To Begin With
In today’s world, companies strive to remain focused on functions
and activities that are close to their core competence and where
they enjoy competitive advantages. But they still need to perform a
host of other functions in today’s complex market place. This need
opens the door for providers of business services.
Business services can be defined as ancillary services provided by
companies to other players in the market. It can also be called a
tertiary sector. Hence, the main business of one company can be a
business service for another company.
The business service sector is highly fragmented, with no single
service provider boasting dominant market share to rule the
industry. As per business reports, the top 50 companies of the
sector contributes to less than 25% of the overall revenue of the
business service sector.
The business services industry comprises a large number of
businesses. The industry’s array of diverse services includes
marketing, consulting, staffing, security, telecommunications,
internet services, logistics, food and catering, and waste
handling, among many others. In its expanded sense, the US business
services sector generates consolidated yearly revenue of about $620
billion, though many companies mentioned below do not strictly fall
into the generally accepted definition of the industry.
Some Industries in the Business Service Sector
Advertising & Market Services and Direct Marketing plays a
vital role in informing consumers about new products, eventually
helping the producers to better penetrate into the markets.
The Interpublic Group of Companies, Inc. (IPG),
Omnicom Group Inc. (OMC),
Valassis
Communications Inc. (VCI),
Harte-Hanks
Inc. (HHS) and Vertis are important players in this
industry.
Consulting Service providers offer expert advice in a given field
for smoother functioning of the companies. Major companies in this
arena include
Accenture plc (ACN), Bain, Booz
Allen, Deloitte Consulting (an affiliate of Deloitte Touche
Tohmatsu), and
IBM Global Services (IBM).
The Staffing business helps companies identify and recruit the
right person for the right job. This sector is dominated by
Insperity Inc. (NSP),
Kelly Services
Inc. (KELYB),
ManpowerGroup (MAN), ADP
TotalSource, and the US operations of Adecco.
Internet Service Providers and Telecommunication Services act as a
bridge to connect knowledge, information and personnel across the
globe. This sector is ruled by
AT&T Inc. (T),
Verizon Communications Inc. (VZ) and
Comcast (CMCSA).
Surveillance, Investigation & Security Consulting Services
providers offer specialized security services and this sector is
dominated by
FTI Consulting (FCN) and Kroll.
ABM Industries Incorporated (ABM) and
ServiceMaster are the leaders in Janitorial & Carpet Cleaning
Services. This service helps to maintain cleanliness and hygine at
workplace.
As the name suggests, Food Service Contractors provides food. Major
components in this domain include ARAMARK, Centerplate and Delaware
North.
Waste Management service providers offer services that includes
collection, transport, processing, recycling, disposing and
monitoring of waste.
Waste Management Inc (WM),
Republic Services Inc. (RSG) and
Waste
Connections Inc. (WCN) are the major players in this
arena.
Travel Agencies & Service providers offer logistics and
conveyance services. The sector leaders include Carlson Wagonlit
Travel and Sabre Holdings.
The US and Europe are the largest markets for the business service
sector. Some of the dominant players beyond the US boundary
include: waste and remediation services provider
Veolia
Environnement (VE) (France), facilities support services
provider Serco Group (UK), staffing services provider Adecco
(Switzerland), travel agency service TUI Travel (UK), and security
services provider G4S (UK). Other big names in the field are
Rentokil Initial (UK); and ISS (Denmark).
Nevertheless, the emerging economies, such as India and China are
also becoming important destinations for the business service
sectors.
OPPORTUNITIES
Labor Intensive: Given the nature of intangible products
offered by the service sector, it is a labor intensive industry.
Labor, both skilled and unskilled, is an essential part for a
smooth functioning of this sector. Being a labor-intensive sector,
it offers immense employment opportunities.
Cost Effective: All business operators prefer to minimize
costs of operation and maximize margins. This sector offers cost
effectiveness to the companies that opt for their services.
Companies will have to incur higher costs if a company employs the
services by themselves and does not take the help of the service
providers.
The service providers specialize in particular services and reduce
the operational cost of a company, eventually helping companies to
limit overall costs. Notably, an increased number of companies
opting for such specialized services would increase the volumes for
the service providers. As a result, they can offer services at a
lower cost, which in turn will further lower the cost for the
companies.
Specialized Service: The industry offers specialized
services that come with latest technologies. This is very evident
for the security and consulting services. To safeguard data,
companies are compelled to engage security service providers. The
security service providers need to have the latest and most
efficient technologies in place to persuade its clients and win
business contracts.
Also, with increased number of mergers and acquisitions across the
globe, the prospects for legal service providers look good.
Consulting services is another wing of this industry that is
gaining traction at a higher pace these days.
With complexities in business on the rise, companies are opting for
expert advices before entering into any new venture rather than
having hiccups once already into it. Hence this service sector also
looks promising as their services are becoming an indispensable
part for companies that are fighting to survive in the competitive
market.
CHALLENGES
Growth Tied to Health of Economy: One of the major factors
that could impact the growth of the service sector is the overall
health of the economy. The companies in the business service sector
derive revenue by providing essential services to other companies.
Spending by companies to avail services might reduce drastically if
the pace of economic growth is slower than the expected level. This
would naturally reduce the business of the service providers and
affect their fundamentals.
Training, Maintaining Skilled Workforce: Since skilled
workers are always in high demand, there remains a possibility of
high turnover rate within the sector. Training of unskilled workers
or taking in new skilled workers increases operational costs,
thereby affecting margins. This sector needs to have more skilled
workforce to take advantages of the technology that is developing
almost everyday.
Zacks Rank
Our proprietary stock-picking framework, the Zacks Rank, provides a
reliable indicator of the likely movements of the Business Service
Sector stocks. Among the companies mentioned, only
AOL (AOL) holds a Zacks #2 Rank, which translates
into a short-term Buy rating. The Zacks Rank captures the essence
of earnings momentum or lack thereof by focusing on trends in
earnings estimate revisions.
Valassis Communications, Accenture, Insperity, AT&T, Verizon,
Waste Connections, Republic Services, ABM Industries and Veolia
hold a Zacks #3 Rank, indicating a short-term Hold rating.
Interpublic, Omnicom, Waste Management, and Harte-Hanks holds Zacks
#4 Rank, indicating a short-term Sell rating. Manpower holds
Zacks #5 Rank, translating into a short-term Strong Sell
rating.
To Conclude
A dearth of skilled labor in the business service sectors can have
an impact on the future growth possibilities. Non availability of
quality workforce at a reasonable rate might increase the overall
operational cost.
However, due to the highly fragmented nature of the industry, it is
difficult to set a distinct trend or predict a concrete future of
the industry. The industry is expected to grow at an annual
compounded rate of 4% from 2010 to 2015.
With population growing at an accelerated pace and economic turmoil
being a constant drag of late, generating employment is a burning
issue. This sector, being labor intensive, involves lower capital
investments and confidently addresses this problem. Thus, we can
safely say this industry is essential to business operations going
forward, despite the hurdles.
ABM INDUSTRIES (ABM): Free Stock Analysis Report
ACCENTURE PLC (ACN): Free Stock Analysis Report
COMCAST CORP A (CMCSA): Free Stock Analysis Report
HARTE-HANKS INC (HHS): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
INTERPUBLIC GRP (IPG): Free Stock Analysis Report
(KELYB): ETF Research Reports
MANPOWER INC WI (MAN): Free Stock Analysis Report
INSPERITY INC (NSP): Free Stock Analysis Report
OMNICOM GRP (OMC): Free Stock Analysis Report
REPUBLIC SVCS (RSG): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VALASSIS COMMS (VCI): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
WASTE CONNCTION (WCN): Free Stock Analysis Report
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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