To Begin With
In today's world, companies strive to remain focused on functions
and activities that are close to their core competence and provide
competitive advantages. But the complex marketplaces in which
companies perform demand a host of other functions as well. This
need opens the door of opportunities for providers of business
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. But given its unique nature, Zacks
has classified the group as one of 16 sectors (the S&P has only
10 sectors and business services is part of its 'Industrials').
The business service sector is highly fragmented, with no single
service provider showing market dominance. As per business reports,
the top 50 companies of the sector contribute less than 25% of
overall revenue of this sector.
This industry covers an array of services that include marketing,
consulting, staffing, security, telecommunications, Internet
services, logistics and waste handling. 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 within the generally accepted definition of the
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 sector.
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 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. This sector is
) and Kroll.
Waste Management service providers offer services such as
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
) (France), facilities support services provider Serco Group (UK),
staffing services provider Adecco (Switzerland), travel agency
service provider TUI Travel (UK), and security services provider
G4S (UK). Other big names in the field are Rentokil Initial (UK)
and ISS (Denmark).
The emerging economies such as India and China are also becoming
important destinations for the business service sectors.
Out of the 31 companies under the Zacks coverage universe of the
Business Service industry, only 42% could beat earnings estimates
in the last reported quarter. The average surprise was 37.7%. While
the highest surprise came from
SPS Commerce, Inc.
) (800%) the lowest was from
The average earnings surprise from Advertising & Market
Services and Consulting Service, the two major components of
Business Service sector, failed to impress.
Of the 18 companies under our Consulting Industry coverage,
Information Services Group, Inc.
) delivered the highest surprise of 300%, with the lowest of -100%
Hill International, Inc.
). However, most of the companies delivered a positive surprise in
the last concluded quarter.
The average surprise from the Advertising & Market Services
Industry (14 companies under our coverage) was a negative 24.6%,
with less than 50% of the company delivering a positive earnings
The divergence further establishes the fragmented nature of the
Given the nature of intangible products offered by the service
sector, it is labor intensive. Labor, both skilled and unskilled,
is essential for the smooth functioning of this sector. Being a
labor-intensive sector, it offers immense employment opportunities.
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 a
better retention ratio.
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.
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 volumes for the
service providers. As a result, they can offer services at a lower
cost, which in turn further lower costs for companies.
The industry offers specialized services based on the latest
technologies. This is evident for the security and consulting
services. To safeguard data, companies are compelled to engage
security service providers, who need to have the latest and most
efficient technologies in place to persuade their clients and win
Also, with the increased number of mergers and acquisitions across
the globe, the prospects for legal service providers look good.
Consulting service is another wing of this industry that is gaining
traction these days.
With business complexities on the rise, companies are opting for
expert advice before entering into any new venture rather than
risking losses due to trial and error. Hence, this service sector
also looks promising as it is indispensable for companies that are
fighting to survive in a 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 their
Requires Continuous Spending for Research and Development:
Importantly, consulting service providers need to remain abreast of
the latest technologies through continuous spending on research and
development. The performance of these providers can be hampered if
they do not acclimatize and/or widen its services with ongoing
Training, Maintaining Skilled Workforce:
Since skilled workers are always in high demand, there remains a
possibility of high turnover rate within the sector. The training
of unskilled workers or taking in new skilled workers increases
operational costs, thereby affecting margins. This sector needs to
have a more skilled workforce to take advantage of the technology
that develops at a relatively rapid pace.
Maintaining or increasing market share 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
The Zacks Consensus Estimate for the Business Service industry for
2013 lies between -$1.75 and $2.42 per share.
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 to outperform others. The top 1/3rd of the Zacks
Industry Rank qualifies as industries with 'Good' prospects, the
bottom 1/3rd as those with 'Bad' prospects, and the middle 1/3rd as
those that are 'Neutral.' Most of the constituent 'industries' in
the business services sector fall in the top 1/3rd of the list.
Business Service, at Zacks Rank #45, is placed in the top 20% of
the industries or in the top 1/3 of the total Zacks industry rank
list. Most of these companies carry a Zacks Rank #3 (Hold).
The Consulting industry is currently at #26, which puts it in the
top 10% of the industries. Of the 18 companies in the Consulting
industry, 8 have Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy),
while only 3 have Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong
Sell). Companies like
Towers Watson & Co.
CRA International Inc
) are Zacks Rank #1s while
) has Zacks Rank #2.
Internet commerce, currently positioned as #60, has companies that
mostly carry Zacks Rank #3. The industry has made its place within
the top 25%.
Almost 80% of the companies, under the #95 ranked Advertising &
Market Services Industry, including players like Interpublic Group,
Omnicom and Harte-Hanks, carry a Zacks Rank #3.
The Financial Transaction Services industry, with players like Visa
and Mastercard, is currently at #108, or in the middle 1/3 block.
A dearth of skilled labor in the business services sector 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 for
the industry. The expected annual compounded growth rate for this
sector is 4% from 2010 to 2015.
With population growing at an accelerated pace and economic turmoil
being a constant drag, 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 that despite all the hurdles, this industry is essential
to business operations going forward.
CORELOGIC INC (CLGX): Free Stock Analysis
CRA INTL INC (CRAI): Free Stock Analysis Report
FTI CONSULTING (FCN): Free Stock Analysis
HARTE-HANKS INC (HHS): Free Stock Analysis
INTL BUS MACH (IBM): Free Stock Analysis Report
INTERPUBLIC GRP (IPG): Free Stock Analysis
KELLY SVCS B (KELYB): Get Free Report
MANPOWER INC WI (MAN): Free Stock Analysis
INSPERITY INC (NSP): Free Stock Analysis Report
OMNICOM GRP (OMC): Free Stock Analysis Report
REPUBLIC SVCS (RSG): Free Stock Analysis Report
TOWERS WATSON (TW): Free Stock Analysis Report
VALASSIS COMMS (VCI): Free Stock Analysis
VEOLIA ENVIRON (VE): Free Stock Analysis Report
WASTE CONNCTION (WCN): Free Stock Analysis
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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