Tyco IS takes 'disciplined approach' to making margin

Imperial Capital’s Kessler says end users back up Tyco’s claims
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Wednesday, May 1, 2013

BOCA RATON, Fla.—Taking a page out of SimplexGrinnell’s playbook, Tyco Integrated Security is following a structured approach to making margin on its commercial security jobs, according to Tyco executives and analysts who cover the company.

Brett Ludwig, Tyco’s director, external communications, and Joseph Longo, Tyco’s director, investor relations, told Security Systems News that the company has instituted incentives for its sales force to go after high-margin business with recurring service revenue attached, and there’s a tiered approval process for projects that do not meet certain profitability parameters.

George Oliver, CEO of Tyco International, was successful with this approach as head of Tyco’s fire installation business and wanted to see it “implement[ed] on the commercial security side,” said Ludwig.

In an Imperial Capital report generated after ISC West, Jeff Kessler, an Imperial research analyst, backed up Tyco’s claims. Kessler said that Imperial did "scores of outside interviews … with end users and product providers, [and] we are now convinced that Tyco, at least in North America, is deadly serious about discipline in demanding a fair margin for their value proposition and walking away when they believe the margin does not warrant it.”

Tyco wants to make sure “it allocates its time and resources to the appropriate jobs. So, we do the value-added design work and installations … that lead to higher-margin service revenue and longer, stickier customer relationships,” Longo said.

It’s an approach that “benefits the customer as well as Tyco from a focus and a financial perspective,” he added.

Ludwig said customers like it because Tyco spends “more time upfront doing design work … designing the right system and coming up with the appropriate solution.” 

What changes had to be made to implement this approach? “There’s a discipline around it,” Ludwig said. Tyco made some changes in the sales compensation structure and the approval process for projects.

“Projects at a certain monetary level have to go up the chain to get approval to [ensure that Tyco] is getting the appropriate level of profit on that project,” Ludwig said.

“Projects have to be approved at the branch level [and may be escalated for approval up to] the regional level, to the [Tyco] COO, Brian MacDonald, and ultimately, depending on the size of the project, to George Oliver,” he added.

“It’s a disciplined process of approval … with specific financial parameters put around projects,” Ludwig said

“We are seeing the result of that effort coming through,” Longo said. “It does put pressure on the revenue line, but it focuses our sales force to go after profitable revenue.”

Longo said Tyco’s overall service revenue is growing. Worldwide, it grew 2 percent in the past quarter “and we’ve laid out a plan to get to 5 percent growth [year over year] in service revenue in 2015.”

Kessler said that some smaller independent integrators with  “IT IQ have successfully gained access to this higher margin, greater than 30 percent margins, due to the higher level of conversation with the client, improving trust and longer relationships. It is another driver for the market altogether for the largest North American integrator (which its commensurate worldwide scale) to succeed at this.”

Should Tyco succeed it “would be a model for the industry,” he concludes.