Storms in the Channel

Recessionary pressures strain distribution results

All too often, the emphasis and focus in the security industry is on new products, new applications or new technologies. But in order for these advances to deliver their potential to customers, they must find their way through the marketing channel of integrators, distributors, manufacturer rep firms and various contractors.

All of the many manufacturers that hype the latest competitive product or technology ultimately find themselves reliant upon the same relatively narrow channel of professionals to sell and deliver their products. In many cases, the creativity exerted to advance the overall size and scope of the channel has raised a number of concerns that may threaten the traditionally most stable element of the channel: the systems integrator. An elemental equation of business states that excessive profits will lead to ruinous competition. That statement is subjective and open to great debate; however, the core of that channel may be showing early signs of the competition. This is indicated by a number of symptomatic trends that have become more focused during the latest period of recessionary pressures:

  • Price and profit erosion.
  • Increasing costs in labor, training and retention.
  • Changes in the formulation of the customer.

We will address each of these categories in more detail. Clearly, an environment of steadily increasing costs paired with steadily decreasing profit can point only to one ultimate outcome, absent of significant changes in the basic business formula. That outcome spells trouble for the growth and sustainability of the entire industry and is certainly worthy of analysis at this juncture in its development.

Price and profit erosion. When the general economy is in a downturn, prices do tend to decline, but our industry continues to expand the greater market for our goods and services by providing less-expensive products at almost every turn. In theory, the growth in the overall market should provide a higher return in the long run to accommodate the lower pricing.

That model generally works. But when the economy contracts, the greater security market contracts as well, and the integrator is left with a market and a decreased price and profit framework. In addition, many elements of our industry are now parts of large, public corporations, so the drive from the manufacturing base to continue the previous growth trends leads to more direct contact and price discounts directly to end users, which often prevents the integrator from maximizing the potential of opportunities that do exist.

Though the market is fully expanded for video, access control and alarm technologies, the manufacturing base continues to release the latest technology at a price point decreased from earlier models. As such, these price reductions are promoted in the industry and rapidly become expected by the customer. Once again, the integrator loses the opportunity to maximize the value of the opportunity.

As the dominant pricing model in the integration industry is one of markup on costs, margins as a percentage can remain the same, but what is known as contribution margin (actual dollars) has diminished, requiring the integrator to do more production to achieve the same amount in overall income. Other areas that erode prices and profits are amount volume resellers from the general distribution sector and the open availability of products via the Internet.

The value of the integrator is in the ability to deliver a quality installation and provide quality services for the various products. But when the income from selling equipment falls, this puts pressure upon the integrator to increase labor charges to remain level.

Manufacturers that depend upon the integration channel have a responsibility to the channel to consider this issue in the rollout pricing of newer technologies and communications of pricing to the general market. When service-related industries have no avenue for income other than the service, labor charges must jump dramatically to address overhead. That is the primary reason lawyers, accountants and consultants must charge so much on an hourly basis.

Increasing costs in labor, training and retention. Who doesn’t want to make more money each year? Typically, the growth of one’s income is derived from the person’s value to the enterprise. For employees to grow their income, they have to advance in position, responsibility and expertise.

Enterprises invest in training and, in many cases, expensive outside training from their various manufacturers. As the employee’s value grows while he is with one organization, his value also grows to the employer’s competitors. Thus, the valuable employee base is always under pressure to change jobs, ending up in competition with a previous employer.

While this phenomenon is not unique to the security industry, it is compounded here due to the specific nature and high degree of technical training and licensing required, as well as the absence of any significant barriers to entry for new competitors. Standard labor costs will continue to grow as a natural element of a growing economy. The accommodation of that growth is always provided through increased productivity and efficiencies as well as creeping price increases to customers.

In such an environment, where available margins from equipment diminish, upward price pressure to customers for labor charges is already in the mix, thereby doubling the exposure for the integrator to remain competitive.

Integrators have many strategies for retention and cost recovery available to them; the behavior of any given manufacturer can either create value to the channel partner or erode it based on certification policies. With the high cost of training, the issues of retention and the low barriers to entry in the business of security integration, manufacturers may want to consider a closer tie-in with the granting of certifications to individuals to the specific channel partner to reinforce the value package of having good people tied to good organizations.

Changes in the formulation of the customer. Everyone knows that there is no such thing as the typical customer, and in the integration industry today that is more pronounced than ever. The integration partner may be working for a general contractor on a large construction project, an IT executive on a new system installation, a property manager, human resource manager, facilities manager, security director or any combination of these or others, with each one bringing his or her own background skills and expectations of price and performance.

Most technologies used in the higher end of the security spectrum have a “little brother” technology available in the consumer market. Digital recording, access control and voice communications all found their way into the public in a big way, so the basics of the technology are not foreign.

All too often, what is foreign is the difference in price and performance between the industrial offerings and in consumer offerings. In many cases, this difference can be staggering, conflicting with customers’ expectations.

This chases them off to find a “cheaper” price on the Internet, bidding process or buyers boards, seriously discounting the value the integrator provides in terms of training, certification, long-term support and warranties.

No one wishes to spend more than is necessary, but the “Wal-Mart-ization” of complex computer-based technologies deployed to provide critical security is not a healthy formula for the customer nor for the professional systems integrator, as the customer may lack the experience to comprehend the values or dangers. As each individual integrator works to address this concern through policy, customer education and general actions in the market, the problem continues to contribute to lost margins and the requirement for higher labor charges.

Creative and well-managed businesses will always find a way to move forward, compete successfully and deliver the desired returns to shareholders, but the summation of these issues indicates the need to understand them.

When customers want to provide their own equipment from a discount house, the integrator will need to charge more for installation and warranty. When customers want to put the integrator under a general contractor, the integrator will need to charge more for projects to offset the increased costs in meetings, paperwork and payment delays. When the technologies advance and employees require more training, the integrator will need to charge more to provide the services.

Historically, the systems integration business has been somewhat shielded from many of the pressures associated with economic recession, but this time around the industry has experienced such an expansion in overall market, sources for products and competing products that the pains of recession have exhibited inherent threats. Integrators should not have to manage for their long-term success alone, nor should they have to manage for their success in spite of their key product vendors. The success of the high-end security market is solely dependent upon a relatively lean channel of sophisticated, talented and professional reselling integrators, and it is time for the manufacturing segment that is so dependent upon them to recognize the pressures that they endure, especially during recessions going forward.

This article originally appeared in the March 2011 issue of Security Today.

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