Artificial intelligence (AI) is transforming business. Sophisticated franchises are using it to create efficiencies and drive growth.
Businesses are using AI more than ever before. In a recent workplace survey of 13,000 people across 18 countries, 50% of respondents said their company was using AI – up from 22% just five years ago. Businesses are also using AI in an ever increasing variety of ways. In another survey of business and technology executives, the most commonly cited uses for realizing value with AI were increased productivity through automation, improved customer experience, and improved decision-making. These experiences can also enhance and present significant AI opportunities for franchise businesses. However, because the legal and regulatory environment remains largely underdeveloped, franchisors should be aware of the potential risks as well.
What is artificial intelligence?
The first AI computer program was developed in the United States in 1956 by three researchers working for the RAND Corporation. The program, called the Logic Theorist, was designed to mimic human problem solving skills and was presented at an influential conference at Dartmouth University that same year. One of the organizers, John McCarthy, is widely credited with coining the phrase “artificial intelligence” and the conference would prove to be a catalyst for significant research into AI over the following decades.
Through the 1960s and early 1970s, research into AI benefitted from funding from US government agencies but struggled due to the limited computational power available at the time. The next burst of research activity came in the 1980s, which saw more innovation and significant funding from the Japanese government. The 1990s and 2000s saw more advances, such as when IBM’s Deep Blue computer program beat a chess grand master. AI technology became more mainstream in the 2010s with the release of Apple’s Siri and Amazon’s Alexa voice assistant programs.
Artificial intelligence is an umbrella term that refers to an application or machine that mimics human intelligence. Machine learning is a subset of AI and describes a machine or program that is trained on existing data to find patterns, make predictions, or perform tasks when given new information. Deep learning is a subcategory of machine learning that uses machine learning algorithms, but structures them in layers to create artificial neural networks modeled after the human brain.
In November 2022, San Francisco-based tech firm OpenAI released ChatGPT – an AI tool that users can interact with conversationally and prompt to generate text. The ability to generate new content is one of the attributes that sets generative AI apart from previous AI technologies. ChatGPT was an overnight success and amassed more than 100 million users around the world just weeks after launching. Investors quickly took note, as significant venture capital poured into startups focused on generative AI.
Opportunities for franchise businesses
Franchise businesses can use AI in various ways to streamline their operations. A key use case already being implemented by many franchisors is automation. AI chatbots – programs that use AI and natural language processing to understand and answer customer questions – are a common feature of many websites. However, certain fast food franchisors are taking the concept further and have been experimenting with using AI to take customer orders. McDonald’s has been a leader in this area. It acquired an AI company in 2019 and introduced its first automated restaurant this year. Franchisors in other industries are also using AI to automate the customer experience. Hilton Worldwide’s collaboration with IBM on an AI concierge service is an example.
Operations and human resources
AI can help franchisors create more effective standard operating procedures customized to the individual franchise owners and locations. Franchise businesses can also find efficiency with AI in the recruitment process. Human resources is a time-intensive business function and AI tools can be used to save time on analyzing cover letters and resumes.
Marketing and customer service
There are several applications for AI in sales and marketing. Franchise businesses in the retail sector can utilize AI tools to provide pricing recommendations. AI can analyze transactional data, competitive price data, marketing data, and other factors to simulate pricing scenarios and create actionable recommendations. Many franchise businesses are also using AI to improve customer service. For example, many franchise gym businesses such as F45 and Orangetheory use AI software developed by MINDBODY that uses an extensive fitness industry customer data set to better serve customers.
While AI presents many opportunities, franchise businesses should also be aware of potential risks. The legal and regulatory landscape for AI in Canada is still largely underdeveloped. One area to monitor for franchise businesses relates to privacy. Under existing law, the federal Personal Information Protection and Electronic Documents Act (PIPEDA) sets the rules for how businesses must handle personal information in the course of commercial activity. AI is able to produce responses to user questions by learning from the data that is available to it. If AI is provided personal information, including names, locations, buying patterns, and other identifying information, AI may inform decisions that pull sensitive information and use it to analyze and predict patterns and behaviours of its users. Businesses that use AI in their operations should be aware of their obligations under the Act if personal information is used.
The law related to artificial intelligence in Canada will continue to evolve. Allowing AI to access sensitive data related to its users may impact individuals’ fundamental privacy rights, as well as impact business decisions relating to fairness, accuracy, bias, and discrimination – all of which the Canadian Government is reviewing and amending various privacy laws as necessary. Currently, Bill C-27 completed its second reading in the House of Commons on April 24, 2023 and will go to review at the Standing Committee on Industry and Technology. If passed, it would replace PIPEDA with new legislation including specific rules for AI. Franchise businesses that are interested in adopting AI technology should monitor developments with changing privacy legislation and position themselves for compliance going forward. Failure to comply with federal privacy laws may have far-reaching effects that outweigh the benefits that AI can generate.
The business risks of being on the wrong side of AI are real. In May 2023, a publicly traded education technology company admitted on an earnings call that ChatGPT was starting to negatively impact sales. The stock dropped 50% the following day. What franchise businesses cannot afford to do is ignore this technology. AI presents franchise businesses with significant opportunities to unlock value. Through automation, franchisors can allocate human capital more efficiently and insights and recommendations from AI can enable more effective sales and marketing strategies and allow for improved customer service. Franchise businesses should embrace these opportunities, but proceed with caution and due diligence.
Edward (Ned) Levitt is a Certified Franchise Executive, a partner at Dickinson Wright LLP, Toronto, Canada, and provides legal services to Canadian and international clients on all aspects of Canadian franchise law. He was General Counsel to the Canadian Franchise Association (2000-2007) and is a member of the American Bar Association Forum on Franchising, the International Bar Association and the International Committee of the International Franchise Association. As a member of the Ontario Franchise Sector Working Team, Ned was instrumental in the creation of Ontario’s franchise legislation and has had significant input in the franchise legislative process throughout Canada. Among his many publications is the leading text, Canadian Franchise Legislation (2001, LexisNexis/Butterworths). Ned can be reached at 416.646.3842 or [email protected].
Richard Schuett is an associate of Dickinson Wright LLP, Toronto, Canada. His practice primarily focuses on franchising, commercial transactions, and commercial leasing. Mr. Schuett can be reached at 416-646-6879 or [email protected].