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Economy
The rise and rise of the strategic business service
by Marian Murphy
What have the following activities got in common: computer software and information processing services; R&D and technical testing services; marketing services; business organisation services; and human resource development services? The first answer is that they all fall into broadly the same category of "strategic business services", that is to say, they might not be core parts of a traditional manufacturing firm's business, but they are important complements to it. This point explains a second common characteristic: these strategic services are increasingly outsourced in OECD countries, rather than handled from within a firm's own resources.
While strategic business services have been growing rapidly during the past two decades, they remain a little known and under-researched area. One reason lies in the statistical difficulties associated with their measurement. However, since 1997 the OECD has been working to correct that and has managed to build a picture of the importance and role of strategic business services for some 21 OECD countries.
Serving the economy
Services generally have greatly expanded their importance in OECD economies and by the mid-1990s they accounted for some 70% of GDP and 65% of total employment. The strong growth of strategic business services in recent years has been particularly striking, and their efficient supply has become key to enhancing performance across the economy, whether in manufacturing or general services.
A considerable, but still imprecisely known, share of the growth in strategic business services owes much to the increased importance of outsourcing (see box). Information technology services, personnel supply services and training are just some of the many services for which businesses are relying increasingly on external suppliers. The aim of outsourcing is to improve efficiency and growth by boosting service quality and, of course, lowering costs. It allows firms to concentrate on their core business, to free up internal resources for other purposes, gain access to resources not available internally, and reduce or share risks.
Steady and reliable growth
But apart from being a support to companies, strategic business services can be considered to be an economic sector in their own right. One of the striking features of strategic services is that they have grown spectacularly, even in periods when overall economic growth was slow or non-existent. This finding holds for strategic business services in several countries, including Australia, Austria, Canada, Finland, the United Kingdom and the United States. More complete information and data, if available for other countries, would likely confirm this picture elsewhere.
The data available show a quite striking pattern. Turnover in strategic business services amounted to at least US$1,100 billion in 19 OECD countries in 1995, which was roughly the GDP of the United Kingdom in the same year. Such services provided employment for almost 11 million people in 21 countries. That puts it at more than twice the employment of the entire OECD motor vehicle industry. Gaps in the information collected to date suggest that these figures are conservative, perhaps even a serious underestimation of the true size of these activities. This is particularly true of human resource development services, such as adult education and training and vocational rehabilitation, where information is scant.
Within these impressively large figures are some star performers. At the head of the field is computer services, which generated the highest turnover of some US$350 billion (see chart). Business organisation services that is management consultancy, labour recruitment services, and the like were the second most important activity, generating just over US$290 billion. Turnover for marketing services and for R&D and technical testing and analysis services amounted toUS$242 billion and US$192 billion respectively.
Strategic business services are big employers too. Of the estimated 11 million employed in these activities in 1995, business organisation services employed the most: 3.6 million in labour recruitment services and 1.5 million in management consultancy. The United States accounted for approximately 53% of the total number and approximately 2.6 million of these US jobs were in labour recruitment services, well ahead of R&D, computer services and management consultancy. Labour recruitment/personnel provision services have been large employers in the United Kingdom and France too, whereas computer services were the most important employers in Japan and Germany. Computer services and recruitment were dynamic sectors in many OECD countries, though this should not detract from the fact that all strategic business services have enjoyed strong employment growth over the last decade and more, with annual growth rates often reaching double figures.
A key characteristic of these services is the predominance of small firms. The average firm size is invariably a fraction of the average firm size in the manufacturing sector, or indeed in the economy as a whole for all countries. In Spain the self-employed operate some 70% of computer services firms, 50% of firms in technical testing services and a slightly smaller share of firms supplying personnel recruitment services, advertising and human resource development services.
But strategic business services can also be described as comprising a large number of small firms and a small number of large firms, the latter being leading global players which deliver their services as multinational operations. This minority of large firms has flourished with the globalisation of manufacturing industry and in many cases business service firms have established an international presence alongside major manufacturing and other clients, for example, Andersen Consulting, the Boston Consulting Group, Cap Gemini Sogeti, SAP and WPP Group. It is noteworthy that US multinational firms figure prominently among the top ten global players in the different strategic business services, whether in information and software services, advertising, or in management consultancy and recruitment.
Globalising trend
Detailed data for cross-border trade in strategic business services is scarce and the OECD has had to rely principally on US trade data for its analysis. The US is indisputably the largest international supplier of business services and US exports in 1997 of strategic business services amounted to US$6.6 billion. However this figure is dwarfed by sales by US majority-owned foreign affiliates abroad (MOFAs), which totalled some US$28.3 billion in 1996 for computer services and US$4.9 billion in 1995 for advertising services. In addition, the foreign direct investment position of the US worldwide in these services amounted to approximately US$11 billion in 1994.
These figures do indeed show that strategic business services have come of age. And given their globalising character, it would not be a surprise if they stole some of the limelight in the Seattle trade round as well. End