Customisation and Management Control: An Analysis of Franchise Contracts

The aim of this paper is to investigate how service customisation impacts on the way in which franchisors control the relationship with their franchised service units. We particularly investigate variation in franchise contract design in terms of the delegation of decision rights, monitoring, incentives and input control in chains offering services with varying levels of customisation. We code and analyze a unique sample of 81 contracts of chains from different service industries. The results of our empirical analyses show that there exist important differences in the contractual control system dependent on the level of service customisation. Franchisors of chains offering highly customised services delegate more decision rights to their service units, but include higher monetary incentives and more input control items as safeguards in their contracts. Regarding outcome monitoring, we observe no difference in the use of financial outcome monitoring across chains with different levels of service customisation. Nevertheless, higher customisation is associated with a higher use of subjective nonfinancial outcome monitoring, whereas objective nonfinancial outcome monitoring is used to a higher extent when services are more standardised. In chains offering standardised services, franchisors make higher use of behaviour monitoring. Supplementary analyses point to complementary as well as substitutive relationships among the contractual control items in franchising contracts of chains with different degrees of service customisation. Chains offering highly customised services are more likely characterised by high levels of delegation to their service units, leading them to substitute direct behaviour monitoring for higher monetary incentives. Within this group of chains, incentives are more likely complemented with input control and a certain amount of subjective nonfinancial outcome monitoring. By contrast, chains offering highly standardised services more likely retain a high degree of decision rights and substitute incentives for direct behaviour monitoring. The chains within this group may or may not complement behaviour monitoring with a considerable amount of objective nonfinancial outcome monitoring and input control.

This seminar is organised by the Erasmus Accounting Research Group.