Channel Sales Harm Security UsersBy: John Honovich, Published on Feb 14, 2011
The standard security sales model encourages bad system designs and poor integration skills. Specifically, manufacturer's varying discount levels to integrators creates incentives that work against the needs and interests of security users. While integrators should focus on providing the best design, installation and optimization of security systems, the standard sales model incents them to push products that provide them the best relative discounts. Following this path can provide a 5%+ total cost advantage, a substantial advantage in winning projects.
The standard sales process consists of integrators selling end users a full solution. The integrator provides a single quote that covers all products and labor necessary to integrate the system. In most surveillance projects, products represent a majority of the total system cost, often reaching 40% - 60% of the entire project (i.e., a $100,000 project might be $50,000 in product costs and $50,000 in labor costs).
Integrators buy products from manufacturers, or their representatives, at various price levels and then re-sell them to end users. This price each integrator pays can vary greatly depending on a number of factors:
- The more products an integrator buys from a manufacturer, the greater the discount provided
- Being the first integrator to recommend a manufactuer's products to a user often results in bonus discounts (called 'project registration')
- The greater the size and power of the integrator, the more likely the manufacturer will provide steeper discounts (especially if the manufacturer is small)
- The manufacturer's perception of the tactical role of an integrator can impact discounts (Can an integrator help get the manufacturer into a new region? Does an integrator have a strong relationship with an end user the manufacturer desires?)
- Whether an integrator can buy direct from a manufacturer rather than through a distributor (buying direct often increases discounts)
- The negotiating skills and tenacity of the integrator
While each manufacturer's specific policies and tactics vary, some combination of the above almost always occurs. The end result is that 'most favored' integrators regularly buys products at 10% or greater discount than an integrator who only occassionally sells the manufacturer's products.
The Incentive Structure
Securing the best possible product discounts is an important advantage for integrators. Since product sales are such a large component of overall projects, small variances in product discounts can result in significant overall cost advantages. For instance, in the $100,000 project we referenced earlier, an integrator with a 10% advantage in product discount pays manufacturers $5,000 less (10% times $50,000). If labor costs were similar (as they often are), the end user would save over $5,000 from the integrator who had the better discount from a manufacturer. The product discount significantly increases the integrator's odds of winning the project.
Since the skills needed for product procurement and system integration are so different, the standard sales model inflicts important inefficiencies. Organizations that excel at procurement need to move high amounts of products, be tough negotiators and have a lean cost structure (think Wal-Mart). By contrast, companies that excel at integration need to have great technical expertise, strong problem solving skills and personal dedication to the client (think boutique firms like software development, accounting, etc.). Forcing these two fundamentally distinct practices together, creates difficulties in excelling at both.
Furthermore, higher discounts often make integrators more dependent and aligned to specific manufacturers.
Impact of the Incentive Structure
Practically, this fosters two common problems:
- Encourages integrators to design systems or advocate solutions based on products that they possess the best discounts
- Reduces the value of integration/labor skills as integrators can win projects based on superior discount structures / product sales abilities
This is almost certainly the opposite of what security end users want. Of course, they want and need product but they are poorly served when product sales interfere with the best overall design and implementation.
While many integrators put the interest of their users first, doing so puts them at a competitive disadvantage to those who play the game more shrewdly.
From the perspective of manufacturers, incenting customers to buy more products is quite rational. However, since the proportional cost of products in a project are so large, those incentives can help align the integrator more to the manufacturer than the customer.
Many decry falling product margins yet if integrators only sold their services ('smarts'), we'd likely reward better integrators and foster stronger overall security solutions.
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