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 • Top Ten Predictions for the Next Five Years • Conclusions • Key Messages for Distributors and Manufacturers
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 • 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 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!
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 Situation • Why is the market changing? • Heightened security concerns • Advanced digital technology available across products • Falling product costs • Easier implementation
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!
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 accelerate convergence— and will change what opens the door. New technologies work across systems and vendors Older technologies provided proprietary solutions
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 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 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 • 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? • 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?
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 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 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 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 • 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 • 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 • 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 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 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 • 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
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
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 Ahead? • 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 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 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 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 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 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 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 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 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 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 • 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.
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 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
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 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
Anonymous quotes • “The security industry will continue to move forward without the hardware industry.”
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:email@example.com 312 558 4808 (office) Jeanne can be reached at:firstname.lastname@example.org 312 558 4820 (office)