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 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
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 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 sector.
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. 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% coming from
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
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
Requires Continuous Spending for Research and
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 developments.
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 services.
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
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
The Financial Transaction Services industry, with players like
Visa and Mastercard, is currently at #108, or in the middle 1/3
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
FTI CONSULTING (FCN): Free Stock Analysis
HARTE-HANKS INC (HHS): Free Stock Analysis
INTL BUS MACH (IBM): Free Stock Analysis
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
OMNICOM GRP (OMC): Free Stock Analysis Report
REPUBLIC SVCS (RSG): Free Stock Analysis
TOWERS WATSON (TW): Free Stock Analysis
VALASSIS COMMS (VCI): Free Stock Analysis
VEOLIA ENVIRON (VE): Free Stock Analysis
WASTE CONNCTION (WCN): Free Stock Analysis
WASTE MGMT-NEW (WM): Free Stock Analysis
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