Investment in skills needed to boost service sector fortunes

Dec 12 2007 by Richard Bottomley for The Journal

THE importance of the service sector in this region, as an economic force and a source of employment, is such that it accounts for 43% of regional GVA.

So it’s worth considering the reasons that may be behind the fall in confidence among UK service providers, found in the autumn KPMG Business Outlook Survey, which asked 2,800 businesses in the service sector about their prospects for the next year.

Although remaining positive, expectations for activity, revenues, new orders, profits, employment and capital spending were all well down on last year.

An increase from 10% in the spring to 15% of UK service providers who now expect activity to fall in the next 12 months may be due to a perceived weaker demand environment following recent financial market turmoil.

The combination of increased economic uncertainty and strong market competition could explain the lowering of their expectations for the rate of profits growth over the coming year, too.

Concerns over rising costs also continue. Acceleration in the annual rate of input price inflation is expected by 47% of businesses questioned, with the knock-on effects of the high price of crude oil on fuel and energy costs alongside continued expectations of rising labour costs underpinning inflation concerns.

It’s no surprise that as confidence has fallen, so too have expectations regarding employment and capital spending.

While positive – with more businesses anticipating recruitment and investment than not – scores for both were at their lowest since survey data was first available in the spring of 2006. These relatively subdued sentiments could result from feeling the impact of an increase in competition from emerging markets overseas, primarily China and India.

This is a particular concern for the North-East, given that many of our service roles are relatively low skilled and so can be delivered overseas – and more cheaply.

Just as it’s recognised that the UK manufacturing sector must invest in production capabilities in order to exploit niche, high quality opportunities and move away from direct competition with China for example, so the region’s service businesses must invest in skills to create a differential, ensuring clients can see a benefit from paying ‘premium’ rates to use a UK based business in preference to cheaper overseas competition.

This region, and indeed the UK as a whole, cannot compete with these low-cost economic forces on price, no matter how rigorous a cost-cutting programme is undertaken.

Of course, other organisations within the region can also support the prosperity of this sector by fulfilling their service needs through local businesses.

Buying locally may secure a higher level of service, with a greater bespoke element, to that which can be achieved by an overseas supplier.

This survey indicates that the service sector is set to drop down a gear in 2008 but, given it’s a strong force behind our regional economy, it’s worth taking steps to resist this outcome.

It may require businesses to invest in improving the skills base of their labour force, even at a time of only limited growth, because it could make a significant difference to the sector’s long-term prospects.

:: Richard Bottomley vice-president NECC and senior partner KPMG.