Knowledge-intensive business services - what future?

Note: ‘Market economy’ and ‘services’ excludes financial intermediation; data for EU15 less Greece. - Source: Based on Table 1.2 from Eurostat (2004a), p. 10.

Over the last decade, the computer and businesses services sectors (NACE 72 and 74) have almost all shown growth rates that are higher than those of the economy as a whole, and of those of other market services. Mainly small firms are active in these sectors compared to most other sectors of the economy; though R&D services are more oriented to large firms. Often there are a few large transnational companies cooperating with a large number of small firms dealing with specific localities (knowledge is not as mobile as is often thought) or specific niches (specialist classes of knowledge). Many of the sectors have a higher share of women in the workforce than the economy as a whole, although important differences remain in the gender composition of specific KIBS from country to country.

Drivers of development in KIBS

The knowledge-intensive business services sector’s growth rate is so much faster than that of other sectors that it cannot solely be attributed to the growth of those sectors which are users of KIBS. According to statistical analyses, KIBS’ growth is largely due to changes in the extent to which all sectors are demanding inputs from KIBS. As a result, some researchers argue that a major driver for KIBS growth is ‘outsourcing’.

Outsourcing

At the beginning of 2005, EMCC has published a report dealing in much more detail with the topic of outsourcing - and, in particular, focusing on offshoring and how this impacts on computer and business services (Huws (et al), 2004). Firms have increasingly contracted out services which were originally internal operations. This reflects various types of motivation, one of the most prominent being the philosophy of focusing on core competences. Indeed, specialised business services could be expected to gain the following: economies of scale; the efficiency and effectiveness that come from experience and learning from different clients; the impetus that comes from having to compete with other suppliers; and other ways of improving service performance. The client benefits from being able to be more flexible - terminating contracts and shifting between suppliers may be easier than dealing with an in-house workforce.

However, things do not all work one way. The sorts of specialised labour force that are involved in KIBS may sometimes adhere to cultures and work practices which do not fit easily within client firms. Thus, several factors work towards a ‘buy’ solution to the ‘make or buy’ question in respect of KIBS. Furthermore, there are transaction costs involved in locating and using external suppliers of services. It is necessary to establish a sufficient ‘absorption capacity’ in the client organisation, otherwise the benefits of the service may be lost. Smaller firms may be unable to afford KIBS - or specialised service workers of their own - and have to rely on internal managerial, technical or administrative resources to perform these functions. Highly strategic functions are often hard to relinquish on the part of potential clients, though it is notable that even activities like R&D have been increasingly outsourced in recent years. In any case, the outsourcing tendency still has a long way to go in most KIBS areas, for example, the vast majority of business R&D is not yet outsourced.

Outsourcing may increase the number of KIBS firms offering their services. However, offshoring may lead to service activities being relocated to cheaper sites - not necessarily in the EU. It is suggested that new information technologies (IT) may make offshoring, in particular, more attractive, by enabling the relocation of information work to low-wage economies where the appropriate skill set is available. Relatively unskilled office and call centre work has attracted a great deal of attention in this respect. At the same time, there is a visible tendency for elements of more knowledge-intensive work - software development, some forms of professional advice, etc. - also to be offshored. This is related to decreasing communication costs over long distances and the expanding capacity of new IT to allow detailed interaction and coordination. Therefore, offshoring - and outsourcing in general - becomes relatively less expensive options in many cases, despite the problems of arm’s length relationships with the KIBS sector in the EU.

Although outsourcing is changing the shape of the European KIBS sector, it is not a sufficient explanation for the sector’s growth. Large numbers of KIBS-type employees are still present in most sectors of the European economy - indeed, the share of the workforce accounted for by white-collar and knowledge-intensive employees is growing across all EU economic sectors.

There are also other forces driving the development of KIBS industries. In particular, Kox (2002) and Toivonen (2004) have sought to examine growth drivers active in the KIBS sector, looking at those drivers that may operate in the future, as well as those that have been important in the past.

Technologies

When considering the growth of KIBS, the increasing demand for certain forms of knowledge has to be taken into account. A major driver of KIBS growth is revealed by the rapid increase in technology-related business services, of which the most prominent examples are computer and information technology services (see Table 1, NACE division 72). The rapid advance of technological performance and the proliferation of applications create a major problem for organisations wanting to make effective use of these technologies. In order to keep up with these developments, it is necessary to acquire substantial (new) knowledge. Of course, many organisations have built up internal IT capabilities; Nevertheless, IT services provide an alternative source of knowledge.

IT services are multifaceted, including sourcing and configuring complex technology set-ups required for clients’ specific IT applications (systems integrators); writing software or designing web pages; giving advice on IT strategy; or implementing and running facilities for clients (facilities management).

More services have emerged to help clients deal with different technologies and technological problems. Some of these are active around specific bodies of technological knowledge - mechanical engineering, biotechnology, nanotechnology, etc - while others are more focused on specific problems - most notably environmental problems and technologies that can be brought to bear on these. KIBS offer services as diverse as waste disposal, emissions and discharge monitoring, remediation and clean-up, environmental auditing, environmental impact assessment and eco-design.

This technology-related driver of KIBS constitutes a major element of the knowledge-driven economy. To the extent that European economies are increasingly dependent on a widening range of technological knowledge, these services are therefore playing an important role. In many ways, these services are locating, developing, combining and applying various types of generic knowledge about technologies and applications to local and very specific problems, issues and contexts of their clients. As with many other KIBS, they are involved in a process of fusing generic and local knowledge together. Sometimes this means that substantial negotiation with the client is required to reach a shared understanding of the problem. However, such negotiation is not always successful as many IT projects are failures or only partially successful. One way of dealing with this problem is to create services which are more like engineering (concepts like ‘service engineering’ and ‘software engineering’) so that problems are spelled out explicitly and formally, and solutions are broken down into well-documented component elements.

Regulations and social change

Many KIBS help clients thrive in their social environments, such as specialised services to support legal and accountancy frameworks which have existed for a long time. KIBS that provide intelligence and advice on dealing with regulatory structures are also significant. For instance, compliance with environmental regulations, health and safety standards, and a range of similar issues represents a major challenge for firms. These challenges are greater for companies working across countries with different traditions. KIBS provide basic information, advice and intermediation services, and help in training client staff (which is also a function of some of the more technology-oriented KIBS).

Other KIBS are more in the business of helping clients understand, and relate to, the markets and cultures, the consumers and stakeholders, with whom they deal. Market research, marketing, and public relations are examples of such services. The proliferation of products and the diversification of consumer demand have prompted a major growth in demand for such services. Again, firms operating in international environments are faced with greater requirement for knowledge about their environments, and how to operate in them.

Environmental regulations and social concerns about environmental issues are important factors promoting the growth of environmental services, such as waste disposal as well as KIBS dealing with ‘clean’ technologies and environmental law. Environmental issues may also impact on how KIBS do their business ensuring that KIBS are less energy-intensive than many other services. For example, this is relevant for services in transport and services that require large office infrastructures. However, this does not mean that KIBS are inherently environmentally friendly. In 2001, Zaring (et al) included several KIBS in their study of ‘eco-efficient producer services’ and suggested that several factors are liable to push these firms to being more eco-efficient - with explicitly environmentalist motives often playing a minor role.

Other drivers

In the discussions above, internationalisation and globalisation have often been mentioned as a closely related pair of factors driving clients to seek inputs from KIBS in order to successfully operate in more diverse environments. They may also be thought of as a driver affecting KIBS directly (Miozzo and Miles, 2002) while also being a stimulus for KIBS firms themselves to internationalise which, in turn, creates new pressures for these firms:

• they may need to internationalise in order to follow their clients into new operating environments;

• they may internationalise to find new markets;

• they are liable to face competitive challenges from overseas KIBS firms which enter the markets of more and more countries. Trade liberalisation agreements may facilitate such competitive pressures;

• the internationalisation of KIBS also allows for direct comparison with KIBS from other countries and their practices, and to learn and improve as a result;

• some informational elements of KIBS - design and delivery of services, remote management and coordination of service processes - may be facilitated through the application of new information technologies.

However, many KIBS are believed to be relatively sheltered from international competition. The diversity of rules and regulations across countries, the national character of many professional qualifications, and differences in language and culture have all made these sectors ones where there are more than usual difficulties confronted by those wishing to trade across borders. Correspondingly, the EU is putting considerable efforts into reducing such barriers. Some KIBS, such as computer services, already display relatively large degrees of foreign presence and ownership.

The rise of the knowledge-based economy might also be seen as a driver of KIBS growth. One element of this which is important is the overall increase in ‘service’ as an operating principle in economic life and is sometimes referred to as the ‘servicisation’ or ‘servation’ of the economy. Firms in all sectors recognise that their competitive advantage lies in the actual services which their customers gain from the transaction, not the particular goods being sold. This means more attention to service components of the customer relationship - ranging from involvement of customers in product selection and design, to after-sales and product disposal. While many of these ‘product services’ are carried out in-house by suppliers, there is also a growth of specialised services that offer support in this way.

Some trends in the labour market also need to be taken into account. On the one hand, there are skill scarcities which render work in some KIBS sectors lucrative as KIBS clients often find it difficult to offer the same wage levels. On the other hand, there may be changes in the workforce as more people look for diversified careers, rather than stable ‘jobs for life’. Both of these factors should encourage work in KIBS. Furthermore, evidence suggests that KIBS work may be stressful in some cases, but it offers relatively high levels of learning on the job and diversity of work experience.

Further articles in this series

This first article in the Sector Futures series on the knowledge-intensive business services (KIBS) sector looked at the sector’s structure and development. The second article in the series, KIBS: Trends and scenarios, examines the main trends driving change in the sector and outlines a set of scenarios of possible future development, drawing upon existing prospective work for the sector. The third and last article, KIBS - policies, issues and the future, reviews a range of policy issues that are raised by the three scenarios in relation to the future development of KIBS.

References and further readings

All links accessed on 25 June 2005.

Andersen, B., Howells, J., Hull, R., Miles, I., and Roberts, J. (eds.), Knowledge and innovation in the new service economy, Cheltenham, Elgar, 2000.

European Commission, Employment in Europe 2004: Recent trends and prospects, Luxembourg, Office for Official Publications of the European Communities, 2004.

Eurostat, Business services: An analysis of foreign affiliates and business demography statistics - Data 2001, Luxembourg, Office for Official Publications of the European Communities, 2004a.

Eurostat, European business: Facts and figures - Data 1998-2002, Luxembourg, Office for Official Publications of the European Communities, 2004b.

Gadrey, J. and Gallouj, F. (eds.), Productivity, innovation and knowledge in services, Cheltenham: Elgar, 2002.

Huws, U., Dahlmann, S., Flecker, J., European Foundation for the Improvement of Living and Working Conditions, Outsourcing of ICT and related services in the EU: A status report, Luxembourg, Office for Official Publications of the European Communities, 2004.

Kox, H., Growth challenges for the Dutch business services industry: international comparison and policy issues, The Hague, CPB Netherlands Bureau for Economic Policy Analysis, 2002.

Leiponen, A., Knowledge services in the innovation system, Helsinki, Etla, Working Paper B185; SITRA 244, Taloustieto Oy, 2001.

Miozzo, M. and Miles, I. (eds.), Internationalization, technology and services, Cheltenham, Elgar, 2002.

Rubalcaba-Bermejo, L., Business services in European industry, Brussels, European Commission, 1999.

Tether, B. S. (ed.), Analysis of CIS Data on innovation in the service sector: Final report (

1.03 Mb), report to the European Commission DG12, CRIC, University of Manchester, 2001.

Tidd, J. and Hull F.M. (eds.), Service innovation: organizational responses to technological imperatives and market opportunities, London, Imperial College Press, 2003.

Toivonen, M., Expertise as business: Long-term development and future prospects of knowledge-intensive business services (KIBS), Helsinki, Helsinki University of Technology, Doctoral dissertation series 2004/2, 2004.

Zaring, O. (ed.), Creating eco-efficient producer services, Goteborg, Gothenburg Research Institute, 2001.