Now we believe that this is not going to happen. Yes, we do see some parallels between the market dynamics that SSIs are currently facing, and the situation Enterprise IT service providers faced in the late 1990s—though by now it is clear that security product margins will not fall nearly as far or as fast. The answer to “why?” is simple and two-fold: (1) there is simply too much value added in the products that video, access control, ID management, analytics software, storage, CBRN,(chemical, biological, radiological and nuclear sensing), asset tracking and other technologies in the sector provide relative to IT components, and (2) the services component of integration is growing too fast for end users to ignore the overall value-add of what good integration partners can bring to their business, both today and hopefully for years to come.
While the recession did exacerbate a permanent downward push on pure product and installation margins, through it the integration community continued to show resiliency in protecting product margins. Planning and provisioning security systems will likely remain the province of the security industry. IT integrators are concerned about the capabilities, security, efficiency, storage and integrity of the network. They have not shown an interest in deciding which type of camera (infrared, megapixel, dome, compression) or access control system (ruggedized for the outside, hosted, frequency spectrum), or which types of overall monitoring and backup service the IP security system should have.
The key to successful, long-term relationships
Integrators can change their business mix away from overreliance on installation and product margins toward service. Nearly all of the largest integrators (from Siemens Industry to Diebold to ADT to Niscayah) are attempting this wholesale, or in separate business units geared to be fast-growing examples for the company. For example, ADT has made a concerted effort to hire IT-oriented personnel who can talk the talk with clients who need to talk converged physical and logical solutions at once. Siemens has set up an entire division within its integration business just to install and service customers who want a network-based security solution. ASG Security, a mid-sized integrator is finding its fastest growth coming in remotely hosted IP-based access and video services.
Many end users will prepay for some managed services. Senior lenders are accustomed to looking at recurring revenues in security companies and treating them as an asset. As a result, banks frequently will lend based on a multiple of recurring revenue. This is certainly advantageous to cash flow-based lending, which is not as stable and garners a lower multiple.
Nevertheless, the biggest disconnects, both positive and negative, are occurring among the smaller integrators (less than $30 million in revenue)—where we are seeing both the fastest business mix changeovers (less than two years) by some integrators, while at the same time the greatest indifference ("the model has worked fine for two generations, why change?") by others.
During the recession, our surveys found a number of companies in this former category, such as Northland Controls, Dakota Security Systems and Intelligent Access Systems, that have made some hard decisions and dramatic changes to their business models. The result has been relative stability during the recession and a rebound now due to services and existing customer contracts, while the majority of smaller integrators saw sharp (15 to 20 percent) declines in their installation revenue during the recession and a hard climb back now.
There are companies that have grown through the recession. This has required a commitment to training, capital to fund a service model and the follow-through to make sure customers become long-term relationships.
Jeff Kessler is Managing Director, Institutional Sales and Trading at Imperial Capital based in the firm’s New York office. He focuses on producing the firm’s quarterly security industry reports and whitepapers, as well as providing direct support for the firm’s clients looking at investments in the security industry sector.