While some aspects of the security industry, for example guarding, have long profited off the recurring monthly revenue (RMR) business model in which long-term contracts are signed and the security service provider collects monthly revenues, the same has not always applied to the technical aspect of the industry.
System integrators (SIs) have been the foundation for security projects for many years. The traditional approach to a project was that the SI would be called in by a customer or consultant (possibly having to participate in a tender of some sort), after which the winner would get to install and support the systems (primarily for large projects). SIs were paid in tranches and when financing was required, the product distributor or the customer would (more often than not) handle that side of the deal for the SI.
This meant a few nice paydays for SIs, but it also meant that looking for new business was a constant concern. Keeping staff paid in order to service existing customers was important, and profitable in some cases, but this service was not enough to keep the SI afloat. Even small installers, the much maligned ‘bakkie brigade’ were (and are) in the same boat when it came to continually needing to find new business to keep their business going.
Following a similar pattern to the IT industry, the security market has changed and the large projects of today are no longer the big paydays they once were. This is because much of the technology used in a security installation has been commoditised and the margins on products have been getting smaller – the surveillance industry is a prime example of this. The lower margins, advanced technology, and increased availability and reliability of communications infrastructure have resulted in a new business model in the security industry, a model that has benefits for the SI as well as the customer.
Enter the services era
The new model is based on services. Not simply a service of being available for a call-out when equipment breaks, but providing the whole security solution as a service. With costs known upfront and payments for the period of the contract (which can be anything from one to three, and sometimes five years), the services model allows the SI to take better care of customers knowing there is a recurring income, while customers pay per month and don’t need to worry about what technology from what brand is driving their security operation – they pay for a service and it is up to the service provider to deliver. The customer also has the benefit that they have one service provider to talk to, irrespective of whether they bring in third-party expertise during the installation phase.
MJ Oosthuizen, national sales operations manager at G4S Secure Solutions SA, explains that customers paying for a Security-as-a-Service solution know they have to pay a set amount of OPEX (operational expenses) each month, and can claim the tax benefits associated with operational spend. This allows for better planning and budgeting, and avoids those difficult meetings with finance people who want to know why the security project requires such an enormous CAPEX (capital expenditure), which would either have to be paid by the company or financed.
Read more about CAPEX and OPEX at www.securitysa.com/*capop, redirects to https://www.investopedia.com/ask/answers/020915/what-difference-between-capex-and-opex.asp.
This model is not only about money, however. Oosthuizen notes that the word ‘service’ is the key element. The customer is not buying cameras or access control readers or even remote monitoring, they are buying a security service that includes cameras, perimeter protection, access control, monitoring and response, whatever it is the customer requires, and this can include service such as guarding, armed response and remote monitoring. The service is delivered according to contract and it is up to the SI to ensure that the technology works as required and the right people are on site when required – with potential penalties if that doesn’t happen.
Even when the SI doesn’t provide manned guarding or off-site control room services, it still needs to monitor the technology to ensure it is working as per the contract instead of waiting for an angry client to call and complain. It may have become a cliché, but this is a case where the service provider will know of a technical malfunction before the customer. With the advance of the Internet of Things (IoT), the SI should be able to monitor a customer’s technology and tell that a device is going to fail before it does, at minimal costs.
Flexibility as a service
Another benefit of the service model Oosthuizen highlights is flexibility. Should the customer need more, an addendum can be signed and another camera (or some other solution) added to the contract going forward.
Moreover, the decision of what technology and which brand to install is also left to the SI in the service model. The client is buying a service, for example a number plate recognition service at the gate. Whether the SI uses the cheapest camera and software around, or the most expensive is irrelevant to the client, as they simply want the service to work as contracted. The SI therefore has to make sure the service works and if they use poor quality equipment, the cost savings will soon vanish as they are continually called back to site to make it work.
Depending on the agreement signed, at the end of the contract the equipment will either belong to the customer or revert to the SI. At this stage, the contract can be extended or renewed so that new, updated technology can be installed. Of course, the customer can also look to move their business to another SI.
Oosthuizen adds that the contract signed is therefore very important. What if the customer wants to switch to another SI? Does the contract allow for this, leaving the technology in place or will the SI want to take their toys and go home? This is why he says it is often in the customer’s favour to finance the technology themselves; they can switch SIs and continue their SLA with a new provider without worrying about the installed equipment.
While paying a monthly fee sounds good, for both the SI and the customer, someone has to pay for the equipment upfront. There are various financing options available in the market. The larger product distributors generally have their own finance departments that work with banks and other finance houses to obtain deals for large projects, although the customer should understand who all is getting a cut of the deal as this adds to the overall costs.
Some users may wish to approach the finance houses themselves, but this is often a lengthy process as these companies decide whether to make finance available or not. The process may extend the length of time until the SI can start the installation. Oosthuizen points out that it can be partially shortened if the SI handles the financing as the bank or finance house they use will already have a relationship with them, making the paperwork somewhat simpler.
Frieda Le Roux, sales manager at Merchant West Asset Finance, explains that finance companies have different criteria and appetites for deals. “At Merchant West we try to be flexible and do tailor-made solutions. We do, however, have minimum criteria, but it isn’t cast in stone. With proper explanations and references we can offer specialised solutions.”
The generic minimum criteria at Merchant West include:
• Two years of operating the business.
• Clear credit record with positive credit scores.
• Supporting financials for deals over R150 000 excluding VAT.
• Industry dependent.
In addition, Le Roux says Merchant West does have a process of getting the SI approved. “We call them our suppliers or dealers, and then offer the finance solution to end users through them with a view to the protection of their own client base. The same minimum requirements will be followed and we would also do reference checks on them, mainly with their major suppliers. We try to gather as much information as possible on them to make sure they can service and support the brands they sell.”
The company also has a new product for end users called a ‘Smart Approval’, which promises very fast approvals. The speed depends on the size of the deal, and Le Roux says it can be done in 48 hours. “The relevant account managers will be in contact with the SI and end user with the result or to ask for additional information.” See the sidebar ‘Tips for Getting Finance’.
Another important component of the service contract, according to Oosthuizen, is the annual cost increases. While many would opt to go with a set number, say a 10% per annum increase, this does not always work. The SI must include the variable increases it will have to pay in the sectors it operates in (PSIRA fees and annual increases for the guard force would be examples), plus the inflation rate, etc. He suggests agreeing on a base price and annual increase, but leave room for the variable costs that neither the SI nor the client has control over.
The cloud is your friend
It is worth mentioning that cloud services are more popular than ever in a variety of industries and security is no different. We mentioned monitoring above and using the cloud to facilitate remote monitoring of sites, even for virtual patrols or virtual gate guards after hours. Of course, there are many other options, such as remote surveillance or Access Control-as-a-Service (ACaaS). Moreover, incorporating the IoT again, using the cloud to constantly monitor the installed technology will allow the SI to recognise faults and dispatch technicians as they happen.
When one includes a bit of artificial intelligence into the monitoring, it is possible today to detect almost insignificant signals from devices that will alert the SI to their impending demise. There is no better service than replacing equipment before it breaks.
Combining these monitoring operations with the latest analytics solutions will also allow for a ‘black-screen’ approach to monitoring, which will only demand operator attention when something serious happens. This has an additional benefit of making use of more skilled people for more complex tasks, leaving the technology to handle the mundane jobs.
Of course, Oosthuizen warns that cloud solutions also have their costs, especially if you are recording video. The storage requirements alone will be significant, as will the infrastructure requirements to ensure reliable connectivity at all times.
As easy as Pi
The services approach definitely has its benefits for all concerned; however, getting the numbers right is not always that easy. There are a number of financial issues to cover when going the services route. Some of these include how to cover the equipment costs over the years of the contract, what your own staffing, technical and administration costs of the installation and ongoing SLA (service-level agreement) will cost, the costs of gaining new customers (and the potential costs of losing some customers before their contract ends), cost increases over time (as noted above), and, of course, your own profit margins. And let’s not forget that hungry competitors will also always be there.
None of these challenges are terminal, but they need to be taken into account when approaching the services model to ensure your approach is successful. One thing is certain, as economic conditions continue their downward trend, more clients will be looking at managing their security costs more efficiently (which includes reducing them). The RMR approach will work for them, but the SI will also have to put their thinking caps on to find ways to capitalise on technology to the fullest extent possible in order to deliver more with less and for less.
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