Data Processing Services

SIC 7374

NAICS 518210

Data processing firms provide diverse computer-related services primarily to other businesses. Specialties within the industry include:

Data entry

Database management

Text or graphics digitization

Payroll processing

Credit card transaction processing

Medical claims billing

Computer time leasing

Off-site data management facilities.

Certain firms in the industry also perform computer systems design, hardware consulting, contract maintenance, on-site management, and integration services. For discussion of these activities, see Computer Services.

INDUSTRY SNAPSHOT

A key beneficiary of the global trend toward outsourcing non-core business functions, the data processing industry obtained double-digit sales growth in leading markets throughout much of the 1990s, and continued to grow well into the new millennium. According to the Bureau of Labor Statistics, the computer and data processing industry was the fastest growing industry in the U.S. economy, with employment projected to increase 86 percent between 2000 and 2010. During 2000, the information technology outsourcing market, a loose measure of data processing receipts, was nearly 20 percent of all outsourcing expenditures in the United States. According to International Data Corp., total global outsourcing spending was projected to reach US$151 billion by 2010.

Long-term prospects for the data processing industry worldwide remain strong. Trends supporting industry growth include a continued swing toward outsourcing for cost savings and, in some countries, a shortage of technologically savvy workers available to firms outside the information technology industries. The Outsourcing Institute reported that, outsourcing related to e-commerce functions continued to be the fastest growing sector, with an annual growth rate of about 18 percent. The institute also claimed that demand for such support would continue to increase. By 2004, the institute reported that while the original intent of outsourcing was to save money, the reasons have ballooned to include the desire for access to the best providers in the industry, but on an as-needed basis.

By 2004, the outlook for data processing services was strong, as the outsourcing of IT services in general began an upswing. The Bureau of Labor Statistics reported more than 286,000 U.S. employees in the industry in 2003, the vast majority of whom worked in computer or administrative support positions.

ORGANIZATION AND STRUCTURE

Data processing companies perform services such as credit card authorization and billing, data entry, medical claims processing, payroll processing, and off-site data center management. Data processing services generally use their own facilities and proprietary software to process their customers' data. Many of the big data processing services tend to specialize. Historically, the largest segments of the industry by revenue were data center management, payroll processing, and credit card transaction processing, but with the proliferation of the Internet and the growing popularity of e-commerce, new sectors in the data processing services industry have become popular including online database management and Web site hosting and management.

Although many industry firms work with multi-year contracts, data processing services are often delivered on either a timesharing or a transaction basis. A timesharing service vendor usually sells customers a portion of time on a large computer. Timesharing is valuable to companies that need access to computing power that they could not otherwise afford. Companies also use timesharing services to handle part of their data processing needs in cases where their in-house facilities cannot accommodate the additional capacity, or when they are upgrading or building their own in-house computing systems.

Firms that provide transaction processing services assume responsibility for a company's high-volume office functions, such as payroll processing. Transaction providers base their rates on the number of transactions processed, rather than on the time it takes to process them (as with timesharing). One disadvantage for establishments that provide this kind of service is that transaction processing is sensitive to shifts in the economy. If a company offers payroll services, for instance, it may find that during a recession a client that trims its workforce needs fewer payroll checks processed.

Many companies turned to outsourcing in the late 1990s because of their increased need to consolidate operations, control costs, and make more efficient use of existing resources. Outsourcing continued to experience substantial growth into the early 2000s. Outsourcing has a particular appeal to companies that often spend hundreds of millions of dollars a year on data processing. Because computers generally account for between 3 to 5 percent of a company's operating budget, using an outsourcing vendor can lower costs significantly. The vendor is able to offer computerization on a large scale and can consolidate its data centers. The vendor will typically charge a fixed (or at least predictable) annual amount, and this gives the customer better control over costs.

The United States continues to command the greatest share of the world's data processing business. This is true in part because U.S. companies have been quicker to outsource various data management tasks, notably payroll management and credit card transaction processing, to independent services that specialize in the various kinds of data handling. The United States also has been quick to adapt to changing technologies brought on by the increased use of the Internet. Major industry participants in the United States, several of which lead the world in certain service categories, have also aggressively courted business worldwide and are market leaders within other countries, particularly in Canada and Europe. In addition to the leading companies that primarily sell computer services, the global market also is served by major hardware companies such as IBM, which have found that offering contract data management services can help cushion their profits during volatile periods in the hardware business.

Legal and Trade Issues

The U.S. government has placed a high priority on removing the barriers to cross-border trade and investment. Information service companies have benefited from implementation of both the North American Free Trade Agreement (NAFTA), and expansion of the General Agreement on Tariffs and Trade (GATT) to include services under the General Agreement on Trade in Services (GATS). Because its companies are so central to the world industry, the United States accrues a significant trade surplus in computer service revenues each year.

Provisions regulating telecommunications and intellectual property protection are important to the data processing industry. One of the greatest challenges facing the industry is the need to develop methods to protect personal privacy, security, and intellectual property. Industry firms process highly sensitive information for consumers and businesses—including paychecks, credit card transactions, and medical information—and thus data security is of paramount importance. As a larger portion of transactions began to take place either on the Internet or through company intranets, the need for security grew as data became susceptible to theft, credit card fraud, and computer viruses.

The International Chamber of Commerce (ICC) started to focus on security-related issues surrounding electronic commerce. The ICC created the Commission on Telecommunications and Information Technologies to develop policies on information security. The ICC also created the Electronic Commerce Project (ECP). The ECP consisted of experts from various other ICC commissions including Banking Technique and Practice, Telecommunications...

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