Service Industry Revolution in the Making

Wayne Wang / Founder, Chairman & CEO, CDP Group / 2015-01-11

The concept of “tertiary industry” was first raised by British economist andprofessor at Otago University Alan Fisher in his book The Clash of Progress and Security in 1935. Tertiary industry refers to sectors that produce not manufactured goods, but services. The word ”tertiary“ was used for the convenience of categorization apart from the “primary” and “secondary” used to represent agriculture and manufacturing. Nevertheless, this name unintentionally “downgraded” the importance of this industry. This is specifically true in China. Tertiary sectors have long been deemed as an affiliation or an attachment to primary and secondary industries with a certain amount of contribution to employment, but never as a driver of the economy.

A negligence of fact is risky, especially in a society with a transition underway. To simply prioritize an industry based on its name no longer fits into the broad picture. Tertiary industry, or the services sector, is facing a technological reinvention in finance and retail, among other soon-to-be-reshaped sectors, thanks to rapid evolution.

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We’ve heardthe phrase “reinvention” so much these days with a great number of industries undergoing significant changes. How do you understand the idea of a “modern service industry”?

Wayne Wang: “Modern service industry” covers not only conventional sectors such as food and beverage, stores or banks, but also those information technology-enabled businesses, which bring in new revenue models, new ways of services are provided, and new operational methods.

Wayne Wang/Chairman, CEO and founder of CDP Group, former president of the Human Resources Forum of the EU Chamber of Commerce in China, executive member of the Council of Shanghai Modern Service Union

Take tourism as an example. The Chinese travel agency Ctrip made its service users accustomed to a new way of consumption by redesigning the value chain of the whole industry. The modern service industry was not brought up to satisfy new demands. E-commerce still aims to meet shopping demands while leading to a shift in the business model and paradigm. It alters the form of retail services provisionsfor customers and redefined how to use services. The new business format has already replaced the traditional one without competition.

Human resources services also belong to one of the traditional industries. However, conventional management wisdom is bound to lose its charm after mobile technology enables instant communication among managers, subordinates and colleagues. As a result, contemporary human resources outsourcing companies function more like an IT or software company with a gigantic database and server, and a high proportion of technical staff.

We used to give service industries the label of tertiary industry, and define it as a complimentary.

This concept is obsolete and full of danger.

To view from a broader perspective, China is in the middle of a structural shift. With its aging problem and deteriorating population, China is seeing the size of its working population (age 19 to 65) dwindling at a rapid pace. On top of that, domestic labor costs have been climbing at almost a double-digit rate since 2010, with the average salary in Shanghai rising as much as 20%. On top of that fact, productivity per capita in China progresses more slowly than in developed countries. Last but not least, urbanization has attracted a deluge of migrants swarming into advanced and coastal cities such as Beijing, Shanghai and Guangzhou, pushing up demands for urban housing, education, medical care, social security and infrastructure services.

All of these changes imply that China’s industries that grew on the back of cheap labor, such as manufacturing, will have to adjust to the fact that the population dividend of the past three decades has run out of steam. Furthermore, income rise and urbanization will drive the upgrade of consumption, resulting in over 300 second-tier cities catching up with metropolises such as Beijing, Shanghai and Guangzhou in terms of consumption level in five to 10 years. Against such a backdrop, China is destined to accelerate its development in the modern service industry and mark it as the guide for economic development together with advanced manufacturing­­–an imminent task that China has to cope with.

Does an information-heavy or Internet-leaning service sector kill employment?

For food and beverage, nursing and other businesses that lie at the lower end of the industrial chain, human-labored service activities will remain, whereas the adoption of new technology is likely to increase efficiency and added-value. In the past, a human resource manager could oversee 80 employees. With the help of information technology, an operator is now able to remotely manage 1,000 workers. Over 500,000 employees have their information recorded in our database.

Best Logistics, invested in by Jack Ma,acquired 70% of the shares in another logistics company, Best Express, in July 2010. Soon afterwards, human resources managers had to take stock of the utilization of over 2,000 employees from the newly acquired company. They had to streamline management processes, pool wisdom of different talents, and minimize labor costs with the help of information and technology. Delivery workers in the field of logistics usually work short term with different types of household registration. CDP stored all information using cloud services, where all management operations carried out workers’ hiring or lay-offs, employment contracts, social security information, automatic warning of work contract signing, statistics regarding the failure rate for social security registration, a reminder of the end of the probation period or employment contract, and other management issues. All online information and updates averted risks for human resources managers while letting employees enjoy better employment conditions. Best Logistics thus saved 60% in human resources costs compared to last year and laid a solid foundation for future business expansion.

Service sectors will have to climb to the higher end of the industrial chain as well by getting rid of labor intensive approaches. They can do this by using an embodiment of the knowledge economy and embracing more high-tech elements. This is a necessity for other industries served by these sectors to move upwards in the value chain. It is required for us to command new skills for better adaption to these changes. Some work will be proven obsolete, but  new types of jobs will be brought to the surface.

Aside from cloud computing, what kinds of changes can we expect from social networks and mobile technology to better manage employees and data?

For instance, managers can have access to their management platform by downloading mobile apps to their phone. Employment history and records of a new worker can be obtained after sending a photo of him/her via cell phone. Companies and their staff can join their professional social network that works just like LinkedIn to share identity information, personal skills and compensation requirements to stay connected with colleagues and peers.

We tend to recommend highly-personalized commercial insurance and benefits programs on the basis of the employment database we already built. Workers can choose to pay their utility bills through our platform, which is unimaginable in a traditional management system. It is fair to say that to a certain extent, we have access to the most complete and accurate credit and capital records – income and tax payment history – of 500,000 people. This is the unique added-value we can provide to clients in China, where the credit system is still at a primary stage. This benefit that is impossible to be provided by traditional human resource management service firms has also helped to spread the business chain from B2B to B2B2C.

I assume concerns about data security and privacy will be raised.

Indeed. Firms tend to be dragged behind when introducing new services. Loss of talent is one of their worries. While every coin has two sides, it is necessary for us to be optimistic. Professional social networks are designed to provide unprecedented platforms for business exchanges and training opportunities. We encourage our staff to innovate and develop entrepreneurship as we invest heavily in R&D. Over 150 employees worked professionally for our software development team.

Lots of innovation sprouted from real customer demands. With its workers located in different cities in the country or even in the world, a large company will have to face different sets of employment benefits, payment systems, tax rates, and social security standards, just to name a few. Unless these companies are able to transform to an automatic management process in a timely manner, they don’t have many choices other than outsourcing the workload to professional HR service companies equipped with professional software platform, a large database and the capacity to bulk purchase of insurance.

Internet companies like Google and Apple also look to digitize a part of their traditional business, including remote medical services. Will human resources management reform be their next step?

I believe these Internet companies have come into maturity in terms of their development cycle. A slowdown is inevitable, just as it was for players from other sectors. But for lots of traditional businesses who haven’t fully adopted a transition to online management, they are, on the contrary, on the rise. Major Chinese enterprises are getting accustomed to buying and consuming modern services, which is likely to last another two decades.

It is not certain for us to embrace a rosy picture, even with the participation of Internet giants. Personal consumption habits differ fundamentally from those of companies, with the latter being more rational by making decisions on the basis of cost performance. Dr. KlemensSchuerger, ‎Head of HR Services and Systems International of Continental Automotive Systems, believes companies choose suppliers with considerations of “true professionalism,” meaning their ability to meet with different demands on short notice and raise and implement efficient solutions.

Continental AG runs 10 branches in China with a staff size of over 20,000. A fair number of these branches came with different qualities of human resources management, as they became Continental’s properties through M&A. The headquarters had a hard time managing payment systems of these companies and understanding labor costs in China due to individual settings of compensation packages.

Aside from following assessments from companies like IBM and HP, Continental AG decided to outsource payment management and other administrative affairs to more specialized CDPs after consulting service suppliers in China, India, Malaysia and other countries. The project was launched in April thanks to hard work from both sides. The successful experience was then spread to other Continental branches in the Asia Pacific after adopting operational changes to salary management, system and work flow.

Is there anything new you learned about your clients in recent years?

I mentioned the challenges we faced in acquiring and using human resources. Another important factor has something to do with the trend of cross-sectoring. Working to serve multiple disciplines raised higher requests of human resources managers, who are obliged to transform organization structure and bonus methods, which will leave tangible notes on companies’ business. Unlike the past innovation-unfriendly organization structure, new departmental arrangements will represent more cross-sector characteristics, including connecting separate teams in an aim to bring more people working at different places, or even through virtual means, into coordination based on projects.

Human resources management in the past had a lot to do with card-punching, rewarding and KPI, and now it’s only becoming more complicated.

Do you mean a potential rise in the cost of human resources management?

Cost is bound to rise with the demand evolving to be more complex and diversified. But this also points to a good chance for modern outsourcing service industries to grow. Cloud computing saved a great amount of time and energy by disrupting the conventional mode of pay-as-you-go, as it saved hundreds of thousands, or even millions in software and hardware investment and expensive system upgrades and maintenance. Any company is granted access to the service with connection to the Internet. Service based on devices saved much time and cost for companies after their transition to information and quality-oriented service.Furthermore, companies will be offered with more wiggle room to invest in R&D and innovation with the amount of money they saved on management.

Are we expecting the disappearance of human resources managers inside companies?

I don’t think the HR management function in cooperates will soon be gone, but this might be true with old working methods. All kinds of human resources “specialists” will be replaced by “HR Business Partners.” They will work closely with sales and finance departments and offer strategic advice, such as talent division and identification of workers with potential to company leaders. They are expected to implement targeted investment and training with company strategic targets as the focus and take charge of follow-up as well. For those employees with unsatisfied performances, “Business Partners” is obliged to find out roots and designate new positions for them. Human resources management is expected to welcome these shifts in job duties in an era featured with fierce talent competition. Routine tasks such as salary, bonus and insurance will be taken over by professional outsourcing companies.

We’ve heard lots of talks about the impact of robots on human employment. What is your take on this?

I just mentioned that traditional, inefficient labor intensive industries will be gradually eliminated. Especially for manufacturing businesses, human beingswill likely soon be replaced by robots. But there is one thing we should be clear about: human resources management and industrial consultation work is for people, not jobs. As long as there are humans being employed, management in this regard will be achieving good.