Self-regulation was not enough – or was it?

The security guarding and close protection sectors have fallen under close scrutiny since the introduction of the Private Security Industry Act 2001 and the formation of the Security Industry Authority (SIA).

Indeed, the Regulator was born – at least in part – due to a number of ‘cowboy’ outfits running protection rackets on construction sites (notably in Glasgow). Those companies were often exposed to the glare of hugely negative publicity. In turn, the Government felt obliged to act. So it did.

However, does the SIA’s formation – and the introduction of the Act – represent a knee-jerk reaction from Parliament, or is it more of a considered response?

To its great credit, the SIA recognised immediately that imposing regulation on what has been an industry exhibiting ill-health without first addressing the commercial and economic issues would not realise the underpinning aims of the Act. It could be said that, with net margins averaging between 2% and 4%, market forces – in tandem with the efforts of the British Security Industry Association (BSIA) and the National Security Inspectorate (NSI) – were already starting to make a positive impact in any event.

On that note, last January Paul Goggins (at the time serving as the Home Office minister) spoke at an NSI exhibition week in the House of Commons (‘NSI engages MPs in the House’, News Update, SMT, February 2006, p7). The minister praised the Inspectorate’s regulatory role in the industry thanks to its provision (and enforcement) of rigorous standards and Codes of Practice. He also waxed lyrical about the achievements that had thus far resulted from voluntary regulation.

“Consultation with the industry is a key objective for Government,” said Goggins. “I intend to engage even more extensively with industry bodies, including the NSI, to ensure that the security sector provides the very best service it can to members of the public.” What a pity such recognition didn’t precede the Act!

With such low margins at play, vast tracts of the guarding sector were always going to struggle when it came to making the investment needed towards heightened standards. It would be fair to say that there was managerial and strategic ineptitude on the part of some operators. That said, it must also be recognised that central and local Government have been major contributors to the industry finding itself in such a state.

Best Value proposition

At this juncture, I’d like to introduce some words from the BSIA’s chief executive David Dickinson. “A survey undertaken by the European security guarding organisations CoESS and Euro-FIET at the end of the 1990s found that 60% of contracts for security service provision in the public sector across the UK are awarded on price alone. The reason for adopting this approach was found to be a combination of lack of understanding over the potentially detrimental effects of using the lowest price competition for contracts. Also, it was due to a lack of understanding in relation to how one ‘judges’ a Best Value proposition. Increasingly, that situation is being mirrored in private security sector buying practices – to the detriment of both customer and supplier.”

A major BSIA Member Company conducted some market research while the Private Security Industry Bill was passing through Parliament. It sought to find the level of understanding of the impact of statutory licensing on the supply and costs associated with security guarding services provision.

Huge costs have been heaped upon security guarding companies, who must then make a naïve appeal for clients to bear some of that expense

An astonishing 48% of client respondents believed there would be no impact on costs... “If our supplier tries to raise its prices, we will go out to tender”.

That mindset underpins the essential nature of the problem still facing the industry today. The belief – largely, let it be said, emanating from Procurement Departments – that prices can always be driven down during the tendering process has created this impression that security services are a commodity and a ‘grudge’ purchase.

The net result of that is low operating margins. Two decades ago, the gross margin on most security guarding contracts was 26%, the net profit was around the 4% mark and the balance invested in the service. That investment was made in training, quality control and support in the form of site supervisors. With margins driven down, these vital elements of a contract have all-too-often been compromised.

In turn, this has contributed to increased staff turnover (which in itself costs contractors and clients dear in terms of service consistency and training/recruitment fees). Clients have become impatient with their contractor(s) and re-tendered, often moving to another supplier for an insignificant reduction in contract price.

The hand of ‘resolution’

Today, we have the Government attempting to resolve a problem that it was instrumental in creating. As is the case with much regulation, the hand of ‘resolution’ has been far too heavy. The majority of guarding operators were striving to provide a good, ethical service and, as I said, the BSIA and the NSI were doing a good job in sifting out the rogue elements.

The SIA’s great hope and ambition is that its work will help to improve the status and image of the industry. Well, it ought to make individual employees feel better about their jobs and be privy to opportunities for career development. However, I doubt very much that the Regulator is going to change the mindset of customers that quickly. That is where some of the funds collected by the SIA through licensing should be invested – in educating clients on the fundamental difference between price and value.

In the meantime, the SIA’s cumbersome regulation (and the confusion surrounding its introduction) has been a shambles. There is still much debate over what roles are ‘hoovered up’ by the Act, and then there’s the in-house question. Huge costs have been heaped upon security guarding companies, who must then make a naïve appeal for clients to bear some of that expense.

We are now going to see a polarisation of the industry, with the larger contractors expanding still further and achieving even greater economies of scale. The mid-range businesses will all but disappear because they’ll not be able to compete with tender offers made by ‘The Big Boys’ or the cost base of smaller, local players. There will still be a role for the smaller contractor with either a low cost base or a specialism by sector/discipline.

The Regulation Tank is now parked firmly on our lawn, and work with it we must.