Background Notes on Social Franchising:

By Helmut Anheier

UCLA/Heidelberg

EFC – Madrid 2007

Introduction
Social franchising is not about the creating ‘McDonald’s type organizations in the
nonprofit word or philanthropy. It is about finding ways of enhancing the impact and
sustainability of philanthropic action (effectiveness), and seeking ways and means of
creating economies and scale and scope in nonprofit organizations (efficiency).

The challenges: In the nonprofit world, social franchising (or ‘scaling up’) happens in
situations where funding and operational models are often specific to locations,
populations, or needs, and where both information flows (‘signals’) and incentives are
typically weaker than in market situations.

Franchising in the nonprofit world is different from business franchising – has a different
objective functions. A typical objective in the business world would be to reach more
local demand through franchise operations, whereas the typical nonprofit question would
be: how can we take what we have learned in project A to other areas, apply it to
different situations etc. Nonprofit or social franchising is about replicating best practice.

However: social franchising has two distinct meanings, and it may well be best to use
different terms for each:

CONCEPT I: Social Franchising as scaling-up / replicating social

programs.
In philanthropy, scaling up approaches (or theories of scale) are linked to two other
aspects of achieving impact: Frumkin (2006) introduces a logic model (p. 175) that
integrates three ‘theories’ or more precisely sets of assumptions: theories of change that
state how the foundation intends to achieve the desired impact; theories of leverage that
focus on the mechanism on how to improve the effectiveness of giving; and theories of
scale that address how the program could be replicated, expanded and networked to reach
more beneficiaries, affect greater change and impact etc.

The theory of scale has five aspects:

 • Scale as financial strength: securing endowments and sustainable resource base
(museums, universities)
• Scale as program expansion: building on existing pilots to add more and related
activities
• Scale as comprehensiveness: seeking economies of scope to achieve greater
cohesion and coverage at the same time
• Scale as replication: reconstructing a proven program or activities under similar
circumstances elsewhere
• Scale as accepted doctrine: applying new ways of seeing and doing things
(blueprints) to different cases, situations, circumstances.

However: (See Bradach’s article in the Stanford Social Innovation Review). Replicating
social ideas is far more complicated than replicating tangible products. Reason is that
social interventions are difficult to measure and impact difficult to assess. Therefore first
question is:

Is Replication a Reasonable and Responsible Option?

o Depends on the organization’s Theory of Change, which reflects both its
view of why its program works and its understanding of the activities
required producing successful outcomes for its key constituents –
recipients, donor-funders, staff, and volunteers. For example, the theory
of change for an organization engaging in early childhood literacy is much
more easily stated than one that involves replication of an organizational
culture, replicating the culture of an organization is a far more complicated
undertaking than replicating a few program elements.
o One of the key dimensions on which theories of change vary is their
degree of complexity, as measured by the number of activities required to
create the desired outcomes. The more complex an organization’s theory
of change, the more difficult it is to replicate, which is why its leaders’
ability to specify the activities that create their program’s value is so
important.
o The principle that should guide the analysis is minimum critical
specification, defining the fewest program elements possible to produce
the desired value.
o If an organization has a clearly articulated theory of change, the potential
for replication is likely to rest on the degree to which key activities and the
key components of its operating model can also be articulated and
standardized. As a general principle, the greater the number of elements
that can be standardized, the more likely it is that replication will succeed.
This is easy in the for profit sector such as fast food, but more challenging
in the nonprofit sector where critical knowledge is often tacit.

Successful replication should consider four components:

o People: The skills of local site managers are often a critical ingredient in
making replication work. Finding the right people to fill new positions

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 depends on two distinct activities: (1) proper selection, and (2) training
and socialization.
o Context – Every program starts off somewhere, and the effectiveness of
its operating model is often context dependent. Therefore effective
replication often depends on holding constant – standardizing – the
context within which a program will operate.
o Financial structure – A critical aspect of standardizing a program is
making its underlying economics – costs as well as revenues – transparent.
Establishing a reliable source of funding – standardizing the flow of
money – increases the odds of success for two reasons: (1) new leaders
can direct their time and energy to program; (2) minimize the pressures
created by funders’ varying interests.
o Service recipients – The consequent tight alignment between the org’s
operating model and intended beneficiaries makes it difficult to serve
other groups unless model is modified at the same time. Program leaders
must be careful not to drift into serving recipients to whom their theory of
change does not apply.

Replicating Operating Models:

o Requires answers to three questions:
(1) Where and how to grow or Defining the Growth Strategy.
Identifying the potential demand for a program and
determining where the critical ingredients for success can be
found are early challenges of implementation.
(2) What kind of network to build. The relationship among local
affiliates and between affiliates and the national office can
range from tight to loose. The key dimension driving the shape
of the network is the degree to which the operating model can
be standardized. Striking the right balance between loose and
tight is a matter of constant experimentation.
(3) What the role of the “center” needs to be, or Role of
National. However a network’s founders choose to organize
its members, sooner or later they will need to confront three
challenging issues: (1) ensuring quality; (2) facilitating
learning; and (3) providing central services. These questions
help to determine the role of the played by the national
organization.

Bradach suggest that funders should provide support for well – conceived strategies for
replication rather then just for specific program services. He calls this the “Paradox of
success in the nonprofit sector,” where successful replication often depends on (1)
resources for the new site; and (2) funding the national office. If replication is to occur
and proven ideas are spread, strong organizations are required both at the local level and
at the center. Yet, for the most part, the funding patterns of the nonprofit sector – small
grants, for short durations, focused on program work – conspire against building strong
organizations.

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CONCEPT II: Nonprofits as owners of a franchise.
This is an attractive option for nonprofits seeking to diversify revenue streams and
seeking alternative forms of income. Owning a franchise involves less risks (both
monetarily and failure risks) than starting a social enterprise from scratch. This is due to
the fact that the franchisor has a system and network in place as well as a product that is
‘market tested.’ Community Wealth Ventures conducted a study on the strategic
approach to nonprofit owned franchises and developed these core concepts:

Fanchisor Value to Nonprofits:

Proven Business Concept

Established Brand

Defined Operations

Well-defined cost structure

Operations support.

While often the franchisor requires the franchisee to pay a monthly royalty to the
franchisor, this cost is far outweighed by the benefit.

Nonprofit Value to the Franchisor:

The report also outlines six general stages of the Franchising Process:

(1) Applicant recruitment

(2) Applicant assessment
(3) Negotiations and signing
(4) Unit build-out
(5) Unit launch
(6) Operations support

Franchising to a nonprofit rather than an individual provides the following benefits to the
franchisor in terms of the six stages outlined above:

Ability to assemble an advisory board of industry experts . With their strong

community relationships and philanthropic focus, nonprofits can attract industry
experts and business leaders to assist in developing a franchise unit. This
advisory board can assist the organization in the planning, launch, and on-going
oversight of a franchise business.

Access to nontraditional financial markets - Nonprofits have access to financial
markets and instruments unavailable to individuals such as endowments,
foundation grants, and sub-market rate loans. This can significantly reduce the
organization.s risk in acquiring and capitalizing a franchise unit.

Established community relationships and reputation . With these relationships,
nonprofits can create a community event to highlight the launch of their franchise

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 units. For example, when the Latin American Youth Center opened its Ben &
Jerry’s Partner Shop in Washington DC, the organization was able to secure
representatives from the mayor’s office and press coverage from the Washington
Post. Not only did this event deliver public relations and marketing benefits for
the venture, but it also highlighted the franchisor’s commitment to helping the
community.

Existing accounting departments . With government regulations requiring
nonprofits to annually report their finances, nonprofits typically have dedicated
accounting departments that handle these functions. The accounting requirements
for the franchise unit could be easily integrated into this department that would
allow the nonprofit business manager to focus more on the operations and
marketing of the franchise unit.

Existing development/marketing departments. Given their need to raise
charitable donations, most nonprofits possess a development and/or marketing
department designed to promote the organization within the community.
Although there is a marked difference between fundraising and marketing,
nonprofits nevertheless can leverage existing staff members to market the
franchise. These activities would help augment any marketing activities by the
franchisor and allow the nonprofit franchise manager to focus their time on the
operations of the business.

Access to a loyal, trained workforce. For a nonprofit with an existing job-training
program, the organization can reduce its recruitment costs by hiring the clients it
has trained through its program. Not only will these clients be more loyal to the
organization than regular hires, but the nonprofit can also specifically design its
programs to meet the needs of the franchise business. More importantly, the
nonprofit may be able to access government or private sources to fund the job
training so that the franchise unit would incur no additional costs.

Affiliate network of organizations . A national nonprofit can offer a franchisor a
network of operationally similar organizations that exists in markets across the
country. With a qualified organization, this situation not only reduces the time
needed to recruit new franchisees, but it also allows the company to reap the
benefits of partnering with a nonprofit organization in multiple markets.

The nonprofit ‘halo’ effect . Industry research has repeatedly demonstrated the
benefits a company receives when it partners with a nonprofit organization.
These include higher employee retention, increased customer goodwill, and
visible brand enhancement. A franchisor can leverage this ‘halo’ effect to
differentiate itself from its competitors, to acquire prime retail locations, to
improve its corporate image, and to institute cause-marketing campaigns to
increase system-wide sales.

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Finally, the report presents important lessons learned from existing nonprofit owned
franchises (based on interviews with ED of 18 NP that operate franchises and 11
franchise companies with NP owners):

Lessons from NP Practioners

1. Financial performance will suffer if mission objectives are considered equally
important as the franchise.s business objectives.

2. Hiring an experienced operator to manage the day-to-day franchise operations

significantly increases the financial performance of the business.

3. Nonprofits must have an internal champion providing oversight and guidance for the
franchise at all times.

4. Assembling an advisory board of business and industry experts greatly benefits an

organization during the franchise assessment phase and beyond.

5. Conducting a thorough market research study before signing a franchise deal is

critical.

6. Nonprofits need to be clear with the franchisor about any mission objectives and look
for a company that understands these objectives.

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7. Nonprofits need to capitalize the franchise adequately.

8. The location of the franchise should be determined by its business needs rather than
by the nonprofits needs or desires.

9. Nonprofits should not assume that they will automatically receive the .best. offer from
the franchisor during initial negotiations.

Lessons from Franchisors

1. Franchisors can accrue benefits to their brands and franchise systems by actively
promoting their nonprofit-owned franchise units.

2. Nonprofits are better able to manage the accounting requirements of the business than
other franchisee units.

3. The most profitable nonprofit-owned franchise units are those that focus primarily on
the business performance of the venture rather than on their mission performance.

4. Franchising agreements with national nonprofits are most effective with an

organization that possesses a strong, highly centralized affiliate network.

5. Franchisors should be prepared for a slower decision-making process with nonprofits

given their status as a corporate identity.

6. Nonprofits require greater levels of support from the franchisor compared to other
franchisee units.

Recommendations

1. Nonprofits need to present and deliver the business case to franchisors for expanding
nonprofit-owned franchises by:

Taking active steps to minimize the differences between working with a nonprofit and
an individual as a franchisee;

Fully leveraging the organization’s asset base for the benefit of the franchise; and

Focusing on the financial performance of the nonprofit-owned unit.

2. Franchisors need to view nonprofit-owned units as business relationships by:

Structuring the nonprofit relationship to maximize benefits for both parties; and

Developing a system that will obtain the full benefits of a partnership for the
company.