After Years of Growth, the Service Sector Struggles

Law firms, advertising agencies, and other business services companies have been hard hit in the recession.

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Service businesses boomed through much of the 1990s and early 2000s, as companies brought in outside consultants to handle matters ranging from branding to human resources. But companies that primarily sell services are now struggling, according to a new report released by Sageworks, a company that tracks the financial data of private businesses. The report's authors note that businesses are behaving much like the average consumer these days, often choosing to forgo some basic services or to handle them in house. "People are cutting back on the things that they normally would spend on growing the business," says Drew White, the chief financial officer of Sageworks.

Drawn from responses of 950 private businesses, the report analyzes data from December 2007 through October 2009. Among the service industries with the sharpest decline in sales were legal counsel and advertising and marketing services providers. The rate of annual growth in billings at law firms contracted 18 percentage points from 5 percent growth in 2007 to negative 13 percent growth in 2009. At advertising and marketing services, the rate of growth of annual billings dropped 21 percentage points from 9 percent in 2007 to negative 12 percent in 2009. Computer systems and website design services companies saw a decline in revenue growth of nearly 15 percent in that same period, while automotive repair companies saw revenue growth fall off by 8 percent.

In the case of marketing, for example, many companies are turning to viral campaigns on social media sites like Facebook and Twitter, and managing them primarily with existing staff members, rather than contracting out the work to a public relations firm or a marketing agency. "Privately-held companies are being more frugal, more disciplined, and less impulsive," says White. "They're spending a little more time thinking, 'I could hire the firm, or I could do it myself."

The offices of physicians were one of the few areas in the service sector to continue to prosper, with the rate of annual revenue growth rising from 7.6 percent in 2007 to 10 percent in 2009. The fact that this industry stands out could be attributed to the presence of the insurance company as a third-party payer, White says. "It's one of the only industries where you're not paying for the service directly," he notes.

J.J. McCorvey is a reporter at Inc. magazine, where he covers a wide range of topics, including technology and business research. He has covered metro news for The Detroit News, and his work has been featured in Men's Fitness. @jmccorvey