The New RMR Paradigm
June 18, 2008
When it comes to technology, security systems integrators specializing in video surveillance and access control often are very sophisticated. Yet the economics of their business model often are surprisingly unsophisticated.
As Bill Bozeman, president and CEO of PSA Security Network of Westminster, Colo., points out, “If you go out and sell a $100,000 video surveillance system, you’re not a whole lot different from the guy who hangs up $100,000 worth of sheet rock or lays $100,000 worth of carpet. You’re not doing anything for your balance sheet.”
Ironically, although many alarm dealers install systems that are considerably less complicated from a technological standpoint, they have a major financial advantage over many systems integrators: they know how to generate recurring monthly revenue (RMR). As a result, alarm dealer valuations have climbed at a significantly faster pace than those of many systems integrators.
The good news is that systems integrators today have more opportunities than ever before to change this paradigm, because advances in technology have created solutions that allow integrators to offer new services.
Before long, interactive video and audio, access control system management, and video storage and hosting will be “table stakes” for systems integrators, predicts Bill Gorski, director of mergers and acquisitions for Siemens Building Technologies of Buffalo Grove, Ill. Services such as these provide new sources of RMR for systems integrators and as Gorski notes, “Anything that adds some healthy recurring revenue at good margins to the bottom line is going to increase the value of the company.”
While declining to provide details, Gorski says Siemens is exploring a range of creative new ideas in this area. These include “things like becoming part of the customer’s staff and making them an integral part of our own work processes,” Gorski hints. “Some simpler ideas may involve new regulations from the TSA that could be on chemical storage, agriculture or the food chain. You can’t just show up with some canned idea. You have to sit down and spend some time with potential customers and make sure you extract what the real business issues are.”
In this article, SDM examines several RMR opportunities that exist today and how systems integrators have successfully implemented them.
VIDEO DOORMANBased in the New York City borough of Queens, American Security Systems specializes in systems for multi-dwelling units. Recently American Security Systems launched a unique offering called Video Doorman that has strong appeal for condo developers â€” and generates strong RMR for the company.
As American Security Systems president, Larry Dolin, explains, Video Doorman integrates a video intercom with a DVR camera system, a speaker and microphones, and card access. The system is monitored by Statewide Monitoring of Staten Island, N.Y., which offers service to American Security Systems on a wholesale basis.
The Video Doorman system functions as a video intercom when residents are at home. When residents aren’t at home, visitors can press a button that brings up a video image of the visitor at Statewide’s central station. Central station operators can let delivery people in remotely, and watch them as they take packages to a clearly marked package-receiving room.
A reason apartment dwellers like to have a “doorman” is for a sense of security. Video Doorman actually can provide a higher level of security than a traditional doorman by using images from a series of cameras to follow a resident from the building entrance to his or her apartment. To activate that capability, a resident would push the Video Doorman button to interact with a central station operator and ask the operator to provide that service. Operators also can use the system’s two-way voice capability to ask anyone who doesn’t belong in the building to leave.
“The condo market is exploding here in New York and, as a result, people are paying huge amounts of money for condos but they can’t afford a doorman,” Dolin explains. It costs about $150,000 a year to cover the costs of 24-hour doorman service including benefits, he says. “But Video Doorman doesn’t go to the bathroom and doesn’t take vacation,” quips Dolin.
A good prospect for Video Doorman would be an apartment building with 10 to 20 units. American Security Systems typically sells to the developer, who includes the cost of Video Doorman monitoring in condo purchasers’ monthly maintenance fees. Developers are drawn to the system because it helps them differentiate their buildings from others that potential purchasers might be considering.
Monitoring costs vary depending on the number of apartments and the number of cameras. A unit with 10 units and four cameras would have monthly monitoring costs of $700, Dolin says. Dolin declines to reveal his margins on that revenue, but says they are “comparable to or higher than other RMR” that the company generates.
The next move for American Security Systems will likely be to begin offering Video Doorman on a wholesale basis to other systems integrators. “It took us a year-and-a-half to two years to perfect the system and we’ve trademarked the name Video Doorman,” Dolin notes.
VOICE & VIDEOAlthough American Security Systems’ Video Doorman is a highly targeted application, other systems integrators are applying similar technology to generate RMR to serve other types of customers.
Team AVS of Billerica, Mass., markets video monitoring services with voice capability on a wholesale basis from Viewpoint CRM, which the company incorporates into its security solutions for schools, health-care providers, property managers, car dealers and others.
“There are many things customers like about it,” comments Team AVS sales manager, Eric Caruso. “They can save money by cutting down on their guard force or use it to help their existing guard force. They like the proactive measures of having another set of eyes watching their property and moving potential trespassers off of the property.”
In Team AVS installations, the voice capability typically is implemented only in one direction â€” from the central station to the customer premises, an application that Caruso calls “voice down.” A typical application is to ask loiterers to move on. Using video monitoring, the company also offers video guard tours, where central station personnel look in on a customer’s cameras at specific times during the day or night.
“Viewpoint Services from AVS are less expensive and more effective, generally providing our clients with an 11-month average ROI for our systems and providing additional RMR as added to our maintenance programs,” Caruso says.
Another systems integrator that offers video monitoring and voice capability is Kratos Defense and Security Solutions, a San Diego-based defense contractor and systems integrator with offices in several markets. Like TeamAVS, Kratos offers video guard tour services with voice-down capability.
“We prefer to sell this as a solution as a capital investment, as opposed to operating expense, then spread the costs across a five-year service agreement,” notes Steve Cory, vice president and general manager of Kratos Defense’s southeastern business unit. “We bundle capital and monthly recurring costs into a leasing arrangement.”
RMR to Kratos ranges from a few hundred dollars a month for installations that include monitoring only to several thousand dollars a month for installations that have capital costs built in. As for margins, Cory says, “We don’t want to see RMR margins of less than about 45 percent” â€” although occasionally the company earns somewhat less when there is a significant upfront capital investment in new cameras and video networks.
Currently between five and 10 percent of Kratos’ video installations are sold with monitoring, but that percentage is increasing. Noting that video surveillance systems often can be sold through a general contractor that has responsibility for a broader construction project, Cory says, “The art is to translate your general contractor construction relationship into a relationship with the ultimate end user.”
Monitoring and other sources of RMR are typically sold by a service salesperson, Cory adds. “You need to have a well-defined link between the construction or system installation and service process. The art is to connect those two and make sure you have a good handoff between the end of the construction process and the beginning of the end-user service process.”
Cory adds that Kratos also is finding success in selling video guard tours and monitoring to customers for whom the company previously installed video surveillance systems.
OFF-SITE VIDEO STORAGEAnother opportunity with video technology is off-site video storage. Devcon Security, a systems integrator based in Hollywood, Fla., sells video storage services as a backup, or occasionally as an alternative, to an on-site digital video recorder (DVR).
Underlying Devcon’s offering is a hosted video storage service provided by OzVision of Woburn, Mass. Video images are stored on servers that OzVision operates and maintains. The monthly cost to Devcon’s customers for video storage depends on the number of days of archives the customer wants to retain, but ranges from about $25 a month to about $80 a month.
“We make at least a 55 percent to 75 percent margin,” notes Ziad Ghossaini, director of technical services for Devcon.
Ghossaini says that 100 percent of Devcon’s video installations now have an RMR component and that total revenues have increased between 25 and 30 percent, as a result.
ACCESS CONTROL SYSTEM MANAGEMENTDevcon also pursues RMR on the access control side of its business. Through an arrangement with Brivo Systems of Bethesda, Md., the company lets authorized users control their access control system through a browser interface. Devcon also has a managed offering, which the company administers through its central station, for customers that want to completely outsource control of their access control systems.
“We can do downloads and add users or make changes,” Ghossaini explains. “They send a fax or e-mail and we do that for them.” To serve customers choosing this option, Devcon installs access control equipment from DSX Access Systems of Dallas.
Revenue for either of these access control services begins at around $45 a month and can run more than $100 for larger systems. Margins are in the range of 60 percent, Ghossaini says.
A high percentage of Devcon’s access control jobs have an RMR component and access revenues have increased about 20 percent as a result.
SERVICE CONTRACTSAlthough it may not be as high-tech as some other RMR opportunities, systems integrators should not overlook another important source of RMR â€” the service agreement.
Genesis Security Systems, a systems integrator based in Germantown, Pa., sells a maintenance agreement with 90 percent of its installations, reveals Alan Kruglak, senior vice president and principal of the company, who also wrote a book titled “Growing Your Service Revenue.” In part because of that strategy, Kruglak says, “we’ve grown in five years from zero to $15 million in revenues.”
Fewer than 25 percent of systems integrators sell service contracts, according to Kruglak’s estimate, but he believes that’s a big mistake. Service agreements can generate three times as much revenue as monitoring, he believes.
Such agreements “should include all labor and materials and typically these are five-year contracts,” Kruglak says. Systems integrators that choose to emphasize service agreements must be prepared to make an appropriate investment to back them up, Kruglak cautions. He also recommends compensating salespeople appropriately for selling service agreements.
The cost of a Genesis service contract varies depending on the size and complexity of a job but typically runs between three percent and 15 percent of the total sale. Kruglak declines to reveal the margins that the company earns on service contracts, but says, “We wouldn’t do it if they were low margins.”
SIDEBAR: System Leases â€” a Lucrative ServiceAn RMR opportunity that may go hand-in-hand with a service agreement is equipment leasing. Securus, a systems integrator based in Fair Lawn, N.J. structures about 20 percent of its system sales as lease agreements.
“Our lease is very unique,” says Securus vice president of customer service, Neal Marcus. “We build in the ability for customers to upgrade and expand their systems without incurring the expense of throwing things away that they’ve grown out of. If somebody needs to expand or grow, I’ll tear up their old lease and insist they sign a new one for 60 months. But we don’t charge a penalty for what they outgrew and are giving back.”
Using this approach nets Securus some leasing agreements that virtually never end. “Some customers have been leasing from us for over 30 years,” notes Marcus, who adds that salespeople are incentivized for selling leases.
Marcus emphasizes, however, that, “All of our leases include full maintenance.” Noting that margins on maintenance agreements typically are higher than on equipment sales, Marcus says, “Without the maintenance portion, this would not work.”
Securus carries its own leases rather than using a third party. “Customers like that,” says Marcus. “If I don’t perform, they don’t pay.”
Not every systems integrator can afford to carry its own leases, however. “Some systems integrators are so strapped for cash they have to get half down on a job so they can go out and buy the equipment,” notes Bozeman, who participated in the creation of Integrator Support, a new company that aims to help systems integrators address such challenges.
“We created a financial arm specifically to lend money to systems integrators so they can participate in RMR,” Bozeman explains. By using that financial arm, systems integrators will be able to generate RMR through leasing arrangements, he says.
Integrator Support also is creating partnerships with vendors to enable systems integrators to generate RMR by offering services such as video monitoring and remote access control system management. For information visit www.integratorsupport.com.