Service Businesses

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Service Businesses

INDUSTRIAL CLASSIFICATION

Industries are broadly classified as goods-producing and services-producing, but in the gradual evolution of industrial classification, ever new definitions of the services-producing sectors have emerged, indeed continue to emerge. Thus, for example, until 1997 U.S. industry was classified using the Standard Industrial Classification (SIC) system. It broke down industrial activity into nine major divisions: Agriculture, Mining, Construction, Manufacturing, Transportation and Utilities, Wholesale Trade, Retail Trade; Finance, Insurance, and Real Estate (FIRE); and, finally, Services. At that point the "services" component at least had a division of its own—although, in common parlance, people tended to include the Retail and the FIRE categories as part of the services sector.

Then came the North American Industrial Classification System (NAICS). It greatly expanded the divisional breakdown of industry, creating some 19 sectors. For example, Utilities were separated from Transportation; an Information sector was cut out of Manufacturing. FIRE lost Real Estate, which came to stand alone. And Retail lost Food Services. Most importantly, the Services Sector, which had become very important over the decades, was split apart into eight separate categories: Professional and Technical Services (which include law and engineering, for instance), Management Services (including holding companies), Administrative Support and Waste and Remediation Services, Educational Services, Health Services, Arts and Entertainment, Accommodations and Food Services, and Other Services (including household services, for instance).

The transition from SIC to NAICS, which had been a difficult path for industrial analysts in any case, was still not entirely traveled in the mid-2000s. During this period, the Census Bureau, working with Canada and Mexico (co-authors of NAICS), are working on NAPCS (for North American Product Classification System). NAPCS is causing the Census Bureau to revisit the services classifications. As a consequence of this new initiative, certain elements of other industries are now coming to be classified as "services," as indicated by the Census Bureau's Services Annual Survey: 2004, issued in April 2006. Important additions to the list include Truck Transportation, Couriers and Messengers, Warehousing and Storage, all of Information (which includes communications and publishing among others), Securities Brokerage (taken from Finance and Insurance), and Rental and Leasing (taken from Real Estate).

DEFINITION, CHARACTERISTICS, AND EXTENT

Given this still dynamically changing structure of classification, defining with any precision just exactly what a "service business" is presents some challenges. Service businesses are major movie studios, gigantic telecommunications firms, major publishers, enormous engineering concerns, the shoe repair shop down the street, the law firm, the payroll service, the auto rental organization, the apartment house, the fast food chain, the dental clinic, and so on and on.

Given the very great diversity that the term "service business" encompasses, its characteristics must, by definition, be rather broad. A service business is not primarily engaged in extractive, harvesting, and goods producing activities but in delivering results, often based on symbolical processes or the rearrangement of physical environments (landscaping, redecorating, waste handling, repairing), on personal services (healing, counseling, litigating, advising, persuading, amusing, caring for, teaching, etc.), on transporting goods and messages, and in structuring and managing ongoing or future activities by others (planning, engineering, management).

A service business, however, may also, if only incidentally, sell and deliver goods: people in the entertainment business sell CDs—although it is the films and the music that people are buying; in the information sector businesses sell newspapers and books—although it is the content of these media consumers are paying for; in the landscaping trade the businesses sell shrubs, plants, and decorative rock—but the buyer hires a landscape architect for the design ; and in waste management, companies physically remove the waste—although the consumer is buying the absence of trash.

According to the Bureau of Economic Analysis (BEA), which produces the Gross Domestic Product estimates, the goods-producing sectors represented 21.3 percent, the service-producing sectors 74.5 percent, and the information, communications, and technology producing sectors 4.2 percent of GDP in 2004. BEA uses the "value added" measure, meaning the difference between a sector's outlays for input and receipts for sales. The Census Bureau, also using the 2004 base year, estimates that non-goods producing sectors accounted for 70 percent of business activity (using revenues, this time); services, more narrowly viewed, i.e., based on the categories presented above, accounted for 55 percent of the economy. Thus by any measure, a company in the "service business" could count itself as a member of the majority.

MASSIVE AND GROWING

The services sectors—however defined, whatever industries happen to be parts of it today—are the consequence of a mature and wealthy economy—as illustrated by historical statistics provided by the Census Bureau. In 1900 services represented 25.4 percent of all employment (business and other but excluding government); this percentage had changed to 50.6 percent by 1980, 57.7 percent by 1990, and stood at 62.5 percent in the census year of 2000. With productivity in the goods-producing industries increasing (fewer people needed to produce the same dollar output) but much more sluggish in growth in the services sectors, employment in the mid-2000s stands even higher.

SMALL BUSINESS IN THE SERVICES SECTORS

In terms of sheer numbers, small business has always dominated the corporate population, with well over 90 percent of all business firms being small, even when excluding the tiny operations that do not employ people, the owner alone participating. The usual—but not the formal—definition of a small business is one with fewer than 100 employees. (For a more detailed discussion, see the entry Small Business.) A look at small business in the services sectors shows that these not only dominate services but very small companies, those with fewer than 20 employees, are the overwhelming majority.

These data, for the year 2003 and provided by the Census Bureau, include only the traditional services sectors, thus Professional and Technical, Management, Administrative and Waste Handling, Educational, and Health Services. Also included are Arts and Entertainment, Accommodations and Food Service, and the "Other" category. In the aggregate 88 percent of all firms participating in these industries had fewer than 20-employees—but those counted all had some paid employees. The two sectors with the most "under-20 employee" firms were Professional and Technical Services and Other Services; in both, very small firms were 93 percent of all companies. Management firms (which include holding companies) had the fewest—only 24 percent were companies with under-20 employees. Educational service companies were next to the lowest—but among these the small companies already represented 75.7 percent of the participants.

In terms of employment, the largest of these sectors was Health Care and Social Assistance, with 15.4 million employees, followed by Accommodation and Food Services, with some 10.4 million employees in the aggregate; the smallest sector was Arts, Entertainment, and Recreation, with 1.8 million workers and Educational Services with 2.8 million employees.

TRENDS LIKELY TO CONTINUE

With services a dominant expression of the U.S. economy, with manufacturing productivity still growing, and outsourcing of function a favorite activity of very large organizations—almost always outsourcing service functions—the service sectors are likely to continue growing. With the majority of people employed in services industries, moreover, those thinking of striking out on their own will also, on average, be experienced in services activities—and start up service businesses themselves. Entry into the services sector requires more education and know-how than capital resources, which favors the entrepreneur with limited means. He or she, looking "to be of service" to society, will find a rather favorable environment for venturing out.