July 19, 2011
The Man Who Built ADT – Interview with Former Tyco CEO Dennis Kozlowski
It’s not widely known that security giant ADT was founded in 1874, when 57 district telegraph delivery companies affiliated and became "American District Telegraph.” But it wasn’t until Tyco purchased ADT in 1997 that the alarm company really flexed its muscles and became the behemoth it is today. While you can argue about whether bigger means better (and I have often stated that ADT proves just the opposite!), there is one man who is more responsible than any other for ADT’s current size - Dennis Kozlowski, former CEO of Tyco. Kozlowski, who happens to serving a jail term for a variety of white collar crimes, was recently interviewed: what he had to say about ADT is extremely interesting to those of us who actively participate in the electronic security industry.
Everyone in the security industry is familiar with the scandal surrounding former Tyco CEO Dennis Kozlowski. But putting aside the events that led to his conviction, Kozlowski leaves an unassailable legacy in the security industry. Here is a man who guided ADT from 700,000 accounts to more than 7 million, fostered an extremely successful dealer program and left a company that is so dominant that many believe its presence and market share alone are single-handedly keeping big phone, cable and utility companies out of the alarm business.
ADT Buyout Details – On Buying ADT
"ADT was on our radar from the late 1980’s. We knew the company. We had hundreds of thousands of fire sprinkler customers that we could possibly move into the ADT central stations and offer our commercial customers security monitoring. That was our plan at the time, and we were probably going to get out of the residential security business. That’s how we justified the acquisition, which wasn’t the way it went at all when we got to understand the business. The ADT deal was by far the best deal we ever did."
"At that time, ADT had 700,000 customers worldwide. When I left, we had 7 million customers. We went the other direction [than previously planned] on the residential business. ADT was probably the best Tyco business. It’s predictable. You got checks every month, no matter what. For a company that needs forecasting abilities and stability like a big public company does, it’s a tremendous business. It’s a great business."
On ADT’s Growth Strategy
"We decided to build it up. We signed on more dealers. We got more people on the street. When we bought ADT, we didn’t know about residential security. We didn’t know about the average life of a customer. We didn’t know what it took to sell alarm systems. We were a commercial company - we didn’t know about consumers, we didn’t know about television advertising. That was all foreign to us. We thought we would emphasize the commercial side, possibly find a buyer for the residential side and move on from there."
On Negotiating to Buy Other Alarm Companies
"We knew what our break-evens were. We needed to calculate how many sales and service people we needed to retain to service the customer properly, and what was our monthly recurring going to be. I forgot what the specific number was, but we had to make money after folding it into our call centers, insurance, etc. Big deals we paid in the 50X’s (times monthly fees). If you were bigger, you deserved a premium. Usually we were filling in a geographic area where we were weak. The prices varied on location and economic times. We paid 56X for Alarmguard in Connecticut. We overpaid for that."
But Service Matters!
Hey, Dennis - you're talking about my old company there: I actually spent five years as a senior executive at Alarmguard. Yes, ADT/Tyco paid more for Alarmguard than any other alarm company they ever purchased (including Brink’s/Broadview), but we were worth it. I’m not surprised to hear Dennis say he thinks he overpaid: after all, the notable lapse in service delivery experienced by Alarmguard’s customers after being acquired resulted in customer attrition trebling under ADT, from 11% to over 30%. Alarmguard's on-site service response was degraded from same or next day to two or three weeks out under ADT – you just can’t treat people that way and expect them to stay on as customers. They left ADT in droves, and no wonder.
In some ways the industry has changed little: companies are still bought and sold as a multiple of monthly fees, and ADT is still more focused on servicing its national accounts and commercial customers, with home alarms getting last place on the priority list. And unlike the “next-generation” service providers like FrontPoint, ADT is primarily “old school,” focusing on traditional, less reliable security. In fact, ADT never considered safer cellular monitoring a priority, and interactive monitoring like that already offered by FrontPoint (including video, home automation, and mobile apps) is only recently being offered by ADT. While FrontPoint has been providing these smarter alarm features for close to four years, ADT was late to the game with its new Pulse product offering, and the jury is still out on how well they will support it (here is an update on pricing and other aspects of Pulse, since you can’t find anything on ADT’s web site!).
Stay tuned here more news from the alarm industry – and please let us know if there are topics you want us to cover. We aim to be topical, timely, and informative. A big part of FrontPoint being ranked as the leader in wireless home security and the #1 ranked alarm company is the US comes from knowing the competition – and staying several steps ahead.