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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.
Omnicom Group Inc.
Valassis Communications Inc.
) 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
), Bain, Booz Allen, Deloitte Consulting (an affiliate of Deloitte
Touche Tohmatsu), and
IBM Global Services
The Staffing business helps companies identify and recruit the
right person for the right job. This sector is dominated by
Kelly Services Inc.
), 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
Verizon Communications Inc.
Surveillance, Investigation & Security Consulting Services
providers offer specialized security services and this sector is
) and Kroll.
ABM Industries Incorporated
) 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
Waste Management service providers offer services that includes
collection, transport, processing, recycling, disposing and
monitoring of waste.
Waste Management Inc
Republic Services Inc.
Waste Connections Inc.
) 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
) (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
Nevertheless, the emerging economies, such as India and China are
also becoming important destinations for the business service
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
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
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
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
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.
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
) 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.
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
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.