Should Security Integrators Focus on Recurring Revenues?By: John Honovich, Published on Oct 28, 2009
While integrators have historically generated 90% or more of their revenues from projects, for years many have advocated a shift to more service and recurring based revenue sources.
An October 2009 SSN interview with Ray Dean of Niscayah [link no longer available] is the most recent to advocate the move to services. [Background Note: Ray Dean's company PEI was acquired by Niscayah in 2007. At the time, PEI's total 2006 revenue was reported as $11.6 Million USD with 20% through service contracts.]
The interview discusses changing integrator's mindsets including resistance by sales staff used to making commissions. Niscayah says they are focusing on jobs with a service oriented connection such as remote video monitoring, guard replacement, video escort, etc.
While such services are useful ancillary revenue streams for commercial/government integrators, it is unlikely that this can replace the financial importance of projects for many years to come.
Unlike residential offerings where the capital cost is low relative to the services that can be sold, the commercial/government market is the opposite. Most businesses need tens or hundreds of thousands of dollars of on-site equipment (readers, cameras, panel, servers, etc.). Since the customer needs 100% use of this equipment and tend not to need many services, the products have to be sold. Of course, some recurring revenue can be generated from maintenance contracts but most revenue will remain project based.
This is starting to change but only at the low end of the market. Managed/hosted video services are showing that similar to alarm monitoring, the capital equipment costs are becoming low enough that those costs can be subsidized from ongoing service contracts.
Central Financial Problem for Security Integrators
At the same time, security integrators face two major problems -- declines in gross margins for integration projects and a decrease in overall integration projects. The gross margin problem will likely never recover with margins permanently squeezed by the rise of on-line price competition. The decrease in integration projects is likely to be more temporary and should recover along with the economy.
The third emerging problem is new entrants (like cable companies, telcos and installation companies) with lower cost structure than security integrators offering managed/hosted video and access. Security integrators generally have design expertise and specialists in configuring and optimizing security systems. The more security systems move to "the cloud," the lower the need for on-site expertise reducing the competitive advantage of integrators.
While securing recurring revenue may be a goal, the feasibility for security integrators to achieve it is questionable.
[Update: While integrators like Niscayah have been pushing Axis hosted video, the results appear to be weak and insignificant to their overall business.]