This category encompasses establishments primarily engaged in providing computer processing and data preparation services. The service may consist of complete processing and preparation of reports from data supplied by the customer or a specialized service, such as data entry or making data processing equipment available on an hourly or time-sharing basis. Subgroups within this entry include computer calculating services, computer service bureaus, computer tabulating services, computer time-sharing, data entry services, data processing services, data verification services, keypunch services, leasing of computer time, optical scanning data services, and rental of computer time.
514210 (Data Processing Services)
Serving a diverse array of industries, data processing services allow companies to outsource some or all of a data management process, be it payroll, electronic transaction processing, or some other task. Data processing firms offer specialized knowledge and technologies, as well as economies of scale, making them efficient and often cost-effective alternatives to handling such data in-house. As a result, demand for data processing services rose sharply in the 1990s. From just 1994 to 1998, according to government statistics, industry revenue swelled 50 percent.
A significant portion of the industry's rapid growth in the mid-to-late 1990s was fueled by the rise of the Internet and year 2000 (Y2K) related issues. By the early 2000s, growth began to level off. According to U.S. Census Bureau data, industry revenues climbed 14 percent in 1999 and 13 percent in 2000, reaching $42.9 billion. In 2001 and 2002, the industry was impacted by weak economic conditions characterized by reduced levels of corporate spending. Although government figures for these years were not available in early 2003, there were indications that the data processing industry had fared better than others. For example, from 2001 to 2002 the majority of the industry's leading players either saw their revenues increase or decrease by less than 1 percent. In fact, some companies saw their sales rise as much as 13 percent. It is worth noting that Automatic Data Processing, Inc., the world's largest payroll processor, was able to achieve double-digit earnings growth for 41 years until 2003, when its growth was expected to be in the single-digit range. This is one indication of the industry's relative stability.
The largest segments of the industry include payroll processing, employer tax reporting and filing, credit card transaction processing, billing services, insurance claims processing, and general data-center services. Many of these functions have been outsourced for a decade or more, but market penetration is still relatively low for some, leaving considerable room for growth. Small companies, for example, have been a target for payroll-processing firms because that market is the least saturated for such services. However, recent advances in payroll software have slowed growth in this area somewhat, making it more cost effective for small- and medium-sized companies to handle payroll themselves.
One of the most important growth trends affecting the industry has been a shift toward Internet-based bill payment and presentment. Under these services, a third-party processor packages billing information for another company, say, an electric utility or a long-distance carrier, and presents it to the customer, often a consumer or small business, in a unified environment. A service might also allow users to pay bills electronically. In the late 1990s, the field was wide open for competitors and had attracted both traditional data processing firms, as well as many nontraditional players. Revenues from online bill payment and presentment services were growing in the early 2000s.
The data processing services industry has evolved greatly since the 1950s, when computers became more prevalent in business. The computer services industry developed when companies purchased systems and needed assistance to effectively use them. Other niches developed, as other firms saw the benefits of computerizing certain business functions but could not afford to install and operate systems. Computer time-sharing developed as an alternative to purchasing and maintaining an expensive system, and allowed clients to purchase time on a computer as needed, avoiding personnel and equipment costs. Calculating, keypunch, optical scanning, and tabulating services were used by corporations that saw the value of automating large batch jobs but could not maintain these systems in-house.
Many computer service companies became successful because they could offer useful services at lower prices than it would cost companies to install and maintain similar systems. The costs were divided among all users, making data processing services an attractive option. Often costs were determined by the number of transactions, instead of simply a flat rate.
Many of the segments of the industry, such as keypunch service and computer time-sharing, have decreased substantially since the 1970s. Keypunch services became outmoded for general applications when computer disks and magnetic tape were developed. Disks and magnetic tapes, the storage materials of choice, are less sensitive than cards and contain thousands of bytes of memory capacity. Computer time-sharing decreased as an industry segment when hardware prices decreased in the 1970s and 1980s, and software became more adaptable. Many corporations have invested in computer hardware and have hired in-house staffs to maintain and program their computer systems.
As computer capabilities increased, companies looked to the computer service industry to provide either more sophisticated services or to reduce their record-keeping costs. Data entry services that have typically been maintained in-house became candidates for outsourcing, as employee benefit costs increased. Access to the most sophisticated computer systems may become important for specific tasks, which would be prohibitively expensive if companies had to purchase a computer and customize the software.
Outsourcing represents the segment of this industry with the greatest growth potential. Outsourcing is the practice of turning over a portion of the company's data processing to an outside vendor. Eastman Kodak was the first major corporation to sign a 10-year contract with International Business Machines (IBM) in 1989. Other companies soon followed Kodak's lead, and outsourcing was projected to expand by 25 percent annually to become a $21-billion business by 1996.
Economic conditions in the early 1990s forced companies to reexamine the resources devoted to data processing. Competition intensified in business, placing an additional burden on information systems. Many companies opted to use outside computer service firms for various tasks in order to tap into the most precise and timely information. By using computer service firms, companies could reserve expensive personnel and capital resources for other portions of their business.
Time-sharing and transaction processing are the two main categories within processing services. Time-sharing involves purchasing time on a large computer that otherwise would not be accessible to the company. Few companies use time-sharing any longer because most basic corporate processes can be performed in-house with the abundance of inexpensive hardware and sophisticated software. Companies that do use time-sharing do so because they can access accelerated computer power that would otherwise be too expensive; the purchase makes a computer upgrade transition period more smooth; and a company's computer resources are taxed beyond their capacities during certain seasons.
Back-office tasks, or routine, high-volume clerical tasks such as payroll processing, have long been completed by computer service vendors. Payroll duties include generation of checks and journals, employee earnings statements, departmental earnings summaries, and withholding tax reports, as well as pension fund and profit-sharing reports. The future of payroll processing is tied to the economy: when unemployment increases, the number of paychecks decreases, as does the number of small businesses, because some fail during an economic downturn. While payroll processing remains the largest single application, the industry is evolving and being utilized for more sophisticated applications in banking, finance, insurance, and medical industries.
Transaction processing vendors process routine, high-volume applications. Computer services have primarily automated back-office functions. Because most companies have completed this automation, many data processing services are focusing on areas that enable companies to win business from customers, or front office functions. Computerization can aid in automating customer information systems, providing electronic funds transfer systems, and other decision support tools. These applications rely on real-time, or immediate, activities and cannot be batch processed, unlike credit card or medical claims. The future growth in this area will be slower than previous outsourcing revenue.
Traditionally, companies providing data processing services have utilized their own extensive computer facilities and proprietary software. This practice enables them to divide the cost among many users, which makes the services more affordable for each company. Trends are developing, however, that include placing the contractor's hardware in the client's site or utilizing existing client hardware. This practice reduces the vendor's costs, as well as their revenues, while placing an increased burden on the client. The contractors generally welcome the chance to exclude hardware costs and to make their clients responsible for computer maintenance and upkeep. Instead of focusing on hardware, the vendors are able to provide software applications to industries such as health care or insurance. Duplicating such sophisticated information applications in-house would be technologically and financially impossible. The data processing services industry is adapting to technological advances by seeking ways to assist computer owners to more efficiently utilize their resources.
In 1998 data processing service revenues were valued at $33.2 billion in the United States, according to U.S. Census Bureau data. Around this time, some segments of the industry were expanding faster than others. Payroll processing services, for one, were poised for strong growth in the early 2000s, driven by broader market penetration. Among businesses with 100 or fewer employees, for example, payroll outsourcing services had at most a 20 percent penetration rate in the United States during the late 1990s. Even among companies with more than 100 employees, the penetration rate was barely over 50 percent. Electronic bill payment and presentment was another emerging growth area for many industry firms in the late 1990s and early 2000s. However, they faced competition from a more diverse swath of other companies that were positioning themselves in that business.
In 2000 revenues for the data processing industry totaled almost $43 billion, according to the U.S. Census Bureau. More than 59 percent of sales were attributable to transaction processing and data exchange. More than 13 percent came from other forms of data processing, while things like data capture and imaging as well as computer timesharing services accounted for the remainder.
Consistent with past trends, by 2003 electronic bill payment and presentment services continued to catch on with both consumers and businesses. According to a study conducted by Jupiter Research Inc. and reported in the October 17, 2002, issue of American Banker , some 18 million households in the United States viewed at least one bill online in 2001. Jupiter forecast this amount would increase at a compound annual rate of 23 percent through 2006, reaching 52 million households.
It was widely accepted that, in order for electronic bill payment and presentment services to take off en masse in the consumer sector, consumers would need to be able to conveniently receive and pay their bills through one entity, such as a bank. By 2003 many banks had not yet embraced these services. According to the July 2002 issue of U.S. Banker , research firm Gartner revealed that 60 percent of people who used e-billing did so in accordance with the so-called "biller-direct model," whereby they dealt directly with the billing party as opposed to a third party that consolidated their bills for them. Jupiter's study found the biller-direct rate to be higher (more than 80 percent), but expected this number to fall to 40 percent by 2006, as consolidators made additional progress.
One major roadblock for consolidators like banks was the fact that many bill-issuing organizations did not want to give information away to outside parties, thereby foregoing regular communication opportunities—such as monthly e-mail reminders or Web site visits—with their own customers. In addition, many banks and payment providers charged monthly fees that, for many customers, amounted to more than what they already paid in postage to send payments the traditional way. However, some banks were eliminating such charges for customers who maintained a minimum account balance. In the early 2000s, firms like CheckFree were continuing to make inroads in the e-billing arena, and even the U.S. Postal Service was getting into the game. Facing significant drops in postal activity due to the rising use of e-mail, the agency formed a partnership with consolidator CheckFree.
By 2003 electronic bill payment and presentment services also were taking hold in the business sector. Surprisingly, large enterprises were demonstrating strong interest, according to Citigroup, Inc. The financial company found such services to be especially suitable in the business-to-business realm, since electronic bill payment and presentment shorten the invoicing and payment process. This was helpful in the event of billing disputes. According to the July 8, 2002, issue of American Banker , in the business sector "dollar amounts are typically much larger and relationships much more complex, frequently involving goods and services delivered to different departments in different locations. When a dispute arises, the buyer may render partial payment or may withhold the whole payment, and in conventional paper billing it may not be clear to the biller what is being paid, what is being withheld, and why."
One of the largest firms in the business, Automatic Data Processing, Inc. (ADP) is the biggest independent payroll processor in the United States. With more than 450,000 business customers, the publicly traded firm had sales in fiscal 2002 of $7 billion. In addition to payroll processing, ADP provides government and tax filing services, benefits management, automotive insurance claims processing, automotive dealer services, and securities transaction processing.
Electronic Data Systems Corp. (EDS) is a major integrated technology services firm and a major processor of medical insurance claims and financial data. EDS signed its first long-term contract in the medical area in 1966, when legislation establishing Medicare was passed. EDS organized claims processing support across the country, and by 1968 Medicaid and Medicare contracts represented 25 percent of Electronic Data Systems' revenues. Data processing today, however, represents only a small part of EDS's revenue. In 2001 its business process management unit reported sales of $3 billion, almost 14 percent of the company's $21.5 billion in total revenue.
Catering to the small business market, Paychex, Inc. is considered the second-biggest U.S. payroll service, with 440,000 customers and $955 million in sales as of 2002. Like ADP, Paychex offers a package of related human resource services like benefits management and tax filing.
Ceridian Corp. is another leading contender in payroll processing and human resource services. In 2001 the company recorded $1.2 billion in sales, most of which ($866 million) came from human resources services. In addition to being a major player in the U.S. market, Ceridian also has a leadership position in Canada and the United Kingdom. In 2003 the firm served about 18 percent of the workforce in the United States, or 20 million people.
First Data Corp. tops the credit-card transaction processing side of the business, with $6.5 billion in 2001 sales. First Data operates the Western Union cash transfer network and is involved with merchant credit-card processing services and check authorization. In 2001 First Data's revenues fell more than 13 percent, although its workforce increased more than 7 percent.
According to Monthly Labor Review , in the early 2000s employment growth in the computer and data processing sector had slowed in comparison to past years, due in part to a sluggish economy. In the first three quarters of 2001, growth was occurring at an annual rate of about 2 percent. Some industry segments, such as data entry and keypunch services, did not require a college or university education, but could be filled by high school or technical school graduates. Most segments preferred workers with a college education despite the training that they provided; in-house education at specific companies enabled workers to learn their duties. An interest and background in computer science was typically desirable for this industry.
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