Mark Hemmeter of Office Evolution | Flexible Workspaces Will Need to Become More Flexible

ABOUT THIS EPISODE

Office Evolution Founder and CEO, Mark Hemmeter, talks about Ohana, franchising, and why flex space operators will need more flexiblity in the post-pandemic world.

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Transcript

Frank Cottle [00:00:17] Good morning, this is Frank wottleith the Allwork.Space Future of Work Podcast. Today, we have the pleasure of having Mark Ammeter, the founder and CEO of Office of Illusion. With this, Mark has been an industry veteran, leader, thought leader, company leader, and has a very innovative approach to our industry and flexible work in general. Mark, welcome to the podcast. 

Mark Hemmeter [00:00:42] Thanks, Frank. It’s great to be here.  

Frank Cottle [00:00:44] Can you tell us a little bit about Office Evolution, your own history? I know you and I have known each other forever. But can you can you share a little bit of your own history and office of Elution’s history with everybody?  

Mark Hemmeter [00:00:59] Yeah, I think it’s important to go back into the history pre–Office Evolution. So, I was born and raised in Honolulu, Hawaii, in a family business that was all about hospitality. So, I helped with projects around casinos, believe it or not, hotels, resorts, food and beverage of retail. And so, I’ve been around hospitality and big, complicated real estate projects my entire life. In 2003, 18 years ago now, I founded Office Evolution, mostly because I was a client of a company who now is a competitor of ours. And I love the model. I love that we were surrounded by small businesses and entrepreneurs. And I’ve loved entrepreneurs my whole life. My entire family are entrepreneurs. And that’s important because it’s part of our culture at Office Evolution. So, I started off this evolution in 2003 coming from another flex office provider, and we always stuck to a model that’s been successful through the 2008-2009 recession and been successful through this pandemic. And it has three components. First of all, we focus on local small business owners. We don’t go after the big corporate users, the enterprise, those things. We focus on that local lawyer in your community. Number two, we build in the suburbs. We build suburban and secondary market locations that are close to where our people live. So, we are not an urban or downtown or business center type operator; we are a suburban, a secondary market operator. And third, which is the most important part, is we’re locally operated. So, we’re a franchise model. We have seventy-three open locations today. Sixty three of those seventy-three are owned by local franchisees. So again, local business focus locally operated in those in the suburbs with franchisees. That’s our model. And it’s been resilient through all sorts of ups and downs for the last eight years.  

Frank Cottle [00:02:44] You know, Mark, the franchise model is interesting and I think that’s a good place to start going into a little bit. We hear about the expansion of flexible workspace, coworking business centers, serviced offices, accelerators, incubators, all different variety of brands or companies. Only a few, though, have chosen or have been able to franchise, even though a lot of people talk about brand extension and franchising. Can you give us a little definition of what a true franchise is versus, say, a wannabe? Yeah, and the differences between franchising and licensing and or just brand extension of franchising.  

Mark Hemmeter [00:03:31] So I’ll answer that question two ways, Frank. I’ll describe kind of the legal definition of a franchise which will surprise a lot of people. And the second one, what it takes to be a successful franchise or in my view, so the legal definition of franchise is actually there’s only three components.  

Mark Hemmeter [00:03:47] Is there a brand name being used, a shared brand name number one? Is there a shared operating manual, another? In other words, a way of doing business? And number three, is there a change of money to somebody getting paid a fee for that? If those three answers are yes brand name, shared operating structure or operations manual and a fee, then it’s a franchise under a US government law. And a lot of people try to get around that by calling it a license or something else. And that’s OK until you get to certain scale and somebody starts saying, no, I really think you’re a franchise. Being a franchise isn’t necessarily scary. It’s just there’s a lot of reporting requirements. There’s a lot of legal issues that you have to work through to be a franchise. In my view, the most successful franchise owners are ones that realize that their success is based on the success of their franchisees. So, a franchise owner is only as successful as their franchisees are. And I hope that that’s the culture we’ve instilled at Office Evolution. I see lots of other I mean, there’s seven thousand franchises in the United States from burgers to Office Evolution; the most successful ones are focused on their franchisees, not the company, if that makes sense.  

Frank Cottle [00:04:57] No, I really think it does.  

Frank Cottle [00:04:59] I know we have had an Alliance in years past and currently we have our Alliance Network, which is not a franchise because we don’t share the same the same way. But we’ve always had a decision-making philosophy internally. I know your company and I think you’re very much aligned with this, where every decision we make, we say, is it good for the members? We have to work with all our members first. So, is it good for the members? If it’s good for the members, even if it’s harder for us, we say, well, that’s what’s going to make them more successful than put this through them. So that’s what we need to do. And I know you’ve got your Ohana set up, which is kind of neat, kind of interesting. But how do you go about making decisions of that kind? Because that always comes in with franchisors and franchisees and we’ve seen others in our industry go through that. Larger companies and in some cases, how do you how do you go through your own establishment of that role?  

Mark Hemmeter [00:06:06] You know, it’s an it’s a really tough balance because on one hand, like we said, you want the best for the franchisees. You want to do that, motivate them and help them make money. And so that’s a huge priority. But on the other hand, if you have a weak franchise owner who isn’t getting paid enough fees or spending so much time reinventing the wheel at every location, different systems, different processes, that isn’t good for the system either. So, you need a franchise owner who is strong and making money and your franchisees who are strong and making money. And that is a very difficult balance. And it certainly is not as simple as saying the franchisees always win. And it’s certainly not as simple as saying the franchise owner always wins. There’s a balance in the middle.  

Frank Cottle [00:06:51] You know, the issue of how you choose your franchisees or how they use it for. Yeah, and I think if, you know, you have 70 some units up right now. But I also know you have quite a number of units that have been sold that haven’t been opened yet. You always have a pipeline of new franchisees coming on. And that’s, again, that that’s unique in in the industry for a company of your size, although it’s really struggled getting that critical mass going where you guys have been succeeding very consistently.  

Mark Hemmeter [00:07:29] Yeah, I know. We’ve been we’ve been fortunate. And I and it all starts to me with the franchisees and our corporate team. We’ve built a great team that’s really rallied around this concept of Ohana and serving our franchisees. And likewise, we’ve got franchisees who believe in a win-win, which is one of our core values, one of our five core values. And they believe that their comments and their help and their expertise also make the system better. So, you’re right, is it’s very important to pick the right franchisees. That’s very, very important. It’s hard to do. We’ve got franchisees who surprised us both ways .But it’s it starts there and it starts with alignment about what we’re all trying to accomplish. The franchisees have to have the ability, right, the business acumen to do this. They also have to have the right attitude. They certainly need to have the right balance sheet, but they have to have the right attitude to work on this together as a kind of a shared vision, building a company together.  

Frank Cottle [00:08:24] Well, you know, you’ve referenced and I’ve referenced Ohana a few times. I’m not sure that people throughout the audience are familiar with that term and what an important part it plays within your overall structure, not just between you and your franchisees, but between the centers and the members within the centers, as well as extended and live in Ohana.  

Mark Hemmeter [00:08:55] Since I’m from Hawaii, like I said earlier, Ohana is a Hawaiian word that means family. But it also in the way we interpret it, the way we instill it and put it out there, it’s a, it’s a group of people all working together for a common purpose, a common cause, which can be true in Hawaii. A football team can be an Ohana, for example. Sure. And that’s how we use it here.  

Frank Cottle [00:09:19] Or my canoeing team? Your canoeing team, absolutely.  

Mark Hemmeter [00:09:24] So we treat this as Ohana.  

Mark Hemmeter [00:09:25] This is not grandpa sitting out in the front porch drinking a bourbon. That is not what this is. This is an active group of people working together for a common cause. And so, if you went to all of our locations and asked any employee throughout the whole company and they said, what’s your culture? They’d all say, Ohana. They could all tell you what it means. And so, what it means. And it really starts with our customers. Remember, our customers are small business owners. There’re the ones who write the checks. They’re the ones who own the business. Our franchisees write the checks and, on the business, and we do the same here. We are all small business owners together in this, figuring it out, so we’re this small business owners trying to figure out how to make our way through life and make our way through our businesses.  

Mark Hemmeter [00:10:05] And that unifies us. And it did remarkable things through the pandemics. Because we all know where we’re striving to work for each other’s better interests and improve the Ohana; no one threw rocks during the pandemic. No one blames, no one finger pointed. Everybody said this sucks. What do we do to make it better? But no one lobbed hand grenades at each other during the entire thing. And I credit that to the power of Ohana.  

Frank Cottle [00:10:30] Well, you know, I think it is important overall to really understand that all companies need a, particularly franchised companies because you’ve got so many layers, they need something that draws their culture together. And I think that goes well beyond the franchise concept. Certainly overall, it’s every company. Everybody needs something that draws people together. And you’ve chosen family, which is a wonderful extension. And I understand how, you know, I’ve spent many, many years of your life here as well. And as you know and I understand how strong Ohana is as a not just as a word, but as a complete lifestyle. And I think that’s what you’re trying to, that’s what you’ve succeeded in creating.  

Mark Hemmeter [00:11:20] Yeah. You know, frankly, if you think about our users, our customers, our customers all started their own small businesses, 90 percent of them. And they did that most likely because they believed in their own talents and what they could do. They wanted to spend more time with their family. They got, they were sick and tired of the commute. They’re sick and tired of missing their kids’ ball games. So, for them, starting their businesses, which was about family from the beginning, their families. And so, we’re just multiplying that. And that’s, you know, maybe later in this talk, we’ll talk later about kind of enterprise and why we don’t really go after enterprise, because while enterprise is a great solution and there’s a lot of that out there and we get our we got a fair share of it. It’s not what we’re really about. At the end of the day, we’re about that small user who wants the place to hang out and feels like they’re part of a family.  

Frank Cottle [00:12:06] Well, I think that’s great because the concept of community is so strong within so many centers and it’s talked about so much. But you’ve really taken the concept of community and elevated it to family. And I think that’s an important distinction. It’s not just a word. It’s not just a hyper networking. You really have elevated it. One of the I don’t want to have to give away any trade secrets here, but I’m going to come around on you a little bit. Many people in the industry look at franchising as a solution for extending their own brand or their own reputation, because very few companies in our industry actually have a brand. When you say, oh, I have a coworking center, most people say, oh, like WeWork, even though there are quite a challenged company right now. If you say I have a business center like Regus, it’s the same. Those companies have a brand. Most small companies do not. But they do have a good reputation in almost all cases, and they want to understand how to extend that in in the services that you provide. They differentiate from other franchise organizations that I’ve seen in the past or that I see currently is, you do a lot of centralized work in the load for the franchise operator in the field. Could you kind of describe some of your centralized services very plain so that people understand what it takes to launch a franchise versus just having a great brand and maybe a great operating policy?  

Mark Hemmeter [00:13:53] Well, let me start with the why first and why we do this. So, so I come from the hotel business and I try to be a student of that business. And if you watch everything from a Hilton all the way down to a Hampton Inn or Fairfield Inn, they centralize a lot of services to try to make those hotels as simple as possible. The other thing is kept in mind that our locations, the suburban secondary markets, and they’re smaller, so they’re ten thousand feet or so. Fifteen thousand feet. And so, we need to make sure they’re really, really efficient. So, we ask ourselves all the time, what do we put out in the field as a responsibility and what can we centralize to make those locations more efficient and also give a scale the ability to add more locations, plug and play pretty quickly. So that’s why we do it. So, what we do, for example, right now is we do all of the invoicing for all the locations centrally. We issue all the invoices, collect all the money deposited in the franchisee’s account so they don’t have to.  

Mark Hemmeter [00:14:47] And Frank, we didn’t say one thing.  

Frank Cottle [00:14:48] Stop right there… you just did the invoicing or do you have a give me a master operating system that handles other elements within.  

Mark Hemmeter [00:15:01] Now we have a master operating system for sure. I mean, we have an overall enterprise level infrastructure that handles all of this. So, I’ll give you an example. We, like we said, we do all the invoicing, collect all the money deposited in the franchisee’s accounts so they don’t have to. And remember, each IOffice Evolution location has only one employee at the center with one employee, not meaning not the investor owner, but one staff member, one paid staff member, plus the franchisee. Several of our franchisees actually fulfill that role to the operator, too, but generally it’s an employee. So, one of the, I’ll give you an example why there’s another reason why this is important. Well, let me back up. So, we do central telephone answering to centralized support, centralized technical support, centralized marketing. We have one single website for the entire system that we maintain. We have to pay per click vendors that we maintain that the franchisees work for work with. So, a lot of things that we centralized to do, the heavy lifting to the franchisees don’t have to know. They pay us fees for those, but they don’t have to go figure it out on their own. The other thing, Frank, is, for example, we allow every customer to use any location anywhere in the United States 24/7. So, where this gets complicated is if you move between franchise locations because they’re owned by different people. So, if you go from a location in Columbus, Ohio, to one in Indianapolis, Indiana, which happens all the time behind the scenes, we figure out how the money moves around. So that’s another example of centralized services that we have to provide.  

Frank Cottle [00:16:30] How about reservations, bookings and things of that nature,  

Mark Hemmeter [00:16:34] All centralized.  

Mark Hemmeter [00:16:34] I mean, the franchisee plugs and plays into our centralized technology platform so they don’t have to there aren’t reinventing the wheel every time. That’s what they pay us for. They pay us for a system and that’s what we provide.  

Frank Cottle [00:16:45] You know, I’m a, I’m going to go one step further. One of the big changes that we’re seeing in the industry over the last several years has been the utilization of phones by reception, phone systems, etc.  

Frank Cottle [00:16:59] Many centers that are built to that particular and don’t put in centralized phone systems for the center for the clients, they say, well, the client already has a mobile. Why do they need that? How do you handle the telephone line reception, things of that nature, centralized, individualized?  

Mark Hemmeter [00:17:16] It’s centralized.  

Mark Hemmeter [00:17:20] It’s a big nationwide VoIP telephone system. So, we have our own phone switch in a location here center here in Denver, and we install VoIP telephones around the country, plug and play. We are definitely looking at upgrading that system to go into one that has more bells and whistles where you can have an app on your phone and in essence, you’re in the center. But right now, it’s a centralized telephone system. There’re no local phone numbers at every location. There are no TI ones and all that old stuff or SIP trucking at a location. We do it all centrally. We can get phone numbers in New York and Florida and California and Washington. We have all that, but it’s all centralized plug and play at the location.  

Frank Cottle [00:17:56] So basically a franchisee in your system is going to say, look, I don’t mean it to, but I think it’s a differentiator in your system, really. They are primarily and singularly almost responsible for two things. First, the physical plant, the center and the relationship with the property company. And in some cases, they probably own their own buildings as well. And second. Ohana. Service. Family that’s it. 

Mark Hemmeter [00:18:30] They have one other responsibility and that they have the sales functionality, they have to close the deal. So, we drive leads, they close deals. And so, they’re all in charge of their own pricing, how they want to price. And that’s one of the things we’re looking at, too. Can we centralize a sales opportunity for them or some sort of sort of hybrid? So, but that that’s the only differentiator from what you said, is they have to close the deals in today’s system.  

Frank Cottle [00:18:55] Well, I would say that you probably can centralize sales on certain things, or at least in certain time zones, you can take over sales on the East Time East Coast when they close the office. And still, you still have leads and things of that nature coming in through your website so people don’t have to wait.  

Mark Hemmeter [00:19:13] We have a real practical concern, too, since we only have one employee and eight and a franchisee who probably has another career or another job. What happens when that that we call a backup business center manager? What happens when that BCM is sick, has a car, has their own T ball game to go to, moves, quits? How do we cover the sales functionality for a location like that when there is nobody at the front desk? So that’s another reason to do it, too. 

Frank Cottle [00:19:38] Well, I would say sales functionality is important there, but most of most important is service functionality in that case. How do you sustain services, which really is a question? You’ve brought it up. So, I’m going to ask the question. Yeah, how does that happen in a light load? And I won’t single you guys out for that because I know the largest operator in the world currently has a policy in many locations for a one person support so that it seems like it’s becoming almost not the norm, but very close to even in large numbers.  

Mark Hemmeter [00:20:17] Yeah. And so, we can operate all of the central technology with nobody at the front desk, like we said, building conference, room reservations, Internet, all those types of things. You know, to me, Frank, it’s a game of setting expectations. And I like to use Southwest Airlines all the time because I love Southwest. I love their culture. I love their discipline of what they’ve decided to do. They tell you, look, you’re going to line up by number, there’s no first-class seats. We don’t have a lounge, yada, yada, yada. And people are like, that’s fine. I understand the expectation. And so, we do the same thing. We say, listen, we’re going to be all to keep your rates low. We have this close to your house because we only have one employee and sometimes that one employee isn’t going to be there. They say, OK, that’s fine. And typically, what we find is the members pitch in. The members will sign for the FedEx, one side of town, the member will be going to get a cup of coffee. They’ll see somebody the front desk who doesn’t know how to use the Greeley system, who’s working on the grill. And they’ll say, hey, how can I help you? So, when you set this expectation of Ohana and we’re working together and we’re going to keep your costs low because we only have one employee, we find that the customers rally around that and help out.  

Frank Cottle [00:21:18] Let’s talk about pricing for just a second, if you keep the cost low, but it’s a competitive market, you want to make the sale overall, but you also have to have certain margin expectations in order to grow the business and attract investor franchisees. So, there’s a balance there, of course. But how far do you go to keep the price low concept that you just made versus the make the profits high so I get more franchisees?  

Mark Hemmeter [00:21:49] Yeah, that’s it’s a great question. We certainly don’t push ourselves out there as a low-cost leader. We push ourselves out there as a great value solution with an amazing culture and national reach. And so, you know, in this in the pandemic, there’s certainly a much more cost-conscious consumer trying to keep the price down. Absolutely. And I don’t know how long that’s going to last, but in terms of our pricing, it’s also, don’t forget, set by the franchisees. So, it is not a national program. It is set. It’s hyper local deal by deal as necessary in this type of situation. And we give that level of responsibility to our franchisee and trust them to make the right decisions. It’s their money at the end of the day.  

Frank Cottle [00:22:29] You know, you have 20 years’ experience a national footprint, you get probably better feedback from or more aggressive feedback, at least from your franchisees than a lot of larger organizations actually even get from their managers to collect in a lot of centralized data, all these things going on. So, here’s the final question for you, because we’re going to run out of time here in a moment. Final question for you is, how do you see or where do you see the industry at large going in the next three to four years? And what expectations do you have for the industry, not for your own company, but for the industry overall?  

Mark Hemmeter [00:23:15] I think we have a lot, we have we overcome the storm and of a lot of headwinds, but there’s a lot of talent going behind us and that we’re positioned the industry in exceptionally strong place. I think the clearly the flexible office space world is going to accelerate. However, I also think there’s going to be a big change in how our customers use us previous to the pandemic. Most people signed a full-time lease. It was their office full time. The pandemic’s proven that we can all work remotely. And why would our customers be any different? And why wouldn’t they want to stay home two days a week and come into an office three days a week? So, I see a shift. Even though we’re flexible, we’re going to have to become even more flexible. And we’re doing this now, offering packages with, you know, you want an office one to three days a week, five days a month versus 30 days a month. And so, I think we’re in the right place, but we’re going to have to become even more flexible than we have in the past.  

Frank Cottle [00:24:12] Well, you know, it’s interesting, going back historically, the part time office was a genuine product that about 15, 20 years ago got replaced by the virtual office. And I think that what we’re going to see is certainly what we see in coworking centers, a lot of them have plans that include a certain utilization structure that per week, per day, per month overall. And so, we are going to see a more consistent use of those types of plans, not just in coworking centers, but not just as virtual offices, but in the classic business center and serviced office sector as well.  

Mark Hemmeter [00:24:55] Yeah, they’ve done a kind of a bolt on secondary product, in my view. And I think they’re going to start becoming a very much of a leading product here soon, if not already.  

Frank Cottle [00:25:04] Absolutely. I think it will become primary.  

Mark Hemmeter [00:25:07] Yeah.  

Frank Cottle [00:25:07] Well, Mark, thank you very much. I really appreciate your time today. I think you shared a lot of valuable information for people not just that are in our industry, but are thinking of coming into the industry and franchising and maybe being on one or the other side of that. So, thank you for being so open and sharing and we really do appreciate it.  

Mark Hemmeter [00:25:28] Great. Thank you very much for inviting me, Frank. I really appreciate it as well.  

Frank Cottle [00:25:31] My pleasure. Thanks.