Issue #87 Cover Story: The Race To The Bottom

coverBy John Bigelow.

It is no secret that there is a race going on in the security industry right now. In fact, this particular race began a number of years ago, around 2009, shortly after the beginning of the global financial crisis. It is not a race for the best technology, nor is it a race to set the benchmark for service delivery or standards, it is a race to the bottom – to see who can provide the cheapest products and services. It is a race in which there are no winners.

It is an often repeated mantra in business that competition is healthy. However, as is so often the case with such sayings, one missed word can change the entire connotation of the message. Take for example, practice makes perfect. It should actually be, perfect practice makes perfect, as practicing something badly will only serve to reinforce bad habits. In the case of competition, the saying should actually be healthy competition is good for business. Price wars are far from healthy. They drive down margins, put downward pressure of businesses and encourage the cutting of corners in order to minimise expenses with a view to recouping losses. Most business experts agree that a price war is not a viable long-term business strategy and often results in significant casualties – including the perceived victor. After all, once prices have been driven down, it may be years, if ever, before a client is willing to once again pay the kinds of prices that were considered normal pre-war.

There are a number of reasons why price wars erupt. All too often, it is easy to blame an event like the recent GFC. However, in reality, while this was undoubtedly a causal factor, it was not the only factor in play. Many in the industry would say that the current price war is driven by end users demanding cheaper and cheaper rates, which, again, is definitely a factor but factor but not the only factor. The reality is, most price wars tend to erupt when clients fail to see any point of difference between the products or services being offered. Think of it in terms of a book. If two stores were to offer exactly the same book (same author, same number of pages, same content and cover), but one store offered the book for $20 and the other offered the book for $35 dollars, virtually everyone would opt to purchase the cheaper book. That would be the logical choice because there is no justifiable reason to spend the extra money. This is why Amazon has crushed many of the smaller book retailers. However, if the $35 book had extra chapters, was a hardcover version and perhaps featured a collector’s cover, then it is possible to build an argument as to why one should spend the extra money.

Security companies, security equipment and installers can often fall into the same conundrum. Take for example, security providers. In the most simple of examples, a tender is released asking for a security company to provide security patrols three times an evening, to also respond to alarm events, and provide written reports concerning actions required as well as verifiable reports regarding the frequency and times of patrols conducted.

Five companies respond, all claiming they can provide the required services. On what grounds would the client make his or her decision other than price?

According to John Rogers, General Manager, National Operations Wilson Security, it is the provider’s responsibility to create value in the offering.

“You cannot blame the client for wanting to reduce costs. We all do it. When we go shopping, for everything from clothes to cars, we find the brand or model we want and then we shop around until we find the cheapest price. It is up to individual companies to demonstrate to a client the unique value in their offering,” Rogers explains.

Rogers believes that in order to achieve this, a company must always be looking to innovate. In his opinion, this is the best way to create a unique point of difference, which raises the question – what is innovation?

This question can perhaps be most easily answered by first understanding what innovation is not. According to innovation consultant and business strategist Mark Hawkins, of leading Melbourne-based consulting firm Inventium, innovation is not a group of people sitting around in a company boardroom brainstorming until someone announces “Hey, I have a great idea!”

Hawkins believes that too often, people make assumptions about what customers or the market wants based on their own thoughts or experiences. That person’s enthusiasm and passion for the idea becomes infectious and, before you know it, companies are spending significant money on developing ideas that might seem great, but have never been tested.

According to Hawkins, the most successful innovations are usually developed through the adoption of a best-practice innovation process. Following best-practice involves focussing on [among other things] identifying a real word problem common to a specific target market, such as security users, and then finding a new and unique way to create and capture value by dealing with the problem in a new and innovative way, which improves on previous solutions. It may be that your idea delivers value by improving speed, ease of use, or generally improves on current solutions better in some way. Alternatively, it may be that there was no previous solution. One of the ways that can help get to this point involves a process of testing and crushing assumptions around the challenge that you’re trying to solve (often through consultation with clients) which helps to stimulate thinking in new areas. This often results in the development of a unique solution or idea that you know clients want (because you’ve consulted with them during the process) as opposed to coming up with ideas that are based on what you ‘reckon’!

For Rogers, this is one of the most important aspects of evading the price war. If a company can show that its products or services are truly innovative, and that those innovations benefit the client and meet a genuine need, then there is a basis upon which to mount an argument as to why the cheapest may not be the best. If you cannot demonstrate what you can do for a client that no one else can do, and then further demonstrate why that is of value to the client, and how the client will benefit from it, then why would they not make a decision based on price?

Many in the industry argue that the price war is being driven by end users who continually insist on lower and lower margins, thus driving down prices and perpetuating the race to the bottom. Brian Sankey, National Security Manager at British American Tobacco, agrees that end users need to accept some of the responsibility.

“A good security manager needs to understand and speak the language of finance,” believes Sankey. “Much like a security company, if a security manager cannot mount an adequate argument as to why the organisation should be prepared to pay above the cheapest quote, then procurement will have no reason not to go with the cheapest option.”

While Sankey agrees that a security company – whether they be providers of guarding services, security equipment or integrators – must be able to demonstrate value in their offering. He also believes that security managers need to be realistic about what they are buying.

“Forcing a company to operate on margins of two, three or four per cent is not conducive to a long-term relationship and best practice. The more you force a company to reduce prices, the more that company is going to cut corners. It is simple reality. Furthermore, some companies need to ask themselves why they are even in business? In much the same way as a security manager needs to be prepared to battle with procurement over a contractor’s margin, contractors need to be prepared to walk away from a deal. What is the point in undertaking a job if you can get better returns by simply leaving your money in the bank to earn interest?”

However, most importantly, Brian believes that end users and security managers need to get serious about their due diligence.

“If three different companies can all clearly demonstrate on paper how a job cannot be done for less than a specified amount once the contractor has meet all its legal obligations such as minimum wages, super, on costs and the like, and yet the fourth company is prepared to come in five or ten dollars an hour under than minimum amount, a security manager needs to ask some serious questions. Too many people engage in willful ignorance in order to achieve lower costs.” According to Sankey, this is no different to not asking questions about why the television you are buying out of the back of a truck is so much cheaper than the one in all of the stores.

“Security and procurement mangers within organisations need to understand that there is more than one type of cost to an organisation. When you encourage potentially unlawful behaviour and push margins to the point where providers have to do whatever they can to cut overheads, you significantly increase the probability that something will go wrong. If it does, what is the cost to the organisation? When something goes horribly wrong because your guards are not trained properly, or are inexperienced, badly supervised or have not had adequate rest between shifts – whatever the case may be – it is not the third party contracted security company that the media and shareholders will be chasing, it is you and your department. Therefore, when engaging a security provider, security managers need to ask the hard questions and then properly engage in due diligence. Demand that the contractor provides clear, documented proof regarding how then intend to deliver their promises while also meeting all obligations and requirements – if they cannot, or if in doing so the margins are so fine as do be negligible, ask: what might the real world cost to my organisation be if something goes wrong or this company falls over? How much will it cost to put this contract back out to tender? What would be the cost to our reputation or brand in the event of an incident? What is the real cost of doing business with this seemingly ‘cheaper than the rest’ organisation?”

Retention of contracts is also an important factor if you wish to stay out of price wars. It is an often stated fact of business that it costs far more to secure new business than it does to service existing clients. Sankey feels that too often, security companies think that it is enough just to ensure that nothing goes wrong throughout the term of a contract. However, when it comes time to revue that contract, once again, company boards, procurement departments and security managers are going to be looking at what the security contractor has done over the last few years. To simply say nothing went wrong is not enough. The senior managers at the organisation are going to want to know how that contractor has added value to the business as a whole. Therefore, a security contractor must seek to work with the end user to make good things happen. This might include reducing energy costs through better use of existing technologies. It could also include introducing initiatives that improve the customer experience or safety, or which enhance the brand. Whatever the case may be, the reality is, the better the contractor makes the security department look, the harder the security manager will fight to keep them. Furthermore, a proactive security provider gives the security manager ammunition throughout the course of the contract which he or she can then use in the battle with the procurement department at the time of the contract renewal. It is all fine and well for people to blame the Security Manager or end user, but security contractors have to help themselves as well,” says Sankey.

Steve Charles, Sales and Marketing Manager at Sony Video Security Solutions Australia and New Zealand, comments that he has seen a similar sort of ‘race to the bottom’ occurring in the electronic security industry.

“As manufacturers, we are seeing more and more distributors and integrators calling for lower and lower margins on product. We understand that this is because of the downward pressure that end-users are placing on their businesses but there comes a point where, as a manufacturer, one has to rethink the strategy to market. If things don’t change, there is, in my opinion, a very real danger than many manufacturers will seek to cut out the middleman (this is currently happening both here and even more overseas), and go direct to market.

“It is not the way companies want to do business, but at the end of the day manufacturers might be left with no option if this current trend of pricing competition continues,” Charles explains.

“Manufacturers spend a great deal of time and money not just researching and developing new products, but also developing a brand. No organisation wants to see that work undone by a fight over who is cheapest. It is not about that – it is about which product or service is the most innovative and is the best choice for the job.”

When asked how he believes he has ended up in this race to the bottom, Charles explains “It is no one simple thing. Obviously, the tightening of the economy has played a role. However, I believe a more important factor is that not all Salesmen have received the fundamental skills required to sell the value in the product’s offering. Rather than focus on price, a Salesman needs to emphasize how the products features are required to achieve the end-user requirements for the project as well as highlighting the additional benefits which can enhance the desired end result. Many of the people working in a sales role are ex-technical or installation staff brought in to fill a sales position. Due to the person’s knowledge of the product or service, they understand it better than anyone but because they have come from on-the-job backgrounds, they often do not receive proper Sales training. Too often, I have seen people who have risen up through the ranks to become sales professionals go into meetings, listen to the clients needs and then come back with a rock bottom price before the negotiation has even begun.”

According to Charles, “This is because the industry has become so price driven that the potential contractor is terrified that if he is not the cheapest, he or she won’t even make it into the final pool of candidates”. Charles believes that only the industry can break that cycle and it can only be broken by people who are willing to extend themselves beyond their comfort zone and learn new skills. In most cases price is actually the third or fourth factor of importance when selecting a company to employ. It is just we often fail to get this information. “If I can overcome your price objection can we do business?”, this should be the first question raised with any price objection, this is the only way to get the information we require and possibly turn the job around.

“We need to start building value into what is being offered. If peopel are simply offering apples against apples then yes, it comes down to price.” Charles echoes the belief that it has to be about the value the contractor can bring to the client. “Manufacturers can make the most innovative product ever seen but unless the client understands how that product benefits his or her organisation, it makes little difference. Knowing how the product works is not enough – knowing how it adds value to the client’s organisation, or how it solves a specific problem and then demonstrating that value is the key.”

Rogers, Sankey and Charles all agree that one of the biggest dangers the industry faces is that in the race to the bottom, more and more companies and jobs are falling casualty to the pricing wars. This means that much of the senior talent and knowledge in the industry is being lost – leading to a less experienced profession.

The overriding message seems to be clear. The current pricing war is unsustainable and will only inflict long-term damage on the market.

While end users such as security managers may need to take on a greater level of accountability in their decision making processes, it would seem that organisations need to get better at creating value and points of difference so that they can get away from price comparisons.

According to Hawkins, this is best achieved if a company’s point of difference forms part of the organisation’s business development strategy.

“An organisation’s strategy and its points of difference should be closely related. Points of difference should underpin strategic decisions; and strategic choices should drive innovation for the creation of points of difference. Importantly, both an organisation’s points of difference and its strategy should be understood and embraced by everyone in the organisation and should be clear so that the organisation’s offering can stand out and avoid becoming commoditised. The way that an organisation capitalises on its points of difference should be implicit, if not explicit, in the organisation’s strategy.

Hawkins points out that in 2008, David Collis and Michael Rukstad’s famous article: Can You Say What Your Strategy Is? was published in Harvard Business Review. “A key observation that underpinned the content of the article was that executives can rarely summarise their company’s strategy in 35 words or less; and when they can, it’s rarely put the same way by their colleagues.”

“This creates a large barrier to an organisation’s success. Strategic alignment throughout an organisation is critical. There is little point in having an incredible strategy underpinned by strong points of difference if the people who are implementing it don’t really understand it. Moreover, communicating strategy throughout an organisation is challenging for other reasons, not least of which is that employees often ‘read into’ the strategy that is being communicated to them and make their own determinations of what the ‘real’ strategy is.”

“Therefore, it is critical that your strategy is clear, concise, incorporates a simple explanation of the way in which you compete, and that everyone in the organisation can articulate it in the same way. This level of alignment can have spectacularly positive consequences.”

“If you expect to avoid the commoditisation of your offering by ensuring that your clients truly understand your points of difference – and their value – it is important that first, everyone in your organisation understands and embraces the strategy. This means that it should be short and it should have a level of simplicity to it that embraces your points of difference.”

“To avoid having to constantly compete on price alone, organisations must create a strategy that is intertwined with their points of difference, align the entire organisation with the strategy, and then ensure that all marketing efforts embrace it. If a company provides products and/or services that are genuinely unique, insofar as the benefits they offer, they need to make sure that everyone knows it! If they do not offer something unique, then they need to look at ways they can innovate, or they will forever be locked in a pricing struggle as they race to the bottom.”