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In recent years, rapid shifts in consumer behaviour and technological advancement, accelerated by the global pandemic, have increasingly influenced the traditional franchise model. This article also explores the scale of these changes, the legal issues arising from them, and, where necessary, how these new risks might be managed.

The Bigger Picture

Three core factors are driving the challenges that technology brings to franchise networks:

  1. Centralisation and Brand Uniformity: Franchises aim to make the networks homogeneous and integrated, while network members aspire to independence. Applying technology owned by the franchisor poses a problem to the franchisees’ marketing and operations autonomy, which creates conflict, especially where the franchisor store adjusts to changes in technology more quickly than the franchise outlets.
  2. Increasing Reliance on Franchisors: As franchisor-led enterprise development expands to sectors that directly interface with technology consumers, the franchisee’s feeling of autonomy changes as they become more dependent on their franchising company. This also increases the probability of the franchisor incurring more legal liabilities and obligations.
  3. Contractual Flexibility vs. Certainty: Franchise arrangements always call for a long-term relationship, often agreed upon under some form of contractual tenure. However, the fast pace of new technological developments usually disrupts this. On the other hand, sufficient novelty must be met to meet unforeseen contractual demands or gaps between both to be realistically possible. 

Key Challenges and Risks

Here are specific examples of the types of challenges that these trends create:

  1. Contractual Authority

When setting up new technology, franchisors should have the legal right to enforce usage throughout the franchise system. Under most franchise agreements, a franchisee is expected to sign an updated “system.” Proposing these provisions into these agreements to allow for tech-related change and capital investment is desirable. Without this authority, franchisors may have to postpone implementation and use voluntary acceptance or wait until the franchisee has to renew contracts.

  1. Testing and Pilot Programs

Piloting the new technology in some franchised units before applying it on a large scale is crucial. Not only does it enable the franchisor to make changes, but it also supplies franchisees with real-life case studies to alleviate adoption throughout the franchise network. Franchisors should choose and record participants for the test phase because a more systematic initial phase would guarantee a better outcome.

  1. Communication Strategy

It becomes essential to present the advantages and consequences of the new technology and conceive plans to communicate them. Where technology changes imply major capital outlay, franchisors should be able to tell how these changes impact franchisees depending on the status of the franchise contract. Franchisors should expect the costs and whether the current fees will suffice or if new ones will be incurred, like the costs for cybersecurity insurance. Contract conflicts may occur if the theoretical recommendations do not consider these aspects.

  1. Implementation Timeline

Technological rollouts need appropriate training and support, which must be timed appropriately. Franchisees’ subordinate employees require training for effective functioning; franchisors should regulate how they fund this training in line with the adoption rates. This could help avoid situations where companies feel financially pinched if rollouts are more than anticipated.

  1. Selecting Contracting Structures

Franchisors have multiple ways to integrate tech with franchisees:

  • An intermediary assists the technology vendor in making the adoption process more accessible.
  • Delivering services right on the front line when the franchisor possesses the technology means to provide direct service while simultaneously assuming new risks.
  • Mandating franchisees to engage directly with approved vendors reduces uniformity but limits liability.

The approach depends on the type of technology, with core technologies receiving a favourable term through negotiation with the franchisor.

  1. Updating Franchise Agreements and Manuals

The franchise agreement usually has rules about handling new technology and changes. While day-to-day operations are explained in detail in the manual, essential things like fees and who’s responsible for what must be written in the actual contract. However, if you try to enforce everything in the manual, it might not hold up legally. The best way to ensure new rules can be legally enforced is to create proper legal documents for any changes or new agreements.

7. Franchise Model Changes

The adoption of technology impacts core franchise agreements in areas like:

  • Revenue Collection: Increased centralisation may lead to centralising revenue collection from franchises and transferring it to the franchise company. 
  • Local Marketing Autonomy: Technology may limit franchisees’ marketing control since promotional campaigns become centralised.
  • Exclusivity Agreements: Retailing online sales boundaries may affect exclusive territory lines and need some tweaking with delivery zones.

In conclusion, these adjustments may necessitate changes in fee structures, advertising funds, and franchisee incentives. Navigating technological advancements within franchise networks requires carefully balancing contractual authority, communication, and flexibility. When consumer behaviour shifts, franchisors ought to ensure systematic technology integration into the franchisee’s business, cautiously craft agreements, and anticipate regulatory requirements to orchestrate efficient advancements. Being aware of such issues and incorporating their mitigation into contract structures allows for a robust, flexible, and stable franchise model that can grow in harmony with a changing and developing technological and consumer climate.

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