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Security Business Model Transformation

Updated: Jan 28, 2019

Service based revenues continue to grow as digitalisation advances

Following a tour of industry events in the autumn WA noted that almost everything is available “as a service” in today’s security market and data driven business models is now a key competitive battleground. A review of the leading physical and cyber security organisations by WA concludes that on average organisations grew service revenues from 2015-2017 by 8.4% p.a. compared to product sale growth of 4.9%. Service sales as a percentage of total sales increased over this period from 42.7% in 2015 to 44.3% in 2017 and the trend shows no sign of slowing down.

The trend is evident across all security sectors. Cyber security organisations registered a decline in product sales by 0.7% p.a. whilst the service market grew by 16.4% p.a., fuelled by Cloud services ranging from IDaaS (Identity as a Service) to DRaaS (Disaster Recovery as a Service). The need for cyber professional services (auditing and penetration testing) and Managed Security Services will continue to generate strong services growth as organisations increasingly rely on external partner expertise for protection and to meet regulatory requirements. New services have emerged through digital platforms that bring together supplier ecosystems to the benefit of the customer. For example, Splunk’s SOAR (Security Orchestration, Automation & Response) platform brings together its partners products into a single operational tool that can deal with a threat alert and investigation in a few minutes. This compares to the 45 minutes it takes a trained expert to run the scenario using the individual products provided by Carbon Black & Bit9, Cuckoo and Talos amongst others.

Service based models are also becoming more prevalent in contingency planning and response. BCaaS (Business Continuity as a Service) is a response to organisations focusing on business resilience and using industry experts to provide an end-to-end service to ensure compliance and to reduce risk.

Product and Systems organisations registered similarly strong service growth at 16.5% p.a. versus product sales growth of 7.5%. A dominant theme in an increasing hyper connected ecosystem is cross-border servitisation, the ability to deliver value to a customer based on performance rather than the value of the physical asset. Smiths Detection provides a good example of this. The company grew by 22.8% p.a. from 2015-2017 driven by service revenue growth of 33.9% p.a. through a strong core product coupled with performance based models and new services such as predictive maintenance.

Further key trends and business models relate to a growing focus on risk-based services. From a cyber security perspective this relates to suppliers like Tenable who provide a series of tools to help organisations prioritise cyber threats based on risk scoring to reduce the likelihood of missing attacks like WannaCry. In the physical security market the same trend applies, with organisations using multi source data correlation and risk profiling to assess security threats.

Advisory services to help organisations with their digital transformation, personalisation and improved product features through software development are all important competitive differentiators. It’s for this reason that WA believes that CEO’s will continue to fund innovation in digital services though it should not be to the detriment of continued product innovation. After all, brands are built on the reliability and effectiveness of the core product that detects threats or enables mission critical communication. Without a strong product there is unlikely to much scope for business model transformation and service revenue growth.

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