Published August 31, 2021 • 3 minute read
We’ll explain the sources of risk that warrant careful COI tracking.
Third-Party Risk for Franchisors
Your franchisees themselves may be a significant source of third-party risk. If they do not hold proper insurance coverage, you may be forced to become involved if an incident occurs. Not only can this be costly, but also harm your brand’s reputation.
You may rely on suppliers to acquire the goods you need for your headquarters or franchise locations. This can entail risks associated with research and development, production, material sourcing, and software development.
Doing everything in-house isn’t always possible, so you may have a veritable army of third-party service providers. Between outsourced accounting, marketing, IT, legal, leasing, and other services, your potential exposures may have a much wider scope than you’ve considered.
If you supply franchise locations with special equipment, your manufacturers can be a source of risk. Undetected manufacturing errors could result in injury, or worse—opening you up to costly lawsuits.
Franchises that produce a physical product may rely on a distributor to sell to customers. This creates another step in the process in which an incident could occur.
What Is Fourth-Party Risk & Why Should Franchisors Be Concerned?
While most industries have exposure to third-party risk, franchisors also frequently face fourth-party risk. The former arises from relationships with vendors and contractors, while the latter originates from the parties they outsource to.
In franchise management, this expanded exposure network usually develops when franchisees outsource with local vendors and contractors. This essentially creates a pyramid of risk, with the franchisor at the top, third parties they contract through directly and franchisees in the middle, and their networks of vendors and contractors at the bottom. Not only should franchisors maintain COIs for their vendors, contractors, and franchisees, but those franchisees must also collect and review COIs of their contractors to achieve the highest standard of risk management.
Common Risks for Franchisors
- Reputational Damage to Your Brand: A franchise’s worth is dependent largely on its reputation, so incidents that reflect negatively on your brand could significantly harm your business.
- Regulatory Compliance Violations: While regulations vary between industries, one thing remains true: Violating them can result in costly fines.
- Operational Risk: Failed procedures, policies, or systems can jeopardize your ability to continue business as usual.
- Financial Risk: Every business faces financial risk related to revenue and expenses.
- Liability for Injury: If an employee or customer is injured, the franchisor could be held responsible.
BCS: COI Tracking Software & Support to Minimize Risk for Franchise Management
While there is no way to prevent all risk, effective risk management can safeguard your business and help ensure an incident doesn’t spell complete disaster. Contractual risk transfer and COI tracking for business should be at the heart of these efforts.
BCS is the ultimate partner for franchisors, offering two distinct service levels to better fit your needs and budget. If you’re looking for a platform to simplify your in-house tracking efforts, the BCS App may be just what you’re after. This powerful, easy-to-use software is available with both our self-service and full-service options. However, the full-service solution also includes human support from expert compliance analysts to review and correct COIs on your behalf.
Protect your franchise management business from third- and fourth-party risk. Contact us today to discuss your options.