Business services trends
OUTLOOK | May 18, 2022
Authored by RSM US LLP
Technology is helping business services firms overcome inflation and labor shortages
Business services firms are working through many of the same challenges everyday Americans are—inflation, labor shortages and higher gas prices—while seeking ways to meet increased demand. To that end, firms investing in productivity-enhancing technologies and their labor force are developing competitive advantages, while those that might be lagging can look around the marketplace and see the importance of catching up.
Strong demand in the services industry
American consumers are spending again following a two-month downturn to end 2021, and that’s great news for business services firms. Consumer spending correlates to corporate profit, which is a key driver of demand in the business services sector, as it indicates increased business-to-business activity.
Consumer spending increased 11.3% from June 2020 to December 2021, driving a 51% jump in corporate profit during that span. The Institute for Supply Management’s Services Business Activity Index showed a coinciding steep increase in service demand. This measure of sentiment among purchasing managers in service firms reached a high of 72.5 in November 2021. Although it has since eased to 59.1 in April 2022, it remains strong overall. For context, values above 49.2 indicate service executives are viewing the industry as being in an expansive state.
In addition, the business services sector is forecast to grow at an annual compounded rate of 6% between now and 2026, according to First Research. In other words, the sector can expect consistent growth for years to come.
Firms can position themselves to capitalize on this by ensuring they have the proper resources in place, including a skilled labor force and technologies that will not only provide efficiencies but also result in the best end product for customers.
Some subsector firms are doing just that. In facilities services, for example, Guardforce AI recently announced its robotics services in the United States. The robots have been deployed on a trial basis in office buildings in the New Jersey area to disinfect office spaces. Chairman Terence Yap said in a statement that the robots are being integrated onto the company’s robotics management platform with the goal of “building a truly intelligent network of robots with the ability to help customers reduce labor cost and improve operational efficiency.”
Mitigating the labor shortage
The labor shortage has persisted longer than many business services firms were prepared for. As a result, many are investing in technologies—specifically those with automation and data analytics capabilities—that can either replace the workforce they’ve lost or complement the skilled talent they’ve retained.
Many firms have expanded their benefits packages to include increased wages, additional paid time off, longer holiday breaks and other perks. Some firms have embraced social consciousness and adopted causes related to environmental and social justice, understanding they are increasingly important to employees when choosing an employer. All those factors drive up the total cost of labor.
As that cost increases, labor productivity is keeping pace at firms that invest in digital solutions. We’re seeing differentiated results at the company level across most subsectors, which highlights opportunities for firms to gain a competitive advantage as the industry-level margin between job vacancies and hires continues to widen.
Overall, investments in highly skilled employees and digital solutions are manifesting in increased labor productivity. Companies further along in executing those strategies are reaping the rewards early and often.
Inflation continues to plague the economy, coming in at 8.5% higher in the first quarter of 2022 compared to the first quarter of 2021, according to Bloomberg. Service-sector costs were up 5.1% from a year ago, accounting for 60% in the overall consumer price index.
Many firms in the business services industry, such as waste management firms and security firms, have a large field-service component that exacerbates the challenges of high oil prices. Given that the ongoing Russia-Ukraine war likely signals that inflation and oil prices have not topped out, such firms will have to either pass the additional costs to their customers or find innovative methods to maintain their margins, such as using high-efficiency vehicles.
You might have heard the notion of price controls to curb inflation and provide some relief for consumers and those participating in business-to-business activities. The case against that form of government intervention is well established; however, they are something to keep in mind as things progress. To this point, at least, many firms have increased prices. According to Bloomberg, the Prices Received for Services Index was at a three-year high of 47.1 in February 2022 after reaching an all-time low of minus 19.8 in May 2020.
Firms considering raising prices have to ask themselves: What additional value are we providing to our end customers? Firms in the staffing sector, for example, are shortening placement times by automating the process of matching candidates to job descriptions using common keywords. This added value helps to justify price increases. Firms in other sectors may want to find their equivalent to ensure customers receive and recognize what they are paying for.
Inflation and labor shortages don’t have to slow the growth of business services firms. Investing in productivity-enhancing technologies and focusing on recruiting, retaining and developing skilled employees will give firms a competitive advantage and could help them justify increasing prices across the board. It will allow firms to not only maintain their margins, but also meet the increased demand we’re set to see in the coming years.
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This article was written by Cameron McMillian and originally appeared on 2022-05-18.
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