Industry Corner: Private Contractual Security Services: The U.S. Market and Industry
Bailin, Paul S., Cort, Stanton G., Business Economics
The private contractual security services industry encompasses investigating, monitoring, armored transport, consulting, data security, and private correctional facility services. Corporations, institutions and private individuals are increasingly looking to these services to fill the void left by public and proprietary security. Growth is likely to be higher in nontraditional regions and nontraditional services that are outside the major metropolitan areas and in "new" areas such as counter-industrial espionage. The $18 billion industry will see dynamic change as large players diversify and new large players enter. Contractual guard services, private "police" services, and private correctional facility management are key growth sectors.
The "private contractual security services" industry encompasses guard and private investigative services, central-station alarm monitoring, armored car transport and ATM servicing, security consulting and data security, and private correctional facility management services. Niche markets also exist for a wide range of specialized security services, including: bomb sweeping and metal detection; drug testing; preemployment screening; renting of off-site secure vaults; radon and hazardous gas testing; and guard dog services. Corporations, institutions and private individuals are increasingly looking to the protective services to fill the void left by public and private "proprietary" security. Perhaps more than any other single factor, rising crime incidence has torn at the fabric of American life during the past several decades. Yet, in spite of the resulting public outcry, municipal police departments find themselves chronically lacking the funding and manpower needed to deter effectively and solve crimes. At the same time, a wave of corporate downsizing has left firms with fewer resources to maintain their own "proprietary" security personnel.
The potential for and occurrence of crime are the principal determinants of demand for security products and services. Actual crime rates, in turn, reflect a myriad of socioeconomic and demographic factors, including population size and density, urbanization, unemployment, age and gender distribution patterns, and racial and ethnic composition. The public perception of criminal activity, however, is of equal importance. That perception is formed largely by the news media where pervasive coverage of crime, especially violent crime, has led to rising public fears even as actual crime levels have subsided modestly in the United States since 1992.
More complex is the relationship between crime, private security demand and macroeconomic trends. Periods of economic stagnation tend to expand the ranks of the jobless and urban poor; despair can lead to crime. Yet recessions also leave profit-squeezed corporations with fewer resources to invest in private security measures aimed at preventing such crime. However, a healthy economy creates additional wealth, increasing both the need for and the means to purchase security services, while simultaneously reducing the number of disenchanted individuals most likely to commit crimes.
In any event, as companies increasingly opt to outsource their security operations and society in general loses faith in the ability of the police to provide adequate protection, private protection activity increases. Commercial and residential private protection businesses currently employ 2.5 times as many people as public law enforcement agencies. In this context, the prospects for the private contractual security industry will remain quite favorable.
The 1995 combined demand for private contractual security services in the United States is estimated at nearly $18 billion. Table 1 shows that the overall outlook for the industry is attractive. Total security service revenues will expand at 7.9 percent annually to $26 billion by the year 2000. In spite of the industry's general maturity, pockets of above-average growth potential, primarily in relatively new service markets, continue to exist throughout the security services spectrum. These include: security consulting, propelled by midsized and smaller organizations instituting more formalized security programs; the private management of correctional facilities, a field which has blossomed in the past decade as government agencies strive to cut costs and inefficiency while appearing to be tough on crime; and certain miscellaneous services (e.g., drug and alcohol testing, executive protection, data security) addressing nontraditional security concerns that are becoming more prevalent in society.
Table 1 Aggregate Demand for Private Contractual Services, 1989-2005 (in millions of dollars) Item 1989 1994 2000e 2005e Business Services Revenues (bils $) 249.0 350.0 540.0 760.0 % Security 4.70 4.73 4.83 4.84 Security Services Revenues 11708 16550 26100 36750 Guard & Investigative 7665 10930 16835 23350 Alarm Monitoring 2797 3660 5720 7825 Armored Car Transport 695 905 1230 1525 Security Consulting 395 620 1050 1550 Other Security Services 156 435 1265 2500 % Annual Growth 1989 1994 Item -94 -2000 Business Services 7.0 7.5 Revenues (bils $) -- -- % Security Security Services Revenues 7.2 7.9 Guard & Investigative 7.4 7.5 Alarm Monitoring 5.5 7.7 Armored Car Transport 5.4 5.2 Security Consulting 9.4 9.2 Other Security Services 22.8 19.5
Source: The Freedonia Group, Cleveland, OH, 1995. Note: e = estimate (projection)
Regional markets for private security products and services are influenced by the interplay of three major forces: local demographics and socioeconomic conditions; the history and threat of crime in a given area; and the existence and maturity of a local private security industry. Above-average growth is expected in the "Sunbelt" regions of the South and West throughout the 1990s and into the next century, especially the South Atlantic, Mountain and Pacific states. These subregions exhibit healthy secular growth in population and economic activity and possess underdeveloped private security industry infrastructures (in terms of quantitative measures such as spending per capita). They also report crime rates above the national average. The more mature markets of the "Frostbelt" states of the East and Midwest, where population outmigration is more in evidence, will lag the national average.
Most demand for security services is concentrated in metropolitan areas, where the largest population bases and highest crime rates are found. New York, Los Angeles and Chicago, the nation's three largest urban areas, are also the largest private security service markets. Because vendor proximity to users is a paramount consideration in many private contractual security market segments, the security services industry is more urban-centered than most business service industries. As a group, however, the large metropolitan areas will exhibit below-average growth in security services revenues.
In the future, vendors will target nonmajor metropolitan markets to a greater extent. Technological advances in service delivery, including products, communications capabilities and security service management techniques are making it more economical to service less densely populated areas. Moreover, vendors are well aware of continued demographic shifts away from large cities, the relative maturity of most metropolitan area security services markets, and rising crime rates in previously insulated rural and suburban areas.
END USE SEGMENTS
Historically, virtually all sectors of the economy have comprised growth markets for security services, as the incidence and awareness of security breaches and associated losses have risen sharply. The rate of traditional violent and property crimes, however, appears to have stabilized, at least for the short term. In contrast, rapid growth is experienced in the number of incidents, degree of loss and level of criminal sophistication of such so called "new crimes" as computer hacking, industrial espionage and terrorism. These increased risks are spurring demand for security services in virtually every user sector. Information security service firms ranging from "hackers for hire" to loss recovery experts will enjoy skyrocketing demand from customers, ranging from private residences to the largest corporations and organizations.
Through the mid and latter 1990s, the best opportunities for security services firms will be found in sectors whose markets are less developed, or which are facing a disproportionate degree of unconventional security threats or persistently high loss levels. Thus, of the end-use market segments the residential (7 percent of the $16.6 billion total) and institutional sectors (13 percent) each hold substantial potential as security service markets, given a comparatively low existing degree of penetration and rising security needs. The transportation sector, especially airports, (8 percent) will also provide growth opportunities as government agencies allocate additional resources for construction and counterterrorism, while simultaneously moving toward the privatization of security operations. In the vast industrial (33 percent)and trade (16 percent) sectors, by contrast, security services will face functional competition from sophisticated new security hardware, such as biometric access controls and electronic article surveillance systems. The firms which prosper in these markets will be those best able to exploit the possibilities for human/technology symbiosis. Business (8 percent) and financial service (15 percent) comprise the remaining areas.
INDUSTRY SIZE, STRUCTURE AND DYNAMICS
Over 9,000 firms are engaged in the provision of security services in the United States, with guard and alarm monitoring firms among the most common. As in other service industries, the highly localized nature of many security operations creates significant niche opportunities for smaller players. Security services also tend to be personnel-intensive, minimizing the barriers to entry in most market segments. The primary exception is armored car transport, where firms wishing to enter the industry must contend with heavy up-front investment requirements for armored vehicles, high insurance costs, and the presence of dominant market leaders such as Brink's and Wells Fargo Armored.
In spite of the vast number of firms engaged in the provision of security services, the U.S. market is relatively concentrated in several areas; Table 2 shows some examples. These current players and some new entrants pose serious challenges to smaller firms. Large, diversified concerns such as Borg-Warner bring vast financial, technological and marketing resources to the industry. They can leverage them into dominant positions in many markets. In 1994, the five leading firms jointly accounted for one-fourth of the U.S. market. Borg-Warner held a 10 percent market share, Pinkerton a 5 percent share, Wackenhut a 4.5 percent share, ADT a 2.8 percent share, and Pittston a 2.6 percent share. Only ADT restricts its operations primarily to one security service market segment (i.e., alarm monitoring).
As security problems become more complex and opportunities in traditional activities (especially uniformed guards and armored car transport) diminish, larger vendors with the requisite resources will become, in effect, "security service boutiques" by expanding into related but less conventional business segments like information security or terrorism security. Firms such as Pinkerton's and Wackenhut can be fairly categorized as having achieved such status.
Table 2 Industry Leaders Within Selected Security Service Segments Category Firms Guard/Investigative Borg-Warner (via Burns, Wells Fargo & Globe Pinkerton's Wackenhut Alarm Monitoring ADT Honeywell Borg-Warner (via Wells Fargo & Pony Express) National Guardian Armored Car Transport Brink's (Pittston) Wells Fargo (Borg-Warner) Prison Management Corrections Corp. of America Wackenhut
Source: The Freedonia Group, Cleveland, OH, 1995.
Moreover, recent deregulation of the Regional Bell Operating Companies (RBOCs) poses a serious threat to scores of small, regional alarm monitoring firms already struggling to compete with industry giants such as ADT. Ameritech was the first RBOC to take advantage of this opportunity, acquiring SecurityLink in December 1994 and National Guardian Corporation (among the nation's top five monitoring firms) in October 1995. Several other RBOCs, large cable operators and other public utility firms, hoping to leverage their widespread name recognition, marketing resources and communications infrastructures, have expressed an interest in following Ameritech into the security monitoring market.
Finally, large players in the small business and residential market segments are emerging. Circuit City in electronics retailing, Sears Roebuck in general merchandise retailing, and Target Stores in discount retailing have expanded their security product and service offerings. Partly this interest is made possible by companies like Phillips Consumer Electronics offering packages of user-friendly security products. Survival of small service and monitoring firms may depend on the fact that less than one-quarter of prospective small security system buyers plan to do their own installation.
Contractual guard and private investigative services represent the largest segment of the security service industry. The demand for these services is projected to increase from $10.9 billion in 1994 to $16.8 billion in the year 2000. Projected growth, which is surprisingly vigorous for a relatively mature industry, primarily reflects the ongoing trend away from proprietary, or internal, guard services among many large and midsized organizations. The most salient example of this to date was Pinkerton's 1993 acquisition of General Motors' internal security operations, a deal valued at $100 million in annual revenues. Cash-strapped institutions (e.g., hospitals, libraries, etc.) that have traditionally maintained proprietary guard forces are also expected to turn increasingly to third-party vendors for provision of these services, as are airports and other public facilities. Increasing liability costs and regulations establishing more stringent guard training requirements will also make it more costly for establishments to maintain proprietary guard forces, further accelerating the pace of outsourcing. In addition, guard firms are increasingly willing to provide their customers with a greater degree of control over contact security operations, (including guard screening and hiring). That fact will encourage more banks and other establishments with specialized security concerns to move away from proprietary guards.
Along these lines, local communities, both higher and lower income, are more willing to pay for private "police" services, in the form of twenty-four-hour vehicular or ambulatory guard patrols. These patrols, which are typically intended to supplement rather than replace underfunded and undermanned police departments, offer a number of advantages over public police services. Beyond simply being more affordable and flexible than their public sector counterparts, private police forces can dedicate their resources solely to deterring crime through their visible presence. They are unencumbered by the need to investigate crimes and prosecute criminals.
The nascent private correctional facility management industry represents the fastest growing category of security services. Projected annual growth is almost 19 percent, reaching $1.1 billion in 2000. Growth markets will exist both in the construction of new prisons and the privatization of existing facilities, as government agencies at all levels attempt to reconcile two conflicting sets of public demands. Fears of rising crime have led to the adoption of tougher mandatory sentencing laws. But, overcrowded prisons result in the early release of many convicts. This requires allocation of sizable funds for prison construction, while dissatisfaction with government in general has led to the call for reduced federal spending and downsized public bureaucracies. Private correctional firms such as Corrections Corporation of America, which have demonstrated the ability to improve service while reducing costs to the taxpayer, stand to profit handsomely from these conflicting demands. Although private prison management is legal in over half of the states, these firms managed less than 5 percent of all adult inmates in 1994. A vast market is open for the privatization of existing facilities as well as the construction of new ones.
Firms engaged in the private corrections industry typically manage every aspect of prison life, including security, food service, sanitation, education/rehabilitation, counseling and health care. In addition, management companies are often responsible for prison construction, and in some cases maintain ownership of the facilities that they contract.
There are numerous examples of the improvements in private security services allowed by advances in electronics and related technologies. Westinghouse Security, for instance, offers alarm systems with two-way communication between subscribers and the central monitoring station. This feature allows verification of false alarms (a major barrier to security system sales in some areas) before alerting police. It even permits direct communication between monitoring personnel and intruders in systems with integrated video surveillance capabilities. In such cases, technology has served to improve the quality and lower the cost of service delivery, contributing to growth in a manner similar to that of electronic security systems. In addition, security consultants, who are often employed to recommend the use of specific equipment and systems, have benefited from the growing complexity of private security technology, which has made their expertise more valuable to an increasing number of organizations.
Indeed, virtually every segment of the security services market has benefited from technological advantages to some extent. Hand-held asset protection devices, electronic guard tour recorders and shipment tracking systems have directly improved the efficiency of guard patrols, armored cars and other security couriers. Computerized simulation programs have also raised the quality of security guard training, while the proliferation of information accessible over computer networks has vastly expanded the potential resource base available to private investigators. Advances in bomb/metal detection technologies have heightened demand for firms offering related services, while improvements in video surveillance, access controls and ID tagging (identification) have increased safety in privately managed correctional facilities.
By the same token, access to advanced technologies has also led to the proliferation of more sophisticated criminals; this in turn created business opportunities in data security, e.g., encryption. In this area, companies like Microsoft Corporation and Netscape Communications Corporation are developing software and standards to protect and facilitate commercial transactions on the Internet.
The security service industry must comply with a wide range of legal statues and other regulatory constraints. While some market segments, such as armored car transport services, are governed by a single set of standards imposed by federal agencies, others must contend with regulations varying on a state-by-state or locality-by-locality basis. Examples of the latter include building safety codes (in the case of alarm monitoring) and security guard training requirements and firearm licensing procedures. The greatest legal and regulatory hurdles continue to face the prison management industry as only twenty-five states expressly permit privately run correctional facilities at the state and local level. Even in states where such services are legal, providers must adhere to a wide range of health and safety practices, often stricter than those adopted by publicly run prisons.
Legal statutes can enhance as well as restrict security service providers' scope of activities. For instance, in certain states security guards are given the legal authority to act as full or quasi-police officers within their limited area of responsibility. They can make arrests, act as a state representative in court, and the like. As another example, laws restricting the use of polygraph testing by employers in hiring and discharge decisions, as well as court rulings discouraging full disclosure in job references, have generated greater opportunities for private investigators who conduct background investigation services. Along similar lines, local building and fire ordinances that mandate the use of products such as smoke alarms or sprinkler systems can create spillover demand for central station alarm monitoring services.
Insurers are eager to develop regulations and/or standards to define risk levels and liability. Armed security guards, for example, can incur substantial liability through their actions. Products and services that offer protection also can be held liable for failure. Insurers need standards to set appropriate rates.
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Publication information: Article title: Industry Corner: Private Contractual Security Services: The U.S. Market and Industry. Contributors: Bailin, Paul S. - Author, Cort, Stanton G. - Author. Journal title: Business Economics. Volume: 31. Issue: 2 Publication date: April 1996. Page number: 57+. © 1999 The National Association of Business Economists. COPYRIGHT 1996 Gale Group.
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