Computer Processing and Data Preparation and Processing Services

SIC 7374

Companies in this industry

Industry report:

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.

Industry Snapshot

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. The industry, therefore, is relatively stable. For example, 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 continued, albeit in the single-digit range.

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 since the 1990s, but market penetration was 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, such as an electric utility or a long distance carrier, and presents it to the customer, often a consumer or small business, in a unified environment.

By 2011, according to statistics from Forrester Research, 21.2 million households were projected to use online bill payment services. New IT services, such as security features and personal financial management capabilities, could provide additional growth of online banking. Security features were considered especially important in the late 2000s, due to the rise in security breaches and sophisticated scams. According to American Banker, there were nearly 36.4 million households utilizing online bill payment services in 2010, compared to 32.6 million the previous year.

According to industry statistics, there were an estimated 24,880 firms primarily engaged in providing computer processing and data preparation services with industry revenues of $61.57 billion in 2008. The industry employed approximately 315,600 people, with the average firm employing 13 people and earning $2.9 million. System integration services and system software development were the two largest segments in this industry.

The global data processing services sector was projected to grow at a compounded annual growth rate of an estimated 6.0 percent between 2010 and 2015 to reach $140.7 billion in 2015.

Background and Development

The data processing services industry has evolved greatly since the 1950s, as computers became more prevalent in business. The computer services industry developed when companies purchased systems and needed assistance to use them effectively. 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, 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 typically were 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 continued to use time-sharing because most basic corporate processes could 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 and because computer upgrade transition periods are smoother. Additionally, companies could avoid having their computer resources 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 was expected to be 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 was expected to be slower than previous outsourcing revenue.

Traditionally, companies providing data processing services have utilized their own extensive computer facilities and proprietary software. This practice enabled them to divide the cost among many users, which made the services more affordable for each company. Trends were developing, however, that included placing the contractor's hardware in the client's site or utilizing existing client hardware. This practice reduced the vendor's costs, as well as their revenues, while placing an increased burden on the client. The contractors generally welcomed the chance to exclude hardware costs and to make their clients responsible for computer maintenance and upkeep. Instead of focusing on hardware, the vendors were 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 was 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 years of the first decade of the 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 segments like data capture and imaging, as well as computer timesharing services, accounted for the remainder.

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. In the early 2000s, the majority 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.

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 were paying 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.

Although the data processing services industry was recovering from a challenging economic downturn in mid-2004, there were signs that businesses were once again investing in information technology (IT). Despite the favorable market conditions, some companies were going forward with caution. One concept introduced by the industry was the use of specialized software such as a subscription, or rental, service. Electronic bill payment was also growing by leaps and bounds, with analysts such as Forrester Research predicting that over half of American households would use such a service by 2010, and over 60 percent would use them by 2011. Half of the accounts were expected to be managed by billers and half by banks.

Although banks in general were slow to adopt the electronic payment technology, growth was strong in the mid- and late-2000s. Bank of America Corporation acquired National Processing Inc. from National City in October 2004 in an effort to maintain a competitive edge in the electronic bill payment sector. The newly formed company, BA Merchant Services LLC, teamed up with Bank of America's Merchant Card Services division. The acquisition positioned Bank of America as the nation's second largest in bankcard transactions.

Wells Fargo launched its online "money management tool" in 2005, geared towards its 6.2 million online customers. Wells Fargo incorporated added features beyond online banking and online payments. Their innovative feature called "My Spending Report" offered its customers a complete overview of all their banking transactions. The report detailed check card and credit card expenditures, as well as checking and online bill payment.

More and more banks, however, were finding themselves under scrutiny when it came to security breaches that could slow the growth of online banking as well as electronic bill payment. A scam known as "phishing," or "phish attacks," moved scam artists from the streets onto the Internet. A phish attack is a mass e-mailing guiding recipients to sites where they are asked to divulge private information such as account passwords, credit card information, or bank account numbers. Business insurer TowerGroup reported that the total number of phishing attacks reached 86,000 in 2005, up from 31,300 in 2004. This number continued to grow, and by 2006, for example, phishers had become sophisticated enough to specifically target desired groups. Phishing attacks caused havoc with consumer confidence.

Considering the well-publicized mid-2000s breaches at Automatic Data Processing, ChoicePoint, and the Department of Veterans Affairs, as well as others, the 2006 analysis from IT research firm Gartner that prevention was the best strategy was being heeded. Security breaches could cost $90 or more per customer after the fact, compared to just $6 per customer for preventive measures such as basic encryption. Government became involved in the issue in 2006, during which 35 states introduced security breach legislation. At least six states had notification laws that went into effect in 2007.

Following numerous security-related issues during the mid-2000s, the industry continued to focus on security as more and more processes and data were moved to the Internet. Internet-based storage and computer data services were expanding rapidly in the late 2000s. Known as "cloud computing," firms could buy or rent space to not only store but also process information. Because cloud computing is operated via the Internet, expensive infrastructure and software are eliminated from the business's bottom line. Not to be left behind, industry-leading computer service firms such as Automatic Data Processing, Inc. (ADP) and Electronic Data Systems Corp. (EDS) jumped on the bandwagon. Although yet to abandon their traditional array of services, in the late 2000s, both companies were also offering Web-based services.

However, the new trend toward cloud computing faced some challenges. One of the top issues was consistent access to reliable and fast Internet networks. That is, cloud computing was much more feasible in areas with consistent access to reliable and fast-wired Internet connections. However, wireless networks and slower wired access created difficulties. Also, the cloud operations themselves were still being developed in the late 2000s as providers struggled with such obstacles as how to transfer huge chunks of data from customers' servers to the Internet. For example, when a cloud cannot handle large amounts at once, companies must spend time and money to break up data sets before transferring to a cloud.

Current Conditions

The weakened economy in the late 2000s stifled growth further in the already mature data processing services market. Fortunately, the industry was able to bounce back faster than expected. The data processing services industry is extremely competitive; the leading four service providers handle a mere 10 percent of the global market. Thus firms continued to launch new service products to stay one step ahead of their competition.

The industry began to focus more on "service diversification" following the economic downturn. For instance, when revenues fell from the double digits prior to the recession to -3.9 percent in 2010, Paychex took note and in early 2011 acquired SurePayroll to expand upon not only its services, but also a roadmap to more than 30,000 additional businesses. Then, in mid-2011 the company acquired ePlan services to expand on its 401(k) existing services.

Another industry leader, ADP, planned to introduce its payroll app that would allow employees to view their pay statements, including gross salary, taxes paid to date, and more, all from their smartphones and slated for July 2011. One factor affecting the company's growth was their image as basically a payroll services company. ADP would like to be viewed as not just a payroll services company, but a "�cradle-to-grave employer services company," CTO Michael Capone told Network World in May 2012. To tackle this challenge, the company planned to step up its advertising and marketing efforts. ADP's non-financial services were growing at double that of its payroll services. Other areas ADP hoped to tap into were "practice management services" for doctors, for which the company acquired AdvancedMD. The company spent $776 million in acquisitions to grow its business in 2011.

Industry Leaders

One of the largest firms in the business, ADP is the biggest independent payroll processor in the United States. With more than 560,000 customers, the publicly traded firm had 2008 sales of $8.78 billion and employment of 47,000. 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. ADP, with operations in North America, Europe, Latin America, and the Pacific Rim, reported nearly $10 billion in revenues for 2011 with a worldwide workforce totaling 54,000 people. The company was responsible for paying one out of six U.S. employees or an estimated 33 million globally.

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 arena in 1966, when legislation establishing Medicare was passed. Data processing in the early twenty-first century, however, represented 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. During 2008, EDS generated close to $2.15 billion in sales while employing 139,000 people. In August 2008, EDS became a subsidiary of Hewlett-Packard, which acquired the company for an estimated $13.9 billion.

Catering to the small business market, Paychex, Inc., was considered to be the second largest U.S. payroll service with 543,000 customers and $1.67 billion in sales as of 2006. Like ADP, Paychex offered a package of related human resource services such as benefits management and tax filing. With more than 100 offices on a national level, Paychex realized $2.1 billion in revenues for fiscal 2011 with over 12,000 employees.

Ceridian Corp. is another leading contender in payroll processing and human resource services. In 2007, the company recorded $1.7 billion in sales, most of which 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. The privately held company is owned by Thomas H. Lee Partners, an investment firm, and Fidelity National Financial. The company reported slightly lower revenues in 2010 of $1.49 billion.

First Data Corp. topped the credit card transaction processing side of the business, with $8.8 billion in 2008 sales. First Data was involved with merchant credit card processing services and check authorization. First Data Corp. purchased its rival, Concord EFS, in 2004 and spun off its Western Union money transfer segment in 2006. The company is privately owned by KKR & Co., L.P., which purchased the company in 2007. The company reported revenues of $10.4 billion in 2010 and 24,500 employees.

Workforce

According to a 2009 Dun & Bradstreet Marketing Solutions report, this industry was made up of 24,379 businesses with a combined total employment of nearly 302,000, averaging about 13 workers per establishment. Businesses with 25 or fewer employees made up nearly 92 percent of the industry. However, firms with 25 or more employees generated over 86 percent of industry revenues.

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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