Home > Trends > Witnessing a Correction in the Physical Security Industry

Witnessing a Correction in the Physical Security Industry

Many economists say the stalled housing market is the sign of a “correction,” when the market, meaning buyers and sellers, reconsider the value of a particular item.  I think we are witnessing a kind of correction in the security market, too. 

Why have companies like Tyco, GE, UTC and IBM virtually ceased innovation related to security?  It’s a type of correction, but not strictly economic in nature.  You see, security is recession proof.  When folks have a lot of money, they spend money on security to keep what they have.  And when money is tight, they spend money to protect what they have. It has been that way for centuries – through lean times and plenty.  The key to enjoying the benefits of buying and selling security is value.  If you buy or sell value, you’ll always be welcome at the table.Stock_chart

So what does it mean when Tyco, UTC and these other big companies stop innovating and blame the economy for struggling sales numbers or cut heads in order to hit goals?  It may mean they’ve been selling fluff, and not real security value.  Remember, the real value of security is always in demand.  That’s the correction.  We are simply witnessing the big companies’ attempts to find where value truly lay. 

Does this principle of correction apply to small companies as well?  Yes, but less precisely.  If a startup is suffering due to poor sales, it may be the result of several factors such as incomplete sales channel, poor go-to-market strategy, or simply crappy products.  Maybe it’s simply bad timing for the technology.  My point is that product quality (or crappiness) is not the chief variable.  In most cases, for large and small vendors, the correction can itself be corrected by more closely aligning product capabilities with the current needs of the end user.

Here is where the sales systems built by UTC, GE, Tyco and others break down.  The executives running those companies don’t have deep relationships with end users, generally speaking.  They rely on the sales channels – dealers and integrators – to touch the end user.  The subtle but important changes in the preferences and priorities of end users can manifest themselves as mysterious downturns in revenue by the time manufacturers way up the supply chain feel them.

That’s why it is important for manufacturers to maintain a closer relationship with the end users of their products. Big companies got big because they successfully built a sales channel to move their products, crappy or not.  Therefore, if sales are slumping, it means somewhere along the line, value – and an understanding of the ultimate customer – got lost. 

My end user clients – mostly in the Global 3000 – complain to me about this disconnect all the time.  They are baffled by the paltry attempts by manufacturers to understand the real challenges facing the enterprise.  Schmoozing by overly-friendly “strategic account reps” doesn’t cut it.  Fancy lunches and tickets to ball games are fun, and certainly lubricate relationships, but in the end do not address the pressing needs of the customer.  If you ask me – (and most of those big manufacturers don’t) – I’d say it’s time to focus on the end user. It’s time to correct the correction.

Categories: Trends
  1. July 14, 2008 at 10:32 am

    Steve- you are so dead-on about large security manufacturers. As an ex-senior executive with a major player, I can confirm that we were forced (mostly by trying to please the stock market) with spending our days in budget meetings, PowerPoint presentations, and report writing, almost always inwardly focused. After finishing those never-ending cycles of forecast and report, customers were regrettably dropped from the list.
    I will say that many large corporations, including my past one, have started to realize that they were sequestering their best people AWAY from the clients and we only got to see them when Rome was burning. By then it is too late.
    They have learned by default. Look at the likes of Ben Cornett of Honeywell. He still finds time to walk the trade show floor and visit customers. I guess he must be behind on his reports….
    Small companies have the edge in that by default, their top people MUST be road warriors, listening as well as preaching, and that is where true innovation arises, finding out what the customer REALLY wants. There is no shortcut.
    Keep uncovering the stinky underbelly of our industry. What gets exposed gets changed!

  2. July 14, 2008 at 11:58 am

    Hi Steve,
    The lack of listening is evidence in the lack of product differentiation. So many of the big companies’ products are very similar. Take DVRs: It is very hard to tell most big companies DVRs from one another. Like with any product, when multiple vendors offer what looks to be the same thing, people tend to choose on price. The result is profit losses, revenue declines, etc.
    Security, as a whole, may be recession proof but I am not convinced that security products are recession proof. Security products are capital expenditures. In recessions, companies prefer to defer such expenditures and extend the life of existing systems.
    We will see soon enough. Clearly we have not seen the worst yet.

  3. July 15, 2008 at 7:36 am

    HBR had an article earlier this year about some of the structural issues that make innovation really difficult in big companies.
    But listening to the end user would be a good start.

  4. July 15, 2008 at 11:45 am

    As usual, your comments are right on target. My experience has been that most of the major manufacturers not only don’t solicit input from end-users, but actually treat feedback from customers with disdain.
    Time and time again, I have facilitated meetings between manufacturers and my end-user clients to discuss product shortcomings and requirements for new features. In most cases, we get smiles and nods from the manufacturer’s people, but rarely see any follow-through or action. I have one client who pointed out a major bug in an access control application more than three years ago and it has yet to be corrected several versions later.
    Even worse are the manufacturers who refuse to deal directly with end-users and insist that all communications must go through an “authorized dealer” or “channel partner”. This results in watered-down communications and lack of accountability.
    The only thing that keeps this whole thing afloat is that, so far, the end-user has few real alternatives — most of the major industry players are equally bad. In most cases, it is a matter of picking the “least worst” alternative.
    Every now and again, a new company emerges that has an innovative product that is responsive to client needs. Unfortunately, once the company becomes successful, it often gets gobbled up by one of the big conglomerates, and soon degrades to the level of mediocrity that is typical for this industry.

  5. Nameless
    July 30, 2008 at 7:35 am

    Steve et al,
    Food for thought…
    I agree with your observations, yet in certain cases, other factors have caused the slow down for innovation inside of the big players.
    As you correctly noted, these companies are being led in some cases by executives that have classic business educations with no security industry experience or ties. Their typical focus is myopically tuned to the financial reporting side of things. One other ingredient is that they are in some cases a part of a master plan to rotate from unit to unit inside of the overall company…kind of a grooming ground for the next CEO.
    With that being said, much of their product content comes from acquisitions, and in some cases, they simply pay way too much! This single act starts a cycle for a self fulfilling prophecy that leads to the drop in innovation and the layoffs that you described.
    In an acquisition, once the deal is done, the acquired company is expected to provide returns that are based on a single piece of paper that justified the deal to the board. In some cases the acquired company (in the beginning), is still innovating and growing at a rapid pace, yet nowhere near the astronomical (crazy) rates that the acquisition dictated.
    Then, instead of senior management admitting they made a mistake and adjusting the forecast to a point of reality and allowing the culture, people, and innovation to continue, these companies put the squeeze on the acquired company which leads to a culture of cutting expenses and then investments in the business. Eventually, this lack of leadership allows the cuts to go past the fat and muscle and into the bone itself. Another aspect is that in some cases, the acquired company is performing yet other units are not so the leadership in its wisdom decides to squeeze the performing unit to make up for the other non-performing unit.
    If shareholders only knew what really goes on!
    History has many such examples that have resulted in a once industry leader after being acquired, to become a flat and uninspired business unit of a public company.

  6. September 14, 2008 at 8:33 pm

    As a displaced economist working in the security community for 20 years, I tend to focus on security market economic trends with different eyes. I wish to call out a three economic phenomenon that I believe are most responsible for impacting spending on physical security markets —
    (1) The security market is not immune from the effects of the macro economic downturn. It is a misnomer that the security industry is somehow decoupled from the broader economy. While it is true that Recurring Monthly Revenue (RMR) accounts and multi-year services contracts offer greater protection in down markets, the discretionary spending in security (large capital projects, training, consulting, marketing) in combination with sector based downturns (in housing, banking, non-war related DOD spending) appear to have hampered sales in 2008 Q2 and Q3. Regulatory mandated projects, and projects currently in construction appear to be buffeting the downward trend — however new contracts and project suspensions will undoubtedly impact future year forecasts.
    (2) Commoditization of security products and services reduces total revenue per client. Commoditization is the natural result of productivity increases (typically saving labor) and cannibalization of legacy markets reduces the total average sale price of goods and services, making that which was premium priced as unique, now commodity priced as commonplace. This commoditization will continue to shrink budgets until demand is increased by the expanded availability of services to a wider audience, either through greater market penetration of existing purchasers, or by identifying new buyers for services. Consequently, beyond encouraging market-focused security market innovation, growing the security market size will occur through increasing elastic demand brought through increased population use, lower prices increasing demand, and the security community’s continued expansion into allied fields.
    (3) Politics influence decisions of capital spending, regulation, and industry focus. The sea change coming with this Presidential election cycle, regardless of who wins the presidency, will undoubtedly impact spending for and against current spending programs and future programs. The hemorrhaging of share price of the major listed companies referenced in your article are likely the impact of large shareholders and hedge funds switching their strategy away from militarism supporting the Iraq war, and refocusing on the green energy wave.
    So while innovation is important for sustained growth for market leaders, other macro economic factors such as the economic recession, commoditization of security markets, and political change may be more responsible for the decreased demand for shares of large listed security companies.

  7. September 16, 2008 at 6:02 pm

    Thank you everyone. And welcome, Mr. Sorensen. I appreciate your anlysis.

  8. December 4, 2008 at 11:20 pm

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