What's Driving the Business Services Sector? - Industry Outlook

The business service sector is seeking avenues for growth in various markets. Having established its indispensability, the sector can now comfortably try out several strategies. Discussed below is what keeps the sector rolling.

Labor Intensive: The sector, which offers intangible products, has immense employment opportunities as it requires both skilled and unskilled labor for its smooth functioning. Business reports indicate that the two most populated countries, China and India, are together expected to create 300 million placements in the global job market by 2030.

The last U.S. jobs report showed that total nonfarm payroll employment increased by 248,000 in September, with the unemployment rate declining to 5.9%. Professional and business services witnessed an increase in employment of 81,000 in September in the U.S. As per The Institute for Supply Management, the U.S. services sector employment hit a nine-year high in September.

We will know more as the October jobs data comes out later this week, but a stronger momentum on the services side will put the labor gains on a sustainably upward trajectory.

Global Reach: Companies can reach their consumers or prospective buyers across the world when Advertising & Market Services and Direct Marketers act on behalf of these in informing consumers about new products or added features in existing products. Thus, these service providers help in widening a company's customer base and maintaining a better retention ratio. It also opens the door to international trade.

A key development in this regard has been noticed in the banking space. Online banking, for transfer and collection of money from anywhere in the world, mobile money transfer and ATMs are fast gaining traction. The Western Union Company WU and MoneyGram International Inc. MGI are among the stalwarts, which are continuously working on their new age service offerings via electronic channels to ensure smooth fund transfers. Fund transferors are forming alliances with banks and mobile operators to launch their services.

Mobile payments are gaining popularity owing to their convenience and round-the-clock accessibility. This channel will see a faster adoption rate than any other electronic channel. Western Union has mobile money transfer facilities in 17 countries and bank account payout in 49 countries. MoneyGram has 345,000 agent locations spread across over 200 countries and territories.

A large portion of the world market remains under-penetrated. With the strategic introduction of money-transfer in such markets, such service providers can enjoy ample business opportunities.

Cost Effective: All business operators prefer to minimize costs of operation and maximize margins. This sector offers cost effectiveness to the companies that opt for services which would otherwise be far more expensive.

With specialized services, these providers reduce the operational cost and in turn the overall costs of companies. Notably, an increased number of companies opting for such specialized services would increase volumes for the service providers. This would eventually lead to services at lower costs and a further reduction in costs for companies fuelling margin expansion.

Specialized Service: The industry offers specialized services based on latest technologies. This is evident for the security and consulting services. To safeguard data, companies are compelled to engage security service providers, which are required to have the latest and most efficient technologies in place to persuade their clients and win business contracts.

Also, with increasing mergers and acquisitions across the globe, the prospects of legal service providers look good. Consulting service is another wing of this industry that is fast gaining traction.

Business complexities are on the rise, and 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 to companies that are battling to survive in a competitive market.

Consolidations

Mergers and acquisitions play a key role in not only strengthening a company's foothold by grabbing more market share but also in edging out competition. The business service space has seen a flurry of acquisitions so far this year.

Last month, PFSweb, Inc. PFSW, a global provider of end-to-end eCommerce solutions, acquired REV Solutions, an eCommerce system integrator and LiveAreaLabs, a digital creative agency and eCommerce systems integrator.

Recently, Avis Budget Group, Inc. CAR agreed to acquire its Budget Car Rental licensee for southern California and Las Vegas for approximately $210 million, plus the cost of acquired fleet.    

This month, Cardtronics Inc. CATM completed the takeover of U.S.-based Welch ATM. The acquisition has brought together two premier retail ATM service providers.

Viad Corp. VVI has acquired leading U.S. event housing service providers, onPeak LLC and Travel Planners, Inc., to fortify its live event service business -- GES -- which is part of its Marketing & Events Group.

SPS Commerce, Inc. SPSC has acquired all the assets of Australia and New Zealand's leading provider of cloud-based supply chain solutions, Leadtec this month.

Bottom Line

The high labor and low capital intensity of the business services sector makes it a perfect a vehicle for labor market gains worldwide. We haven't really seen much of that in the U.S. in particular and the developed world in general, as most of the gains have taken place in the emerging markets of India and China.

That said, the sector does offer attractive investment opportunities to stock market investors. The sector hasn't done much year to date, with business services companies in the S&P 500 index as a whole up less than the index as a whole. This means that valuations for the sector are a lot more reasonable than is the case at present for the better performing sectors.

Check out our latest Business Services Outlook here for more details from an earnings perspective, and how the trend is looking for this sector from now onward.

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