Paul Cronin is senior vice president of Atrion, a Warwick, R.I.-based IT services company, and former CEO of 1nService. He joins the conversation to discuss challenges integrators face in the midst of evolving market trends.
How long can an integration business hope to exist if it does not truly adopt IP/IT skillsets?
The very fact the whole analog world begins to die and systems migrate to an IP-centric network means there are going to be serious threats to these providers’ businesses. If they don’t make the decision to change and move with the technology, then they really have made a decision that will result in a lack of competitiveness and inevitably, I believe, going out of business in three or four years down the road, maybe sooner.
It’s no longer about, “I can compete because I have a relationship with Joe because I sold something to him.” No. 1, the buying decision-makers within these organizations are changing, and No. 2, clients are more intelligent than ever before and they want something different than just having a relationship. They need something more substantive. They need you to educate them and help them migrate off the analog into the IP-centric world. If you don’t invest to be able to have those conversations, then somebody else is going to have them. And whatever relationship you might have with Joe, if Joe is even still there, is not going to be based around doing business.
If an integrator doesn’t want to compete on price alone, how can they move to offer more value to the customer?
A lot of the A/V integration work and some of the physical security work is all responded to through the RFP [request for proposal]. Everyone has their own secret sauce, but they are all responding to the same RFP. So I go with the low cost and squeeze it out. That in itself is a poison. If you don’t retool your organization to just be all about low cost like Wal-Mart did, for example, then you begin to take those small, little deals and you start carrying them and the cash shortage is what makes you struggle. You have bonds. You have terms. You have insurance. If you don’t retool your organization it will actually, over time, make you go out of business. You won’t have the cash.
The other side of the spectrum is to increase your value to the customer. You have to create a client experience, something that is marketable that resonates with the types of markets, the size of the types of clients you want to focus on. It’s what makes you unique, not what makes a manufacturer’s product unique, that the customer can buy from anyone else. The products are all commodities. You are the noncommodity piece when you move up that value chain. That is where recurring revenue is and the way you work with the client through the engagement process, through to the lifecycle support.
It is also things like offering training. What do I do to bring them additional business value, not just implementing a hardware solution? Am I committed to these business unit owners in order to create assessment type programs? Or system health checks? Things that provide additional value that can’t always be discounted in an RFP — and actually necessitates some clients to not even go to an RFP based on they want your service.
Are integrator valuations increasingly dependent on a strong recurring revenue model?
There is a number out there that says 50% of integrators struggle with solvency and having enough cash to grow their business. They literally live month to month, project to project. They have nothing to help fill in the gaps when their bench isn’t being used and they have less utilization but they are trying to maintain the talent because it’s important for them to have for the next project. Having the recurring revenue flattens that line and gives them a consistent influx of cash and profit.
In order for a solution provider to be able to grow, they must have profit. The best way to build profits, and everyone knows this, is through the recurring revenue model. It basically gives you more cash upfront because clients [often] pay in advance. It is a higher margin business because you are selling your own products, not someone else’s.
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What do traditional security integrators need to know about how decision making within an end-user organizations is evolving?
Of course, IT has become more of an influencer in all decisions and in some cases an owner in all decisions. Even for IT integrators who have been doing this for a long time, we are seeing a trend where business unit owners are now controlling much of the IT spend — not the CIO or the IT director. There is even a bigger shift coming and one that is difficult for us who have had strong IT relationships and now have to learn how to sell to these business unit owners like HR and manufacturing and sales and critical operations people. They are all starting to control the investment.
What market forces are at play that are making for such a competitive landscape and margin erosion?
I am sort of a student of Michael Porter’s book, “The Five Competitive Forces That Shape Strategy.” What we see in play today in the security industry are all five [bargaining power of suppliers; threat of new entrants; bargaining power of buyers; threat of substitute products or services; rivalry among existing competitors].
No. 1, today, the way manufacturers work with solution providers is changing and that is also having an adverse effect on the margins we can make with them. In some cases manufacturers are selling direct to end users for certain accounts. In addition they are creating their own service arms or relationships with other services arms. There is a lot going on in the backend that the partner can’t control that is primarily eroding the margins due to the buying relationship with the suppliers.
There are new entrants in the marketplace. The buyers now are another point that actually control the integrator and the profits they are going to make. Because now there are more people — because there are new entrants — there are substitute products. Then you have perhaps the manufacturers or distribution they can buy through now. They can buy over the Internet. There are buying groups. There are a lot more options for that buyer. They can begin to control what they pay and who they are buying from and what the expectations are when they do buy it. That has an adverse effect that is more competitive than what a lot of these people in their own marketplace are used to. They are now under fire because the buyer is influencing how they make money.
Substitute products is an important factor. One example in the physical security world is streamed video. Hosted video bridges are now popping up. There is a lot more adoption of those. These are almost cloud-like providers delivering these types of services and are now a competitor to the traditional way clients used to buy and own the equipment. Also, access control used to be handled by an inside security person or some other person within the organization. Now it is like a hosted solution. For many people, although they get their cameras and the access control boxes put on site with the door locks and everything, but the majority of the administration of the system is a hosted service. Now they don’t have to make the full investment and have an outsourced person doing it or they can use it themselves. There are a lot of substitute products, particularly cloud applications, that are popping up. In a way, they are scaling back the size of the opportunity and yet promising a lot of things to clients as well.
The final one is the “me too guy” down the street. They all compete for the same clients in their general regional area. There are two things these organizations are struggling with. One is they either adopt the fact that they want to be a high value type of organization; I’m going to cost more and deliver higher value that is going to be substantial that you can actually see the difference between [me and my competitors]. Or on the opposite side you have an example where I am going to be the low cost provider and I’m going to live on cost.
Either of those two ends can make you successful. It’s what happens when you are not at the top of one of those two ends and you live in the middle. That’s when you don’t have high value and you don’t have low cost. You basically are under fire every day and you competition down the street is fighting right alongside you and you have nothing to differentiate yourself with.