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Research Stock Economic Moats in Business Services
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In business services, size does indeed matter. Companies can leverage size to boost both their top and bottom lines. By expanding the range of services of­fered, companies can Increase total revenue per customer. By handling more volume—especially over fixed-cost networks—companies can lower unit costs and achieve greater profitability.

To capitalize on this, many business services firms have attempted to ac­quire their way to critical mass and achieve scale economies by consolidating the operations of multiple businesses. For example, data processing firms such as Fiserv, First Data, and ADP have all made acquisitions an important part of their overall strategies.

Size impacts the industry through branding as well. Often, brands play a major role in a business outsourcing purchase decision. Companies may be hesitant to outsource payroll processing (and the related handling of employee pay and tax funds) to Fly-By-NIght Upstart, Inc., but are comfortable entrusting the responsibility to ADP, founded in 1949 and currently the biggest payroll processor. Even in business services, brands count, and it's usually the biggest companies that have the most recognizable brands.

Many industries in business services have significant barriers to entry, making it tough for new players to enter the field. For example, a company that wanted to process credit card transactions for banks and retailers would have to build a processing infrastructure to support its business, including hardware, the software development to manage the data, and a sales network to sign customers. Such a company "would have to go through considerable trouble and expense just to try to compete against a company such as First Data, which already handles billions of transactions each year.

Despite the relatively high barriers to entry in the electronic transaction processing industry, there's little protection against competition from other industry participants. For example, in 2OOI, Concord EFS lost Bank of Amer­ica's electronic funds transfer switching business to a very aggressive bid from competitor Visa. Thus, although most business services industries have wide moats, companies still need to differentiate themselves further to fend off potentially intense competition from established industry players.

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