The last few weeks have highlighted the difficult position of the UK manned security industry. G4S reported further erosion of its margins in the UK, and aPlimsoll Report identified that 27 percent of the top 1000 Security companies in the UK made a loss last year. Both developments reinforce the views of industry leaders that current market trends in tenders may be economically unsustainable.
Security guards provide a valuable service, often acting as a key liaison with police
Both customers and suppliers play their part in driving these trends. Last yearMartin Gill’s Security Research Initiative highlighted the reduced influence of customers’ security managers compared to their procurement team colleagues. Not a surprise in a difficult economic market with shrinking demand, but surely suppliers will know their own limits? Perhaps not if they think they can go further with one of two options below.
The first option is reducing operating costs. Security has very transparent costs, but linking reductions to service quality is tricky. Quality is assured by officer motivation and expertise; however much technology you have, officers will always be needed somewhere to respond to unexpected events and needs.
Differentiation does not only come from electronics. Cost management plans tend to remove local management support; aggressively utilise tax schemes; and reduce officer benefits, development, and job security through staff turnover. These changes are not always evident to customers, and all can risk damaging the service quality in a way that is neither immediately visible, nor always easy to recover.
Long term, continuing cost reduction will remove specialist infrastructure and damage suppliers’ capability. Suppliers will change from security specialists to regulated agency labour, contract, and cost management specialists. The industry could become less able to demonstrate professionalism, add value to customers’ enterprises through “solutions,” and support protection of the public on the occasions when it is really needed.
Manned security provided at cost
The second option is to accept reduced margins at tender with pricing based on direct costs. Suppliers are then accepting marginal profitability they expect to develop through future cost-reduction sharing; price increase plans; or other services and technology. Some suppliers have apparently stated that they could even see manned security provided at cost. This would set benchmarks that prevent the industry ever properly recovering its officer management overheads.
To examine whether this might be the case, I reviewed the recent accounts of the main security service providers, and their parent companies, with a focus on their “general administrative” or indirect costs. These costs ranged from 6 to 11 percent, generally skewed to the upper end. Based on this, known tender awards of recent months would appear to have been accepted at margins that are at the limit of what is independently sustainable in the long term.
Low margins, high risk
Manned security is a market where margins are both transparent and low, yet the risk of a service failure that affects a customer’s business can be high. A 0.5 percent cost reduction to the customer can equate to the loss of 25 to 50 percent of a suppliers’ profitability. This could deliver limited customer benefit and an un-motivated supplier.
Pressing slender margins further, with payment terms extending, encourages the perception that security is a service that is commoditized and unvalued by some customers. This is not a direction in which our industry can afford to move.
The experts understand these risks, but remembering the SRI study, do they have a voice if the finance director, faced with budget pressure, is led by benchmark studies from procurement consultants?
So, what should we do? Perhaps IFSEC Global can facilitate comments and views on whether current tenders and benchmarks for the “most economically advantageous” security service are sustainable? Most of all, is the industry permanently damaging itself trying to answer the procurement question, “What price security?” and if so, how do we now move the debate to the more important question, “What value security?” with the scope to deliver it.