Maximizing the ROI of your IP security system
In a previous post, I presented a model for Total Cost of Ownership (TCO) in IP security, and how that could be applied to projects. In a recent post, I further explored the use of the TCO as a tool for buyers to make better business decisions. I also argued for the expansion of the TCO model to include risk factors, an increasingly important area in any industry.
Another great benefit is that a solid TCO calculation is the basis for estimating the value of the system, or the Return on Investment (ROI). As stated in the white paper “Unpacking best value” from Vested, research conducted by the University of Tennessee College of Business Administration and funded by the U.S. Air Force: “While the conventional definition of TCO is exclusively concerned with the cost side of customer value, the real power is that TCO provides a foundation for making best value sourcing decisions.”
Why look at value?
The cost of your system is balanced against the expected benefit, or value of the system. What this value is depends on the industry, the customer, the application and many other factors. In the white paper “Total Cost of Ownership: Realizing Procurement’s Full Potential in Value Creation” from 2016 by NIGP Business Council, the authors define value as, “a set of attributes and expectations meaningful to the organization; a fair return on investment.”
In the security industry, there are some obvious values that most buyers would identify, such as reduced theft and vandalism. Other key benefits from an IP security and/or camera system can include increased – real or perceived – safety for citizens, customers or staff, and business and process improvements in for example retail and manufacturing industry.
To illustrate the role of value in relation to the TCO, let’s revisit the simple case from our previous post, where a buyer is considering two different systems: A and B. In the below, the TCO analysis in the left figure showed that while system B had a lower price, system A had a much lower TCO over the lifecycle of the system, making it clearly the best choice from a cost perspective.
Now, let’s assume that the buyer has analyzed the expected value from systems A and B, and found that system A will deliver a greater value over the lifespan of the system. For example, system A might offer tighter integration with the customer’s existing systems (for instance, a point-of-sales system in retail) leading to additional revenue created. In the right figure, this is illustrated as the total created value from A and B respectively, and the difference becomes even clearer when we look closer at the resulting value after costs are deducted.
With this information, it is also possible to calculate the expected Return on Investment (ROI) for the buyer with system A and B. ROI is typically expressed as a percentage, and calculated with this formula from Investopedia:
In our hypothetical example above, the difference is significant. System A offers an ROI of 67%, while system B only offers a 20% ROI. The case for choosing system A is now even more obvious.
Which values are important to you?
In the security industry, it can sometimes be challenging to quantify the value of a deployed system, since many of the benefits are intangible. However, identifying the value is critical to create a reliable business case.
In the “Unpacking best value” white paper quoted above, the authors list real world examples of how buyers have successfully used value criteria when procuring products and services, and how more or less intangible values have also been included – such as the sustainability, aesthetics, safety, diversity, competence and responsiveness demonstrated by the different vendors bidding for the projects.
In a white paper from BSIA, British Security Industry Association, “The (Real) Price of Security Solutions” from 2016, the authors coin the term “security dividends” and argue for the importance of looking at intangible benefits that premium systems deliver: “An additional benefit of using high-quality security solutions is that they may increase business opportunities for a company. These sorts of intangible results can be described as ‘security dividends’.”
Vendors can help
If you find it difficult to quantify values in a buying process, a natural partner to turn to are the vendors. Vendors that have a long track record of providing complex products and services should have a very good grasp on the typical outcomes and value their system can provide, and would likely be happy to engage in a value conversation.
Challenging vendors to provide good value argumentation, and scrutinizing case stories and testimonials from other customers that have implemented similar solutions are good approaches to learn about the potential value of the system in question.
Five things to consider in defining value
Here is a way to get started on defining potential value:
- Identify which values are important to you. Map the challenges and possibilities that you face. Speak to peers, investigate case stories, and challenge vendors to help you understand more of what you should expect from the system.
- Look at direct value. What is the value created from increased loss prevention, decreased theft, minimized vandalism or prevention of burglaries?
- Look at indirect value. Will your legal expenses decrease from reduced slip-and-fall claims? Can you re-negotiate insurance costs? Will a more robust security system decrease costs such as service disruption fees due to metal theft or security problems in public transportation?
- Look at value created in new areas. Will you improve revenue in your retail stores due to store optimization solutions? Will traffic systems increase your income from parking fees?
- Look at important soft values. Will your retail security system improve staff retention and customer experience? Will your school security system decrease bullying and help attract more students? Will your city surveillance solution contribute to reduced traffic congestion, minimized pollution and improved reputation among citizens, visitors and businesses?
From theory to practice
In recent TCO posts I have demonstrated the usefulness of TCO as a tool for strategic buyers, and explained how adding the value perspective gives the buyer a more complete picture to make an informed decision.
However, while based on a lot of experience and input, the examples shown here are still hypothetical. How do TCO and ROI analyses look in the real world? In future posts, I will examine some real TCO and ROI case stories from the IP security industry.
For more details on the TCO and ROI methodology and for a closer look at some case stories, please download the white paper: