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How to pay for technology: don't use copper wire: the right agreement language, right expectations and adequate funding make the difference.

What does one get when business partners are fighting over a penny? Copper wire. All too often this old joke is analogous to the way one approaches technology investments--fighting over the pennies versus focusing on the prize.

Funding technology is one of the greatest challenges in operating a franchise system, as most systems have a love-hate relationship with technology.

The love: Technology can open new channels of distribution, such as eCommerce, can make the business more efficient, can offer better ways to provide support to franchisees and so forth.

The hate: Managing and implementing technology, disruption to franchise businesses while implementing changes, and last, but certainly not least, figuring out how to pay for it.

Over the past few years Batteries Plus has implemented many technology initiatives to improve our system, including a new point-of-sale system, intranet, electronic catalog and cross reference, a national accounts application and most recently eCommerce. During this process the firm has faced its share of speed bumps, but fortunately received sound legal and information-technology advice (internally and through consultants) that allowed the franchise system to fund these initiatives. Here are the key points to help a franchise system pay for technology:

If there are no technology fees and the flexibility to require franchisee investment in technology and technology standards, stop reading this article and call a lawyer (and if the lawyer hasn't heard of these types of provisions in a franchise agreement, call a different lawyer). If the operations manual still references Microsoft Office '95 as an acceptable standard, stop reading this article and update the operations manual. Having a franchise agreement and operations manual provide the flexibility to invest in technology and will prevent headaches and a need for negotiation as technology implementation

Design an Appropriate Fee Structure

Fee structures will vary by system, but the following structure has served this franchise system well:

* Upfront Fees. In addition to the normal hardware and software investments for a new store, each new store pays an "access fee" for our technology tools, such as an electronic catalog. This is a fair way for new franchisees to have support tools funded by the company and by existing franchisees in the system. These fees allow the organization to accrue for the future and improve existing applications.

* Monthly Support Fees. Each store pays a monthly support fee to cover support desk assistance, anti-virus software, system security and so on. This type of fee allows the franchise system to support and protect franchisees. As an example, less than 50 percent of this organization's franchisees had anti-virus protection on their local networks, so the company purchased a license for a system and now centrally ensure all of the PCs across the system are protected.

Leverage Your Suppliers

New technology applications can provide new sources of revenue for suppliers, which they can and should support. In the case of eCommerce, a system may reach new customers and markets where they do not yet have franchisees. Suppliers will often invest in initiatives that will feature their products or provide vehicles to increase growth. To do so, involve key suppliers in the project to best determine how to create value for them, and leverage those benefits to seek their financial support for the project.

Is the National Marketing Fund a Source of Funds?

The National Marketing Fund will never be a primary source of funds for technology projects, but some segments of a technology project may be marketing-driven or focused. These elements of the project may be appropriately funded using "NMF" dollars. If the NMF language in an agreement is properly developed (and change it going forward if it is not), the franchise system should have some flexibility. In this system, franchisees decided to implement a third party e-mail system to consistently market their businesses. This was initially funded through NMF contributions and wholeheartedly endorsed by franchisees. The development of an application on an intranet Web site to house marketing materials, such as advertising layouts, direct mail templates, and other materials is another example of an IT initiative for a marketing need.

Creative Financing

There are financing opportunities through lenders, suppliers, or even the franchise system. Some options include:

* ASP Offerings. Many members of the International Franchise Association's Supplier Forum provide application service provider pricing offerings, in an ASP model, there is access to the technology, and usually after some modest initiation fee, pay some type of regular fee, such as a monthly per store amount). These offerings are attractive for emerging franchisors.

* Leasing. Almost anything can be leased including hardware and software. If financing is a high priority with your stores, work with suppliers or preferred lenders to arrange a leasing program for that system.

* Be the Bank. If the balance sheet allows, an option would be to buy applications as the franchise system and then charge franchisees fairly for access. Batteries Plus purchased a POS system on behalf of the system, which enabled it to secure much better pricing, which made it affordable to franchisees. The other benefit received is that the system centrally controls the customer and transaction files.

Finding ways to pay for technology will continue to be a challenge for most franchise systems. However, if a franchise system has the right language in its agreements, the right expectations in its system, and taps into a variety of sources to fund technology, fighting over the pennies and making copper wire can be avoided.

Other Tips for Wisely Investing in Technology

* Benchmark your investment against competitors and industry studies (Example: retailers generally spend 2-3 percent of sales on IT).

* Educate your franchisees on budgeting for IT (amortize PC's and be prepared to invest in new ones).

* Avoid creeping elegance--buy what the business needs not what the consultant wants.

* Build in the right to invest in technology into your agreements (see article) but manage those rights as a privilege--be fiscally responsible and involve franchisees in IT planning.

* Pay Your Fair Share--Some technology investments benefit both the franchisor and franchisee. Weigh these benefits, and make sure you invest your fair share.

Russ Reynolds, CFE

Russ Reynolds, CFE, is CEO of Batteries Plus. He, can be reached at rreynolds@batteriesplus.com. To discuss this topic further, visit the International Franchise Association's Technology Forum at www.franchise.org/techforum.
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Copyright 2006 Gale, Cengage Learning. All rights reserved.

 
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Title Annotation:TECHNOLOGY STRATEGIES TO STAY AHEAD
Author:Reynolds, Russ
Publication:Franchising World
Geographic Code:1USA
Date:Aug 1, 2006
Words:1044
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