Service Delivery Companies
A service is basically a transaction where no physical products are traded between the seller and the buyer. The seller’s willingness to conduct the transaction is held to be evidenced by the willingness of the buyer to participate in the exchange. Generally, public services are the ones that society as whole pay for. Examples of public services include health care, education, social security and many more. There are numerous reasons why people prefer to engage in a service rather than investing directly in something tangible.
There are several arguments presented by service providers as to why they conduct business in this manner rather than employing private capital to generate the capital. One of the main arguments is the notion of intangibility, where the value of the good being exchanged cannot be altered without the change of ownership. Intangibility is highly related to service provision because the goods being traded are not tangible assets. However, this view is not fully accepted by all service providers because tangible goods do have a useful life cycle that can be measured and therefore traded.
Service providers usually provide intangible goods and services because these goods and services have low-term costs and high leverage. Low-term costs refers to the expenses involved in producing the good or service and its life cycle. The life cycle of a tangible item is generally defined as its life over a period of time, from the moment it is produced until it is finally disposed of. On the other hand, intangible goods and services undergo a much shorter life cycle and hence their prices tend to fluctuate less frequently.
As to the extent that services are tangible goods, there is an allowance for depreciation wherein the service provider is allowed to depreciate the cost of the goods that it has provided. It is for this reason that some service providers offer intangible commodities as payment for the services that they render. On the other hand, some intangible goods and services are not allowed to be traded on a commodity exchange because the Commodity Market is not a true marketplace where service providers can buy and sell their intangibles and consumables to each other.
The practice of exchanging non-tangible goods for intangibles was initiated by the United States government during World War I when it was discovered that German soldiers were dying off because they had no food. The government set up a program to deliver food to the soldiers and thus enabled the soldiers to survive. This practice eventually spread all over the world and was later known as ‘merchanting’. Even today, the practice of purchasing raw materials and then reselling them to others at high prices is called ‘micro-transaction’. One important example of micro-transactions is the purchase and sale of foreign currency by service providers who are based in different countries. Another example of micro-transactions is the lease of inventory by producers of a particular good, who do not actually produce the goods in the business premises.
Micro-transactions serve two purposes. First, they remove the cost barrier for the service provider to buy the relevant intangible and convert it into cash. Secondly, they remove the risk associated with inventory. Since production cannot take place without access to raw material and labor, there is always a possibility of an inventory excess. Since these costs and risks are externalised to the service consumer, they can easily be balanced out and satisfied by selling the intangible directly to the service provider.