Security Systems News had an insightful editorial on the Integrator of the Future on Friday. Coming from observations on the front line of integrators and customers looking at large scale implementations it points out some challenges for today’s Integrators and looks to how they might change for the better. The points that stood out to me were the need to take a more solution/consulting approach as well as the need to build a relationship with customers that evolves over time. Also called on integrators to be more aware of a customer’s network and be mindful of value (you can’t charge for something when you don’t deliver and prove the value to the customer).

You are probably not surprised to hear an ‘Amen’ from the managed video as a service community on these points. At the core of what we do at Envysion is a focus on our customer’s challenge and a focus on delivering breakthrough value in an ‘easy’ package. Of course we strongly believe a managed video service delivered via the ‘as a service’ model allows us to do more for customers and partners.  We also see it differentiating us from other players.

So will the current set of integrators adjust? Will next generation of solution providers fill the void? What we likely all can agree on is that over time the winner will focus on the customer and value delivery.  Customers get to vote with each new installation.

Refering back to my blog on SaaS being around for 114 years, Herman Hollerith didn’t get everything right.  According to IBM archives, Hollerith resisted new ideas for the operation of his machines and wasn’t working well with one of his best and original customers, the US government.

To quote the IBM archive of their employee publication “Think” from 1972:

About 1905, the U.S. Census Bureau gave him an ultimatum: improve the machines and cut the rentals (which each year about equaled his total manufacturing cost). To this Hollerith said, No. The Census Bureau said: Then we’ll make them ourselves and improve them ourselves. Which they did, using former Hollerith employees to run the operation.

A simple age old truth, you’ve got to listen to your customers.  The pace of change and the competition in today’s business makes this ever more important.  But technology still needed to be evolved to meet customers needs back in 1905.

As part of my on-going responsibilities I meet with investors (both my current and some potential future investors) throughout the year. My current investors, Columbia Capital, High Country Ventures (the Colorado state technology fund that is managed by local private equity firm Tango), and Dan Caruso meet with me monthly during our monthly board calls. I meet with other potential new investors all the time whenever I travel as it is always good to build relationships with potential partners regardless of whether you are actively seeking additional funding. (For the record, we aren’t actively seeking funding having just closed another round with our existing investors last month – although this could change in the next ~18 months as we look to accelerate our growth even further)

In any case, I’ve talked to more than a half dozen investors that I know over the past couple of weeks and came away with a very consistent theme that I’m not sure the rest of the security industry has internalized yet. The takeaway relates to how Venture Capital firms view recurring revenue.

Monthly Recurring Revenue (MRR), if you come from telecom or Recurring Monthly Revenue (RMR), which seems to be the term used more frequently in the security space, means on-going revenue that you get each month for an on-going service that you provide to a customer. MRR is the new holy grail in the security space. The appeal of MRR is simple, you get to wake up in the morning knowing that you have revenue already coming in for the month without having to go out and sell another thing. Assuming your churn (the rate at which customers decide to stop using/paying for your service) is low, it is much easier to grow revenue when you are in a recurring revenue business b/c you don’t have to start from zero each month and can build on your previous successes. Security providers see the advantages of having a predictable on-going revenue stream and are looking for ways to build that part of their business. There are segments (alarm monitoring for example) that have been MRR businesses for a long time, so this is not entirely new to the space.

The takeaway on how VCs view MRR is that not all MRR is created equal. A number of providers (systems integrators, DVR manufacturers, etc) are trying to build MRR by financing equipment. They take what used to be an upfront purchase (the sale of a DVR and cameras for a couple thousand dollars) and make it a monthly payment instead (the lease of a DVR and cameras for a couple of hundred dollars per month). There are a number of providers out there that are pushing this model heavily as they see the multiples that financial and strategic buyers pay on recurring revenue and that is very appealing to them.

Problem is this type of recurring revenue is not valued as much as the more classic recurring revenue businesses. Why would this be the case? Because leasing equipment is not at all the same as providing an on-going service and doesn’t have the same financial characteristics as other MRR businesses.

First, the only real difference between buying and leasing hardware is the nature of the payments (get cash now or get cash over time) as the customer gets the gear in either case; it isn’t really a true on-going service that is being provided.

Second, the recurring revenue is only really recurring during the lease period, then it ends (most leases have a buyout clause at the end where customer can keep the gear for a nominal amount like $1). This means that three years after a lease is signed the customer can keep using the gear but stop paying until they decide they want to buy new gear. Contrast this with alarm monitoring where the customer pays in perpetuity as long as they want their alarms monitored or with MVaaS where the customer pays in perpetuity as long as they want to use the service.

Third, the scale economics are not as strong and the working capital requirements are worse for equipment financing models. The more leased equipment you sell, the more upfront capital you need as you have to pay upfront for the gear (which you could also lease yourself). The only real scale benefit you get would come from volume discounts. Compare this to a software service where you have a fixed cost of maintaining and supporting the service, but incremental customers and monthly recurring revenue have almost no variable cost. Once you get to scale to cover your relatively fixed costs, all of your incremental revenue drops straight to the bottom line as cash.

The net of this is that VCs place a much higher valuation on true MRR than they do on equipment financing revenue. If you want to create massive shareholder value, focus on building compelling services that customers will want to pay for over time that you can deliver in a very scalable way to drive material on-going profitability. If you want to be a bank/financing company in one of the worst credit environments in recent history, that works too – just don’t expect to get the same multiples on that revenue as you would with a true service.

In case you’ve missed the annual airings of these Christmas classics, here are a couple of my personal favorites (linked from YouTube).

    Linus in “Charlie Brown Christmas”

    George Bailey in “It’s a Wonderful Life”

Don’t hesitate to spread the cheer.  Please comment with your favorites.

To our readers, on behalf of all of our contributors, here’s wishing you the very best of holiday seasons!

Yesterday Matt Steinfort (Envysion CEO) held an all hands meeting in which – for the first time since we were a tiny company with a small office – the entire staff was in the same room (we can do this because we have the Envysion lounge thanks to the Cultural Committee but that’s fodder for a future post). The purpose of the meeting was to share with the entire company the strategy for the rest of this year and 2009.

I don’t need to tell you that the economy stinks right now and that times are tough all over.  Matt spoke about the prospects for our company which are very strong thanks to the hard work of the management team in general but especially Michael Wilson who was our Finance Director but is now our CFO – a very well deserved promotion. Michael is somewhat of a magician as it applies to finances and has ensured that we are in a terrific position financially regardless of the economy in the near term.

That said, Matt wasn’t painting a rosey picture. One of the key messages he delivered is that we need to be better at what we do and that we need to focus on doing only those things that support our customers and the business. This can be boiled down to doing what’s important vs. doing what’s urgent. This is an age old struggle that effects every business and it certainly has plagued us.

The concept is simple but the execution can be difficult. At the heart of the concept is the thesis that one can only accomplish so many things in a given time period. In today’s world the list of tasks to choose from is often overwhelming. In order to be most effective one should strive to do only those things that support one’s Wildly Important Goals – these tasks are the important ones – and ignore whenever possible those tasks that don’t.

There’s a great post about this at PickTheBrain called Important vs. Urgent: 5 ways to focus on what really matters.

In our case we know what our WIGs are because Matt oultined them for us. So in order to be effective we need to do only those tasks and participate only in those activities which support those goals.

I’ll be posting more about this in the future and I’d love to hear your thoughts and opinions on the topic.