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DHI Forum For the Future September 23, 2010 Think Outside the Door Overview Defining Convergence Current Situation What is Changing? Enablers and Accelerants Security Market Life Cycles—the Old and the New Distributor Implications and Future Business Models

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overview
Overview
  • Defining Convergence
  • Current Situation
  • What is Changing?
  • Enablers and Accelerants
  • Security Market Life Cycles—the Old and the New
  • Distributor Implications and Future Business Models
  • Top Ten Predictions for the Next Five Years
  • Conclusions
  • Key Messages for Distributors and Manufacturers
security market investigation
Security Market Investigation

Almost fifty in-depth qualitative interviews with manufacturers, system integrators (IT and security), distributors, locksmiths and other industry experts support our discussion points and conclusions.

Assa Abloy, Cisco, Dorma, HID Global, Ingersoll Rand, ISONAS, KABA Access Control, Lenel, OmniLock, Pelco, Securitech, SDC, Siemens

Manufacturers

System Integrators

Convergint Technologies, UltraSafe Security, DH Pace, Access Control Consultants, Henry Bros

Basis

Distributors

Kelly Bros, Spaulding Hardware, LaForce, Mullins Building Products, Walsh Door, Hogan Security, General Supply

Wholesalers

Midwest Wholesale HW, Pasek, ADI, Doyle, Dugmore and Duncan

Architects/specifiers

Gensler, Hawley, Plum Engineering, Fitzgerald Technology Group

DHI, ALOA, SHDA, SDM Magazine,

Associations/Others

defining convergence
Defining Convergence
  • The changes that occur when different market systems and technologies collide to meet emerging needs of customers.
  • The markets converging around the electronic door opening are:
  • Electronic access controls (traditional and wireless)
  • Smart card credentials and employee ID systems
  • Surveillance systems (cameras, video recorders)
  • Fire safety alarms, perimeter alarms
  • IT networks that are linking these systems
defining convergence5
Defining Convergence
  • Convergence has occurred in other markets.
  • We can predict the likely outcomes and trends that will emerge.
          • Technologies standardize
          • Manufacturers form alliances to capture and strengthen their positions
          • Prices for popular features/packages decline
          • The ROI for customers is reachable for all size organizations
          • The market grows!
current situation
Inside the DHI Market

Weak commercial/industrial new construction

Mechanical market declining

Lots of new software/electronic access products

New sales channels

Service revenue flat for most DHI distributors

Door hardware increasingly a commodity

Outside the DHI market

Retrofit growth

Electronic replacing mechanical, growing future installed base

New EAC products, including IP and wireless hardware/software

New sales channels

EAC services proliferate. 30% margins

Customers seek integration help

IT department becomes key player

Current Situation
current situation7
Current Situation
  • Why is the market changing?
  • Heightened security concerns
  • Advanced digital technology available across products
  • Falling product costs
  • Easier implementation
market evolution
Market Evolution
  • Electronic access broke out of the early development phase into the mid-market. Now it is poised to enter the mass market.

Mass Market

Mid Market Development

Early Market Development

HealthCare, emerging verticals

Educ.

Gov’t

Other Commercial and Institutional

Educ.

Other Commercial and Institutional

Small-MidsizeCommercial and Residential

Educ.

Gov’t

Gov’t

We are here!

slide9

Product Technology Changes

The ‘view’ of how quickly the security market has changed is very dependent on which side of the door you are on!

VERY FAST

SLOWEST

SOFTWARE AND ACCESS CONTROL SYSTEMS

DOORS AND BASIC DOOR HARDWARE

KEYS AND CAMERAS

Open systems and IT network meets access control

Adoption in progress!

Analog meets smart digital

<10 year adoption

Hardware meets wiring

10+ year adoption curve

open systems are growing the eac market
“Open Systems” Are Growing the EAC Market
  • Open systems accelerate convergence— and will change what opens the door.

New technologies work across systems and vendors

Older technologies provided proprietary solutions

technology displacement
Technology Displacement
  • Common credentials are a crucial accelerator driving convergence.

Asset Protection

Payment Systems

Lab/Library

Building Access

Café Debit

Parking Permit

Time and Attendance

technology displacement12
Technology Displacement

Networked technologies will increasingly displace mechanical systems. Networked products generate more revenue per opening.

Installed Cost

Per Opening

$5,000

“Single application” Mechanical Access Control

$3,000

“Multiple Application” Networked System

$1,000

Opening

Capability

‘Intelligent

Opening’

Key operated

OnlineWired and WirelessAccess Control

Electro mechanical

Mechanical Locks

software enablers
Software Enablers
  • Software is the new frontier in the security industry. Customers are getting educated on open systems products with intelligent security applications.
  • The new door security package will be both door hardware and access management software.
the changing channel
The Changing Channel
  • Systems integrators will lead the charge on managing everything in access control—and end users are inviting them in!
  • In the future…
      • If there are wires in your products, it will be part of the converging system
      • If there are no wires in your products, …. The systems integrators may still be the stamp of approval
what is ahead
What is Ahead?
  • The mechanical hardware market will see a single digit rebound in units over the next 3 years, but lower dollar growth. EAC will grow significantly.

CommercialMarket Size

$10B

>50% annual growth.

10-30% annual growth.

Single digit annual growth.

Emerging security managementsoftware products

$5B

Traditional door hardware

and mechanical

access

2010 est. $5.3B

$2B

Electronic Access Control

2010 est. $3.3B

Video Surveillance

2010 est. $2.0B

2010 est.<$500M

$500M

Technology Market

Mature Market

Sources: FL&A estimates based on interviews with industry manufacturers, SDM Magazine

the electronic security market will change more in the next 5 years than it has in the past 10 why
The Electronic Security Market will change more in the next 5 years than it has in the past 10 !Why?
enablers
Enablers

Over the past ten years, pieces of the solution were introduced.

SECURITY TECHNOLOGY ENABLERS

Analog to digital

Digital streamingvideo

Smart cards

Integrated security management software

Wireless technology

Power over Ethernet (PoE)

Open systems

standardization

Manufacturers are partnering. Now the pieces are fitting together.

* Sources: Manufacturer interviews, SDM magazine, Campus Safety magazine

accelerants
Accelerants

In the next five years, these accelerants will speed adoption.

END USER DECISION ENABLERS FOR CHANGE

Lower cost of

technology

IT decision-maker now required for security solutions

Smart Card credential

convergence and ease of use

IT budget increasing; facilities budget not

Employee safety, asset protection and secure information are highest priorities for COO, CIO and CSO

More user friendly, plug-n-play components

Products simplified and cost effective for

1 to 10 door market

We are exiting an old market life cycle and entering a new one.

old market life cycle for mechanical security
Old Market Life Cycle for Mechanical Security

We are exiting an old market life cycle and entering a new one.

Signs of Late Maturity

Industry

Volume, $

Introduction

Growth Market

Maturity

Margins naturally decline over this period. The market volume is flat to declining as commodity prices are lowered and newer technologies are selling faster

Mature value added distributors resist new lines and new service, competing with those who change their model

—leaves relationships as the only differentiator

t

Transition to the right requires a lower supply chain cost structure. Manufacturer and channel economics must change!

Old Market Life Cycle of Mechanical Hardware has moved into late maturity…

Large security hardware distributors with excellent inventory and logistics expertise prevail.

new market life cycle for eac
New Market Life Cycle for EAC

What is ahead?

Maturity II

Growth

Intro

Maturity I

IndustrySales $

New Investments

Increased competition

Emerging

Channels

DIRECT

x

Broadline Distributor to Contractor

New Entrants

Old Market Life Cycle

Specialized

Integrator

Time

Security Dealers are evolving into Security Integrators; learning networks, wireless, PoE, etc.

Security Dealers and Computer Network dealers may partner before leaping into the business.

New entrants are coming in from other markets (IT, telecom, building controls).

Manufacturers introducing products at an alarming rate; looking for channel partners.

Points of significant transition

the emerging systems integrator channel
The Emerging Systems Integrator Channel
  • A systems integrator designs and installs solutions that cut across multiple technologies.
  • In the access control industry, these technologies include:
  • computer hardware and networks
  • video and CCTV hardware and software
  • access control hardware and software
  • traditional mechanical access products
  • Integrators are emerging from several sources:
  • video system dealers
  • security alarm dealers
  • tech savvy electrical contractors
  • computer network integrators
  • entrepreneurial distributors
distribution implications
Distribution Implications
  • This market shift should cause distributors to re-evaluate their overall business model.
    • Product mix
    • Customer mix
    • Support offering
    • One step vs. two step model
distribution implications today and tomorrow
Distribution Implications—Today and Tomorrow
  • What changes will this bring to the Contract Hardware Distributor’s business?

Do I shift my customer focus to include emerging systems integrators ?

Do I continue to focus only on the traditional customers?

Do I sell to both sets of customers?

Do I become a systems integrator?

Do I need to add new products, and software?

Do I need to change the support I offer—and the business model to help me do that?

If you decide to do none of the above, you’ll be competing with those who do!

future business models
Future Business Models
  • Future business models operate under new value propositions.

National Broadline Logistics Distributor

Regional Logistics Distributor

Bolt-on businesses (one step)

Regional Specialty Security Distributor

Door Hardware Distributor

future business models25
Future Business Models
  • Not all will survive the market changes of the future.

National Broadline Logistics Distributor

Mergers and acquisitions will formalize an entrepreneurial model visible today.

Regional Logistics Distributor

Bolt-on businesses (one step)

Specialty Security/Low voltage Distributor

Door Hardware Distributor

x

challenges for door hardware distributors
Challenges for Door Hardware Distributors
  • Manufacturers demand change  Pressure to invest
  • Competing channels are emerging Need to respond
  • Tepid economy. Not a typical recovery Risk is high
  • EAC is growing, but customers are cautious  Return is hazy
  • Sales/margins are down Less money available for investment
  • Employee EAC skills are lacking  Need a strategy
changing your business model strategy options

Return

Risk

Changing Your Business Model – Strategy Options
  • Even greater access to EAC bids/bus
  • Can see how integration business works
  • Cash
  • Play Golf
  • Access to some EAC bids/business
  • Greater access to EAC bids/bus

Formally partner with an EAC integrator

High (cont’d on next page)

Sell your company

Sub-contract EAC work

Train current employees

Low

  • Might not get much for the business
  • Golf can be frustrating
  • Not perceived as real EAC integrator
  • Poor choice of subcontractor
  • Cost
  • Lack of opportunity to use training
  • Training is poor
  • People are just not good fit
  • Poor choice of partner
  • Partner keeps the value-added margin
slide28

Return

Risk

Changing Your Business Model – Strategy Options

(Continued)

  • Complete access to EAC bids/bus
  • Perceived as true integrator
  • Internalize integration skills
  • Diversification and growth
  • Complete access to EAC bids/bus
  • Perceived as true integrator
  • Internalize integration skills
  • Diversification and growth
  • Even greater access to EAC bids/bus
  • Internalize integration skills
  • Diversification and growth

Hire new employees

Merge with an EAC integrator

Buy an EAC integrator

Low

High

(see previous page)

  • Cost, higher pay
  • Insufficient EAC volume
  • Economy remains down
  • Merger, personality problems
  • Ownership dilution
  • Insufficient EAC volume
  • Economy remains down
  • Overpay
  • Decrease cash
  • Integration problems
  • Insufficient EAC volume
  • Economy remains down
what is ahead29
What is Ahead?
  • The Top Ten Predictions for the Next Five Years
the top ten predictions for the next five years
The Top Ten Predictions for the Next Five Years
  • We will see a decline in the overall mechanical door hardware market as mechanical products become a smaller percentage of the door value
      • Electronic products will increase the value of the door, and mechanical hardware will continue to drop as a percentage
      • Unit numbers flatten, and within five years we’ll see a downward trend
        • Mechanical lock, cylinder and key systems could decline by as much as 10-15%, as old technology is replaced with new technology
      • A smaller market will support fewer traditional distributors
the top ten predictions for the next five years31
The Top Ten Predictions for the Next Five Years
  • Electronic access control (door access controls, surveillance, power supplies, locking devices, biometrics and security management software) will grow annually at a rate of 10-30%, depending on product category.
      • Wireless products, PoE push the technology capability and the ROI of having more intelligent openings—this part of the market will grow faster than the rest of EAC
the top ten predictions for the next five years32
The Top Ten Predictions for the Next Five Years
  • Public buildings, hospitals/clinics, educational sites and office security move to smart card solutions.
      • Applications have proliferated (controlling access to buildings, parking lots, file rooms, lab/pharmaceutical areas, supply closets, equipment rooms, cafeterias/other vending, libraries, computer areas)
      • Card solutions move from perimeter to interior doors
      • Dramatic drop in the number of keys in circulation
the top ten predictions for the next five years33
The Top Ten Predictions for the Next Five Years
  • The IT Department will be a key decision maker in a majority of future door security systems because of
      • The efficiency and effectiveness of controlling door access on a network
        • Provide programmable access
        • Create trackable entry logs
        • Tie in access control and camera surveillance systems

“In the future, there will be few door decisions made without an IT Director.”

Systems Integrator, Education Market

the top ten predictions for the next five years34
The Top Ten Predictions for the Next Five Years
  • Proprietary security solutions will lose share. Open systems and plug & play become a customer requirement.
      • Wireless products, PoE support the ROI of having more intelligent openings
      • Software applications running on standardized platforms grow the market by attracting more medium/small customers

“If it’s not plug and play, we don’t want to deal with it.”

Industry Expert Roundtable, ISC West 2010

the top ten predictions for the next five years35
The Top Ten Predictions for the Next Five Years
  • Systems integrators will be the dominant channel in this market.
      • Early on, manufacturers will want to deal with systems integrators directly
        • Certification programs will be required to stay up to date on changing technology
        • Technical support will be needed from the point of sale, through installation and ongoing maintenance
      • Later on, technology will mature and distributors will have a greater role
      • More integrators will buy from distributors over time
      • Distributors will need to adapt their support offering, so higher tech products can be added to their mix
the top ten predictions for the next five years36
The Top Ten Predictions for the Next Five Years
  • The General Contractor will have less control over the security decisions as systems integrators pick up these values, and get closer to the end user decision makers
      • Those GCs who are able to keep security/access control products in their bid will need help to successfully meet end user EAC requirements
the top ten predictions for the next five years37
The Top Ten Predictions for the Next Five Years
  • Distributors cannot dabble in security “technology” and hope for an upswing in new construction. Traditional distributor models who don’t adapt…
      • Will be running a business 25% smaller than it is today
      • Will be operating at roughly 20-22% gross margin
      • Will be forced to compete with other distributors who have packaged door security solutions
the top ten predictions for the next five years38
The Top Ten Predictions for the Next Five Years
  • Whether you participate fully or partially in this market, you’ll compete with distributors running a different business model with
      • Inventory as a key value
      • Investment in certification and product knowledge
      • Systems integrators and security dealers as customers
      • Visibility to new construction and retrofit business
      • Cost over both businesses, more efficient
the top ten predictions for the next five years39
The Top Ten Predictions for the Next Five Years
  • Successful distributors who commit to the EAC market will carry a full line of EAC products, and will obtain a large percent of revenue, and even higher percent of profit, from services to that market
      • Will have wired and wireless technology available
      • Will have certified employees who understand both security hardware and software
      • Will be drawing business from new construction and retrofit/upgrade projects
      • Will have a door shop, or have access to customized door shop services
      • May be offering design, installation, and inspection services from a separate division of the company
      • Will be operating at roughly 28-30% gross margin
conclusions
Conclusions
  • End users continue to get smarter, and eventually will get their way.
  • The market will continue to need efficient, knowledgeable door hardware distribution—with the ability to support converged products outside the door.
  • Competition will be harder to beat if you wait to get in.
conclusions41
Conclusions
  • There are three basic channel survival models that will keep you in business, regardless of the economical cycles experienced in new construction.
  • Access control specialist—door, security and low voltage
  • Inventory logistics specialist
  • Service specialists
      • Security integration consulting/design (with IT capability)
      • Video/alarm monitoring services (software as a service)
      • Door shop and custom hardware services
  • A business model focused solely on new construction commodities is subject to continual downsizing and diminishing margin.
key message for manufacturers
Key Message for Manufacturers

The “future” of IP enabled security products is already here. Successful manufacturers should…

Develop a three year launch plan for intelligent networked and/or wireless product lines

Communicate a progressive cannibalization strategy internally to your product management teams

Add software companies into your alliance “ecosystem”

Revenue and Profit

Create a channel strategy to add distribution for future launches of networked products

key message for manufacturers43
Based on evolution seen in other market life cycles, we believe manufacturers will see these issues arise in the near term. It requires proactive, strategic decision making.

Alliances and new partnerships “outside the door” will bring some channel conflict, not “like for like”

Marketing directly to systems integrators, and simultaneously through distributors, wholesalers and other broadline security channels will challenge today’s marketers

Key Message for Manufacturers
  • Must be managed proactively, but it’s unavoidable
  • The days of separate marketing systems for new construction and aftermarket may be ending
  • Your strategy must evolve with the systems integrator market. It will change over the next few years.
  • Distribution functions will always be needed. Evaluate the cost to market, and the value delivered
key message for distributors
Key Message for Distributors

There are four good reasons to rethink your firm’s position in the evolving security market

Increase participation in the growing systems integrator market

Prop up profit with a mix of integration support services for door hardware and access control

Create a stronger revenue stream that is recession proof and is not dependent on new construction

Participate in a profit stream outside the door

Become a credible source Train and certify employees in access control solutions

slide45
Anonymous quotes
  • “The security industry will continue to move forward without the hardware industry.”
contact information
Contact Information

Jeanne Fec is a Senior Principal at Frank Lynn & Associates. She has extensive experience in the door hardware market and has provided the research for this presentation.

  • Robert Segal is a Senior Principal at Frank Lynn & Associates and is the head of the Technology Practice.

Bob can be reached at:bobsegal@franklynn.com

312 558 4808 (office)

Jeanne can be reached at:jmfec@franklynn.com

312 558 4820 (office)