, in both contract terms and technology. New digital capabilities make it easier to send alerts to the franchisor when inspectors arrive, or to snap and share instant images of a report. The analytical capabilities to make sense of that field data are becoming more powerful and less expensive. Then, of course, the franchisor also has the option to conduct brand-internal field inspections, if the franchise agreement terms allow.
If a franchisee has compliance problems that put it on the franchisor’s “risk radar,” what recourse does the franchisor have? Again, this goes back to the contract. If the agreement doesn’t include the means to monitor and address risk and compliance issues, then the franchisor may have only one lever – determining whether to withhold renewal entirely. A risk-intelligent, modernized franchise agreement that considers the risks of today’s operating environment can provide options.
Is ignorance bliss? Almost never. As data gets cheaper and the stakes get higher, there’s little reason to turn a blind eye. What was that middle path again? New models for franchise system governance are emerging that can help sustain a balanced approach.
Kevin Lane - Principal, Franchise Advisory Services Leader
Deloitte & Touche LLP
With over 20 years of professional experience in advisory services, Kevin has served in a variety of leadership and technical roles over the course of his career. In recent years, he completed an overseas assignment in South America, repatriating to the United States in 2013 to the Dallas/Fort Worth area. Kevin now serves a variety of Consumer & Industrial Products (C&IP) clients throughout the U.S. in meeting their risk and compliance objectives. His areas of focus include compliance, third-party risk, and operations. In addition to leading advisory teams for select C&IP accounts, Kevin serves as Deloitte Advisory’s leader for its Franchisor Advisory Services initiative. Learn more about Kevin and connect with him here