Economic Meltdown Rocks Security Industry

By: John Honovich, Published on Feb 08, 2009

This is no ordinary recession. Dramatic and permanent changes have already begun. In conversations with over 30 end users, integrators and manufacturers over the last 2 weeks, the changes are happening faster and deeper than even I predicted a few months ago.  Fundamental assumptions on how to run businesses in the security industry are being permanently overturned. It is critical to understand what is changing and how to respond.

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The two most important themes I see in my research and interviews are:

  • The cutbacks in security are coming incredibly quickly - amongst end users, integrators and manufacturers. Retail and banking are certainly the most severe with almost daily reports of security and LP managers being laid off. That may expected. However, reports are getting more common about coming or planned cuts even within state and local governments. On the manufacturer side, I would estimate almost 30% of the companies in video surveillance have already started layoffs and/or wage cuts. Amongst integrators, problems with obtaining financing and delays of projects are common-place.
  • The economic contraction is deeper and more global than expected. As most know, the US GDP contracted 3.8% in Q4 08. It would have contracted even further if not for inventory buildup. The economy is expected to contract this quarter by an equal amount. This level of contraction is simply incredible. The economy contracted more last quarter than it did in entire previous recessions. In fact, by the middle of this year, the contraction will meet the standards of being called a depression. Of course, this is not a US only issue. Depsite the continuous claims of China being strong, unemployment is skyrocketing in China.

This is a consequence of a fundamental change in the economy brought about primarily by the collapse of the debt bubble and secondarily by the impact of the Internet.

For decades, economic growth has been fueled by easy debt (as examined in the 2009 industry forecast). What we are experiencing now is not only the elimination of 'imaginary wealth' but the new order of sane lending practices. Both of these factors are powerful depressors on economic activity - and will be so for years to come.

The other major factor is that so many significant industries are being transformed/destroyed by the Internet. The newspapers [link no longer available], publishing, music are the most well known. However, most industries are being forced to make significantly changes because of the Internet. The automobile and finance industries clearly have major problems. However, a large part of those problems are driven by the Internet.  Financial firms used to make money trading for others. The Internet killed that business and drove them to trade for themselves which of course drove them to ruin. The automobile companies are hamstrung by inefficient dealer networks that provide little value in an era where massive information is available on-line. Of course, in the US,  auto franchise laws restrict improvements and will provide further force to eventually blow up the car companies.

Because of these two drivers, the changes that are happening will continue for years and will become the new reality that everyone must adapt to.

Here are the 4 fundamental changes that this will bring to the security industry:

  • Companies will radically cut sales people and will be forced to leverage substantially more technology
  • Buyers will favor good enough products instead of premium price ones
  • Labor intensive projects will be viewed negatively
  • Terrorism marketing will be much less effective as customers will now view the economy as the key disaster

Sales Restructing

Sales organizations are in a nightmare scenario. The economy is dropping so quickly that quotas and projections for most organizations need to be thrown out the window. If this was a short term problem, you could push your team and make up numbers by being aggressive. In this economy, you will not be able to sustain such aggressiveness for the many quarters it will take to get through this.

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I am surprised by how many VP of Sales at manufacturers have already been replaced. Now companies need to figure out what to do after the end of Q1. Q1, for most everyone, is going to be significantly off previous expectations. And it's not as if the economy will be strong by the Spring.

Whether companies blame the VP of Sales or simply acknowledge that the economy is driving these problems, sales organizations are going to be cut heavily. This is because (1) the numbers are not there and (2) the economy will not be driving growth for a number of quarters to come. Furthermore, because of the instability of the economy, companies will be justifiably nervous hiring new sales people because of the time it takes new sales people to ramp up.

All of this will make many companies re-think how they organize sales and marketing. The emphasis on large teams, personal contact, flying out for face to face meetings will drop significantly. 

By the end of 2010, I believe that sales forces will be reduced by 20% relative to 2008 levels. Growing companies will hire less, shrinking companies will either cut back to reduce costs or be driven out of business because they were not aggressive enough to cut costs.

Recommendations:

  • Make your cuts in sales sooner rather than later. There is no immediate recovery so hoping that the economy turns around in a few months is imprudent. 
  • Emphasize using technology and tighter practices to cut costs and the need for labor intensive tasks such as:
  • Be more rigorous on qualifying prospects. Sales people tend to have happy ears. This is great in boom times but can put you out of business in a recession.
  • Cut down on visiting client. I am not suggesting not to go to clients but be careful about how frequently you need to visit. Use web conferencing as an alternative.
  • Publish online videos of your demos and your training. Make it very easy for prospects and customers to learn as much as possible without you having to dedicate your people. A 5 minute video demoing your new releases can save you tens of thousands on trade show expenses and still deliver your key message. Training videos can replace sales engineer visits and reduce customer support costs.
  • Use the Internet and your website to do prospecting. Read my detailed recommendations on how to improve your online marketing.

With good companies already cutting back on sales and the economy still worsening, companies need to be very careful about how they organize sales and what changes they need to make.

Importance of Good Enough

The economy is not merely contracting, customer buying habits in security are fundamentally shifting. Customers are now willing to trade off very high quality at premium prices for good enough quality at low prices.

I was even surprised to see how rapidly this was happening. After I saw the Axis results, I reached out to numerous dealers and manufacturers to see how broad and uniform the weak growth is. Two themes I saw:

  • Budget manufacturers' growth were holding much steadier than Axis
  • Dealers and distributors were already seeing projects and customer switch out to less expensive products

It should be obvious that this trend will continue and grow over the course of this year. What you need to ask yourself is how will this trend evolve in 2010 and 2011?  As I argued in the opening of this report, I think this trend will continue and you will not quickly see buyers snap back to buying premium products. 

It takes time for people to adjust to new realities. The longer this lasts, the more this will impact companies emotionally as well as financially. As companies (and people) are emotionally more nervous, this will reinforce the attractiveness of budget price, good enough products.

Recommendations:
  • Carefully assess if you can cut features or costs out of your products that customers do not really value
  • Be cautious about introducing products with gee-whiz, very high end features 
  • Focus on features that reduce costs
  • Focus on optimizing products to reduce labor use (see next point)

Customer Interest in Labor Intensive Projects

Global layoffs are forcing a fundamental re-evaluation of major projects. A repeated theme I hear is how cutbacks are forcing remaining employees to do multiple jobs and how organizations can no longer handle the level of projects they previously did. Moreover, the consensus expectations is for unemployment to continue to rise significantly over 2009. Plus, companies are always reluctant to hire even when the economy starts to recover. As such, the pressure for remaining employees to do more will only grow and will last for years.

As organizations evaluate new projects, an important rising force will be how much internal labor and risk does the project hold. For instance, the more IT needs to be involved in a security project, the less likely the security project will be done. Beyond the cost of a project, projects will be disqualified if they require too many internal resources. This is a major assumption in my contention that DVRs will make a comeback.

Recommendations:

  • End users and integrators should be very careful about the level of complexity and risk that products or systems entail.
  • Products that are optimized for simple installation, minimal setup and maintenance will be favored.

Terrorism Marketing

For most of the last decade, terrorism related marketing has been the central theme of the security industry. It is essentially a perfect fit as most organizations prioritize around a single threat or crisis.

Unfortunately, the economy has replaced terrorism as issue #1 for most of the world. Because of that, right or wrong, the motivation to buy based on terrorism fears will be replaced by the motivation to respond to the economic crisis. Most buyers will see the immediate fears of budget cuts or closures as significantly more substantial than the relatively more abstract fears of a terrorist strike.

Recommendation: Whether you are a security manager petitioning for internal funding or a company selling security, you need to carefully re-think your messaging around terrorism. More mundane benefits of reducing costs are far more likely to be accepted by customers.

2 reports cite this report:

Is the Video Surveillance Business Starting to Improve? on Apr 07, 2009
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Axis Hammered by Recession on Feb 04, 2009
Axis video growth dropped from 32% to 9% and, in Europe, revenue actually declined. This is bad news not only for Axis but for the industry. The IP...

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