Digital Disruption: The Impact on franchising
This article appears in the March/April 2014 issue of Business Franchise Australia & New Zealand
Digital disruption has been well publicised and many businesses have already felt the impact. In 2012 Deloitte, as part 2 of its building the lucky country series published Digital disruption, Short fuse, Big bang. This publication identified that one-third of the Australian economy was facing imminent and substantial disruption by digital technologies and business models. Whilst this poses a threat to many businesses, many have also seen this as a significant opportunity. This article will reiterate some of the main points in the 2012 Deloitte report, but this time with a focus on the impact on franchising. We will also share with you how our Deloitte Private professionals have used this information to re-engineer our own business and the impact this is having on the way we interact with our franchise clients.
What is Digital Disruption?
The 2012 Deloitte report talks about Digital Disruption in the following manner. In some ways, today’s innovations – broadband, smartphones, the cloud, the ability to analyse complex data sets, social media and other tools that make it possible to ‘digitise’ business processes – are just extensions of the computing and online advances of the past few decades. Yet it is a mistake to see the digital revolution as a function of technology rather than one of business evolution.
Moreover, even as extensions of existing technologies, these innovations are powerful, pervasive and have multiple indirect impacts. Digital reduces barriers to entry, blurs category boundaries, and opens doors for a new generation of entrepreneurs and innovators. In turn, incumbent market leaders will face substantial pressures.
For some, digital disruption will be explosive and immediate – a force that rocks the foundation of their business. For others less vulnerable to digital trends, the changes will be slower and more subtle. For others again, digital innovation will be the cornerstone for future value creation.
So how did Deloitte assess digital disruption for each sector? Initially the following factors were considered:
• The extent to which products and services are delivered physically
• The propensity of customers to use digital channels
• The importance of broadband and computing infrastructure in business operations
• How mobile a company’s customers and workforce are, and their average age
• The significance of social media and innovations like cloud computing
• How digital innovation might be inhibited by government regulations or other factors.
This gave a ranking of how different industries will be more or less affected and whether it will be soon or down the track. If this disruption is to occur within three years, then this is said to be a short fuse.
Deloitte then assessed the size of the impact, or ‘bang’. This was defined as the expected change in percentage terms across a range of key business metrics. Businesses that can expect to see a 15-50 per cent change in their metrics, such as a mix of revenue channels or cost structures will experience a ‘big bang’.
What sectors are significantly impacted?
The sectors identified as ‘Short Fuse, Big Bang’ represented 32 per cent of the Australian economy and included:
• Retail Trade
• ICT and Media
• Professional Services
• Arts and Recreation
• Real Estate.
As franchising is diverse and each of the above sectors will have a franchising impact, I wish to focus the remainder of this article on two of the above. Firstly, retail trade and then through the live example of Deloitte Private, the impact on professional services.
Retail Trade falls into the following categories:
• Food (including Supermarket, liquor, and specialised food such as fresh meat, fish and poultry etc.)
• Household goods (including furniture, electrical, hardware, building and garden supplies etc.)
• Clothing, footwear and personal accessory
• Department stores
• Other retailing (including newspaper and book, recreational goods, pharmaceutical etc.)
• Cafes, restaurants and takeaway food services.
There are also many and varied sub categories within each of these. A large proportion of franchised business falls into one of these categories. Generally, retail trade businesses face a relatively short fuse and an average magnitude of digital disruption. It is important to note that there will be a difference in both fuse and bang for the different businesses that comprise retail trade. For an assessment of your business, you can use the above factors that Deloitte used to assess fuse and bang.
For example, entertainment goods stores will face greater and more imminent digital disruption, as opposed to supermarkets that face fewer direct threats from overseas players, due to the perishable nature of grocery goods and the relatively low value of many items, which means that online sales are still a low proportion of total grocery sales. However, I do note that Costco and Aldi are representing a major threat to more traditional Australian supermarkets. It will be interesting to see how digital disruption may be used to create a competitive advantage in this space.
The other important factor to remember is that digital disruption has many dimensions other than sectoral. Location and size are also important. Many bigger businesses have faced relatively more disruption to date, meaning smaller businesses may face more incremental disruption from here. This has important implications for franchising as franchising consists mainly of smaller businesses. However, on a positive note, the collective power of a franchised network may result in the disruption presenting more of an opportunity against more independent businesses. However, the race is on between franchised businesses in the same sub sector to gain any competitive advantage.
So how do a franchisor and the individual franchisees within a network go about assessing the threats and opportunities of digital disruption against other businesses, including other franchised businesses?
The Deloitte 2012 report identifies three primary responses leaders can implement.
Recalibrating cost structures – digitally powered, low cost business in this sector will have distinct advantages moving forward. To compete, leaders will have to consider their people, supply chains and overheads.
Replenishing revenue streams – This represents building new sources of revenue across segments, geographies and business models as legacy streams dry up in the wake of digital disruption. For many franchised businesses this may prove difficult, but if the disruption is large enough, competitors will take advantage of the opportunity and take market share from a slow to move franchise. A prime example of this is the book and publishing industry.
Reshaping corporate strategies – this is a response where the business reconsiders assets, risk and corporate agility to position the organisation for success in an increasingly digital world.
The Cloud – A disruptor for Franchise Systems
A major disruptor has been the cloud.
To illustrate how digital disruption can shape a business, I will now demonstrate how technology (in particular the cloud) has impacted our own business, Deloitte Private. As a result of the digital disruption report Deloitte Private, which fits within the professional services sector, undertook a review of its own business. Deloitte Private has had a long history of acting for privately held businesses and their owners. The following key challenges and opportunities were identified:
• Cloud based accounting software packages were beginning to have an impact on the market, with the main disruptor being Xero
• This was beginning to change the way advisors interacted and serviced their clients
• It was changing the way businesses structured their business architecture and the way in which they managed their business.
In response to this, Deloitte Private established Deloitte Private Connect. This was then adapted to the franchising sector. Where in the past, Deloitte Private provided services mainly to franchisors, this disruption has provided efficiencies through the use of technology enabling franchisees and franchised systems to utilise the services of Deloitte Private. This offer comprises the Deloitte Private Portal which offers a real-time, single shared accounting system. Within the cloud, individual franchisee system requirements, including a fully integrated accounting system, point of sale, payroll inventory and other systems as required by the specific business form the basis of the franchisee business architecture.
The real-time features may include 24/7 mobile access where franchisees will be able to log in anytime, anywhere via a laptop, tablet or mobile to access an up-to-date view of their financial position. Bank feeds are automatically uploaded to the cloud system, helping to ensure your data is accurate, complete and up to date. The portal includes a secure environment for document sharing and storage that can be accessed anywhere via cloud technology. Through the use of Optical Character Recognition (OCR), much of the previous manual data input now becomes automated. Business Activity Statements, payroll and payments approval happens via the cloud, as does any queries regarding unknown invoices. The cloud and in particular the Deloitte Private portal provides a secure environment for management reporting and other documents such a trust deeds, income tax returns and the like to be exchanged in the cloud.
In the past, accountants have been very reactive. For many of their clients, particularly businesses the size of a typical franchisee, a review of the years trading does not occur until anywhere from two months to 11 months after year end (driven by tax obligations). With the adoption of cloud computing, this has changed forever. Now the accountant can work in a real time environment with the client.
Xero’s approach in the cloud has also enabled other third party suppliers to innovate plug in modules across point of sale, payroll, inventory etc. In particular there are a number of products that deal with data analytics. For a franchise system this may include a KPI scorecard, benchmarking and profit improvement. As these are fully integrated to the source accounting data and this is produced in a timely and accurate manner, these reports become very powerful for the business owner. And the best part, once all the reports are mapped, the initial production of these reports is efficient and cost effective.
In fact, it is our experience that through the portal which includes the tools identified earlier, Deloitte Private is able to act for the franchisee as the bookkeeper, external accountant and strategy partner all in one. For no greater cost than what the business owner is already paying the bookkeeper and external accountant, the franchisee is now gaining more, as they now also receive the base data analytic reports. This is a prime example of the opportunities digital disruption can provide for both the service provider and the franchise systems.
I have spoken to many businesses recently that are in industries where they feel the need to assess the impact of digital disruption. This discussion ranges from a simple technology based improvement, through to changing the underlying business model. It has been well publicised that business are now not only having to deal with change, as this has occurred since the inception of business, but it is the ever increasing rate of the change. Best practice and a competitive advantage today may be long forgotten about in a matter of months (some may say weeks).
Richard is a Deloitte Private partner based in Melbourne and has been involved with the franchise industry for over 17 years, both as an advisor to clients and roles within the Franchise Council of Australia.
As one of Australia’s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 6,000 people across the country. Deloitte Private has over 80 partners and 800 dedicated staff, with offices in every state across Australia. They work with families and individuals who are passionate and hands on with their business.
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