service businesses, service industry

In Britain as in the whole industrialised world, services have grown relatively more important - in employment, share of national output and competitive prowess. That's something 'everybody knows'. The truth, however, is that nobody knows how far the service revolution has surged. Supposedly pure service industries, like catering, account for a diminishing share of the true service total. More and more, manufacturers - including the greatest - are becoming hidden service companies.

This only results partly from diversification. True, the mighty General Electric, for instance, earns 40% of its revenue from mostly purchased service businesses (including the NBC television network). That's only the tip of the iceberg. Within manufacturing itself, the service component is growing at great pace. Critically, service is the key to customer satisfaction and loyalty - more than product or production advantages. Further, modern products embody more and more so-called service provisions.

Thus, you can't make computers (hardware) work without programs (software) - and IBM's software business is consequently three times as big as Microsoft, traditionally a service company. But traditions don't count for much in the brave new world of services. Software is actually manufactured and sold in packages - except when you buy it (as you now can) over the communications networks. Anyway, the divisions were always artificial. Gardner Merchant is a service company on any classification: but catering, just like chemicals, takes raw materials and turns them into a usable product.

Marks & Spencer is a retailer, definitely a service: yet the company devises St.Michael products and orders their components in an intimate relationship with its manufacturing suppliers. Both GM and M&S are players in another crucial part of the new economic game: companies of all kinds are 'outsourcing' their 'non-core' activities (including vital services) to specialists who offer concentrated expertise and economies of scale. The supplier becomes an extension of the customer, independent but indispensable, working closely alongside the latter's wholly-owned operations.

Britain has often been regarded as a potential big winner in the new game. Napoleon's 'nation of shopkeepers' has a major reputation and presence in all service activities, notably those financial operations centred on the City of London. At one point, Mrs Thatcher's government even fell for the seductive notion that manufacturing didn't matter, because services were the wave of the future - a wave which would carry the UK economy onwards and upwards. As noted above, however, services are tightly interwoven with manufacturing. No major service economy can flourish on a weak industrial base.

That's been rubbed in by foreign takeovers in merchant banking, once thought the City's strongest hand, and by the terrible troubles at Lloyd's - now a minor competitor in global insurance. But the best service companies have become Britain's key players. In the Financial Times list of Europe's 30 most respected companies, the top three UK entries are all service leaders: British Airways (3rd), M&S (5th) and Reuters (14th). Of the other four Britons, Virgin and Rentokil are basically service companies: which leaves only Glaxo-Wellcome and British Petroleum from the ranks of traditional industry.

Drug companies like Glaxo, though, are becoming heavily involved in healthcare services: while BP is an enormous retailer. Thus, one way or another, everybody's in services now, and every week sees major new service businesses created. Just as they see the wisdom of outsourcing their industrial catering, so manufacturers are continually finding other areas where it's wiser to sub-contract. By tradition, for instance, companies have managed their own facilities: no longer - even the Atomic Energy Authority's plants are managed by an outside services company, Procord.

The latter originally sprang from IBM (UK), whose facilities it also manages. This example, of services not just outsourced, but spun off, is only one of many which demonstrate that the usual anxious questions raised by the rise of the service industries are no longer strictly relevant. For instance, can the UK hope to achieve the position in services that its factories occupied in the 19th century? The services world has become too fragmented and complex for any such strategy even to be formed, let alone realised.

But clearly (as its European stars prove) Britain has a better chance to generate and sustain truly global service champions. In industries like cars and electronics, the relative size and financial strength of UK contenders greatly restricts their growth potential. No such limitations apply to services: Gardner Merchant is by no means alone in searching successfully for expansion overseas. In the Pacific Rim as in the US, in Continental Europe as in Latin America, know-how developed in providing services in the British market can be rapidly deployed and exploited.

This can't provide the same benefits for domestic employment as factory-based expansion, in which physical goods are exported. That might sound like bad news for the North, where manufacturing used to reign, and good tidings for the South, the heartland of service. But the revolution in communications - itself a prime service industry - is altering the map of commerce. Service centres, for example, can be located anywhere: thus, all BT's directory enquiries are answered in Scotland, and world-wide companies are now centralising similar services in similar low-cost locations.

That fits into another crucial trend, which is for services to go global, crossing all frontiers. According to research published by cleaning group ISS Europe, very few companies currently purchase services on a pan-European scale: 15% for industrial services like cleaning, catering and security. But that could double over two years as firms currently planning to take advantage of the benefits react to real fear that otherwise competitors will steal a march - and they will be left behind.

That fear of fatal lag shouldn't apply to most British service industries, given their advanced development, long experience and ambitious management. But as City setbacks show, winning global success in services is just as tough a task as breakthrough in manufacturing. The saving grace is that hard experience in highly competitive domestic markets has left service contenders with no doubt on that score - and with every reason for bright hope.