Making the shift to managed services

Why are some integrators dragging their feet, while others are reaping rewards of the managed services model?
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Tuesday, January 29, 2013

The security industry can be just like any other when it comes to transitions, adaptations, market trends or the next big thing. Especially when the next big thing looks a lot smaller.

Integrators accustomed to selling, installing and even servicing big-ticket monitoring systems face a nagging issue. Is recurring revenue through remote guarding or cloud-based surveillance systems the way to go even if the initial sales receipts don’t seem to compare as well?

Some industry insiders say it’s a no-brainer.

“We’ve seen enough patterns and cycles,” said Sharon Shaw of Integrator Support LLC. “The industry is maturing. (Some) people have been creative … this is where the rubber meets the road.”

Integrator Support, based in Westminster, Colo., has been helping companies transition from physical security to managed systems for the past five years. Previously the company had been part of PSA Security Network, also based Colorado, for 35 years.

Shaw is trying to shift a mindset from product-based sales to service-based sales and managed systems. It’s not easy.

“Integrators fell into a trap that they set for themselves,” she said. “There is a lack of true understanding of what is happening. … It’s a business model shift.”

But even though video surveillance as a service is “gaining traction,” according to Shaw, something is keeping many integrators at arm’s length from taking the managed system option in what she calls the industry’s “fork in the road.”

What is it?

Part of the reluctance can be a company’s size, overhead and established protocols that make adaptation to dramatic market changes difficult. There also can be internal conflicts between a company’s technical experts and business experts, according to Shaw. And a third explanation for the dragging of some feet could be industry language. What do you call managed services, anyway? Remote video monitoring? Cloud solutions? Hosted video surveillance? Shaw says even industry insiders get tripped up over their own jargon.

Many integrators “want to do it. They just don’t know how,” she said. “They ask, ‘How am I going to establish cash flow? When I have been doing it with a $100,000 (model), how am I going to do it with $5,000?”

Rob Simopoulos is one integrator who has survived and thrived through his company’s recent transition to hosted video surveillance. Advance Technologies, based in Scarborough, Maine, has been around for 19 years, offering security products throughout New England. Only within the past year has the company embraced managed services.

“Some integrators are forward-thinking, some are not,” Simopoulos said. “What we are doing may be cutting edge, but it's not bleeding edge. Some companies wait to see if trends will work for them. … We're not scared to jump in. That being said, we did a lot of R&D to make sure [managed services] was the way we want to go.

“A year ago we evolved and changed,” Simopoulos said. “We are doing hosted and cloud services. We're definitely in that world.”

The concept “has been around forever,” he said. But with high-definition cameras and wider access to high-capacity bandwidth, opportunities for remote video surveillance emerged suddenly, without fanfare. As Shaw put it, “Some integrators thought, 'Maybe I missed my last opportunity. Not again.’”

“Now we can stream everything,” Simopoulos said. “[Customers] don't have to pay for a big expensive server up front. All you have to do is buy a camera and use rented storage space, which is really what cloud technology is.”

Still, the skeptics ask, what if the Internet is down? What happens to our video surveillance? Simopoulos says the installation of small network storage space and other infrastructure safeguards can recover lost information.

Dramatic changes are difficult when established business models are challenged. Two other integrators who have embraced managed systems say the small size of their companies is an asset.

Ken Alen of Alen Security Co. Inc. in Monroe Township, N.J., says larger security companies may think they have more to lose by switching gears too quickly.

“If a big company makes a huge mistake, people lose their jobs,” said Alen, whose company, with 17 employees, has been aggressively pursuing recurring revenue through managed security systems for just 18 months. “The support [for change] has to come from the top. A lot of big companies, if it doesn’t fit their model, it doesn’t fit. We’re small and nimble. And it’s a slow learning process. You either have the staff to do it or you don’t.

“You have to think outside the box,” he said. “It’s not ‘throw in an alarm panel and call Honeywell when things go wrong.’”

The reason for the shift from product-based video surveillance to service-based has less to do with the economy or changing attitudes about security and more to do with the evolution of technology, Alen said.

“The natural progression of technology has allowed this [trend] to happen,” he said, noting that video analytics and expanding networks are just two of the myriad factors changing the security industry at warp speed.

“We take advantage of niche marketing,” Alen said of his company. “If a large company delved into this, it would take time and resources” in addition to top-down protocols for management decisions.

Tim Feury, owner of Altec Systems in Atlanta, Ga., also pointed out that his company can excel at what it does because he has only 11 employees. That’s the same number of players on a football team using the same playbook; Altec employees are on the same page regarding video surveillance as a service. Feury and his wife started Altec in 1994. They have customers in 30 states, but as he points out, Altec integrators don’t have to be in California to service their clients in California.

“It’s a different business model,” he said of VSaaS. “If you have spent years building your business with a technical staff and your gross profit margin in shrinking, it gets harder and harder. If I’m a small company with huge overhead, that can get difficult.”

But it’s not impossible for large companies to make the transition, Feury said.

“Look at the IT world,” he said. “Microsoft is reinventing itself again with Microsoft 8.”

As for risks that come with shifting from product-driven business to managed services, Feury said, “The risk is not doing it.”

“We started on this journey about three years ago,” he said of his company. “It has taken on a lot of iterations.”

There are two options right now for video surveillance customers, noted Feury: “Pay everything up front, or pay as you go.” The latter is the model his company tries to embrace, although he noted, “we do not spend 100 percent of our time selling services.”

“There are a number of ways we deploy” managed services,” Feury said. “Some have 100 percent [of the video surveillance apparatus] on the premises, while some have 100 percent through cloud storage.

“It’s an easier way for customers to take your services,” Feury said of managed systems, or remote guarding. “Instead of $20,000 up front for capital expenses, it can be $5,000 up front and $500 per month for operating expenses.”

“It’s an economic model,” he added. “It’s a typical transaction either dominated by a product or dominated by service. Margins are down on products. The days of 50 percent gross margins are gone. You’re looking for recurring monthly revenue.”

“Selling a camera system for $10,000 is a sale,” Feury said. “Selling equipment for $2,000 and $200 per month for services is an asset.”

Integrators can easily find themselves caught between calculated risks as they see their industry evolve: Continue to follow your successful blueprint and try to do it better when times get tough, or change directions with a different business model.

“Systems integrators love their customers,” Shaw said. “They love their engineers.” But a business relationship without recurring monthly revenue, she said, “is not increasing the value of your company.”