franchising as an alternative to public management in brazil

Int. Studies ofMgt. & Org., vol. 28, no. 2, Summer 1998, pp. 38-53.© 1998 M.E. Sharpe, Inc.0020-8825 / $9.50 + 0.00.

VALDECY FARIA LEITE AND

FREDERICO A. DE CARVALHO

Franchising as an Alternative to PublicManagement in Brazil

The Case of Postal Services

Franchising involves selling by contract the basic formula ofa product or thebusiness format ofa service to an outsider who establishes an outlet of his or herown to produce or sell the product or to deliver the service. Why would a firmwith a successful product/service choose to sell franchises? The expansion offranchising systems in all countries that have adopted them has spawned a volu-minous literature that looks for explanatory theories (e.g., Brickley and Dark,1987; Caves and Murphy, 1976; Inaba, 1980; Mathewson and Winter, 1985;Norton, 1988; Rubin, 1978) to help answer that question.

This paper investigates three questions:

1. Was the adoption of franchising by the Brazilian Post and Telegraph Com-pany (hereinafter, ECT) consistent with the reasons pointed out in theliterature?

2. How did the interaction between the two management formats within theoverall resulting system occur?

3. How have users of the service reacted to the organizational innovation?

To support our responses to these research questions, we provide evidencefrom the theoretical literature as well as from empirical work. As a byproduct,our analysis points out some implications of our responses in terms of publicmanagement practices in Brazil.

The adoption of this organizational format for postal service—a service tradi-

The authors are associate professors at the College of Accounting and Business and at theGraduate School of Business, respectively. Federal University, Rio de Janeiro, Brazil.They gratefully acknowledge financial support from CNPq, the Brazilian National Re-search Council, as well as from the program PAP-ENAP/CAPES/ANPAD, Brazil.

38

FRANCHISING IN BRAZIL: POSTAL SERVICES 39

tionally rendered by a state-owned organization—^is something radically new interms of the issues (e.g., privatization) that have been under recent debate inBrazil. To the best of our knowledge, we present four original points. First, wedeal with the franchising of a service, whereas most authors examine the adop-tion of franchise to produce goods. Second, it is a particular kind of service,namely, a public service, whose parent organization (the franchisor) is a publicenterprise. Third, the contribution of Bradach (1997, p. 278) notwithstanding,our focus here goes to the management aspects of the hybrid form, instead ofestablished emphasis on whether ECT should own or franchise units. Fourth,even though franchising was adopted about six years ago in the postal services, itis seldom considered as an altemative format for public management in Braziland, for that matter, for the privatization of other state-owned companies. Evenin the more advanced economies where there have been some movements to-ward the privatization of postal services (e.g., the United Kingdom), the adoptionof the format discussed here by public bodies is rare.

When one observes what goes on around the world, it must be recognized thatthe attractiveness of franchising is as theoretical as it is "practical." However, aswe. have argued elsewhere, the more analytical aspects of franchising often giveway to texts that are more descriptive, informative, apologetic, or even sensa-tionalist (Carvalho and Leite, 1996a, p. 168; see also Boroian and Boroian,1987). Thus, it seems appropriate to use an existing conceptual framework with aview toward a better understanding of the franchise format.

In particular, two aspects deserve mention. First, we are interested in examin-ing the kinds of dialogue and of reciprocal influence that occur between the twoformats, especially in respect to how each form may have influenced the other'smanagement style; again, it would surely be a peculiar sort of influence, since itbrings together a public body and a private ownership/management format. Sec-ond, since Latin America's reintegration into the world economy is the relevantkeyword for the continent as well as for our focus here, it may be argued that, byincorporating a private business format into its existing organization, ECT mightbe praised for deliberately anticipating the sort of organizational tension to bebrought about through the various reintegrative processes.

We begin with a brief historical background describing the recent evolution ofthe Brazilian Post and Telegraph Company, as well as the growth opportunitiesarising from the introduction of the franchise format and move on to a compari-son between theoretical reasons and factual choices,' followed by a discussion offindings and conclusions.

The evolution of ECT: A brief background since the 1980s

During the 1970s, a period that has often been called the "Brazilian Miracle,"ECT was able to consolidate its operational and managerial infrastructure. To alarge extent it has benefited from the growth of postal traffic at rates exceeding

40 LEITE AND DE CARVALHO (BRAZIL)

18 percent per year (ECT, 1990, p. 21).^ From the second half of the 1980s on,some difficulties arose that threatened the company's business operations:

• The growth rate of postal traffic stabilized at 3.2 percent per annum as aconsequence of the recession that affected economic activity as awhole;

• Following the price freezing imposed by the Piano Cruzado (the so-called Cruzado Economic Plan), tariffs were squeezed, which made itdifficult to generate operational income;

• The investment rate—^which had amounted to about 12 percent of in-come during the 1970s— fell to less than 3 percent during the followingdecade.

By 1989, the strategic plan for the 1990s had been prepared, and ECT wasfacing a very difficult financial situation. Through the analysis of some prospec-tive scenarios, the strategic plan made it clear that the company would have toparticipate in other market segments and not limit itself to merely deliveringletters, telegrams, and small parcels, which were then considered basic postalservices. In other words, the company would have to become more and moreindependent of earnings originating from services related to the "monopoly."^

This reduction of dependence vis-a-vis the monopolized services was in factanchored in a consistent diversification strategy to be implemented following thestrategic plan. In addition, top managers realized the company had a strongpotential owing to its service network: In fact, in addition to a network of postalagencies, the company had also acquired nationwide distribution and transporta-tion capabilities (Chaccur, 1992). At the same time, managers were aware ofcompletely new but increasingly important forms of competition, for example,from courier firms that operated in nonmonopolized segments {Jomal do Brasil,1993, p. 10), as well as from other communication technologies such as fax(facsimile).

An important diversification initiative then amounted to repositioning ECT asa "service bank" as well as a "transportation business." Upon extending its rangeof services to become a "service bank," ECT signed several service contractswith other public agencies and enterprises, taking advantage of its wide networkof agencies, which eased public access throughout the country. In line with thisstrategy, ECT began to offer a number of "new" services (see Table I),"* such aspassport delivery, sale of telephone tokens, registering and filing citizens astaxpayers for the income tax, collecting fees for university entrance exams andother similar exams, delivering drivers' licenses and correspondingly collectingtaxes, duties, and other fees relating to applications for automobile licensing anddriving, and payment of social security benefits.

Service contracts were also made by ECT with some private firms that wereadopting third parties as suppliers of some of the services they used to purchase.


Table 1Special services rendered by ECT per type of client

Clients Description of services

Federal Police

Telecommunication servicesoperatorsThe Ministry of Labor

The Secretary of FederalRevenue

FAE (Student AssistanceFoundation)

IBM do Brasil

The National Institute ofSocial-Security (INSS)

Other

• Application for and delivery of passports

• Sale of telephone cards

• Receipt of applications for unemployment benefits• Receipt and delivery of registration forms for thenational directories of employed and unemployedresidents• Printing, distribution, and receipt of applicationforms for the PAT (Worker Nutrition Program)

• Registration of income tax-payers (CPF)• Receipt of import taxes

• Nationwide distribution of books, including thesupply of wrappings and equipment• Postal preparation of the books for later dispatching

• Postal preparation and delivery of invoices• Collection and delivery of courier bags andcorrespondence between IBM units and itsOperations Center (NCO) (services rendered by theRiodeJaneiro local branch of ECT)

• Concession and control of social insurancebenefits• Receipt of contributions• Payment of benefits

• Receipt of university entrance and similarenrollment fees• Receipt of traffic taxes, registration for vehiclelicensing, delivery of drivers' licenses• Receipt of electoral and related fees and fines

AdaptedfromJornal do Brasil, 1993a, pp. 8-9.

For IBM-Brazil (Rio de Janeiro branch), ECT was engaged in preparing anddelivering invoices, as well as in operating a system of collection and delivery ofcorrespondence among IBM local branches. Other agreements were completedwith private firms aiming at widespread sale of lottery coupon booklets andsimilar objects, such as Tele-sena and Papa-tudo, which are lotteries sponsoredby two competing communications networks. In another direction, ECT diversi-fication tried to realize its potential as a carrier of almost any type of objectthroughout the entire national territory. Thus, it became possible to purchase


ECT services when sending either an automobile or a television set from oneBrazilian city to any other. Up to this moment, no franchise contracts had everbeen considered as a possible altemative to growth: Every diversification initia-tive was pursued within the traditional contract format.

The results of this service diversification strategy immediately affected thecompany's revenues, which leaped from US$890 million in 1989 to almostUSS1.5 billion in 1992, and reached about US$1.7 billion in 1993 {Jornal doBrasil, 1993, p. 10). Yet, despite this demonstrated growth potential as repre-sented by those very positive results brought about by diversification, availableresources for financing company growth were in fact quite meager.

Therefore, the adoption of the franchising business format system arose, ac-cording to company executives, as a "natural solution" for the conciliation ofagency-network expansion possibilities with the reduction of available invest-ment funding. To the extent that it allowed for the use of third-party resourcesfor expanding business opportunities, the franchising system made it possiblefor ECT to diversify its offer of nonmonopolized services without damaging thequality of basic postal services. In fact, ECT executives considered the mainmultiplying factor of postal traffic to be the quality of postal service (ECT,1990, p. 24).

The strategic plan effectively provided for a complete implementation of thefranchising format (ECT, 1990, p. 42). The rapid expansion of postal servicefranchising confirmed how positively the market came to view this new businessformat. Of course, this was partly due to ECT's brand strength as well as tousers' perceptions of ECT reliability, as a number of polls showed {Jornal doBrasil, 1993b, p. 6). Another factor that largely contributed to the quick expan-sion of postal service franchising was the low cost of franchising contracts: Onsigning the first franchise contract, a fi anchisee had to pay an initial fee of about440 dollars {Exame, 1993, p. 101).

From its launch in 1989, when the first franchisee-owned agency was openedin Porto Alegre, an important southern capital, the postal service fi-anchisingformat expanded rapidly, making it possible for ECT to reach 1,443 franchiseeunits by December 1992. At that time, the company ranked first among Brazil-ian franchisors according to the criterion of number of franchisee-owned units; ithad then overtook O Boticario, a leading cosmetic and perfume producer thathad been the fi^anchising leader for four years {Exame, 1993, p. 101).

When ECT was restricted to utilizing its own resources, it took ten years toopen 203 outlets, while after about only two years of support from third parties,ECT was able to launch about 1,700 franchisee-owned agencies {O Globo, 1993, p.46). In this way, the expansion strategy based on third parties has consolidatedfranchising as a virtuous organizational format for managing a traditional publicenterprise.

The fast expansion of the network of franchised units, however, obliged thecompany to interrupt signing new franchise contracts as of 1993, in order to


reassess the system. At that time, ECT considered that the markets in Rio deJaneiro, Sao Paulo, and Brasilia were saturated. If and when new franchisecontracts were to be activated, special attention would be given to stimulatingtheir expansion toward regions in the hinterland, until a maximum number of2,000 franchised units throughout the whole country had been reached {O Globo,1993).

The adoption of franchising brought about a consequence that, even though itmight have been anticipated on theoretical grounds, was rather singular for thepostal services. In fact, because of the franchise format adopted by ECT, all thenew outlets owned by franchisees were added to the existing outlets owned byECT itself.^ In this way, a new form of "competition" took place, namely, amongthe whole set of service units. In other words, following the increase in thenumber of sales points, franchisees—as both private entrepreneurs and newcom-ers—started to compete among themselves as well as with the remaining ECT-owned agencies.

In this "new" environment, one of the preferred methods to reach differenti-ated services was to offer additional benefits without increasing service prices.For example, the majority of franchised agencies offered those "heavy" userswho were used to posting a large volume or a large value of correspondence thepossibility of collecting parcels or objects from the client's premises. Another benefitrelated to offering "credit" for postage expenses: This became possible by passing onto clients the price reduction allowed by the Postal Service whereby franchisees maypay their "accounts" twice a month {O Globo, 1993, p. 46).

The sharpening of competition in basic postal services resulted, obviously, inbenefits for ECT because: (1) after deducting franchise fees, franchised-unitsrevenues—that is, "competitors earnings"—reverted to ECT as the franchisor,and (2) the diversification of services made it possible to utilize all thecompany's resources without prejudicing the quality of those same services.Most likely, this would not have proved feasible without increasing the numberof points of sale through the franchising format.

In line with the literature on services marketing, ECT's strategic plan for the1990s identified service quality as one of the main expectations among users {OGlobo, 1993, p. 20). ECT then started paying more heed to the quality of ser-vices as a strategic objective in order to guarantee "postal monopoly,"* which thecompany itself defines as "the monopoly of quality" {O Globo, p. 20) that itenjoys today.

Reasons for adopting franchising at ECT: A theoretical perspective

The reasons for adopting franchise as a format for delivery of postal serviceshave been collected in ECT official documents or statements (made by its topmanagers either officially or in interviews conducted by one of the authors)concerning the decision to adopt franchising as an organizational format. These


reported reasons are matched against the explanations appearing in the relevantliterature, reviewed elsewhere (Carvalho and Leite, 1996a).

Capital market imperfections

We noted earlier that the existence of additional resources for growth was im-portant for ECT. Let us now examine the explanations offered in the literature.The macro explanation for the use ofa franchise system to support the expansionofa company facing capital shortage (Caves and Murphy, 1976, p. 581; Hoff-man and Preble, 1991, p. 83; Norton, 1988, p. 200) seems consistent with thedecision taken by ECT to adopt that organizational format as a new way tooperate its postal service units. As reported above, this explanation was explicitlystated by an ECT manager as the motivating force behind the strategic decisionin favor of franchising. This strategy has enabled the Brazilian Postal Service,as previously indicated, to increase considerably the rate of expansion of itspostal agencies network through third-party (i.e., franchisees') resources—ei-ther for new investments or for providing new cash for operating expenses. Ithas also been possible to ensure high quality levels even when additional ser-vices have been introduced.

Market power

The second macro explanation about franchise adoption refers to a company'smarket power due to its position at the top of a vertical chain (Vemon andGraham, 1971, pp. 924—925). This kind of explanation does not seem to finddirect support in the case of ECT. However, considering the threat implied in thepossibility that future privatization might break ECT's postal monopoly, thoughtmust be given to the fact that the company, by adopting franchising, has prepareditself to accommodate anticipated privatization pressures now widespread inBrazil. Therefore, the macro explanation of market power would, in an indirectmanner, apply to the case of the Brazilian Postal Service as long as ECT mightbe searching for integration with its suppliers and/or customers. The adoption offranchising was certainly not aimed at preventing would-be ECT franchiseesfrom acquiring products or services offered by other suppliers, as implied in thestrict verticality explanation. However, it has indeed prevented individual as wellas organizational customers from purchasing postal services—presently monopo-lized by ECT— from other independent suppliers (Inaba, 1980).

Incentives

As stated by Bradach (1997, p. 276), franchisees receive their units' profitsminus the royalty payment. In economic jargon, franchisees are owner-managerswho accept the residual risk in a franchise operation in order to take advantage of


the fact that their income will be determined, to a large extent, by the differencebetween future operational earnings and payments to productive factors (Norton,1988, p. 201; Shane, 1996, p. 218). Therefore, franchisees are likely to be moti-vated by specific economic forces such as agency incentives as well as informa-tional incentives (Norton, 1988, p. 202). The most important feature is thatincentives provide a form of self-control by franchisees.

Agency incentives

Among the many reasons to adopt the franchise format, the physical dispersionof operations (Rubin, 1978, p. 202) relates to the incentive ECT might have tofranchise operations of geographically dispersed units, which are less easilymonitored and would therefore incur indirect control costs.^ In the case of theBrazilian Postal Services, an examination of the relevant literature does notallow us to conclude that this might have been one of the reasons for the adop-tion of franchising by ECT. In fact, ECT was used to managing its existingnational network of agencies. However, by 1993, when it interrupted the conces-sion of new franchises, ECT made it known that, if and when the grant of newconcessions were to resume, the expansion toward regions in the interior of thecountry would be stimulated {O Globo, 1993). At that time, ECT concluded thatthe big markets of Rio de Janeiro and Sao Paulo had reached their saturationpoints. It can therefore be speculated that the idea of stimulating the opening ofnew franchises in the interior could be partly explained by the incentive for ECTto reduce the costs of directly controlling its would-be new but geographicallydispersed outlets.

In the case of labor intensity, the incentive might arise from the likely reduc-tions of so-called agency costs directly associated with problems and conflicts ofinterest in those operations in which labor intensity is a key factor (Norton, 1988,p. 202; Silver and Auster, 1969). Since ECT is the largest employer in Brazilamong public-service enterprises (more than 70,000 employees in 1993; seeExame, 1994, p. 250),^ it is reasonable to assume that, in adopting such a system,the company would benefit from a reduction in those control costs. In fact, theowners of franchised postal outlets would feel motivated to behave as nonshirk-ing managers, as suggested in the literature reviewed, given that the financialresults of their business are very strongly correlated with their own earnings. Inother words, they would not avoid good performance or effort at work for therewould be (economic) incentives to so motivate them.

Since the size of the outlet/establishment requires operations that will allowsubstantial scale economies, it would not, according to Fama and Jensen (1983),stimulate the adoption of franchising, because earnings would be greater if own-ers (investors) and managers were kept separated. In the case of the BrazilianPostal Service, a distinction must be made between the large size of the wholeenterprise—embracing a wide operational network throughout the country,' in


addition to a well-grounded transportation and administrative infrastructure—and the large size of its service units. In line with the explanation (appearing inthe literature) that considers franchising appropriate only for smaller organiza-tions, it may seem that this was observed in terms of postal service agencies.This aspect does not seem, however, to have been directly considered by ECTwhen the decision to franchise was made.

Informational incentives

In addition to being entitled to eam their outlets' profits, franchisees usuallybenefit from an intangible asset—they may use the franchisor's trademark. Someauthors highlight two informational aspects that link the (service) brand to fran-chising: (1) the entire franchised network of units exhibits the franchisor's brand,and (2) the brand offers a direct information service to the consumer (Norton,1988, p. 203). In the first case, authors consider that, since franchising requiresheavy investments on the part of the franchisee, it stimulates the franchisee-man-ager to preserve the quality of the products sold, thereby reinforcing the networkbrand as a whole. In the case of ECT, therefore, there are indications that thisfactor was effectively taken into account. The Manual do Franqueado (the ECTFranchisee Handbook) highlights that "through franchising ECT does widen thepresence of Correios as a brand" (ECT, 1993b, p. 1), thereby suggesting that thecompany recognizes the existence of benefits associated with the presence of itscorporate brand at several points of sale.

The second informational way of linking the brand to the strategic decision toadopt franchising refers to its direct supply to the consumer of information aboutthe quality of the offer (Klein and Leffler, 1981). In regard to the BrazilianPostal Service, there seems to be a reasonable association of "postal service" and"service quality" in terms of users' perceptions {Jornal do Brasil, 1993b, p. 6).The strength of the Correios brand also seems to have been one of the criteriaadopted by ECT franchisees in choosing this franchisor among so many othersoffered in Brazil {Exame, 1993, p. 101). Therefore, one might argue that theexisting prestige of the brand strongly contributed toward ECT executives' deci-sion to adopt the franchise organizational format.

In addition to the brand, another informational feature might motivate ownersto adopt franchising in their organizations—a significant variability in the de-mand for the product or service (Norton, 1988, p. 204). In this case, the owners(like ECT) would be motivated to choose franchising as a form of managingtheir operational units in order to reduce the control costs required to be able todistinguish between real shirking on the part of managers and an effective reduc-tion in demand. Published material concerning ECT suggests that the companyevaluated the "business behavior" of the franchisee positively. As a matter offact, the Franchisee Handbook puhlished by ECT may be quoted as follows:

Franchising associates ECT to achieving entrepreneurs as well as renews or-


ganizational values Franchising integrates corporate cultures, and pro-motes both the evolution of professional backgrounds and the improved posi-tioning of ECT human resources Through franchising, ECT will be able toconquer new market niches as well as to increase its market share.... Fran-chising allows Brazilian entrepreneurs to have access to a new business seg-ment Franchising is one way to modemize public services offered by theState to overall society. [ECT, 1993b, p. 1]

Analysis of those building concepts expressed by the ECT way of franchisingallows one to argue that the possibility of being associated with enterprisingfranchisee-managers supports the idea of adopting the franchising of postal ser-vices throughout Brazil.

In regard to the labor market for managers, which is the third informationalfeature considered, most authors (e.g.. Faith, Higgins, and ToUison, 1984) sug-gest that there are costs associated with selecting new managers from the exter-nal labor market, as well as with their training, all of which are incurred in orderto balance the newcomers' productivity levels in relation to those of the manag-ers already operating on behalf of the company. In this way, franchising wouldserve as an instrument for the "natural selection" of more skilled and moremotivated professionals required to manage the operational units. Even though,as previously mentioned, ECT employs a high number of effective personnel(more than 70,000 by 1993), it usually selects and trains the managers of itsoperational units mostly on an internal basis and does not resort to extemalselection to fill managerial-level vacancies in its agencies (this information wasobtained directly from the company).

Bearing in mind the argument relating to demand variability, however, onecan assume that ECT executives expect a differentiated behavior on the part offranchisees as owner-managers, since they used such terms as "achieving entre-preneurs," "renewal of organizational values," and "integration of business cultures,"among others. Additional comments are also available about the development ofa"real business culture" among the managers of ECT-owned agencies through theirinteractions with franchisees (ECT, 1993b, p. 1). It might then be argued that thechallenge of developing "businesslike behavioi" among the public-company manag-ers would be eased as well as stimulated by adding the franchise format to theexisting arrangement represented by ECT-owned postal agencies.

Discussion

The macro explanation offered in the literature reported above—that is, that thechoice of franchising as an innovating organizational format is also a convenientgrowth strategy under capital shortage—^is confirmed in the case of the BrazilianPostal Service. This choice, however, gives rise to some specific and challengingquestions, especially those referring to the management of the new organiza-tional structure. In the light of practical experience previously reported, it is


worth complementing the cotnmonly held view that franchising may fundgrovk^h by providing (outside) capital that might not otherwise be available.'°Therefore, we now stress some management implications of the adoption of thebusiness format franchise by a public-service enterprise in Brazil.

We previously reported how ECT's Franchisee Handbook revealed mostlyfavorable reactions to the fact that franchising implied two kinds of postal agen-cies, namely, franchised units and ECT-owned outlets. Considering that therewere several different reasons why those two kinds should differ in managementstyle—for example, in terms of initiatives to market services, of autonomy tomake decisions, or of the nature and number of different recruitment policiesavailable—it may be said that public managers at ECT had been properly moti-vated to be receptive to their private counterparts as well as to the "new" compe-tition in general.

Also, ECT decided to intenupt the granting of new franchises as of 1993 to enableconsolidation of the franchise system that had been in place since 1989. Therefore, inspite of the arguments presented by Shane (1996) in fevor of franchising, some moni-toring problems persist. The literature suggests that those problems are stronglycorrelated to the incentive problems arising from the ^-caWed principal-agent rela-tionship, of which a franchise system appears to be a particularly relevant exam-ple. In other words, the challenges implicit in managing the new organizationalformat invited ECT to review its procedures and standards.

In addition, it seems that, up to that consolidating stage, most issues relatingto the adoption of the new management format have been analyzed from astrictly internal viewpoint. For example, insofar as the decision to adopt fran-chising is concerned, users of the service, although very likely to be affected inmany ways by the results of that decision, were not consulted. Similarly, Brazil-ian society as a whole also did not offer opinions on the specific questions ofhow to operate and/or to manage the franchising network. Although to solicitsuch input might involve a large number of social actors—political representa-tives, consumer and other citizen associations, the press, and so on—some authorspoint out that the executives of any state-owned enterprise should act as agents,whereas citizens (or "voters") would then be the principals on whose behalf admin-istrative decisions should be developed (Nellis and Parker, 1993, p. 104).

Therefore, once the implementation of the expansion strategy and the newmanagement format were in place, some kind of systemic evaluation was neededto assess whether the organizational innovation was indeed conducive to a highlevel of efficiency and effectiveness from the public users' viewpoint. As amatter of fact, recent empirical research by Leite (1996) evaluating ECT's adop-tion of franchising has taken the point of view of service customers as the basicreference point (see also Carvalho and Leite, 1995). That research enumerates anumber of notable aspects.

First, concerning the determinants of quality, the tests performed revealed thatstate-owned agencies and franchised agencies differed only in aspects relating to


service tangibility, which have been empirically split into service-related tangi-ble aspects and outlet-related tangible aspects. From a competitive viewpoint,this result may be deemed challenging for public managers. On the one hand,tangible aspects are usually associated with service characteristics that could beaccomplished by means of investment in, say, equipment, installation, and auto-mation of services, not to mention other aspects (such as appearance or dress)that are directly related to expenses supporting the interpersonal encounters be-tween clients and employees. On the other hand, since public managers areallowed less autonomy in both investment and expense decisions, it may well bethat franchisees will take better advantage of their potentially more flexibleinitiatives and resources."

Second, so far as the association between the perception of service improve-ment (afrer franchise adoption) and the structural dimensions of quality is con-cerned, Leite (1996) and Carvalho and Leite (1996b) have found that, amongthese dimensions, three are directly and positively related to a favorable percep-tion by clients: namely, responsiveness/guarantee, service-related tangibility,and access (to the outlet/agency). The latter two factors refer to attributes inwhich eventual competitive differences may be compensated for—that is, re-duced, or even canceled—through managerial action not involving any signifi-cant change in the management style of the public enterprise; at most, suchaction might require some form of investment or operational reform. In contrast,if the search for a competitive differential between existing categories of postalagencies—say, franchised versus state-owned—is to be supported by the respon-siveness/guarantee factor, empirical results indicate a need for management reo-rientation of public administrators to be able to face competition. The qualityattributes that empirically comprise this factor'^ clearly point to service charac-teristics that are strongly dependent on the performance of front-line personnel,that is, on the operational service units and their human resources.

Third, respondents in that sample of business consumers were asked to evalu-ate how the postal service performed since the adoption of franchising. The newbusiness format was assessed favorably. In addition, although clients of bothtypes of outlets (franchised or not franchised) stated that the postal service hadimproved since franchise adoption, the clients of franchised agencies chose con-sistently higher values on the improvement scale. In terms of perceived service,two management-related attributes were examined: the outlet's manager auton-omy to make decisions, and the existing relationship between client and man-ager. In both cases, franchisees' clients stated significantly {p < 0.0001) higherlevels of perceived service (Carvalho and Leite, 1998).

Conclusion

Altogether, the adoption of franchising effectively resulted—^from the point ofview of ECT business clients—^in a creative form of privatization. Under the new


format, ECT has been able to provide direct benefits to postal-service users.Since the adoption of franchising supplied ECT—through the combination ofnew services with the traditional ones—^with a significant increase in total earn-ings, one may conclude that the innovation in organizational format has meant asuccessful business strategy in the Brazilian case. These findings summarize ouranswer to the third research question.

To answer the second question, which concerned the interaction between thetwo formats, several aspects received attention. For example, published materialindicated that, upon franchise adoption, ECT explicitly expected to achieve bothenhanced entrepreneurship and renewed organizational values; also, franchisingwas expected to promote the evolution of professional backgrounds and to im-prove ECT's human resources. To corroborate a point made in the literature,franchising would also lead company people into the franchised sector to per-form a number of roles (Bradach, 1997, pp. 282-283).

In regard to our first research question—investigating the reasons foradoption of franchising by the Brazilian Postal Service in comparison withreasons presented in the literature—our arguments suggest, in spite of thelimitations of this study, that there is convergence between both sets of mar-ket-related and incentive-related reasons, on the one hand, and ECT experi-ence, on the other hand.

Two general observations may now be proposed. First, both the businessenvironment and the management culture in Brazil favor a franchisee that, assoon as the business starts making a profit, prefers to hire a manager rather thanrun the business him- or herself. This creates a double, and probably moredifficult, monitoring problem. In this sense, one might wonder whether the hy-brid format implied by maintaining both ECT-owned and franchised units cre-ates more problems than it solves. In addition, the "excess supply" nature of thelabor market in Brazil supports the idea that franchise contracts will continue to beperceived as a form of wage relationship, giving rise to an inequality of powerbetween the parties that does not occur in typical franchise arrangements andthat aggravates the incentive issue. For that matter, the incentive problem islikely to persist independently of the degree of formality in contracts as they arepracticed.

Second, we call attention to two aspects of any franchise awarded by a state-owned service firm. The first is that, because of the public nature of the pro-ducer-franchisor, the previously mentioned (power) asymmetry in the relation-ship between the (public) franchisor and the (private) franchisee appears to beweaker than in the case of (purely) private franchise contracts. In fact, the stateas a "boss" is much "looser" than most private franchisors. The second aspectinvolves the fact that the (public) franchisor may be more inclined than a privateone to transfer—even if only partially—to final constituencies ("consumers, citi-zens, or community") any positive results generated by the business (for exam-ple, productivity gains likely to be transferred through reduced prices). No matter


how complex and how interesting they may be, those questions require muchmore research, both empirical and theoretical.

Notes

1. In Carvalho and Leite (1996a), we presented a literature survey (pp. 169-174)which we used thereafter as a guide to analyze the practical experience at ECT (pp.178-181). Here, because of space constraints, we have reshaped those two sections into acomhined one.

2. For an analysis of the evolution up to the 1970s, see Vergara and Cavalcanti(1995).

3. Income earned from the monopolized services, which had represented some 80percent of total revenue, amounted to only 38 percent of total revenue in 1993; as a matterof fact, it was intended to limit the eamings from those services to between 15 percent and20 percent (ECT, 1990, p. 10).

4. The complete list of special services is available in Jornal do Brasil (1993a, pp.8-9).

5. According to Bradach (1997, p. 276), the simultaneous use of company and fran-chise formats should be called a "plural form" of management. Shane (1996) used theterm "hybrid."

6. It is worth mentioning that this "monopoly" is restricted to so-called "correspon-dence objects," that is, letters, postcards, printed materials, and small parcels {petitspaquets).

1. For a recent exposition of several applications of agency theory in marketing, seeBergen, Dutta, and Walker (1992). For references relating to the specific case of franchis-ing, see Brickley, Dark, and Weisbach (1991) and Lafontaine (1992).

8. This figure amounts to the total payroll of ECT and partly includes nonoperationalworkforce. Franchisees' total payroll applied to some 9,000 employees.

9. By November 1993, ECT postal service units amounted to 5,237 owned agenciesand 1,726 franchised agencies, in addition to some sorting facilities and some residentialdistribution centers, and it covered the entire national territory (see ECT, 1993a).

10. Recall that the investment rate had fallen from about 12 percent of corporateincome during the 1970s to less than 3 percent during the following decade. On the otherhand, the initial fee paid by each franchisee amounted to some US$440.

11. As Bradach (1997, p. 278) argues, what is most needed when studying a hybridorganizational arrangement, such as the one studied here, is to analyze the set of processesthat cause owned outlets and franchised units to influence each other.

12. For example, "employees who inspire confidence," "filling in documents withouterrors," "responsiveness to client requirements," and "quick supply of information" (seeLeite, 1996, and Carvalho and Leite, 1996b).

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