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Rising Costs, Competition Pose Threats to Business Services

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In spite of the fact that the business services industry is riding high on a favorable economic and industrial backdrop, there are certain tailwinds weighing on its growth.

Here we discuss some inherent challenges faced by the Business Services industry:

High Costs

Players in the business services industry need to continuously adopt to changing technology and hence, a considerable portion of their earnings goes into research and development. The performance of these providers can be hampered if they do not acclimatize to or adopt new services to cope with the latest developments.

Furthermore, higher labor costs due to a competitive labor market are expected to continue to keep profits under pressure. The industry needs to have a more skilled workforce to take advantage of technology that develops at a rapid pace. The training of unskilled workers or taking in new skilled workers increases operational costs, in turn affecting margins.

High Competition

The main business of one company can be a business service for another. So target customers for both may at times be the same. Thus, maintaining or increasing market share remains challenging for business service providers. Strategic mergers and consolidations also pose competition for players.

Therefore, a business service provider needs to be adequately equipped to win over customers. While larger providers bank on the broad variety of service offerings and can effectively take up difficult ventures, relatively smaller players compete in an industry backed by specialized services.

Regulatory Hurdles

By virtue of having operations across the globe, service providers face regulatory hurdles and compliance-related issues. Particularly, transaction processing companies like First Data Corp. (FDC - Free Report) and Everi Holdings (EVRI - Free Report) are vulnerable to increasing global regulation, including anti-money laundering requirements and prohibition on certain types of Internet gambling payments.

Stocks to Avoid

Taking an unfavorable Zacks Rank into consideration, we prefer to avoid Healthcare Services Group (HCSG - Free Report) and Fang Holdings Ltd. (SFUN - Free Report) , each carrying Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

To Conclude

The dearth of skilled labor in the business services industry can curtail its prospects. Non-availability of quality workforce at a reasonable rate might increase overall operational costs.

In addition, the highly fragmented nature of the industry makes it difficult for such companies to set a distinct trend or predict a concrete future for it.

In Improving Economy to Fuel Business Services Growth in 2018,” we focus on the conditions that are expected to drive the industry forward.

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