Can Business Services Tide Over Economic, Cost Concerns? - Industry Outlook

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The Business Services sector no doubt has plenty going in its favor, as we discussed in our earlier post (What's Driving the Business Services Sector?). But a number of issues remain that we discuss in this article.

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. Business service providers generate revenues 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 dampen the business of the service providers and affect their fundamentals.

Continuous Spending on Research and Development: Importantly, consulting service providers need to stay abreast with the latest technologies through continuous spending on research and development. The performance of these providers can be hampered if they do not acclimatize to or adopt new services to account for the ongoing developments.

Training, Maintaining Skilled Workforce: Since skilled workers are always in demand, there remains a possibility of a 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 technology that develops at a relatively rapid pace.

Competition: Maintaining or increasing market share remains challenging for business service providers. As discussed earlier, the main business of one company can be a business service for another; 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.

Regulatory Hurdles: By virtue of having operations spread across the globe, service providers face regulatory hurdles and compliance-related issues. While Moneygram International Inc. (MGI) witnessed higher compliance-related costs, The Western Union Company (WU) estimates compliance costs to approximate 3.5% to 4% of revenues in 2014. This will in turn restrict the bottom line of a company.

To Conclude

The dearth of skilled labor in the business services sector can impact future growth. Non-availability of quality workforce at a reasonable rate might increase overall operational costs.


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