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
marketplace. This need opens the door for providers of business
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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. But given its
unique nature, we at Zacks have classified the group as one of
sixteen sectors (the S&P has only 10 sectors and business
services is part of its 'Industrials' sector).
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 contribute 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 include
marketing, consulting, staffing, security, telecommunications,
internet services, logistics 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.
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 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 arena include
), 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 U.S. 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.
Waste Management service providers offer services that include
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.
The U.S. and Europe are the largest markets for the business
service sector. Some of the dominant players beyond the U.S.
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
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 smooth functioning of this
sector. Being a labor-intensive sector, it offers immense
Companies can reach its consumers or prospective buyers across
the globe when Advertising & Market Services and Direct
Marketers act on behalf of them in informing consumers about new
products or added features of existing products. Thus, these
service providers help in widening a company's customer base
and/or maintaining better retention ratio.
Further, technology, or specifically Internet, enables any
producer to sell their products globally from any part of the
world. Thus, companies enjoy a wider marketplace. Here comes the
importance of Catalog & Mail Order Houses like
) among others, through whom customers at one end of the globe
can get any product shipped to them from any other end of the
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.
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.
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
Requires Continuous Spending for Research and
Most importantly, the consulting service providers need to be
updated with the latest technologies that require continuous
spending on research and development. Performance of these
providers can be hampered if it does not acclimatize and/or widen
its services with the ongoing developments.
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.
Maintaining the market share or increasing the same remains a
challenge for business service providers. As discussed earlier,
the main business of one company can be a business service for
another company; hence target customers for both may be the same
at times. Therefore, a business service provider is always
required to be adequately equipped to win over customer demand.
While larger providers bank on the broader variety of their
service offerings and can effectively take up difficult ventures,
the relatively smaller players compete in the industry backed by
their specialized services.
The earnings picture for the Business Services group is better
than broader market. In the just-completed third quarter
reporting season, total earnings for the sector were up 5.9% from
the same period last year, which compares to no growth for the
S&P 500. Total revenues for the sector were up 0.6% in the
quarter, compared to the 0.7% decline for the S&P 500 as
In terms of surprises, the sector's performance was weaker than
the broader market, with only 57.9% of Business Services
companies beating earnings expectations, compared to the 'beat
ratio' of 62.8% for S&P 500. The variance is far more
pronounced in the fourth quarter, when total earnings for the
sector are expected to be up 15.3% from the same period last
year, while total earnings for the S&P 500 would be up only
Zacks Industry Rank
The Zacks Industry Rank, which derives its predictive power from
the time-tested Zacks Rank, helps us identify the industries that
are expected outperform others. The top 1/3rd of the Zacks
Industry Rank qualify as industries with 'Good' prospects, the
bottom 1/3rd have 'Bad' prospects, and middle 1/3rd as 'Neutral.'
Most of the constituent 'industries' in the business services
sector fall in the top 1/3rd of the list.
For example, the Consulting industry is currently at # 33 which
puts in the top 15% of the industries. Of the 18 companies in the
Consulting industry, 8 have Zacks #1 Rank (Strong Buy) or Zacks
#2 Rank (Buy), while only two have Zacks #5 Rank (Strong Sell) or
Zacks #4 Rank (Sell). Companies like
) all have Zacks #2 Rank (Buy). The Financial Transaction
Services industry, with players like
), is currently at 54 or in the top 22% of industries.
A dearth of skilled labor in the business service sectors can
have an impact on future growth possibilities. Non-availability
of quality workforce at a reasonable rate might increase 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.