Security integrators will have to live on lower product margins than they grew accustomed to and develop long-term relationships with their customers, who will increasingly pay on an ongoing or recurring basis. While the economy appears to be improving enough to allow for sustained growth, the hard truth is that service and licensing revenues and margins—and not product and installation margins—will determine success in the industry over the next five years. While we believe that security integration will remain the province of security integrators (and not IT integrators), the business model for success certainly is undergoing forced change.
The most succinct definition of a systems integrator might be one that assumes a central command and control with a common user interface, shares data and forms a system that performs as if it were one. This can mean getting disparate security and non-security components to talk to each other, so that one system controls end users’ security and processes. As end users, both small and large, place more responsibility in the hands of an individual who functions as (or has the actual title of) chief security officer, central planning and standardized systems across the entire end-user structure are becoming more commonplace. In conjunction with these escalating requirements, increasingly greater demands are placed on the ability of security partners to become more than just an installer of good equipment. As a result, integrators’ gross margins depend directly on the level of a project’s sophistication and their value added contribution to the project.
Judged according to ADT’s now very familiar (and nearly retired) “Value Stages of Integration” as illustrated below, the industry generally has evolved up to level two and is currently fighting over who can more effectively create business at level three. Getting to level six—fully integrated business process with security as part of it—may be a decade away, if not more. Commercial, industrial and institutional end users at all revenue levels are generally demanding increasingly comprehensive solutions. They are asking for these solutions because the physical security, as well as the IT market, is now marketing “solutions” as a way to ensure an ROI conversation, which is generally higher up the corporate ladder from branch and security personnel levels of just a few years ago. VMS vendors—who are increasingly pushing to get their brand noticed by the end user (i.e., Milestone, OnSSI or Genetec), are helping integrators on the video end promote this conversation. This conversation also involves a higher level corporate decision regarding whether to allow remote hosting of access control and identification management. Indeed, hosted access control is several years ahead of video in terms of its acceptance by customers and its promotion by integrators.
The ADT table is instructive because it forces us to think about what exactly is that relationship that will maintain the 30 to 40 percent margin for integrators, when far too many commentators have already written that the IT margin (lower) is inevitable. The integration projects that become truly Business Process Improvement (BPI) in nature has impact across the entire organization, not just in security. This type of engagement typically provides a long-term partnership with a customer, generating the highest margin as a result of the premium value delivered. For example, linking changes in the customer’s data environment to actions in their security environment provides critical knowledge and operational improvements. Providing such ROI-based improvements will allow security providers to grow their revenue streams in difficult times and when there is pressure on product margins.
Integrators have traditionally depended on 30 percent-plus installation margins constituting 90 percent of revenue. The IT integrator model is already at 50 to 60 percent services mix, with the remainder from installation revenues at low-single-digit margins. We once thought that a shakeout in the security integrator market could mirror that of the IT integrator market. Along with this, we once thought that project margins were likely to trend down toward the IT channel average of eight to 10 percent.