Evolving Technology & Costs: The New Paradigms in Monitoring

It isn’t surprising that many mass marketing organizations in our industry have shifted down and changed the way they do business. Nor is the reason obscure: giving away hundreds of dollars of alarm equipment as an incentive for new customers no longer makes sense in the face of the rapidly growing costs of subscriber acquisition.

The math is pretty easy. If your cost of acquisition is in the high 20’s, it’s well nigh impossible to make that work in a 36-month contract. Increasingly, acquisition programs charge more money upfront to offset their costs or higher monthly rates are stated. In some cases, a financing option is offered in addition to monthly monitoring.

There are myriad reasons why the cost of acquisition is more expensive, and it would be easy to say, “Isn’t everything?”. Unfortunately, there are very compelling reasons that are endemic to our industry, and they make it certain that a major change needs to be in the works.

Both wholesale monitoring and full-service centers have had to do their part in dealing with the compressed margins their dealers are facing, but in many markets, it has been a race to the bottom. Those with larger economies of scale, along with additional technology, have been successful in lowering prices and maintaining margins while continuing to provide good service.
Still, even those are teetering on the edge.

To be sure, additional competition, new players in the market, the higher costs of goods and more all affect the initial costs, but the two reasons that most drive the need for change are the higher costs of labor and the higher costs of technology — both the results of unrelenting causes.

Ironically, one cause is that the economy is doing very well. We can argue why, but we are nevertheless seeing unemployment at under 3% in most major markets. This, along with political pressures for states and the federal government to increase minimum wages to $15.00 an hour, is pushing not only the cost of labor but the cost of talent acquisition, not to mention benefit packages needed to retain talented workers. Compared to just a few years ago, it’s harder and significantly more expensive to keep good people on the front lines than ever before.

A second cause is a measure of our times: the major expense in monitoring center operations — the cost of technology. In that, there are three focal points that are strategically important in how the new paradigms in monitoring will evolve.

The first is the cost for items like servers, networks, storage systems, VM platforms, desktops and software licensing. For many companies, like Microsoft, there is a push to move various operations into Cloud environments, and that is underscored and accelerated by radically raising charges for on-premise equipment and software licensing, making it increasingly necessary to go to the Cloud.

Most large-scale monitoring operations are not in a position to do that, just yet. A good example is that the cost of MS SQL licensing has increased by an order of 10 over the last eight years. It’s not uncommon to spend five times the cost of hardware on software licensing for the same machine.

The second focal point in the cost of technology is the skyrocketing costs for network and data security. It wasn’t that long ago that a monitoring company could get by with a mediocre firewall and some antivirus software running on the PC’s. Now, an effective firewall costs hundreds of thousands of dollars and antivirus software is a thing of the past, replaced by end-point protection applications.

Add to that intrusion detection, ingress and egress network monitoring, log monitoring, encryption of data at rest and in transit, privacy rules, PII rules, and a whole host of regulatory requirements that need to be met or exceeded.

The third focal point (I hesitate to say, “the last”), and in my opinion the most expensive and hardest to do, is to attract, hire and manage all the specialized people who manage all this very complicated and costly infrastructure. No longer can a company just hire a really good IT generalist; every role in technology is now that of a specialist.

It takes six to eight specialists — now the equivalent of that one good generalist, and they all require anywhere from $100K to $180K, or more, to get them and keep them on staff. If that isn’t enough, they need to spend about 30% of their time getting trained on what’s coming so you can be ready for tomorrow.

What can we take from all this? What can be done? In short, there are going to be several new “paradigms” emerging all of which will impact the costs of monitoring, and in some ways, they are already in the works. As an industry, we need to consider them very carefully.

The first is that the concept of “all you can eat” for a flat rate is going to go away. Instead, central stations are all going to be looking at costs of labor for groups or types of accounts. Dealers that do a good job managing activity will be able to get favorable rates, while those that don’t are going to have to pay more. Many centers are now offering sliding scales in order to facilitate this type of pricing.

Secondly, the use of technology to supplement the labor used to monitor cannot be left on the table, and we must look for even more innovative ways to put it to use. One clear example of that is that 70% of outbound calls for most monitoring centers go to voicemail, leading to the possibility of nearly that many false dispatches. Obviously, if we are only 30% effective using that technology, we must ask ourselves why we would continue to do it, especially when SMS and push notifications are significantly more effective in delivering information.

Dealers are going to need to understand that technology must be leveraged in order to keep costs down, but it also can and should be used to increase effectiveness in getting emergency information to stakeholders as fast and as accurately as possible.

Lastly, size does matter. Monitoring services that exhibit economies of scale, where all the costs can be distributed across a larger number of accounts, make a lot of sense. Accordingly, what we are seeing in the marketplace is two things. For all the reasons already mentioned, many smaller central stations are looking to get out of the business completely and move the monitoring to a wholesale center. The stigma of not having your own center is long gone, and the cost of providing the service for a smaller center is many times the cost of letting a wholesale company do the work.

Similarly, we are seeing more and more medium-size organizations move towards a hosted central station platform, CSaaS (Central Station as a Service). In this model all the receivers, servers and applications are hosted by another organization, allowing the medium-sized organization to focus on the things they are used to managing, like operators, training and customer service, but without the high cost of maintaining the infrastructure. All of these options and methods are ways that alarm companies and monitoring companies can use to reduce costs.

This is an exciting time for the alarm industry, in general, but for those that pay attention to details, that are very concerned about the customer experience and are listening to what their customers need and want, it is especially so. Those are the organizations that will be very successful and will flourish as security becomes more and more a lifestyle.

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