Seeker Blog

OK, you’ve read "America the Vulnerable". You’ve got a handle on the risk management concepts, and you understand the terrorist threat to globalization, continuing productivity improvements and thus your standard of living. You are intrigued with Stephen Flynn’s proposals, where he suggests that the private sector could actually see net bottom-line benefits from enhancing security.

But you are left wondering - what really is the bottom line? Are all these security regulations going to hurt the companies whose stocks I own?

Well, this 40-page study by Deloitte Research "Prospering in the Secure Economy (PDF 500kb)" will give you some insights. Broadly, it is consistent with Stephen Flynn’s assessments and recommendations. By running several surveys of business leaders, Deloitte has developed a profile of how the private sector views their risks, what strategies they are implementing and what some of the P&L benefits may be (click to enlarge into a new window):

Nobody knows at this point what the total public/private cost of enhanced security is. There are a few agency-estimated costs in Table 3, but I take these as nothing more than indications. It will be years before we get a handle on that.

We also can only guess at what the costs of security failures could be - which we know are going to happen regardless (click to enlarge into a new window).

Some sectors affected by enhanced security look to have significant benefits. Participants may actually benefit to some degree from the leveling effect of regulations. I.e., absent the regulations, in the early phases of adoption their EPS drops due to costs occuring before the benefits accrue.

Supply Chain Visibility: This appears to be the most-researched area, and it happens to be one I know a bit about. As an investor it is an area I’ll be looking at (click to enlarge into a new window):

The common enabler to these efficiency gains is better visibility into the supply chain. Technologies such as RFID tags (see box), sensors, smart containers, and electronic reporting and supply chain software solutions, when combined with changes in business practices, can provide companies an unprecedented degree of visibility into their supply chains. This has manifest security and business benefits (see Figure 5 and nearby discussion of RFID tags). For example, a study of the first phase of the Smart and Secure Tradelanes initiative, involving 65 companies across three continents, documented net savings to shippers of $378 to $462 per container per shipment from employing a mix of IT tools to secure and streamline shipping. Efficiency was enhanced in five major ways: lower overhead, reduced transaction costs, increased labor productivity, reduced theft, and lower inventory costs.

One problem with existing logistics systems, for example, is the large number of containers that in transit deviate significantly from their original assigned routing, making it nearly impossible to estimate arrival times. Security-tracking tools can help resolve this problem by enabling suppliers and customers to track such changes—and better estimate arrival times.

New security technologies will eventually allow cargo to be cleared more quickly through customs. Once electronic devices can demonstrate that a shipping container remains in its original intact condition from the time it’s packed and sealed to the time it’s delivered (and we’re still a long way away from that point), then customs officials could conceivably clear the container before it even arrives at port, enabling it to be delivered without delay.

Reduced maritime theft and fraud, which today costs companies between $30 billion and $50 billion a year, represents another potential benefit of security-driven modernization. RFID tags, tamper-proof container seals, and wireless communications will all make pilfering much more difficult. In 1997, technology industry leaders joined together to form the Technology Asset Protection Association (TAPA). By combining best practices and developing security standards for freight carriers, TAPA was able to bring cargo theft numbers down by 30 percent between 2000 and 2004. An added benefit: lower insurance premiums thanks to the reduced claims.

I think there are opportunities hidden in the scramble to adjust to new threats and new regulations. The Deloitte study has the same perspective:

Businesses have essentially three choices when it comes to addressing the new realities of the secure economy and complying with the new security requirements.

- Option one: They can choose to ignore them in the belief that the costs of compliance are too steep compared to the potential benefits or the penalties from noncompliance…

- Second, firms can adopt a bare-minimum security compliance strategy—treating it as simply an add-on cost that should be minimized to the greatest extent possible…

- A more promising option is the third one: Businesses can look to security compliance as a strategic issue—an opportunity to create business value and realize a positive return on their security investment. This more proactive approach moves security upstream: It becomes part of the business process, integrated into the normal course of operations, rather than simply a drain at the end. Investments in security go hand-inhand with real, measurable business benefits. In the same Conference Board survey, 61 percent of executives said that security investments can provide value for their companies and a positive return on investment. Chris Mahoney, senior vice president of Global Transportation Services at UPS, captures a view held by a growing number of forwardthinking executives when he says:

Emerging security regulations will force major changes by shippers and transportation companies and the promise of increased visibility in facilitating secure commerce. These demands—fueled by technology, globalization, and an increasingly empowered consumer—are shaping a new age of commerce. With this new age comes new rules…new models…new ways of looking at things…new challenges…and rich new opportunities.

Bottom-line: we don’t know the costs nor the benefits with any precision. But we do know that managing this level of change reactively is not the way to keep the Board of Directors happy. This seismic tremor of change will once again highlight the well-managed companies, just as did the onset of globalization. Remember Japan, Inc. circa 1988 when they were going to own everything?