Who manages research and development in a franchise?

Research and development ensure that a franchise remains competitive, profitable and efficient. By developing new products, improving services and optimising operational systems, franchisors allow franchisees to benefit from innovations they could not achieve by themselves.

Here, our franchise experts share how R&D works in practice, who is responsible, and what franchisees need to know about costs, testing and the benefits of innovation.

Who is responsible for research and development in a franchise?

When it comes to developing new products or making services better, Brian Duckett, former chairman of The Franchising Centre, notes that “the franchisor is responsible for developing and continuously improving the business system that is the subject of the franchise.

Meanwhile, “the franchisee is responsible for operating that system correctly on a day-to-day basis.” However, this doesn’t necessarily mean that “franchisees cannot come up with good ideas.”

Franchisors collect a small percentage of their franchisees’ revenues and invest it in central services. This often includes marketing, PR campaigns and new product research and development.

Duckett adds, “Ideas for new products can come from anywhere. Indeed, many franchisors set up a sub-committee of their franchisees to brainstorm and discuss ideas. It’s well-known franchising folklore that the idea for the Big Mac and Filet-o-Fish came from McDonald’s franchisees.”

Should a franchisor be carrying out research and development to improve the franchise?

Franchisees rely on franchisors to come up with new ideas and keep the network competitive. Shelley Nadler, legal director at Bird & Bird, notes: “The franchisor should have research and development facilities in relation to the products, services or system and the market image projected.

“It should constantly be seeking to innovate and introduce ideas and methods for improving the business of the franchised network and the operational systems.”

Franchisors may test new products or services in company-owned outlets or selected franchisee locations before a full rollout.

Nadler adds that a franchisor should carefully test all changes to its system, products, or services, just like it tested the original franchise operation before launch. “This is so that the franchisor can demonstrate to franchisees the likely benefit that should result from their introduction.”

R&D can also include exploring new suppliers and bulk purchasing options, which can reduce costs for franchisees. Nadler explains that, this way, franchisees can gain benefits and savings through the network that they wouldn’t get on their own.

Do I have to pay for R&D costs associated with a new product or service?

In most franchises, franchisees do not directly fund research and development. John Pratt, senior partner at Hamilton Pratt, explains: “The whole point about franchising is that the franchisor is constantly developing and improving the franchise system.

“These developments and improvements are reflected in the continuing fees that franchisees have to pay to their franchisor, and by changes and updates the franchisor makes to the operations manual.”

Franchise agreements typically require franchisees to suggest improvements and allow the franchisor to incorporate these ideas royalty-free.

There are exceptions for expensive bespoke developments, such as software. Pratt adds, “Sometimes producing bespoke software can be an extremely expensive business. Franchisors often require “[franchisees to pay for] work in relation to this [...] on a pro-rata basis.”

Is there an industry average of what percentage of revenue goes to R&D?

There isn’t a standard figure for franchisor R&D spending. Shelley Nadler explains, “Generally, companies in health care and technology sectors spend more on research and development than retail and consumer businesses.”

Despite differences across sectors, all franchisors are expected to maintain R&D capabilities for products, services and systems. Nadler adds, “Franchisees will expect franchisors to innovate to ensure the network remains competitive and takes advantage of the latest technological developments. This is part of what franchisees buy into, rather than starting a business on their own.”

Conclusion

As a franchisee, you’ll benefit from your franchisor’s ongoing research and development, without bearing the full expense yourself.

Understanding the roles and responsibilities in R&D allows franchisees to contribute ideas effectively while relying on the franchisor to manage development and maintain the network’s competitiveness.