Like many others, the security industry faced setbacks on multiple fronts in 2021. Supply chain disruptions led to delays in procuring necessary materials, while companies spent more on truck rolls and equipment as the 3G sunset deadline approached. Labor costs were higher as well, with security companies increasing hours as they replaced 3G radios across their portfolios.
The cost of labor was impacted by rising wages as companies jockeyed to retain workers, particularly highly skilled technical staff. Challenges around labor weren’t limited to pay. Many companies grappled with scheduling as workers became unavailable for various reasons, such as regional COVID-19 waves.
Surging inflation also hurt companies’ bottom lines in 2021, as prices skyrocketed on everything from insurance and rent to suppliers and gas. In response, security firms made tough decisions throughout the past year as they adopted a “COVID-19 expense discipline,” attempting to right-size expenses and trim excess spending. This mindset, which began with the onset of the pandemic in early 2020, carried many companies through 2021 and persisted into 2022.
The good news is that these challenges appear to be easing somewhat as we head into the second quarter of 2022. Security companies hope to reduce their backlogs as the supply chain is restored and as equipment becomes available or companies find suitable substitute equipment. A reduction in COVID-19 case counts is also making scheduling projects easier as more workers return to the field.
Many security companies are experiencing increasingly robust sales pipelines, a result of pent-up demand from commercial customers eager to restart projects they paused during the pandemic. It’s an encouraging sign for firms seeking growth in recurring monthly revenues (RMRs). Additionally, price increases could be significant drivers for growth of RMRs in the coming months, particularly for those companies that choose to pass along their higher costs to the customer. Increasing prices across all recurring services, installations, time and material services, and projects is a solid way to protect margins. As a result, security companies can likely expect higher average RMRs per customer. However, its impact on margins will be dependent on whether the price increase outpaces expenses. The alternative for companies who decide not to raise prices is to see their margins erode, which ultimately leads to lower valuations.
While the COVID-19 expense discipline mindset helped companies endure the challenges of the past 2 years, it’s time for the security industry to look ahead to new opportunities for growth. As expenses rise, security companies must focus on growing revenues to maintain margins and cash flow. Companies that can continue to grow their businesses and RMRs, with a focus on maintaining margin and expense discipline, will end the year with stronger cash flow and valuation metrics than companies that do not. Investing in sustainable sales created at a reasonable creation cost — along with disciplined acquisitions that include sales teams or new services to augment existing services — may be the secret ingredient to higher RMR growth this year.
Contributed by Jennifer Holloway, managing director and market lead, Security Industry Group at CIBC, U.S., a North American bank that provides tailored commercial, wealth management, personal, and small-business financial solutions, as well as cross-border banking services, to clients. Contact her at jennifer.holloway@cibc.com Opens your email app.. Or you can call 312-564-3827 Opens your phone app..
