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The Security Guarding Industry and the Race to the Bottom

Tony Dong

At the turn of the 20th century, the German economist Werner Sombart coined the term “late stage capitalism”, to describe the perceived absurdities, contradictions, crises, injustices, and inequality created by modern business development. Keep this paragraph in mind as you continue reading.

Gripes about poor security guard pay have been a long stay in the industry and a source of never ending headaches for employees, clients, and contract companies alike. Low pay is a key risk factor for labour unrest, unionization, client dissatisfaction, poor industry reputation, and high turnover. Don't take it from me though - let’s look at the official figures from the US Bureau of Labor Statistics. The average American worker, aggregated across all occupations and states, makes the following wage:

Compared to the average security guard, who makes:

Whereas the mean hourly wage of a guard is $15.88, the average federal hourly wage for the entire labour force is $19.14, a 17% difference. While I very much understand the implications of a value based, meritocratic society where the value of your work is ascribed to its social utility, does it not strike anybody as odd when 75% of the guards we entrust with life safety and the protection of high value assets makes less ($18.24/hr 75th percentile pay) than the average American worker ($19.14/hr mean)?

You might be wondering, how did this all come to be? Well, before we dive into that, let me explain a bit about the main players in the security industry - contract companies, guards, and clients. The three entities operate in a sort of perpetual, tautological, socio-economic Mexican standoff that would make Ayn Rand roll in her grave:

  1. The client complains about the low quality of guard and how a competing company across the street is offering a lower bill rate.
  2. The guard complains that the company doesn't pay them enough, provides inadequate benefits, and minimal training and support.
  3. The company complains that the client isn't willing to pay enough, and their margins are too narrow to afford paying the guard anymore.

Which came first, the chicken or the egg? Neither in this case actually, all the industry players essentially flung their eggs and chickens at the wall in the hopes that something would stick.

The term "race to the bottom" was first coined by Justice Louis Brandeis in the case Liggett v. Lee, and refers to a situation where a company attempts to undercut the competition's prices by often reducing labor cost, usually in terms of wages or benefits. While there are numerous ways to gain a competitive advantage, a race to the bottom pricing strategy is characterized by a myopically short sighted focus on underpricing the value of a service or asset, without regards for long term microeconomic implications and market stability.

Unlike other strategies, a race to the bottom is notoriously contagious and self-sustaining - once initiated, other companies have few choices but to give in due to its cutthroat effectiveness. Unlike temporary sales discounts, rebates, or incentives, a race to the bottom causes permanent damage to all market participants, and lasting consequences for profit margins squeezed thin. Moreover, the resultant poor quality of services offered as a result of the cost cutting alienates customers, who lower their demand, causing prices to plummet even further and the market to dry up.

Security is a defensive industry that enjoys a natural hedge afforded by insurance providers - that is, even during most economic downturns contract security firms remain stable, because the their clients (the solvent ones at least) are mandated by their coverage requirements to procure security services. The downside is that during times of economic turmoil, clients will look to cut cost while affording to retain the bare minimum level of security needed to satisfy their insurance coverage. In a free market between capable privately owned entities, clients are at liberty to agree to and cease services with a variety of providers at their discretion.

Moreover, there are few strategic differentiators between the services of different contract security companies. Most companies offer the same tried and true combination of static guards, mobile patrols, and systems installation. The guards are usually uniformed the same, trained the same, and carry out identical duties. At least in BC, they usually bounce from company to company over their careers, chasing higher wages or a promotion. Therefore, from a value perspective in the eyes of the client, there is little competitor differentiation between various companies. In the words of Warren Buffet: "price is what you pay, value is what you get".

If that maxim holds true, and the various contract security companies are unable to differentiate themselves in terms of value, then the only variable left for a client to make a purchase decision on is price. This is where the security companies recognize they can still compete, and will step over each other in an attempt to win the contract, regardless of whether it is financially profitable or even sustainable. Bill rates remain one of the tightest guarded secrets within the industry for a reason - if you know your opponents bill rates, you can come in a fraction lower with the same offering, and massively increase your chance of a contract award. But this in turn increases the ruthlessness of the market, and makes it operate even more inefficiently.

Margins remain unjustifiably low today and if the industry does not change the way it prices its services and demonstrates value, it is going the way of Blockbuster. I envision 3 foreseeable outcomes:

  1. The race to the bottom continues, with operating costs reduced. Margins improve temporarily, but at the cost of stagnant wages, paltry benefits, and less training, uniform, and administration expenditure. The effects of this trickle down to the guards, negatively impacting morale, job satisfaction, and exacerbating turnover. Turnover costs compound and the hiring models at contract security firms increasingly adopt a warm body approach to fill open shifts. Client satisfaction from the revolving door of new untrained guards plummets, and security companies are quickly phased out one after the other on a month-to-month arrangement as the client tries to find a provider that works, all while providers continue to undercut another. At the end of the way, the industry's growth stagnates, reputation suffers, and innovation ceases.

  1. The race to the bottom continues, but advances in AI and robotics quickly produces integrated "smart facility" solutions capable of replicating the duties of a security guard - lock doors, patrol areas, monitor cameras, sign in visitors, etc. As the technology improves, and costs decline, more and more clients opt to go "in-house" developing their own corporate security teams comprised of automated solutions augmented by small, 1-2 man teams for complex tasks like emergency response and first aid. Contracts dry up and the remaining security companies diversify into alternative offerings, such as courier, 3rd party logistics, and other forms of temporary manual labour their workforce can be adapted for.

  1. The largest security companies (G4S/Allied, GardaWorld, Securitas, Paladin) continue their trend of mergers and acquisitions, unopposed by anti-trust and anti-competition inquiries. They form a defacto industry syndicate, and recognizing the threat of emergent technology and the dire economic implications of undercutting prices, agree to set a lowest acceptable bill rate standards for all companies operating in the sector in a sort of gentleman's agreement. By being "too big to fail" and dominating the market share by capitalization and employee count, they exert influence over contract awards, pressure other companies into acquiescing with their price demands, or acquire them outright should they refuse.

I'll end this article with a quote that I think sums up my thoughts succinctly:

“I call an animal, a species, an individual corrupt, when it loses its instincts, when it chooses, prefers, what is harmful to it.”

Nietzsche, The Antichrist

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