Even dinosaurs can learn to dance

Regardless of the past performance of companies operating in the UK’s security guarding sector, the onset of Security Industry Authority (SIA) licensing offers a level playing field for all to succeed.

The outcome of the SIA’s work will depend upon the strategies adopted by security businesses in a regulated environment. The regulator has consistently promised “to regulate with the industry, not to the industry”. The foundations have now been laid, and any security company wishing to succeed in what will be a totally transformed working environment occupies an equal footing at the starting line.

Given the pragmatic and consultative approach towards the industry that has been adopted by the SIA, it’s possible that “even dinosaurs can learn to dance”...

The level of a security company’s success will be determined by how well a given organisation adapts to the New World Order. Undoubtedly, the regulator will face teething problems, but these will be heavily outweighed by the long-term benefits.

There is no doubt that the security guarding industry will change dramatically over the next five-to-ten years, moving from a low profit, client-driven industry exhibiting mediocre performance levels to one that is professional, profitable and far more stakeholder-focused than at present.

The current price-competitiveness of the security guarding market has placed financial constraints on any infrastructure development, but the good news is that the key drivers for change are now in place to effect a transformation. That change, however, will not be without pain, which will be shared by all stakeholders.

The labour-focused element of the industry will continue strongly, and be enhanced by a more integrated approach covering all disciplines within the industry – including technology, consultancy and physical security.

What drivers will cause change, though, and how will each stakeholder in the market be affected by that change?

While the opinion offered here is one of many ‘doing the rounds’ at the present time, it is nonetheless a detailed analysis based in fact and designed to assist in scenario planning for the future. It is also one that should stimulate positive debate.

The future in summary

Let’s begin with something of an executive summary of the conclusions drawn from Interconnective’s comprehensive analysis of the private security industry.

It’s fair to say that the security company of the future is likely to be multi-disciplined in structure, combining various elements of the security ‘toolkit’ (such as physical, electronic, manned and consultancy services). A series of so-called ‘bundled’, outsourced facilities services (encompassing cleaning and maintenance, etc) could also come to the fore as an alternative. Service providers will preside over the best solution as opposed to a series of specific service offerings.

It will also be possible for single, disciplined companies to succeed if their offerings are based on knowledge, trained personnel and quality of delivered service.

Cost increases and heightened security requirements will force end users to examine the most cost-effective solution for their site(s), which could result in a combination of physical, electronic and manpower solutions replacing the current manpower-biased service.

Further to this, one of the biggest tasks facing the industry will be to change the mindset of the buyers of security services through education. The buyers of security will pay for added value, but they’ll still be tempted to buy on price if faced with apparently similar security services. While the key change drivers will stimulate industry change, the strength, initiative and ability of the competitive forces within the security guarding sector ought to determine the future shape of the industry.

The four main key change drivers identified are regulation, consolidation, changing security requirements and a growing lack of police involvement.

Those companies embracing change – and competing on product and service differentiation – will move ahead of their competitors. Those that fail to recognise change could face extinction. Price-competitive services will continue, but firms will use critical mass or combined service offerings to drive price advantages.

The much-heralded extended police family will, as the SIA has stated, create growth opportunities for the private security industry. As trust develops between the police and the private sector, so more and more convergence should occur. The demarcation of functions will be clearly defined.

That said, at Infologue.com and Security Management Today we believe that the term ‘extended police family’ is perhaps one-dimensional and focused solely on the policing aspect of security. A more appropriate term might well be the ‘integrated security network’.

Increased cost of guarding

Issues including the cost of licensing itself, the Approved Contractor Scheme (ACS), a shortage of labour and the resulting wage inflation will inevitably increase the end user cost of security guarding. Wage inflation in the industry could be as high as 20%. The introduction of English-speaking labour from other European Union nations on a structured basis will form part of a strategy to compensate for the labour shortage. Labour churn should remain high for the next three years as licensed officers move towards higher payer rates and then, in Year Three, to better working conditions.

It’s just possible that the removal of the UK derogation from the Working Time Directive could be implemented in some form in 2006, resulting in working hours in the guarding industry ‘downshifting’ from 56 or more hours per week to 48. Inevitably, this would have a significant impact on costs. Contractors and end users beware!

As BSIA chief executive David Dickinson has already stated, the estimated 2,500 security companies presently operational in the UK will be whittled down (to around 50 firms within five years, in fact). Regulation itself will drive the numbers down to 500, with the ACS reducing this number still further (to 250) dependent upon the level of compliance adopted in determining membership of that scheme. Natural consolidation should account for the remainder. In anticipation of 100% rigid enforcement, it will be nigh on impossible for companies to operate without the benefit of accreditation from the ACS.

Facilities-related supply services

In respect of the Approved Contractor Scheme, there should be a single set of performance or quality standards against which companies ought to be accredited. There should also be different levels within the scheme to promote competition and differentiation. Any rival or alternative standards will simply serve to confuse the end user

Bobby Logue (interconnective and infologue.com)

Over the course of the next five-to-ten years, large sections of the security guarding market will move from pure manpower supply towards the offering of security solutions or facilities-related supply services. The facilities-type service offering should then develop further into a consolidated service where not only is the management of that service multifunctional, but the operatives involved could perform cleaning, security and other facilities-related tasks.

Those companies adopting a total solutions package may well develop a competitive market edge. Conversely, the security companies that merely add the cost of transition with little or no added value will see increases in turnover but little in the way of additional profits.

In truth, the proposed voluntary ACS initiated by the SIA should not become the benchmark but rather the baseline for service offerings. We believe that this important fact will be ignored, and that most security companies will tune their service delivery to the ACS standards. Unfortunately, this will ensure that procurement in certain segments of the market remains price-driven.

The difficulty with this strategy is that there will always be some company that will deliver the service to a cheaper price, thereby leading to continual contract churn.

At present, it is believed that security companies wishing to join the ACS must have at least 55% of their workforce licensed before this coming September.

Two strategies will emerge

There will be two distinct market strategies: price competitive and value-added. Due to the lack of critical mass, small and medium-size companies may have to compete in the value-added market segment. Certainly, those companies that can demonstrate value-added differential will benefit by way of increased returns.

In respect of the ACS, there should be a single set of performance or quality standards against which companies ought to be accredited. There should also be different levels within the scheme to promote competition and differentiation. Any rival or alternative standards will simply serve to confuse the end user.

While it is the responsibility of the individual to pay for the SIA licence, there will be confusion. Some companies will expect the individual officer to pay. Others have agreed to pick up the initial cost of licences on behalf of their workforce, while many companies will pass the cost on to clients. This could result in distorted prices during the first two years of regulation.

Soaring into the future?

As of next March, any security operatives in the private sector deemed necessary to possess an SIA licence and who don’t have one will be working illegally.

To prevent that from happening, the BSIA entered into an agreement with the SIA at the tail end of last year for a planned roll-out programme. In spite of this, there are still companies providing security services who have not yet begun to focus on regulation.

If we were in the ‘Kingdom of the Birds’, we would be able to segment the reaction of companies operating in the industry into three distinct strands:

The Eagles: They are soaring ahead of the game. Having spoken to their customers, they have managed to secure contract increases (from January 2005) in the region of 2-3%. They have also set in motion twelve-month training and licensing processes.

The Ostriches: In a state of denial, and don’t believe that regulation will actually take place. In essence, they are carrying on as normal...

The Pigeons: Doing what pigeons do best – sitting in a high place and creating a mess! They are talking about regulation, and complaining vehemently about it, but at the same time are too scared to implement the SIA’s suggestions for fear of upsetting their customers and the workforce.

In our scenario, only the Eagles will survive with ease. The Ostriches will suffer the fate of the dinosaurs unless they change their ways, and the Pigeons will either metamorphose into Eagles or otherwise face extinction.

Competing forces at play

Michael E Porter of the Harvard Business School – one of the world’s foremost authorities on competitive advantage – used his 1986 tome ‘Competition in Global Industries’ to introduce the following statement: “The five competitive forces determine industry profitability because they shape the price firms can charge, the costs they have to bear and the investment required to compete in the industry.”

Porter goes on to define the five competitive forces as the:

• bargaining power of buyers;
• bargaining power of labour;
• rivalry among competitors;
• threat of substitute services or products;
• threat of new entrants.

Porter also states: “At the heart of positioning is competitive advantage. There are two basic types of competitive advantage: lower cost and differentiation.”

Since the security guarding industry in the UK is primarily focused on lower cost and not differentiation, the sector is in a downward spiral. Taking each of the five competitive forces in turn, powerful buyers bargain away the margin for themselves. Such practices are particularly prevalent in a weak industry or a price-competitive environment such as that exhibited by the guarding sector. Buyers regard security as a grudge purchase which is perceived to add little or no value to the core business. This perception manifests itself in the selection of the cheapest option due to low budget allocations.

It follows, then, that a key element in transforming the industry will be to educate the buyers in using a best value approach to procurement rather than a price-competitive strategy, thereby creating a high level of product differentiation. That said, any additional benefit will need to be tangible.

It is absolutely essential that the industry adopts the 42-hour working week in order to ensure the inflow of suitable labour. Working anti-social hours is not attractive to labour. Add exceptionally long hours to the equation and the labour pool diminishes still further

In terms of the bargaining power of labour, labour is the key price constituent cost of the service. While it does not have collective bargaining structures, the unattractiveness of the industry and low UK unemployment figures provide those who may elect to work in the sector with alternative, more attractive choices elsewhere in the commercial world.

At Interconnective, only recently we carried out a study of wage rates and the effect that increasing them within a company had on the performance of those security officers’ on our clients’ premises. We discovered that increasing the wages by over 20% had no effect on the performance of the guarding supplier, or indeed the level of performance and quality of the on-site officers. Key non-performance issues – poor quality replacement officers, poor site-based training and ineffective first tier management support among them – continued as before.

We then started to examine comparable labour performance at other security guarding companies, and discovered a direct correlation between the average wage paid by a company in a region and the quality of labour. Increased wages of themselves do not guarantee an improved labour force, nor a better overall security service. It is patently obvious that there are distinct pools of labour which have financial and working conditions ‘triggers’.

The solutions to this have yet to be unravelled by UK contractors. Securitas – the world’s largest provider of security services – has stated: “There is a strong connection between employee training, service quality and compensation”.

Promotion at a premium

A further anomaly is the lack of wage improvement and promotional opportunities for frontline security staff. To a large extent, while most employees have mobility clauses in their contracts, they are employed on a site-specific basis and are moved on only when they fall out of favour with a client.

It is not unusual for security employees to spend years – if not decades – on a specific assignment, and stay on long after their initial employer has lost the contract. The employees merely transfer under the TUPE Regulations.

Due to the employees’ interface being more with the client than the security company, the perception is that they have far more responsibility and loyalty to the end user than the service provider. While this may well be the norm in the industry, it is not good for the security sector in general and doesn’t allow for effective employee career progression.

Clients do not like change due to the assignment knowledge developed by an officer team, but they will certainly force employees to leave in order to raise their earnings or further their careers.

Under current practices, it is entirely possible for a new employee in the industry to earn more than a professional, long-serving officer in the same company (based solely on the wage rates charged by different customers). De-motivation creeps into the workforce due to the fact that new employees could earn substantially more than existing, long-serving ones simply because of the reluctance of existing customers to increase wages in line with current trends.

While there is no collective bargaining in the industry, labour uses its own bargaining power by choosing to work elsewhere (mostly outside of the security guarding industry).

Wages are important, but they are not the only consideration. Hours of work are equally vital when trying to attract the right quality of labour. It is essential that the industry adopts the 42-hour working week in order to ensure the inflow of suitable labour. Working anti-social hours is not attractive to labour. Add exceptionally long hours and the labour pool diminishes even further. In the light of regulation, regardless of the Working Time Directive, a 42-hour working week could become both an attractive and sensible option.

Rivalry among competitors

Fierce competitive rivalry erodes profits through the higher costs of competition. Estimates suggest that there are approximately 2,500 guarding companies in the UK. However, only 60 or so of them turn over more than £4 million per annum. This fragmentation creates the need to be price-competitive, thereby weakening the industry.

There is a greater impetus on getting business and sales teams recruited. On occasion, they are a greater cost to the business than operational management. Money is often diverted from key areas to make sure that an effective infrastructure is in place.

Plimsoll Publishing – a consistent analyst of the security guarding sector – recently stated: “Overtrading appears to be affecting the industry as 36 significant players chase sales at the expense of profitability. While the behaviour of these overtrading companies has yet to impact on all of the 174 companies we have reviewed in the industry, almost 50% have seen their profitability decline.”

The Plimsoll report continues: “There are three distinct types of company behaviour now prevalent in the security guarding industry:

Overtrading: 36 companies among those surveyed for this particular study are losing money. Typically, they are delivering -1.1% margins, yet their average sales growth is healthy. Is their strategy of capturing market share at the expense of profit sustainable?

Under pressure: 81 companies hardly break even.They exist on tight and declining margins. Can they remain competitive while being squeezed by those who overtrade?

As yet unaffected: 57 companies are as yet unaffected. Typically, these firms have remained very profitable, delivering 5.5% margins. Will their profit stream be jeopardised by those overtrading?”

Due to the lack of clear definition of those offerings from a significant number of players, the only differentiation appears to be price.

Where service offerings converge and pricing is the only differentiation, history tells us that margins erode and everyone suffers. A classic example of this occurred in the German mobile ’phone market, where the products available from several manufacturers were so similar that the only difference centred on the price (which was gradually worn down).