McNonprofit.

The growing power of franchises

The apparent products of franchises are etched in our consciousness. Mile after mile of strip malls and tacky signs. Endless come-ons and overuse of exclamation points. Deceptive advertising and shady operators. It's hard to imagine any business entity with a lower fondness quotient than franchises.

Yet the fact is that franchising has been one of the most powerful economic forces in our society in the past several decades. When franchises are seen solely as the cause of neon boulevards and cheap appeals to lowbrow tastes, their value as systems of business organization is being missed.

If franchising is so powerful, shouldn't nonprofits organize into franchise systems? Shouldn't nonprofits gain the benefits of local service delivery and national support structures? Shouldn't nonprofits find a way of building their values into a new model of business organization?

The answer to all of these questions is yes. In fact, nonprofits already do all of these things, they just don't use traditional business terms. Consider most of the names on The NonProfit Times' list of top nonprofits: The American Red Cross, YMCA, Salvation Army and Boys and Girls Clubs are just as much franchise operations as, well, McDonald's or Burger King. Moreover -- you heard it here first -- the issues of nonprofit franchise systems will be a major part of this field for the next decade or two.

It would help to define the terms. When saying "nonprofit franchise" it is any group of local or regional non-profit service providers operating within a single centralized and explicit framework. At a minimum, non-profit franchises consist of a recognizable "brand name," a coordinating entity (usually of the same name), and at least a handful of groups operating somewhat related programs and services. All of the groups mentioned earlier, and hundreds of others, fit this description.

The reason that nonprofit franchises are so important is that, as the nonprofit sector evolves toward collaboration -- not to mention the inevitability of an economic slowdown at some point in the future -- the incentive to deliver services within a larger framework will grow. Based on our work with many such organizations, we can say that the relationship between the coordinating entity and the various groups actually delivering the programs and services is poised to respond.

Typically in these systems there is a fundamental debate about the desired nature of the coordinating entity. Is it a trade association? An advocacy group? Or is it more akin to a traditional corporate office in the for-profit franchise world?

These are the wrong questions. The reason for the confusion is that these models are expressed in the language of for-profit business, while the nature of the task in nonprofits is different enough that we really don't have a term for it. The reality usually is that the coordinating entity performs one or more of these functions, but to slot it narrowly as one of these models is incomplete and misleading.

The new logic

Instead of attempting to shoehorn nonprofits into for-profit models, let's try to work through the logic of the nonprofit franchise relationship. A good starting point would be the nature of the exchange between the local organizations and the coordinating entity.

Rather than considering things like member dues or whether the entity is a trade association or lobbying arm, start with a fundamental assumption: the enduring relationship has to be an exchange of value. Local service providers -- also called affiliates, chapters, members, etc. -- pay dues to the coordinating entity; What do they expect in return for the money?

The most obvious thing is the right to use the franchiser's name. This transaction would be considered a licensing fee and would typically be calculated at 0.5 percent to 7 percent of total revenues in a for-profit context. It also means that one cannot characterize the nonprofit equivalent as a trade association, because pure trade associations are more or less random groupings of entities that create an entity to work exclusively for their own benefit. Trade associations do not require -- nor do they want -- members to use the same name for business purposes.

As funders emphasize performance and outcomes they will almost certainly come to rely on established systems to define and determine their own outcomes and quality delivery systems. Brand names swill then become far more important.

Each of the franchise-like groups in The NonProfit Times' top 100 list boasts a strong brand name. The right to use that name locally means a great deal to affiliates, so the first value that the coordinating entity can offer is the protection and development of the brand name. They pay dues to protect, preserve and promote the name and the marketing advantages that come with it.

Beyond that it gets tricky. The role of advocacy is a classic example. Theoretically, the coordinating entity could advocate with the public for general awareness of the cause, or it could advocate with the federal government or on the local level.

However, public advocacy is best carried out by single, often nationwide organizations. Only the second and third types of advocacy work well in a nonprofit franchise system, because most are composed of service providing members and in this kind of relationship the only viable, sustainable advocacy is on behalf of the members.

Standards of service are another area where nonprofit franchise systems can bring tremendous value, even if most such systems have been slow to realize the potential. An inherent problem with many nonprofit services is the lack of agreement over the definition of the services, let alone the quality with which they are delivered. Nonprofit franchise systems are the only player with widespread leverage and a vested interest in ensuring quality services.

The final and possibly most important area in which nonprofit franchises are creating new models is in governance. Governance is about power and control, and in a for-profit franchise there is not usually much question that it's the franchiser that has the ultimate legal and financial power, even if sometimes the franchisees have a lot of economic power.

But in most nonprofit franchises the members are free-standing nonprofit corporations, just like their coordinating entity. Since there are no owners of nonprofits, authority is diffuse and subject to shifts, which is a nice way of saying that, governance matters can be more about politics and personalities than about measurable outcomes.

For this reason nonprofit franchises are most decidedly uncorporate-like. Decision-making can be slow and skewed toward unrepresentative factions or concerns. Board members can be deeply conflicted about their roles, or out of touch with local concerns. Deciding not to decide can become a popular decision.

Much of this confusion is structural in a nonprofit setting, but the negative effects can be minimized by a relentless focus on strategy. This is why months-long planning processes and widespread participation are integral elements of using strategy to unify and focus the effective nonprofit franchise system.

Parenthetically, one of the areas where nonprofit franchise systems' coordinating entities are not going to excel is in administrative support to members. Most often, the greatest concentration of administrative excellence is in the members themselves, not the national office. Yet even here nonprofit franchise systems' coordinating entities will have an impact as they become brokers and facilitators of member collaboration. The net effect will be to strengthen their systems' overall administrative capacities and therefore their economic clout in the outside world.

Nonprofit franchise systems are already established, even though we don't usually recognize them in this way. What's more, they are poised to be a dominant factor in services for the next decade or two. And they'll do it without a single neon sign.

Thomas A. McLaughlin is a non-profit management consultant with BDO Seidman, LLP in Boston. He is the author of "Nonprofit Mergers and Alliances: A Strategic Planning Guide" and of the soon-to-be-published "Trade Secrets for Nonprofit Managers."