At the risk of being labelled a Grumpy Old Man myself, it must be said that trying to piece together three or even five-year plans for clients is becoming hugely difficult in the face of regulation – as devised both by the Security Industry Authority (SIA) and other areas of Government – which is becoming more and more bureaucratic. Trying to make commercial sense of the changes projected to happen in our industry is every bit as difficult. Let me explain why.
Speaking at 'The Coming of Age of Contract Manned Guarding', The Security Watchdog's annual Client Consortium Seminar held in October at Farnham Castle, SIA chief executive John Saunders and David Dickinson – chief executive of the British Security Industry Association (BSIA) – made several points relating directly to my concerns surrounding the commercial aspects of regulation.
John said that: "Commercial considerations are critical and fundamental". He also suggested: "There needs to be a change in the mindset of buyers", while stating: "£30 million per annum will be needed from industry to support regulation measures."
For his part, David Dickinson stated: "I hope customers will recognise value and not price."
David also opined: "Who will pay [for regulation]? I think everyone will pay". He also commented: "It's impossible to say what price increases there'll be."
Bear all of these comments in mind.
What is 'business' all about?
Before examining the difficulties faced by practitioners in the contract guarding sector, it would seem opportune to review what 'business' is all about. Business is about supplying a product or service which meets the demands of the customer. We must place an emphasis on the word 'demands' because I see little – if any – demand from the customer with respect to the changes now upon us.
Business is also about making a profit. I don't feel ashamed in saying so, either. This is an industry in which it's notoriously difficult to make any decent profits, and yet the changes being proposed seem set to absorb what little profit there is. Manned security web site Infologue.com and market analyst Plimsoll report that the Top 20 security companies in the UK make a modest 0.91% profit at present. Of the 213 companies surveyed by Plimsoll, the average annual profit was 1%. 64 of the company directors questioned said their firms actually run at a loss.
These are slim margins indeed, and take me back to John and David's words at The Security Watchdog event. You can see my concern when it comes to planning for the future and making a profit. I'm not certain, but I suspect that if you were to add up the total profit of the industry you might have trouble meeting the annual costs of running regulation.
Questions are seemingly being posed by our political masters concerning what our business is about. "Is manned security in the future less about meeting customers' demands and more about supplying a service determined by Government regulation?"... "Is it (ie manned security) for the good of the community?" Note how profit has been replaced by "for the good of the community".
I don't know how many of Security Management Today's (SMT) readers were in attendance at the BSIA's annual general meeting this year when, in his opening address, Richard Childs – then chief constable of Lincolnshire Police – suggested that manned security companies should focus less on making a profit and more on what they could do for the wider community as a whole. This, I believe, is indicative of how those in positions of authority and influence think that the commercial arm of the extended police family should operate.
Make no mistake about it. This is dangerous stuff. Customers are already feeling distinctly edgy about the future, and without any profit there will be no industry.
Looking back on margins
In order to determine what that future might be, we need to look back at the history of contract security services provision. I came into the industry in the early 1980s. I can hardly believe it – and still have to pinch myself – that average margins for security companies back then were in the region of 32%.
Average margins for security companies run at around 16%. Indeed, some new business margins are coming in at under 10%. Companies are having to run leaner and leaner operations. Margins cannot fall much lower without the service itself falling over
Did that mean security companies were making excessive profits? Well, no, they weren't. In the 1980s, security contractors had training managers, Health and Safety managers and risk managers who wrote assignment instructions. They also boasted a high ratio of managers and supervisors to officers.
Take a look at the situation pertaining in 2003 and it's rather different. Average margins for security companies run at around 16%. Indeed, some new business margins are coming in at under 10%. Companies are having to run leaner and leaner operations. Margins cannot fall much lower without the service itself falling over.
That poses the question of whether or not service to the client has improved over the past two decades. I recently attended a meeting with representatives from one of the large Scottish banks, who said they felt an 11% margin was a good margin. Customers have certainly benefited from lower prices, that's for sure.
If we concentrate on profit aspirations, it's not unreasonable for guarding companies to expect a 3% profit margin, and to achieve this on the back of central costs totalling, say, 5% and operating costs of 6-7%. It's against this background of falling margins and increasing customer expectation that one could say the customer is indeed enjoying bargain prices. However, it's also a situation in which there's little investment in future service.
When it comes to drawing-up their three-year plans, security companies are struggling to meet shareholder expectations because of low margins. Then they also have to face up to the effects of industry regulation, the Approved Contractor Scheme, the Working Time Directive, the National Minimum Wage, the two-tier workforce ('Shedding a tier', SMT, October 2003, pp39-40), employers' National Insurance and employers' pension contributions.
And let's not forget the extension of the Race Relations Act, legislation concerning age, sex, disability, sexual diversity and religious beliefs, the European Consultation Directive and the European Code of Conduct.
Is it any wonder, then, that with all of this legislation and regulation – much of which, it could be argued, adds no value to the security service in the customer's eyes – security companies are experiencing grave problems in planning and costing for the future?
Change: the only way forward?
We are constantly being told to embrace change. Change, they say, is the only way forward, and yet some of those individuals driving this change have naively asked of the security companies: "Who will be paying for all of this?" The chief executives, chairmen and managing directors of guarding companies can only listen in disbelief at such a poser. "The customer will be paying. Who else?" retort the contractors. But will they be willing to pay? That's the crux of the matter.
To those of us who pushed for regulation of the private security industry there is now something of an embarrassed silence. How many years' profits does the cost of all this legislation represent? We didn't ask for what's now being proposed. We asked for access to criminal records in order to help improve the screening and licensing of security companies – not individuals – as a cost-effective and simple way of regulating the sector. The police service appears to have swayed political opinion towards individuals, perhaps because the only individuals whom they've come across are door supervisors and wheel clampers.
On a personal level, I'm not aware of any demand from customers for the licensing of individual security operatives. In fact, the industry prefers its own BS 7858 as the standard for checking on individuals. The C-R-E check was but the icing on the cake. What we now seem to be faced with is a cumbersome, expensive juggernaut which is going to tell Mr Customer what he should purchase.
The aforementioned door supervisors and wheel clampers come first in the SIA's licensing strand, of course. The worrying thing is the fact that there's already talk in the security industry trade press of "organised non-compliance". Believe it or not, enforcement of the Private Security Industry Act 2001 is going to rely upon one company 'whistle blowing' on another!
Licensing of private security officers is scheduled to commence in 2005. Not far away when you're trying to cost for the eventuality. Start dates slip and costs inevitably have a habit of increasing.
Change, they say, is the only way forward, and yet some of those individuals driving this change have naively asked of the security companies: ‘Who will be paying for all this?’ The chief executives, chairmen and managing directors of guarding companies c
Of great concern to many in the industry is the fact that in-house teams haven't been included in the legislation, and although there's now talk of them being encompassed by the SIA's regulatory regime we can only be sure on the day the Act is physically amended.
If in-house teams continue to be excluded then the effects on the industry could well be devastating. We should not underestimate the strength of feeling of some in-house companies opposed to amending the Act because they perceive licensing of their staff to be an interference in their business.
A definition of 'security'
Back in the early 1990s, I chaired a Home Office Working Group which was looking at the regulation of safe deposits. The Group had been raised following the infamous robbery at the Knightsbridge safe deposit which had in fact been organised by one Mr Latif – its owner. I felt that the first thing we had to define in the report was: "What is a safe deposit?" Easy enough, you'd think, but is it? It was, in truth, an incredibly difficult task.
There is nothing to stop you going out and renting an ex-Chemist's outlet in your town, painting the shop windows black, sign writing "Safe Deposit" on those windows and then accepting customers' deposits. Storing them, if you so desire, in old shoe boxes on a row of shelves. That's why I knew how difficult regulation of the private security industry would be when it came to defining the term 'security'. This is going to be one of the most difficult and contentious areas for the regulator. One person's security officer is another's customer care representative.
And ask yourself these questions. When does a receptionist become a security receptionist? What proportion of an individual's duties must be 'security'-related before they require a licence? If it's 50%, who is going to prove whether or not they're at that level? It's little short of a regulatory nightmare. How much easier it would have been for the SIA to licence security companies. How on earth can we, the contractors, plan for any of this when dates move, charges increase and phasing structures aren't known?
Working to the current SIA timetable and estimated costs, we at Legion Security have deduced that the cost of licensing and training our 1,400-strong workforce will top £500,000. How is that cost to be met? Can it be reduced by phasing, etc?
Those of you who were present at the launch of the SIA last April ('From aspiration springs reality', SMT, May 2003, pp20-26) will recall the words of Thomas Berglund, chief executive at Securitas, when he suggested that licensing and its benefits would take "half a generation" – ie ten years – for its benefits to be realised. That is very probably the truth of the matter, and yet we're having to work to a much faster timetable than that. Driven, one suspects, by the Treasury wanting the SIA to be self-financing as soon as possible.
Details of the Approved Contractors Scheme will be published next year. The BSIA's own scheme will 'shadow' that of the SIA. Estimated costs for this scheme are in the region of £400-£500 per head. The Home Office consultation document on the scheme is out for comment at the moment.
Working times under revision
Then there's the Working Time Directive. We're told that any changes brought about by this legislation are unlikely before the close of 2005. We, like many other security companies, have been preparing customers for this for the past two years. All of our customers are offered alternative quotes, and we really do try to sell the 48-hour week. We have had some take-up, but contrary to what you might have read in certain sections of the security trade press the majority of clients don't want to know about the Working Time Directive 'until it happens'.
Many clients will undoubtedly look at returning to in-house security because of the substantial increase in costs. It's likely that, if the derogation on the Directive is lifted, then security companies can look at losing all contracts under a 168. That could amount to anything up to 20% of a company's portfolio. Undoubtedly, cutbacks on the management side will then have to be made.
We all recognise that removal of the derogation will lead to an increase in security systems usage, with a good many security companies already investing in monitoring sidelines. These systems will, of course, be installed by staff for whom licensing isn't required as yet! And then there's the National Minimum Wage, which is likely to increase to £5.00 next year. It's likely to rise again in 2005 and 2006. The National Minimum Wage has now become something of a political tool, one for which there's no evidence of a ceiling having been set. The difficulty facing security companies – in particular those with employees in the north – centres on their ability to plan figures for this into customers' budgets. It's surprising how difficult it is to ask customers to fund the increase. Surprisingly, the biggest difficulties we face are with Government agencies!
Pensions: what's the point?
A recent Government report has shown that if your pension fund is below £180,000, then you're better off not having any pension fund at all. Proposed contributions for security officers will never reach this level. So, really, what's the point?
At the 2003 Security Excellence Awards, SIA chairman Molly Meacher said in her opening address: "For those companies embracing change, there will probably be a bright future". Molly, we're not in the business of 'probably'. We want to be in the business of innovation, competition and profitability.
Source
SMT
Postscript
David Evans is managing director of Legion Security plc
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