franchising We know franchising works for burgers, but what can it offer the NHS? John Appleby and Anthony Harrison explain

Published: 21/03/2002, Volume II2, No. 5797 Page 22 23

NHS managers might be forgiven for asking what all the fuss is about over franchising. It was clearly stated in documents published with the results of the star-rating system that poorly performing trusts could be subject to intervention from the Modernisation Agency.The nature of this intervention was unambiguous: if 'no star' trusts failed to improve performance over the three months following publication of the ratings, 'the management of the hospital will be put out to franchise'.

1And so, just over three months on from last September's publication, with the performance of 173 trusts analysed, boxes ticked and stars awarded, seven of the 12 no-star trusts have been deemed to have made significant improvements, and one awaits review by the Commission for Health Improvement.That has left four trusts - just over 2 per cent - for whom the franchise bell now tolls.

But what, exactly, is franchising? Although the Department of Health has issued some guidance, the two-page document ends rather weakly: 'More advice on NHS franchising will be issued as it develops.'

2So, while we await developments, it may be instructive to look at the extensive economic research, and nearly 150-year history of franchising, in the public and private sectors.

There are two quite different situations which provide a case for franchising.First, in competitive markets, franchising may allow a business to expand quickly without recourse to extensive borrowing of capital through offering franchises which require franchisees to invest their own money in the business.Such arrangements also spread the risks of failure associated with a growing business among many individuals or organisations.

This approach is helpful where a service has been developed to the point where production and delivery can be codified (such as the recipe for a Big Mac). Instead of having to control a sprawling business, the company can manage it with a small head office.

No longer does a burger chain have to control the entire production process; it simply sells or leases the formula for the production and delivery process to franchisees. In return, the franchisee gets the marketing and customer benefits of a wellknown brand name and a tried and tested business.And because of their stake in the business, they have an incentive to make it successful.

This form of business operation offers distinct advantages over the conventional hierarchy of control.For big, geographically widespread businesses, employment costs, the costs of monitoring services and quality, and general maintenance of the management hierarchy can all be reduced by certain franchising arrangements.

3Research suggests that it is above all the costs of monitoring service and product quality and the distance from a business's monitoring headquarters which is the key to deciding whether or not to franchise.Ray Kroc, founder of McDonald's, had a hands-on approach to monitoring his local, directly owned burger outlet:

from his house, 'I could pick up a pair of binoculars and watch business in that store from my living room window. It drove the manager crazy when I told him about it.But he had one hell of a hard-working crew.'

4A warning for trust managers would be to reject any offer of the DoH to install free CCTV or webcams in their hospital.

The second area in which franchising is used is where markets are not competitive. It was public health pioneer Sir Edwin Chadwick who first suggested the idea as a way of regulating natural monopolies. In 1859, Sir Edwin's paper in the Journal of the Royal Statistical Society set out franchising as a possible solution to the problems of natural monopolies.

5Industries such as gas, water and electricity are cheaper to provide through monopoly.But monopolies have a tendency to abuse their position - to hike up prices and lower service volumes and quality.To get the benefits of cheaper production while controlling the exploitative characteristics of monopolies, Sir Edwin suggested a limited form of competition for the right to be a natural monopolist.

Such 'competition for the field' (as opposed to the usual market form of competition 'in the field') has been an important form of regulation in many countries for over a century. In the UK, it was used when the commercial television network was established.

More recently, it was introduced when British Rail was privatised - though the track remained a monopoly, the running of train services themselves was franchised and also with third-generation (3G) telecommunications networks.

In all these cases there has been an initial competition - sometimes as with the 3G network - based purely on bids expressed in money terms and sometimes, as with TV and rail, a form of 'beauty contest'where those seeking the franchise set out the nature of the services they intended to offer as well as the money they were prepared to pay for the franchising right.Again, monitoring is also a key feature of this kind of franchise.

Long franchises - like simple monopolies - offer scope for abuse.Therefore they are usually subject to regulation.And as the franchises are given for a set period, there is a risk they will not be renewed if performance is poor.

So could either of these notions of franchising have any relevance to the NHS?

Most NHS hospitals outside London are virtually natural monopolies which, if in private hands, would be subject to regulation to prevent them exploiting their power commercially. If, as health secretary Alan Milburn suggested in January, he intended to open the way for outside management teams to 'take over'poorly performing hospitals, then such control could be offered on a franchise basis.Alternative (NHS or private) management teams could make their pitch and be given the 'right'to run the hospital for a given period for a set management fee.

In the absence of the potential for making profits, the management fee would serve as the incentive to bid in the first place.Quite how large the fee has to be to attract reasonably high-calibre management teams to take on the risks of failure is difficult to say, but presumably it would need to be substantially higher than current NHS management costs.

A dilemma for government could arise if potential franchisees feel that their ability to meet the outputs specified by the government requires greater managerial freedoms and opt-outs from central directives and guidance.Determining the extent of these freedoms will be problematic and will need to be set against the expected benefits of franchising.

The use of franchising to roll-out, nationwide, a standardised service is also problematic.There is a precedent for this in education where a Shropshire school sold a teaching package to other schools.But expertise in health is hard to 'brand' in the same way.All the expertise on which a brand could be based is likely to be publicly available anyway, and would be subject to change when new evidence on best practice emerged.Quite what a franchise would bring to the running of a trust is hard to see.

When it comes to improving the quality of healthcare services, franchising may not, as a seminar organised as part of the Bristol Royal Infirmary inquiry concluded, have much to offer.

6Itsuggested that the success of franchising would depend on identifying leaders at every clinical interface, as quality of care needed to be critically appraised by and within the immediate clinical team.This suggests that the set of individuals/posts to constitute an appropriate management team for a potential management franchise may need to extend well beyond the chief executive.

The scope for franchising may not just exist in secondary care, of course. Interestingly, Dr Murray Freeman, a GP, suggested in a letter to HSJ (7 February) that some areas in which his practice had special expertise might be franchised out.But in such circumstances, it seems simpler to envisage practices selling services to other practices on normal contractual terms rather than trying to set out a precisely defined service package, to monitor its use and terminate arrangements if they do not work out.

One cannot help feeling that the star-rating system has been a somewhat arduous and over-blown process to arrive at a point where just four trusts will be subject to so-called franchising.

Franchising, then, involves either a precisely defined 'service' which franchisees deliver, or a structured process for determining who should be allowed to supply a service where there is no competition.The process by which the four trusts were selected involved neither of these. Instead, it was more like the management of any large company dealing with underperforming parts of its business. Indeed, in evidence to the Commons health committee last October, Mr Milburn indicated that he was not surprised to discover the identity of the no-star trusts - claiming to have made a secret list identifying the worst ones before the ratings were published and, on the basis of internal reports 'crossing [his] desk', predicted 10 of the 12 'no stars'.

He went on to say that he did not think it was fair that he knew the names of the poor performers - indeed, that the rest of the NHS also knew - but the public did not.Again, if this was the case, why bother with the star-rating as a way to identify potential trusts to franchise? In fact, why didn't local regions act to deal with the poor managerial performance of the hospitals which they knew (according to Mr Milburn) were among the worst in the country?

John Appleby is director and Anthony Harrison is senior fellow in health systems, King's Fund.

Key points

Franchising is most appropriate to services which can be simply defined.

Introducing it to the NHS will raise issues about accountability.

Those taking on franchises may feel they need more freedom than is currently available.

The scope for franchising in the NHS seems limited.


1Department of Health.NHS Performance Ratings: Acute Trusts 2000/01.

2Intervention strategies and NHS franchising: http: //www. doh. gov. uk/performan ceratings/inter. html (accessed 18/02/02).

3.Brickley JA, Dark FH.The choice of organisational form: the case of franchising. J of Financial Economics 1987; 18; 401-420.

4Kroc R.Grinding it out, the making of McDonald's.Berkley Books, New York, 1982.

5Chadwick E.Results of different principles of legislation in Europe: Of competition for the field as compared with competition within the field of service. J of the Royal Statistical Society 1859; series A22; 381-420.

6Bristol Royal Infirmary Inquiry: Phase two: Culture: professional and managerial cultures and their impact on the quality of service: www. bristol-inquiry. org. uk.