Marketing to the Fortune 1000
Feb 1, 1999 12:00 PM
JAMES G. SPENCER
How to become a part of their lean, centralized operating strategy. Today, security dealers face an enigma. They want to provide security systems to the Fortune 1000, but they suspect they cannot meet all the needs of these companies, and they fear losing the business to a competitor who can meet every need.
Fortune 1000 customers seek to consolidate technology into a family set of one-stop shopping, suggested Dick Mainey of Morgan Stanley at the recent Securing New Ground conference.
At the same conference, Jeff Kessler of Lehman Brothers forecast that security will become a more info-centric facility service business, and Susan Ellerin of STAT Resources noted, "The hub will be information processing and service, and success will be in how to market to the (customer's) bottom line."
The market they describe is far different from the one most security dealers grew upin. To market successfully in this new environment will require change. To understand what changes must be made, it is best to understand the new environment from three perspectives: historical, economic and technological. With this understanding, dealers can decide what role they want to play and what they need to do to be successful.
Historical perspective The electronic security industry began in the 1970s but grew to prominence in the 1980s with the introduction of the PC. Systems were primarily DOS-based, single-application solutions with proprietary communications, serving a single location.
For dealers, the timing could not have been better. The driving management strategy of the Fortune 1000 was decentralization, which forced decision-making on everything, including security, to the local region, plant and office.
Security dealers met the needs of these locations within their geographic areas. As technology grew to include such innovations as UNIX, Windows, Windows NT and LAN/WAN communications, the dealers increased their capabilities accordingly. Occasionally, a dealer would open a new office to meet the needs of large customers, but in most cases different locations were served by different dealers, who often used non-compatible products. Other times, a dealer would pick up a new line of products to meet the needs and desires of a large Fortune 1000 company.
Today, about half of Fortune 1000 locations have access control and CCTV. Further, many locations within a company have different kinds of systems. Three-quarters of these systems are monitored in-house and on-site. Less than 20 percent are monitored in-house and off-site, but they are growing at better than 50 percent per year.
A change in management philosophy In the 1990s, the prevailing management strategy changed, as did the economics. It became apparent that the decentralized structure and philosophy had led to wasteful layers of duplication and bureaucracy.
The new philosophy, which has gained momentum throughout the 90s, is consolidation and reduction of personnel and operating expenses.
For security, the change led to guard outsourcing. Next were the reductions in technical personnel, such as those dedicated to access control, CCTV and fire systems. As a result, consultants are replacing in-house experts.
The next two levels of change, which are only beginning, will have a dramatic impact on dealers marketing to the Fortune 1000.
To reduce operating costs, the Fortune 1000 are using technology to consolidate their existing operations as well as to extend security services to locations not previously covered. End-users are focusing on the cost of operating and monitoring these security systems locally, but dealers have not responded accordingly.
To monitor a local access control system 24 hours a day, seven days a week costs in excess of $240,000 annually. When other costs are added, such as systems administration, local badging and disaster recovery plans, the cost per location can easily exceed a half million dollars annually.
To get an idea of the security situation for Fortune 1000 executives, consider the following questions and typical answers.
Question: Why are you consolidating and enterprise-networking your security system?
Answer: We are using technology to improve and expand our security services while significantly reducing our operating costs in providing these services.
Question: Why aren't all of your locations covered?
Answer: Lack of capital funds in the current budget. We will seek further funding in future budgets. Too many vendors to manage at these additional locations.
Question: Why do you have so many obsolete and non-integral systems?
Answer: These are legacy systems, many of which are still on the books. Where there is a Y2K exposure, we will replace them now; others will have to wait.
The customer's problem of dealing with too many vendors is a concern for security dealers, but it is also an opportunity.
Technological change The move to consolidation and enterprise networking of security has been made possible through technological advances in communications and digital technology. To a far lesser extent, there have only been small gains in the integration of security systems to take advantage of the powerful new operating systems and database technologies.
George Temidis, manager of security systems and information protection for IBM, says: "Integration cannot occur after systems have been developed, rather, it must occur when they are developed."
The significant point to dealers is that while customers have benefited from technology, the technology has not reduced dealer costs in marketing to the customer, nor should dealers expect any cost-saving technology in the near future.
As a further complication, the new enterprise technology, much of which comes from outside the security industry, has dramatically altered the decision-making landscape in the Fortune 1000 community.
No longer is the primary decision-maker the local security manager. Increasingly, the dealer must now market successfully to a more sophisticated security director and their consultants, as well as the directors or vice presidents of information technology, data communications, facilities, human resources and the CFO. This requires a more sophisticated salesperson as well as the technical and project people to back them.
What customers want The Fortune 1000 business requirements can be categorized into two areas: The mandatory requirements that they know how to express, and the opportunity requirements for which there is no current definition.
One mandatory requirement: reliable consistency across all locations. If, for example, a customer wants an access control panel to be configured and wired consistently in all locations, they want a technician to know what they are going to find before they get there. More importantly, they want the central help desk also to know what they are going to find.
While it would appear that national dealers have a significant advantage in meeting this requirement, to date this has not occurred. Most of these national dealers are still largely a collection of semi-entrepreneurial units - each with its own way of doing things. While some will solve the problem of location consistency, such success will not guarantee success in the Fortune 1000 market. No matter how many branch offices they have, the Fortune 1000 will always have locations where there are no branches nor will it be economically feasible to always open new branches.
Rather, success in meeting the consistency demands of these customers may involve less reliance on local skills and more reliance on balancing and managing a mix of in-house and subcontractor skills. Neither the national, the local nor a collaborative association of local dealers has an advantage. The market also is open to firms outside the security industry.
Dealers must reduce their cost and risk for installation and service. They must over-engineer the job to reduce local creative decision-making. They might want to preassemble and test equipment before shipping to a remote site or work with their suppliers to do so for them. They should also work with suppliers to provide diagnostic tools for remote and host use. The goal should be to document, standardize and automate to the extent that a factory-trained field technician is not required to achieve the desired consistency and service value.
The second mandatory customer requirement - a prerequisite for the first - is to reduce the number of direct suppliers to have a single source of responsibility.
Customers do not want to manage the process of consistency across all locations; they want to demand it from a single responsible source.
While consistency and top-layer single-sourcing will cost the dealer, most customers will not pay a significant premium. Rather, they will tend to regard it as the price of capturing their business.
Uniform fair pricing As part of the top-layer sole sourcing, customers do not want to negotiate pricing on every job. They expect to have standardized pricing on a per-door, per-camera, per-employee basis that will cover 80 percent or more of all installations and locations. In return, they offer exclusivity on a multi-year contract.
What dealers have to recognize is that these mandatory requirements, while presenting an attractive opportunity, are a different business than they are in today. To be successful, the dealer must invest in the new business and be able to present their capabilities credibly to meet the requirements.
They must recognize that unless they can provide justifiable billable services beyond what they provide today that their margins in meeting these mandatory requirements will probably be lower than they are achieving in the local market. For some the increased revenue flow will be worth the margin erosion.
For others it will not be worth the cost. These dealers may want to consider teaming with others to be subcontractors to the top-layer sole source. In a deflationary market, margins can be increased only by creating additional value.
The second set of requirements - opportunity requirements - are not as easily expressed, as the market does not currently provide solutions.
Opportunity requirements Dealers have the opportunity to help clients: n meet security needs, both planned and unplanned, in a manner other than the capital budget process; n further reduce headcount and operating expenses while gaining unfettered, consistent access to greater expertise and talent; and n take immediate advantage of new technologies to increase security service levels and reduce costs without risking obsolescence as they do today under the capital cycle and the associated depreciation cycle.
While the mandatory requirements to market successfully to the Fortune 1000 are familiar to security dealers, the opportunity requirements are probably new.
Traditionally, dealers have been in the business of providing installed product. The customer then uses the product to supply service. This has been the business model in the security industry for more than 27 years.
This product model does not fit the market today. Neither does it address the above opportunity requirements nor the margin erosion the dealer will incur in meeting the mandatory and prerequisite requirements.
In successfully marketing to the Fortune 1000, we need to consider a new service model that will address all of the above.
A new service model A complete service model involves a full range of operational services for a monthly fee that includes all equipment and installation through a five- or seven-year agreement.
A full range of services includes monitoring, systems administration, disaster planning, backup and recovery, badging, integration, planning, reporting, maintenance, user education, dispatching and even response or response management.
Monitoring goes beyond the alarm business model. That model is based on having as little contact or interaction with the customer as possible beyond the monthly bill. The Fortune 1000 security service model demands constant interaction because the services provided are an alternative to the services the customer is providing himself. A successful service provider in this market must become an active member of the customer's professional family.
The service model requires the provider to first meet the mandatory requirements and then convince the customer that the provider can also meet the opportunity requirements, at least as well as the customer could provide them.
By including equipment services as part of a bundled offering, the customer incurs no capital budget requirements. That alone is a significant value, since the company could invest these funds in their core business and realize a return on investment. Also, projects that were planned for future capital periods could move forward. Unplanned requirements, such as from acquisition, also could be met immediately without capital considerations.
The provider could purchase existing equipment, either current or obsolete, for the book value and adjust rates accordingly. Should it be desirable to upgrade to new technology in the middle of the service contact, the provider could do so at no additional cost to the customer merely by extending the term of the contract.
There are many potential pricing methods for such a service model -per door or per transaction, for instance. However, the best method is price per employee or per square foot, similar to the method customers currently use to charge for other company-wide services such as employee benefits, heating and light.
Monthly tax per employee could be standard across the company. Tax per square foot could be categorized by type of facility for the levels of security the customer deems as mandatory. This will probably cover 80 percent of the locations. The other 20 percent, such as super-secure areas or locations with major cost variations, could be handled on an exception basis but still be expressed in per-square-foot terms.
If the provider bills in this manner, the customer could either pass the cost through directly to the users or could mark them up to fund remaining headcount or other security services that could remain in house.
A new business opportunity Most experts value the total access control and CCTV markets at nearly $3 billion annually. It is safe to estimate that customers spend at least five times that amount annually to use their systems in supplying security services. This indicates a total potential security services market, including equipment, in excess of $18 billion annually with a 10-15 percent annual growth rate (or higher) for access control and CCTV products and services.
To market successfully to the Fortune 1000, the dealer must capture a portion of this new services business. In doing so they must recognize that it is a new and different business. It needs significant investment in new skills, management, infrastructure, delivery systems, financial systems and valuation criteria.
It is so different and new that serious consideration should be given to setting it up as a separate company primarily for reasons of focus, expertise and valuation.
End-users are under extreme pressure to increase security levels and to reduce headcount. Many have already outsourced services such as guard forces, investigations, executive protection, risk assessment, equipment and vendor selection. They are aware of how the capital budget cycle retards their ability to achieve desired service levels as well as the probability that capital budgets will be lower than they are today.
Even more importantly, end-users are aware of not only the costs they incur today in providing services but also how much costs could increase.
Most of the Fortune 1000 security directors and other executives say they would be more than open to a bundled service offering if (a very big "if") they were convinced there was a supplier capable of meeting their expectations at a better value than in-house.
In many cases, should they find such a provider, they will initially use them selectively until that provider establishes their value.
The dealer enigma Dealers need to decide if and how they want to participate in the Fortune 1000 market.
Those who feel that the requirements and investments are beyond their capabilities or risk tolerance should be aware of the potential that the existing Fortune 1000 clients may select a single source. If they feel the probability is high that this will occur, they must decide if they are willing, or able, to become sub-contractors (at potentially reduced margins) and take steps to be included.
For those that want to be, either individually or as part of a collective entity, the top-level product/installation providers, they must credibly establish their ability to meet the mandatory requirements: 1) reliable consistency across all locations, 2) single-source of responsibility, and 3) uniform fair pricing. The keys to doing this will be to standardize, document and automate to visibly reduce risk and degree of local skills needed. In most cases, this will require project and subcontractor management skills beyond those needed for local projects. Consistency, quality, effective cost management and relationship building at all levels will be the measure of success.
Dealers wanting to market to the Fortune 1000 as top layer product/installation providers should be prepared for potentially lower margins due to higher costs.
From a financial standpoint, a long-term services business is attractive to investors - one reason to form a separate company. Also the service contract itself can be a source of funding. Such a company could well become an IPO candidate.
The skills to run a security operations center (not monitoring center) already exist. They work for customers today. There is even the potential for a joint venture with an initial customer.
These and other implementation concerns can be overcome. The first step is to be able to credibly meet the mandatory requirements of the Fortune 1000. The second step is to creatively and credibly meet the opportunity requirements. These two steps do not have to be sequential; they can be concurrent.
Also, as added value is provided, increased margins can be earned.
The Fortune 1000 customer has changed, but the security industry has not changed to meet the new requirements. Products are important, but the real requirements are in delivery systems.
Security dealers have the opportunity to fill the void and become either product/installation top-layer providers, subcontractors, or top-layer service providers. They have a window of opportunity to prove to customers they can meet the requirements, but the window will not remain open forever. The size of the market, especially on the services side, is large enough to attract new, non-industry entrants.
The first step is to talk to your customers about problems they are facing. The second step is to explore creative, credible ways to solve them together.
Strong sales to continue, thanks to Y2K projects
For the past several years, security dealers selling to the Fortune 1000 have seen sales increase 20 to 25 percent annually - far above the norm for the security industry as a whole.
During this period, successful dealers - displaying good management by reducing costs and increasing productivity - have increased their profitability, despite a deflationary market of increasing labor costs and upward pricing inelasticity.
Credit must go to the robust national economy and the demand for enhanced, consolidated security systems.
Simply put, there has been an abundance of large, well-funded capital projects on the market, and successful dealers have been able to walk away from business that does not produce the desired margins.
Due to the Y2K bubble, there is little indication conditions will change during the first half of 1999. Beyond that, however, there is reason to expect a downturn.
The growth of the past five years and the unprecedented number of capital projects have been fueled by unprecedented profit growth by the Fortune 1000 and the relative availability, or liquidity, of capital funding.
It may be coming to an end. While the overall economy will continue to grow in a non-inflationary manner, both profit and liquidity - despite recent Federal Reserve actions - are drying up. A quick fix does not appear feasible.
Many companies are already announcing plans to reduce capital budgets for 1999 and beyond, except for Y2K projects. Capital budgets are the source of security projects and the lifeblood of security dealers.
Security dealers should enjoy another year of double-digit growth during the remainder of 1999, due to the Y2K bubble. Beyond that, they should plan on a reduced number of capital projects with acceptable margins.