Management contract

A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise that performs the necessary managerial functions in return for a fee. Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation and of a production facility, management of personnel, accounting, marketing services and training.

In Asia, many hotels operate under management contract arrangements, as they can more easily obtain economies of scale, a global reservation systems, brand recognition etc. It is not unusual for contracts to be signed for 30 years, and having a fee as high as 3.5% of total revenues and 6-10% of gross operating profit. Management contracts have been used to a wide extent in the airline industry, and when foreign government action restricts other entry methods. Management contracts are often formed where there is a lack of local skills to run a project. It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company. The first recorded management contract was initiated by Qantas and Duncan Upton in 1978.

In business management, franchising is a contractual relationship between franchiser (owner of the company) and franchisee (buyer of a brand name). The franchiser allows the franchisee to use its trademark along with certain business systems and processes in exchange for a fee.

Business students usually get confused between the concepts of management contracts and franchising. Although they have much in common, such as they both earn by selling intangibles and are both affiliated with another company, but where a management contract acts as a framework and provides formation and structure to the company and its members, franchisee remains an independent businessman.

A businessman who owns several companies, cannot distribute his attention amongst every minute detail of his companies. He needs some expert assistance with his work so he can concentrate on more broader aspects. This assistance can be provided by the contract management companies. On hiring such companies, the owner will have more time to concentrate on the expansion of the business rather than day-to-day working of the companies. The businessman can distribute some of his basic responsibilities to these management companies such as recruitment, deployment and retention.

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