Producer Services

Producer services are forms of service activity sold primarily to business and government clients. In contrast to retailing and consumer services that have their primary markets with households for final consumption, producer services are sold as inputs to the production process of various industries. They are commonly regarded as “intermediate” services because they are absorbed into the goods and services produced by their clients. In the United States, producer services have long been considered to be a combination of business, legal, and engineering and management services. This might be regarded as a narrow definition because other lines of service activity also have strong intermediate markets. A broader definition of producer services would include a considerable proportion of finance, insurance, and real estate; some categories of membership organizations; the arrangement of transportation services; and certain modes of transportation (e.g., air cargo, pipelines, rail freight, truck freight, waterborne cargo container and bulk commodity movement).

Producer services have grown rapidly in the United States and in other advanced economies. In the United States from 1940 to 1970, employment in narrowly defined producer services expanded from 500,000 to 3.5 million, a gain of nearly 600%. This rapid growth has continued, with employment between 1970 and 2002 expanding to 17.5 million, a gain of 400%. Most of this growth has been in small-business establishments. In 1970 the average producer service establishment employed 11 persons, whereas in 1997 the average establishment employed 12 persons. The number of producer service establishments expanded from 300,000 in 1970 to 1.6 million in 1997. Producer service businesses historically have concentrated in the largest metropolitan areas. However, growth has occurred in this sector in smaller and medium-sized metropolitan areas as well as in nonmetropolitan communities.

The reasons for this rapid growth are multiple. First, the overall economy has grown, thereby requiring more producer service activity. However, producer services employment growth rates have been significantly greater than the growth in overall employment—between 1970 and 2002, U.S. total employment expanded by approximately 75%, while producer services had more than five times this growth rate—implying a greater demand for producer services over time. In part, this growth has been related to the export of services to foreign countries or interregionally in the United States. In part, it has been related to growth in the share of total production costs devoted to the purchase of producer services by industries in all segments of the economy and by governments. New types of producer services, such as computer services and temporary help services, have been accepted in the marketplace. Other producer services have been transformed by information technologies so that they provide a wider array of services to clients, for example, the growth of accountants providing financial advisory services to their clients.

There has been considerable debate over the forces surrounding this rapid growth of producer services. Some have argued that the growth has been fueled largely by downsizing and outsourcing of services previously produced in-house. Studies of the use of specialized producer services by manufacturers, for example, find increases in external purchases and, in some cases, shifts of lines of producer service work from in-house departments to free-standing producer service suppliers. Others have argued that growth has come primarily from expanded purchases of specialized producer services. The lack of expertise on the part of clients, the need for independent third-party advice, government regulations, and the mismatch between the minimum size that would be required of an in-house department and the actual demand for a particular producer service all contribute to the purchase of these services from external suppliers. Complicating the question of the shifting of supply from in-house departments to outside suppliers has been the rapid pace of change in information technologies and the evolution in the nature of producer services offered. Clients of producer service firms often have in-house departments producing certain specialized services (e.g., legal services) but at the same time buy different services from suppliers in the same line of work that complements work done by in-house departments.

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