A Winning Recipe of Acquisitions & Low Attrition
Spotlight on: First Alarm
First Alarm, Aptos, Calif., ranked No. 31 on the 2011 SDM 100, a jump from spot no. 36 in 2010. The super regional Bay area dealer worked hard at making strategic acquisitions and reevaluating its attrition programs to minimize the impact of the recession.
A big part of its current strategy, taking advantage of low lending rates, has been to put a focus on finding accounts and companies to integrate into its business through acquisition. Dave Hood, president of First Alarm, said the company doesn’t typically release the details of its acquisitions, but he’s very open about the company’s acquisition plans. “I’m not shy. I want people at least locally in the Northern California area to know that we are in acquisition mode.”
For Hood, thoroughly analyzing potential acquisitions is key, but spotting unique opportunities is crucial. “We have a checklist,” he related. “But you know, checklists are great but then you throw them off to the side and you sometimes have to base a decision on other criteria as well. We want to see an existing service area covering the area that we’re buying as much as possible. But that’s not always possible. So sometimes you’re taking on customers in an area that’s outside of an existing service area. You want to be able to fold it into your operation. We do consider buying companies and leaving them as a free-standing branch or operation. And that would be extraordinary in that they have a team in place and a track record of profitability. We won’t necessarily create a substantial profit just by the act of acquiring, where in some cases the act of bringing another organization into you organization creates additional cash flow.
“We do analyze [any potential acquisition] to make sure we can afford it and it at least meets the basic sanity test. But beyond that we’re looking at other things that are a little more intangible like the talent and any other synergies like the products and services they’ve been selling to their customers to make sure that we can support them. There are hidden costs that can be pretty significant if you have problems with those synergies or lack thereof, which would be with talent or technology that’s already out there.”
Over the last 2 years, First Alarm has completed five acquisitions, including one that led it to take on a new location. All of these acquisitions brought onboard about 25 employees and more than 5,000 new accounts. The company currently monitors more than 15,000 accounts in total.
“It’s the same decision-making process that you use to make any other big decision the company faces,” Hood reflected. “First, is it in the best interest of our employees in terms of long-term financial strength and stability? That’s the first test we have to try to pass. The second one, which is right behind it is, is it in the best interest of customers? The rest of it in terms of the stakeholders, shareholders, etc., is taken care of by the first two questions. When we’re encountering any opportunity, although acquisition is a big outlay or credit — it’s a big risk — it requires us to slow down and take a look at what we’re doing.
Hood emphasizes that getting an infusion of talent is always top-of-mind, explaining that having that can help overcome other concerns. “We also want to increase our financial stability,” he said. “We have our own central station. And being moderately sized, it is not as profitable to own your own central station. Your cost per account is typically a lot higher than what you would see if we were to contract that. It’s not our goal to have that same cost per account but we definitely have a strong incentive to increase in size. With our staffing levels, we could support another 5,000 accounts.”
First Alarm has been operating its own U.L.-listed central station since 1980.
In addition to achieving growth through acquisitions in a largely flat market, First Alarm was able to maintain its low attrition goals in the past several years. The company aims to remain below 6 percent attrition annually. “Even during the depths of the recession, we were very fortunate to see that attrition stay low.”
The company has a three-pronged “attack plan” to fight attrition. The first measure, Hood said, “is pretty obvious and that’s to do a good job.” That goal is often more elusive than it sounds. “You have to have the resources, you have to answer the phone, you have to be able to service your accounts. And if you starve those areas of resources by cutting staff or putting people into a voice machine on the phone where they have to push buttons, or you don’t do service, you can’t do a good job. We have a lot of staff in the field to do repair and maintenance and that’s expensive. But it does enable to provide a high level of service.”
The second measure is a focused sales plan that attracts resilient accounts. “We’re priced in the middle or higher end of the market to attract clients seeking quality,” Hood said. “With that plan, they themselves are of higher quality in terms of credit worthiness. We think it’s a very small price hurdle and that in the long run it is the best value. When the economy dipped in northern California, we did lose some accounts but not sunk to the depths that some of the other companies did.”
Finally, four years ago the company instituted an account retention team and formalized its processes and designated field customer service reps to reduce attrition by providing immediate response to any type of attempted cancellation. These reps are given broad authority to correct problems through credits and reimbursements. A second task this team takes on is exploiting the very short window of time between when a client vacating a home cancels and when the new resident moves in. According to Hood, that’s something the company was not doing a good job at before, but fortunately this system was in place by the time the recession hit.
First Alarm categorizes attrition events into controllable and uncontrollable. Cancellations are individually tracked and the company works to determine the “real” reason behind them. The most common occurrence of a controllable cancellation was that the customer “did not use the system anymore.” The company lost 144 customers last year due to this reason, which the company continues to work at. Hood believes that adding services such as fire protection, carbon monoxide protection and water sensors can help alleviate that so that even if a customer is not interacting with a security panel daily, the system is always active and providing value.
The largest non-controllable reason for cancellation is customer relocation and makes up about 50 percent of the company’s attrition, Hood said.
First Alarm’s account retention team has dramatically increased the attention given to attempted cancellations, Hood said, meeting weekly to reconciling attempted cancellations. It all boils down to taking a proactive and not reactionary approach to attrition.
“A surprising amount of new business has come out of us doing a better job here,” Hood said. The retention team is able to sell new RMR services in addition to re-signing accounts by being in front of customers who aren’t quite satisfied with their systems.
The company’s goals in the market are simple, if not always easy to achieve while dealing with market pressures. “We want to elevate the trade and the process of consulting with customers about their security,” Hood stated. “We feel like there’s huge pressure to sell in a way where it’s all about the recurring revenue. On one side, from the profit perspective, RMR is the lifeblood of our business, but we’re getting it by designing systems that meet the needs of our clients. If we take our eye off that ball, we’re going to have trouble figuring out what we stand for. For us, it’s about upholding this important role that we have, which is that people trust us to design security systems that are going to make them safe and their stuff safe.”
The company has five office locations throughout the greater San Francisco Bay area. “Our goal is to have 90 percent of our client base within 20 miles of our office,” Hood said. “Just to put it in perspective, where we have these five offices, there are two national companies we compete against and they have one office each. And that’s the way we view the business: You can’t provide good service from a distance.”
“A lot of dealers in very competitive environments don’t have a choice but to be analyzing what brand X sells three doors and one motion detector for. It’s hard to both stand for quality and be competitive in the market. We don’t want to join that race to devalue the core product, which is the system itself. We’re there to design the system. The service is important, but not as important as the system. The idea of deterrence is abused by our industry. What’s going to make you sleep better at night? The burglar thinking you’re protected or actually being protected?”
When it comes down to designing more effective systems, Hood believes that spending a lot of time analyzing the client’s risk factors, laying out and designing a system that fits their needs is the most important step and pricing discussions should come second.
Through its various recent acquisitions, First Alarm has come very close to a 50-50 split between its residential and commercial accounts. Hood said, “We definitely want to be diversified so our acquisitions in the last couple of years have brought us much more residential than commercial. We had veered towards about 70-30 — we’d gravitated towards commercial in pursuit of better margins on installation. We’re becoming more bullish on the residential market because the mid and upper levels of custom residential, from $2000 to $20,000 have been pretty good. We also do ultra high end residential from $50,000 to $100,000 security systems. There’s good demand there but it is a more difficult system to go do.”
Looking into the future, Hood is most excited about expanding an area of business with video and patrol that seems to be growing as police alarm response policies shift across the country. “What we’ve done differently is the way we’ve been bringing video into central station. I would not yet call it a profit center for the business. But we have close to 1,000 cameras connected to the central station,” Hood said. The company offers remote video and traditional alarm verification through video but has seen more success with a hybrid approach using video and a private patrol business, through sister company First Alarm Security & Patrol Inc. “It’s one of those things where with the right customer, it is really powerful and does better than any one solutions does on its own,” Hood commented. “We have companies paying us $150 to $350 a month for these services, which for alarm guys sounds like a lot of money. But for the customer it’s dramatically less expensive than the other options, such as having a security guard on the property or a patrol service. We’ve had more than a casual amount of success by selling both. And we’re going to invest more on that. We think that will be an important part of our future even though now it’s a small overall piece of our business.”