What are services?

The traditional, and simplest way, of describing services is to define them by what they are not. In this context, services are commonly described as the residual sector, or as all those activities that aren’t agriculture, mining or manufacturing. As Clark (1940, p. 375), one of the founders of the primary, secondary and service (tertiary) sector classification of economic activity said:

There remains an important residual which we may describe for convenience as

‘service industries’.

The problem with defining services as a residual is that it does not tell us anything about what they are, only what they are not.

As Miles and Boden (2000, p. 3) said:

For early commentators, the third great sector could simply be seen as the residual sector, and often it was discounted as an unproductive residuum. In any case, it warranted no great definitional effort. Because it counted for very little, it was seen as something which could be treated as homogeneous. Consequently, little attention was paid either to defining its common constitutive features, or to examining the variety within it.

Some have suggested that defining services as a residual may have contributed to some of the negative perceptions about the value of the sector. Riddle (1986, p. 5), for example, said:

… the unintended implication that services are not important in their own right, but only in relation to the extractive and manufacturing processes.

In addition, the term ‘residual’ has another more misleading implication — that of size.

A ‘residual’ is usually thought of as that little bit which is left over. Nothing could be further from the truth in the case of the service sector.

An alternative way of defining services is to look for common features or

‘peculiarities’ that make services different from goods or other types of economic activity. But, what features are common to services? As Miles and Boden (2000, p. 5) said:

One of the challenges that face us is both recognising the specific features of the services sector, and taking full account of the great heterogeneity of activities that are lumped together in it.

Some frequently cited distinguishing features of services include:

• their intangible or immaterial nature. The Economist, for example, once described services as ‘anything sold in trade that could not be dropped on your foot’;

• non-storablility and non-transferability — services such as air travel, medical advice and hair cuts cannot be stored or transferred. This contrasts with goods which are both storable and transferable; and

• direct interaction between the producer and the consumer. Many services are consumed as they are produced, for example, a restaurant meal or a visit to a museum or sporting match is consumed at the point of production. In contrast, the production of a good can usually be separated from the final consumer.

A more extensive list of features typically attributed to services is provided in table 2.1.

Many services share the features mentioned above. But, there are also many

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restaurants produce meals and photographers produce photographs. In this vein, Fuchs (1968, p. 15), commenting on intangibility as a distinguishing feature of services, said:

A dentist who makes a false tooth and places it in the patient’s mouth is certainly delivering a tangible product, but dentistry is invariably classified as a service. It is difficult to make a sharp distinction between the activities of an auto assembly plant and those of an automobile repair shop, but the former is invariably classified in industry and the latter is usually regarded as a service.

Table 2.1 Special features typically associated with services

Characteristics typical of services Service production

Technology and plant Low levels of capital equipment; heavy investment in buildings.

Labour Some services are highly professional (especially requiring interpersonal skills); others are relatively unskilled, often involving casual or part-time labour. Specialist knowledge may be important, but rarely technological skills.

Features of production Production is often non-continuous and economies of scale are limited.

Organisation of industry Often involve small-scale operations with a high preponderance of family firms and self-employed.

Service product

Nature of product Immaterial, often information-intensive. Hard to store or transport. Process and product hard to distinguish.

Features of product Often customised to consumer requirements.

Intellectual property Hard to protect (can rarely be patented, though copyright or design rights may be possible), easy to copy many service innovations. Reputation is often crucial.

Service consumption

Delivery of product Production and consumption coterminous in time and space;

often client or supplier has to move to meet the other party.

Role of consumer Services are ‘consumer-intensive’, requiring inputs from consumers in the design/production process. Often hard to separate production from consumption.

Source: Modified from Miles (1995).

Advances in technology have reduced the attraction of a definition based on distinguishing features. For example, new information and communication technologies now permit many services to be performed without the need for personal contact between customers and suppliers. Examples include internet banking, real estate, health care and distance education. Information-based services are also becoming increasingly transferable — software programs, for instance, can

be boxed and stored in the same way as any good can be. As Miles and Boden (2000, p. 9) said:

There is good reason to believe that there is something of a ‘convergence’ of manufacturing and service sectors taking place: each grand sector is acquiring some of the characteristics deemed peculiar to the other.

Hill (1977, p. 318), however, identified two points which he suggested provide the key to the concept of a service:

A service may be defined as a change in the condition of a person, or of a good belonging to some economic unit, which is brought about as the result of the activity of some other economic unit, with the prior agreement of the former person or economic unit. (Original emphasis.)

Education, for example, changes the mental state of a student through the actions of a teacher and hairdressing services change the appearance of people through the actions of a hairdresser.

Miles and Boden (2000, pp. 6-7) suggest that rather than focussing on key features, it is more meaningful to characterise the service sector in terms analogous to those used for the primary and secondary sectors. Thus, they suggest that, while the primary sector is mainly concerned with extracting raw materials from the environment and the secondary sector involves transforming raw materials into goods, the tertiary sector can be seen as effecting changes in the state of:

• the environment (other than those concerned with extracting raw materials) such as waste management, pollution clean-up, park-keeping;

• artefacts produced by the secondary sector, such as installation, repair and maintenance, goods transport, building services, wholesale and retail trade;

• people, health and education services, hospitality and consumer services such as hairdressing, public transport; and

• symbols (that is, information), knowledge services (which bring intelligence to bear on any of the operations already mentioned); entertainment services;

communication services such as broadcasting and telecommunications.

While there is no ‘accepted’ definition of services, for statistical purposes the residual definition is commonly adopted. Consequently, for the purpose of this study, services are defined as everything except agriculture, mining and manufacturing.

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