The services sector is by far the largest in the world’s economy. Services comprise 64 percent of GDP overall, about twice as large as the GDP of the industrial sector. The services sector represents over 70 percent of GDP in advanced economies and close to 80 percent in the US.
Jobs exhibit similar statistics. According to the 2008 World Factbook, about 40 percent of all the jobs in the planet are in services. The numbers go up significantly in the more advanced economies. About two thirds of the jobs in Brazil, Japan and the European Union are in services. In the US, UK and Israel the percentage of such jobs is around 80 percent.
It is interesting that while constituting such a large portion of GDP and jobs in the world, the nature of services remains vague - a kind of hard-to-measure dark matter. It is easier to define the services sector by what it does not include: it is not agriculture or fishing, and it is not manufacturing, construction or mining. Just about every other job is in services. Perhaps the one definition everyone can agree to is one attributed to The Economist: a service is “anything sold in trade that cannot be dropped on your foot.”
In his excellent book, Services is Front Stage: We are all in services . . . more or less!, James Teboul discusses various ways of classifying services jobs, and finds them all more confusing than illuminating. He concludes that “The distinction between industry and service sectors is, in fact, largely irrelevant. Clearly, these two sectors are evolving in symbiosis: services cannot prosper without a powerful industrial sector, and industry is dependent on services.”
He offers a practical definition of services. Every organization, whether in business, government, health care or education consists of front stage and back stage activities. Services deal with the front stage interactions; manufacturing and production with the back stage operations. People are prominent in front stage activities, providing solutions to problems and focusing on achieving a positive customer experience in a collaboration between the providers and consumers of services. Product excellence and competitive costs are key to back stage activities, which tend to focus on specialization, standardization and automation. Given this definition, every business and institution is involved in services to a greater or lesser extent, because its activities will involve front stage interactions as well as back stage operations.
Professor Teboul then nicely explains why services jobs keep growing. "We are all in services now, more or less, but we will be even more in services in the future, as the back end shrinks with economies of scale and outsourcing and the front end develops further with more sophisticated demands from customers.”
Regardless of how you define services, given their portion of the economy, it is clear that you cannot improve the productivity of companies, industries and whole nations without significantly improving the productivity of services. But, is this something we should be concerned with at this time? Why, given the global financial crisis and massive loss of jobs around the world, should we worry about improving the productivity and quality of services? Won’t that result in a further reduction of jobs through automation and productivity increases, running counter to our immediate highest priority, namely the creation of badly needed new jobs?
Let me discuss what I believe are two major forces driving us to continue to improve the productivity of services jobs, starting with the old human drive to improve our standard of living.
The productivity of a country or region is closely related to the standard of living of its citizens, that is, the quality and quantity of goods and services available to people. GDP per capita is often used as a simple, concrete measure of standard of living. While this is both an incomplete and imperfect measure, there is general agreement that, all other things being equal, standard of living tends to increase when GDP per capita increases.
For example, according to Ohio State economist Richard Steckel, from 1820 to 1998 the overall GDP per capita of the world increased by a factor of 8.6, with different regions of the world experiencing widely different increases. GDP per capita went up by a factor of 3.3 in Africa and India, and 5.5 in China. But in all the countries that we now consider rich and having a high standard of living, GDP per capita grew at a much faster rate. Western European countries realized more than a ten-fold increase, the US a factor of 21.7, and Japan 30.5.
We can expect all well functioning countries, rich and poor alike, to continue their quest to improve the standard of living of their citizens by striving to increase their GDP per capita through productivity improvements to its largest component - services.
The second major force driving productivity in jobs comes from companies looking to improve their competitiveness in the marketplace. Like we did for standard of living, let's pick a simple, concrete measure to help us discuss competitiveness, in this case profit margins.
In 2008, services accounted for close to 60 percent of IBM’s revenues, a figure that has been steadily going up over the years. But the gross profit margins of services were roughly 30 percent, compared to significantly higher margins in the more mature hardware and software lines of business, whose products are developed and brought to market using advanced technologies, sophisticated tools and engineering disciplines. Many other companies have seen a similar increase in the portion of their revenues coming from services.
IBM, - as well as every other company that sees a growing fraction of its revenues coming from services, - is thus concerned with increasing the productivity, quality and profit margins of its services offerings, as a way of improving the overall competitiveness of the company. This is particularly important given our global environment, where competitors will often come from countries with lower labor costs.
Despite recent progress, services continue to be too labor intensive and too custom. Services do not make extensive use of standards-based components, as is the case in more mature industries. This is not surprising.
All professions tend to go through a similar cycle as they evolve over the years from a craft or trade centered around highly skilled masters and apprenticeships, to a discipline based on science, technology and management processes. Most services-based professions are still early in this cycle. But, big changes are coming to the world of services.
For several years, IBM has been working to develop Services Sciences, - the shorter name for the somewhat unwieldy Services Sciences, Management and Engineering (SSME), - as a new academic discipline, much as successfully happened with Computer Sciences about forty years ago. The key objectives are to encourage academia, industry and government to focus on innovation in the services sector of the economy, as well as to encourage universities to create inter-disciplinary research and educational programs focusing on services. I expect major progress in services professions in the next several years, especially as we look to create whole new classes of high skills and well paying jobs.
Speaking of job creation, assuming that over the next decades we make significant progress in improving the productivity of services based jobs, processes and industries, where will the new, future jobs come from to replace the ones lost to productivity improvements?
I don’t think that any of us knows. But, let’s look for guidance at the evolution of jobs over the past two hundred years as the Industrial Revolution unfolded. A picture of creative destruction emerges, caused by a succession of disruptive innovation that simultaneously reduce or eliminate older jobs, companies and whole industries while creating new ones. As new industries emerged during the Industrial Revolution, e.g., railroads, electricity and automobiles, many new jobs were created. Over time, those jobs were reduced through automation and productivity. The cycle kept repeating itself over and over.
As we look back over these past two centuries, we can discern some key patterns that can serve as a guide for the future. The more routine the job, the more they gravitate to lower wage countries and regions within countries. Earnings are highly correlated with skills and education, for individuals as well as countries. And, by almost any measure - GDP per capita, Human Development Index, or life expectancy, - the standard of living of most people in most countries has increased significantly of this time.
I suspect that we will observe similar patterns as we transition from the industrial to the knowledge economy. We will continue to see the loss of many jobs to increased automation and productivity, as well as the creation of many new jobs and disciplines that we cannot even begin to imagine. We will continue to see jobs migrating to lower wage countries and regions, and as the skills in emerging economies improve, many of those jobs will be increasingly sophisticated. And, given the increased complexity of the world and the problems to be solved, society will put an even higher premium on education, technology and innovation.
Finally, we truly expect - and should collectively strive for - that as in the past, the world’s overall standard of living and quality of life will continue to rise.