Once again, our move to switch our blog “away” from monitoring and back to technology is being delayed by one more article – this time, an article from a distinguished industry guest, Lee Jones. When I started as an analyst in 1983, I asked who was the most respected consultant in the industry at the time to help me out. Lee, who still runs Support Services Group, was that person. He has sent me his new paper on the “Risk of Critical Failure in the Monitored Alarm Industry,” which focuses on his concern around the potential loss of police response and customer loyalty by today’s leading monitoring companies. These are critical issues facing the industry today and have implications for my blogs on Brinks, ADT and Stanley’s acquisition of Sonitrol. I know there will be many in the industry and some end users who will disagree with the severity of Lee’s comments (I don’t agree with everything), but the issues he brings up are critical to a wide range of executives, consultants, and investors in the industry. Below, with permission, we reproduce Lee’s provocative paper in its entirety.
Risk of Critical Failure in Monitored Alarm Industry
For the first time in over 50 years, the participants in monitored alarm security are at risk of “critical failure”. Very similar to the current sub-prime mortgage crises.
“Critical Failure” occurs when a failure causes other participants to be unable to complete their tasks in the expected manner.
The weakest link, or the “critical failure” in traditional alarm services, is public police response and customer loyalty. It is going away or already gone.
The critical failure in monitored alarm security is the customer expectation that “help” will come to the site when the alarm system calls for help (a/k/a burglar alarms or intrusion alarms). Security providers now know that “help” will NOT arrive in a timely manner for most of their paying customers. Millions of alarm users are paying for services not rendered.
The primary participants in an alarm system are:
- alarm user… the customer.
- sales and installation agent.
- monitoring source.
- billing & collection agent.
- contract owner/investor.
- warranty and service provider.
- private response.
- local police.
All of the listed participants could be coordinated from the same firm that is totally integrated, like ADT, or Brinks, or HMS, or Alarm Detection Systems. Or, because the alarm industry is still highly fragmented, eight or more independent firms could be involved. Some of the participants may not even be aware of each other. All participants are sharing the same $20-40 monthly fee for residential, or $25-100 monthly fee for commercial. Collectively we are an industry of 30 million monitored customers generating over $12 Billion recurring revenue annually… which is now at risk.
Not unlike the sub-prime mortgage market, alarm customers often cannot identify the participants. For example, (a real customer) had their system installed by Sterling Security, which was sold to Alarm Data, which was sold to Masada Corp, which was sold to Regent Corp, which was sold to InterCap, which was sold to Ameritech, which was sold to Cambridge, which was sold to Tyco/ADT. Most of the buyes had a different monitoring source with different monitoring software, and used a different source for billing and collection. Each of the alarm contract owners had a different set of investors. One of the firms in this chain securitized a big bundle of nameless alarm contracts, just like sub-prime mortgages. Another example is bunch of alarm customers that are within a chain of 10 different owners, ending with ProtectionOne/Quadrangle, which also included securitized
bundles of contracts.
A similar problem with alarm customer loyalty exists within the segment known as Third Party Monitoring “TPM”, a/k/a Wholesale Monitoring. We believe TPM is nearing the end of its business life cycle, as we know it today. Significant investment will be required to sustain its historical operational and financial values.
Here are just three of the risks:
· A critical part of the basic infrastructure of TPM is the ability to operate seamlessly across hundreds of municipalities. That standardization is going away, or already gone.
· A critical part of the basic infrastructure of TPM is emergency response to the site when cause of alarm in unknown. That customer expectation is going away, or already gone.
· A critical part of the basic infrastructure of TPM is that alarm users have absorbed financial responsibility for false alarms. A trend is moving toward the monitoring source, not the alarm user, absorbing that operational and financial responsibility.
The customer is paying for a $20-50 service that is outsourced to TPM for $3-8. The noted “risks” have removed most of the operational and financial benefits and resources of TPM. Severe pressure on customer loyalty includes false alarm fees. The $Billions collected by municipalities from alarm users/customers can be translated into a price increase for a reduction of service.
The alarm customer and the police, the two most critical segments of the infrastructure, have been brutally abused. We believe the alarm industry is losing the loyalty of both parties. Without the loyalty of the customer and the police, the entire infrastructure as we know it today, could collapse.
Without the long term loyalty of our customer, high churn is probable, and the market value of the contract (revenue stream) is at risk. Without the loyalty of the police (emergency response) high churn is probable and the market value of the contract is at risk.
The consequences to investors includes the specter of a legacy liability for deceptive business practices, or worse, consumer fraud.
Perspective of the police. Why they do not like us, nor trust us. After several decades of street experience and lots of documentation with alarm systems and alarm companies, the public sector has determined that calls from most alarm monitoring sources do not qualify for emergency police response, because nearly 100% are error. Most police departments have already lowered the priority from an “emergency status” to a “courtesy status”, which means the time of arrival could be 20 minutes to several hours, or not at all. Plus, the customer or the monitoring firm could be paying fines or fees for the call.
Many police departments believe traditional monitored alarm systems are already outdated, or obsolete, because site inspections are still necessary to determine IF an emergency exists, not because of an emergency. Nearly all calls from monitoring firms are nuisance calls for site inspections, not emergency calls.
We believe the alarm industry is experiencing the Kodak Syndrome. An industry leader, Kodak, spent decades of time and its fortunes defending their core business, rolled film, while outsiders developed the digital photography business. Kodak almost disappeared, however it recovered by adopting change rather than fighting it.
Fighting police departments by Alarm Associations has been counter-productive and highly destructive. Thousands of Association Members and their counterparts may have been mislead. For example, fighting against formal verified response simply forced wide scale “de facto verified response”, wherein police priority for calls from alarm companies is lowered to a courtesy site visit, or not at all. Or alternative Zero Tolerance programs are put in motion. Millions of alarm users are restricted from emergency police response. Alarm Associations have been a major contributor to the deterioration of police loyalty.
How does the alarm user get emergency response to their alarm system?
How does the monitoring source deliver emergency response to their customers?
How do the police interact with alarm users if alarm systems do not qualify for response?
Said differently, how do we restore the loyalty of the police and the customer?
Several suggestions:
- Inform your existing customer of their emergency response status in their community with your service. This disclosure can mitigate deceptive business practices (if no emergency response, or slow response, they need to know it). Seek guidance from your legal counsel.
- compare private response with local public response and offer that alternative to your customer.
- consider updating site and monitoring technologies that will remove the need for site inspections to determine the cause of alarm. The cost of several false alarms could offset the costs of the retrofit.
- consider trading your customer contracts for like contracts in a more favorable jurisdiction.
- reduce the expectations of some customers to a customer “notification” service.
- encourage Alarm Associations to support, not fight, local police departments in their efforts to practice Zero Tolerance for False Alarms, including Verified Response (VR simply provides public disclosure of a silent defacto VR program). Remember, the police do not need us, but we need them.
- develop a business model that will provide end-to-end responsibility for your customer security, without police intervention, unless a 911 type emergency is determined.
- (be creative, do it now) We all know there is a huge long term need for private security all over the globe. If you do not provide it, someone else will, like the Kodak Syndrome.
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Lee Jones, founder of Support Services Group, is a 35 year veteran of the alarm security industry. Depth of knowledge evolved from contributing to the problem via operating alarm companies and consulting with industry leaders of all sizes in strategic planning, mergers and acquisitions due diligence, market development. Now committed to the solution, Zero Tolerance For False Alarms. Lee can be reached at 949-361-3300 or leessg@att.net.