Alas the economic woes of the financial crises starting 9/15/08 with the Lehman bankruptcy and other financial blues has now negatively impacted the security market. I frequently contact my peers inside and outside the industry to get a pulse on their niches in the security market. At ASIS Annual Seminar (Sept 08), there was concern particularly among the smaller vendors, but suppliers and large contractors exclaimed that they were not seeing any softening, and I thought this odd. Well, if they felt good in early September, by late October a near chorus of pain was being experienced by all within the industry.
The credit markets have severely impacted client availability of capital, and fear and unexpected economic climate has suspended all but essential or regulated business. This sentiment was expressed in Scott Goldfine's recent blog on ISC East where he wrote, "Although the attendance was reasonably robust, the atmosphere was largely one of trepidation with the prevailing discussions centering on slumping sales, the bleak economy and an unsure fiscal outlook. The vast majority of industry professionals, particularly on the supplier side or among the larger installation operators, are cutting back expenses wherever possible and hunkering down to weather a widespread downturn in business. Most are trying to remain optimistic, but the historically recession resistant electronic security industry is experiencing one of the most challenging periods ever." Note Scott is the Editor of Security Sales and Integration, an important and leading security industry sales and systems integration tracking publication.
In my own security consulting practice at Sikyur LLC, 2008 started out with a boom, with record sales and revenue for the first half-year, however from October onwards the only sounds heard were the screeching wheels grinding to a halt from the coming train wreck. How did this happen, well gradually, then suddenly. Here’s some advice on how to position yourself to survive the long cold winter, and a play by play of actions taken in my own business so that others might see the same trends in their own businesses, and take heed if they desire. Not everyone needs to step in a pot hole to know that it is there.
First, you have got to preserve capital and make liquid and accessible your assets and business lines going into this financial storm. It is unwise to count on business credit lines or credit cards to tide one over as banks are reducing lines unilaterally. Credit is no safe haven, cash is however. My advice is to put away or make accessible sufficient cash or financings to provide up to 9-12 months of free cash flow and capital to operate if no additional dime comes into your business for the next several quarters.
Second, beyond economic uncertainty is macro political economic policy uncertainty, and this may have greater impact on the markets. Prepare for change, study out likely market changes, and move your ground to let the market come to you (if you can). Consider for a moment what is happening in the world right now -- the US government is in flux, a new President and Congress comes to town in January, an historic Bretton Woods type meeting to be held later this week, a new US Treasury Secretary to be announced and financial team put in place, a change of guard for Congress and its committees, and tremendous jockeying for position in the new political climate -- all this while the world experiences a 100-year economic shock.
Third, be nimble, flexible, and be prepared to change your business plan if your "cheese" gets moved. What worked for 2008 Q1 and Q2 is not working now, so don't focus on what is not working, but instead re-invent, prepare for the new market opportunities, and the market will come to you. There is still plenty of security systems buying in regulated business such as utilities and energy, critical infrastructure including chemical and hazmat protection, and the classical businesses that do well in a recession environment. Further in this environment businesses that offer compelling cost savings such as recurring revenue models such as remote video monitoring, SaaS models for access control, building controls, and surveillance will do well.
Fourth, retool your skill sets in the quiet time. Typically when recessions hit, graduate schools become flooded with applications. While graduate school is certainly important and necessary for some fields, more focused certifications and specialized training will get you further along the career path. In the security profession there are several certifications that will leave you prepared for the new challenges. For those considering preparation for Chief Security Officer (CSO) in the future career, consider getting your CPP, CISSP, CFE or other project management certifications. If you have one, consider getting a second as in an competitive environment the highly skilled have the greatest opportunities provided to them.
Fifth, use your new found time to find ways to contribute to your family, church, or community in your skill set area. If I am correct about this economic downturn, we are about to witness a crime wave of great proportions not seen on this planet in decades. What will be a cold winter may thaw into a tremendous warm climate and tsunami of crime if economic misery becomes too great, if unemployment becomes too widespread, indeed if the rule of law is suspended by rational Robin Hoods that value eating more than rule abiding, and then there are those other hoods that just take advantage of the poor, the weak, and crime opportunity wherever it may be found. Your skills as a security professional will be highly sought after the cold season thaws.
So there is my advice. Now on background a little history of how I have come to these conclusions given the experience of the market and my own firm, Sikyur LLC, a security consulting firm that advises Chief Security Officers (CSOs) and their direct reports, other C-level executives and boards of directors.
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Going into 2008 security consulting for Sikyur was excellent and times were good, very good, indeed I turned away work, and I had the luxury of choosing to be picky about what I worked on, and with whom. January, February, and March rolled in like a lion. Indeed, I made my year in the first four months.
However, in late April, I first noticed the economic wheels of the wagon coming off during the 3rd week of April 2008, when due to unexpectedly higher oil prices, one of my customers that runs a nationwide carrier service found that their marginal delivery costs rapidly outpaced their fee structure resulting in unexpected short-term losses -- and you guessed it, management responded quickly to eliminate all non-essential spending (including the remainder 2008-2009 security training and technical assistance) provided by my firm. One client experience while interesting does not make a trend, however it would not be long before another wheel came off the wagon.
In early May 2008, another security systems integration client, from a different industry, found their borrowing and bonding costs had greatly increased and they suspended indefinitely the remainder of the scheduled project starts for 2008 and 2009. There was some hope by management that new projects would be released for Q4 2008, however this public entity failed to raise capital in their tax-free bond financing market in September 2008, causing them to severely pull back on their spending gauge. By October 2008 they were closing all the hatches and preparing for a cold winter with little access to public finance as the bond investors are worried that the municipal authority bonds may default due to decreased housing prices, decreased tax collections, etc.
So what was a mere erosion of economic opportunity in May, turned to Black October where public funding for municipalities was in jeopardy, and clients are now concerned for their own self employment, and they have little time or interest in preserving their contract work in this environment. Now in mid November 2008, the majority of my pipeline projects scheduled for Q4 are frozen, or suspended indefinitely. Several projects that were already approved by line management, still await CFO and board approvals are languishing, and I do not expect these jobs to unfreeze until mid-Winter or Spring. There is still some economic activity, but it pales in comparison to last earlier periods.
So what is my outlook and response -- many years ago I was a young entrepreneur of a rapidly growing company and I was invited to visit the Kauffman Foundation in Kansas City to attend a forum for high-growth companies and entrepreneurs. During the multi-day meeting I had an opportunity to meet with peers and top executives from leading companies that took time to review our business plans and advise us personally. It happened that my two business advisors at the meeting were the Entrepreneurship program director and Foundation Chairman. What I learned has stayed with me to this day. The lesson was this -- every company, business, organization, family, individual -- will experience market cycles, and it is important that you act in good times to preserve capital to give yourself 9-12 months of free cash flow and capital access, so that when truly bad times hit you can ride them out. An example was then given by the Kauffman Executive Director, who was the former CFO of Kauffman Labs. He explained that Kauffman Labs was originally operated with very little debt, owning outright their buildings. Looking at their risk posture, the Kauffman CFO decided that the company needed better protection from downside risk and greater liquidity – so he convinced management to sell their corporate buildings and he leased the buildings back, placing 12-18 months of cash on their books. Sure enough, in a few seasons a recession hit, and damaged their operating market greatly, and because of their strong cash position, they were able to ride the storm out as few recessions last longer than 9-12 months. As fate would have it, a severe economic downturn did occur, they rode out the storm and with their cash they were able to purchase for pennies on the dollar their nearest competitor that was insufficiently capitalized during this period. What was my take away -- cash remains king, credit can contract (by banks at will), but cash and available capital can help you ride out nearly any storm. At the time, I had only 2-months of cash on hand in my operating business and the amount of cash they felt I needed was staggering. They were right, and I moved my ground, reorganized my basket of assets to have access to cash in the bank for time of need.
So today, while the market looks darkest as we are still in the storm, and it may get worse, I have the comfort of knowing that I am prepared and I have ready cash flow and capital to whether 12 months of bad economic cycle. Now I firmly believe that the security systems integration market will come back by the mid- Spring 2009 or early summer as either public spending, regulation, or crime opportunity will encourage reinvestment in security technologies. But for now, it looks like a long cold winter. So I am following my own advice related above, and looking forward to writing a book or two, and using my seasons Ski pass this winter. Cheers.
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