One of the quickest, and probably the cheapest, ways to scale up is to offer franchisees. This model has been prevalent in the private sector for long and numerous local as well as global franchisees exist, the best examples being McDonald's, Subway and UPS stores.
Micro-franchising is being used fairly extensively by the Government of India, too. The Ministry of Communications & Information Technology, for example, is rolling out 100,000 e-Kiosks (Common Service Centers - CSCs[1]) in rural areas under the National e-governance plan. These CSCs are owned and operated by small entrepreneurs in the villages, who are invited to invest money and take control of the centres.
Apart from tackling core issues —such as health, education, and IT gap— franchising has immense incidental benefits in the form of entrepreneurship development and employment generation. It creates a pool of resources well versed with local needs and more aware of ways and means to meet these needs.
The benefits of the model are explored in my latest study: "Frugal Innovation: Learning from social entrepreneurs in India".
Franchising, however, has its own set of challenges, and these get magnified in delivering public services, especially because it often means working with relatively less skilled and smaller players.
Overcoming low or absent professional standards: The experience of Sarvajal, which provides clean drinking water at Rs.5 for 25 litres in rural Gujarat and Rajasthan, shows that one of the critical problems they face is that of low professional standards among local entrepreneurs and employees. The franchisees can be careless in maintaining the infrastructure provided by the franchisor, shun cleanliness or provide below-par services to consumers. For instance, a Sarvajal employee reported that at one of the locations they inspected, the franchisee had bypassed the sealed off piping, which meant that accurate measurement of the amount of water dispensed would become impossible.[2] The problem can become acute when the franchisees do not invest in the infrastructure.
Identifying people with the right business and technical skills: Many franchisees lack basic business skills. The absence of marketing and sales skills puts limits to growth. The franchisee assumes that opening shop is sufficient for the customers to come in. While this may be true to some extent for companies that have strong brand and market presence, all new initiatives are critically dependent on the ability of the local entrepreneurs to market their services.
A good example of the risks associated with the franchisee model is the experience of n-Logue Communications (Pvt.) Ltd., a venture started in November 2001 with the vision to provide Internet services in rural India. It ran into trouble when its 3-tier franchisee model could not deliver on its promise. At the ground level were local entrepreneurs working as Kiosk operators who were expected to pay an annual fees of Rs. 60,000 and, after the first six months, a monthly retainer fees of Rs. 1000. Local Service Partners were expected to recruit, train and support these Kiosk operators. n-Logue managed technological, regulatory, and credit issues.
As is evident, the success of this model was critically dependent on the ability of the local entrepreneurs to market internet services to the villagers. A number of studies show that this was often a missing ingredient. A team of students from one of India's top management schools reported that of the 3 villages they visited, only one Kiosk was doing brisk business. [3] In one of the villages, most people were not even aware of the existence of the telecenter, let alone the services it could offer. Another study reports that by 2005, 32 of the 36 privately owned kiosks opened between November 2001 and February 2004 had ceased to function, with 85% of the operators reporting financial sustainability as the major reason for their closure. [4]
Managing expectations: Franchisees are business-owners at one level. They do not consider themselves sub-ordinate to the franchisor and do not like receiving too much guidance. This can create all sorts of management and operational challenges. Typically, franchisees expect to break even quickly or they drop out. However, if they do break even quickly and are successful in generating a reasonable income, they may expect to grow faster than the franchisor may have planned for.[5]
A particular concern can be that the franchisee may start renegotiating the original revenue-share agreement or even start an independent operation using the infrastructure and machines provided by the franchisor. This is a concern because, in India, the cost of enforcing contracts can often turn out to be higher than the original value of franchisor's investment.[6]
These challenges explain why many social enterprises have refrained from going the franchisee route . Aravind Eye Care, for example, has so far not adopted the franchisee model to expand its reach despite their explicitly stated admiration for the burger seller, McDonald's, which relies extensively on this approach[7]. Dr. Govindappa Venkataswamy, the founder of Aravind Eye Care System, lamented in 2004, "So far we have not been able to develop entrepreneurs in health from the management side".
Franchising is a great way to ramp up services quickly. However, if not well orchestrated, it can also be a recipe for disaster. Franchising works well only when the franchisees realize the value of partnering with the organization and adopt the principles and philosophy of the franchisor, apart from being able to develop critical technical and business skills. Prospective franchisors may be better served if they operate a certain number of business units on their own, establish their brand presence, and codify operations before using the franchising model to reach out to locations where it is difficult for them to go alone.
[1] Ministry of Information Technology, Common Service Centers, <http://www.mit.gov.in/content/common-services-centers>.
[2] Sameer, "The Field", August 10, 2009, accessed 17 March 2011, http://www.sarvajal.com/blog/the-field/>.
[3] Divya Tewari, "A Field Trip to Rural Tele-Centers in Gujarat", Information Technology in Developing Countries, Volume 15, No. 2, Centre for e-Governance, Indian Institute of Management, Ahmedabad, November 2005, < http://www.iimahd.ernet.in/egov/ifip/nov2005/article3.htm>.
[4] Michael L. Best and Rajendra Kumar, Information Technologies and International Development, Volume 4, No. 4, Fall/Winter 2008, pp. 31-45 <http://itidjournal.org/itid/article/viewFile/309/141>.
[5] David Lehr, "Microfranchising at the Base of the Pyramid", Acumen Fund, Working Paper, August 2008 <http://www.acumenfund.org/uploads/assets/documents/Microfranchising_Working%20Paper_XoYB6sZ5.pdf>.
[6] Anand Shah, "Faith and Enforceability", Creating Confusion, Blogs, Social Edge, November 2, 2009, < http://www.socialedge.org/blogs/creating-confusion>
[7] Stephen Miller, “McSurgery: A man who saved 2.4 million eyes,” Wall Street Journal, August 5, 2006, < http://www.aravind.org/tribute/A%20Man%20Who%20Saved%202.4%20Million%20Eyes.pdf>
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