Service Innovation

New Kid on the Block?

AUTHOR Dr Usha Thakur, ATS ‐Technical Research, HCL Technologies, Chennai

Service Innovation: New Kid on the Block?

© 2008, HCL Technologies Ltd.

October 2008

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Contents

Introduction ...... 4

Purpose ...... 5

What is Service Innovation? ...... 5

Recent Developments ...... 6

Drivers of Service Innovation ...... 7

IT Service Companies & Service Innovation ...... 8

Concluding Thoughts ...... 9

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Introduction Innovation and profitability are two sides of the same coin for companies that wish to stay competitive in the market place. In fact, innovation is the mainstay of companies that aspire to lead in their area of expertise, irrespective of whether they are offering products and/or services. If recent statistics are anything to go by then what is becoming very clear is that the share of products in most developed (i.e., industrialized) economies is declining rapidly and that of services is growing at a very fast pace. According to the International Labor Organization (ILO),

[F]or the first time in human history, worldwide service jobs (42%) outnumbered jobs in agriculture (36.1%) and manufacturing (21.9%).1

According to a study published by IBM Global Business Services, product contribution has stagnated at around 29% of the US GDP over the past 15 year, whereas the contribution of services has continued to grow, reaching a high of 42% by 2005.2 Not only is the boundary between service and product getting blurred but there is also an increasing tendency among firms to not consider themselves as providers of services or manufactured goods but instead as providers of ‘solutions for customers that involve a combination of products and services.’3

An IBM report captures the relevance of the current developments in the following manner:

AGAINST A BACKDROP of “I/T doesn’t matter anymore” rhetoric and “what’s the next big thing?” anxiety, a tangible opportunity has arrived for business leaders and technologists alike: the remaking of the corporation by the transformation of its chief components – strategy, process, and people/workforce. Unlike previous conjectures (“the virtual corporation,” etc.), this is not a prediction or theoretical exercise for one very good reason: technical capability and business need are finally aligning.4

1 ILO, ‘Key Indicators of the Labour Market (KILM),’ 5th edition, 2007. Cited in University of Cambridge Institute for Manufacturing and IBM, “Succeeding Through Service Innovation” (April 2008) P.6 http://www.ifm.eng.cam.ac.uk/ssme/ [October 2008] ‐> this represents when the site was accessed.

2 Kevin Curtis, “Hiding in Plain Sight: Service innovation, a new priority for chief executives” P. 4 http://www‐935.ibm.com/services/us/index.wss/ibvstudy/gbs/a1026173?cntxt=a1000050 [October 2008]. In this report, Curtis sites IBM as is an example of a company that transformed itself from a primarily product manufacturer to an IT solutions provider. Today, IBM derives nearly 50 per cent of its revenue from services – a fact that is reflected in its revenue earnings. IBM’s service revenue grew from US$5 billion in 1992 to over US$45 billion in 2006 (see P. 13). For another account of a similar trend, see Reena Jana, “Service Innovation: The Next Big Thing” (March 29, 2007) http://www.businessweek.com/innovate/content/mar2007/id20070329_376916_page_2.htm [October 2008]. For a quick snapshot of the service sector at a global level see Institute for Manufacturing, University of Cambridge and IBM, “Succeeding Through Service Innovation” Op cit., P. 24.

3Bessant and Davies call this phenomenon servicisation of manufacturing. Mentioned in DTI, “Innovation in Service,’ (DTI Occasional Paper # 9, June 2007) P. 4 www.berr.gov.uk/files/file39965.pdf [October 2008].

4 See IBM Research, “Service Science: A New Academic Discipline” P.5 http://www.u.arizona.edu/~jlzhao/SIRE/ [October 2008].

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Purpose The main objective of this paper is to understand the notion of ‘Service Innovation’ and its implication for IT service companies.

What is Service Innovation? There is an amazing amount of theoretical literature that has been generated on this subject ranging from the definition of Service and Innovation to the elements required to make service into a science.5 In fact, some of the articles on Service Innovation are so complex that, as Navi Radjou so aptly put it, “IT buyers…are struggling to comprehend ‘service innovation,’ which sounds a little too esoteric and like a solution looking for a non‐existent client problem.”6

For the purpose of this paper, we will accept that a Service is an activity that links producers/providers to consumers/buyers and Innovation is the successful exploitation of new ideas.7 Service Innovation has been defined and described in a number of ways but for our purpose the following definition by Van Ark et al., offers the most (practical) value:

[Service Innovation can be defined as] a new or considerable changed service concept, client interaction channel, service delivery system or technological concept that individually, but also in combination, leads to one or more (re) new(ed) service functions that are new to the firm, change the service/product offered on the market, and require structurally new technological, human or organizational capabilities of the service delivery organization (Van Ark et al., 2003: 16).8

5 For a very interesting discussion, see IBM Research, Op cit.

6 If one does not want to get lost in the details of the debate about Service Innovation, Navi’s article is an excellent starting point. See Navi Radjou, “Demystifying IT Service Innovation: Self‐Centered IT Firms Must Articulate The Value of Service Innovation to Clients” (July 3, 2007) http://www.forrester.com/Research/Document/Excerpt/0,7211,42430,00.html [October 2008]. To have some idea of the nature of literature in academia, see University of Cambridge Institute for Manufacturing and IBM, Op cit.

7 This is how the Department of Trade and Industry in the United Kingdom interprets ‘innovation’ and we will accept it as a working definition in this paper. For more details, see DTI, Op cit., P. 5.

8 Ark, Van, et al., (2003) "Service innovation, performance and policy: A review." Research Series No. 6 (The Hague: Ministry of Economic Affairs, P. 16). Cited in Pim Den Hertog and Gjalt De Jong, Op cit.“Randstand’s Business Model of Innovation: Results from an exploratory study in the temporary staffing industry.” (Oct‐ Dec., 2007) http://findarticles.com/p/articles/mi_m5QHA/is_3‐4_9/ai_n25017705 P.5 [October 2008].

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Recent Developments Companies like IBM, Oracle, Microsoft, and a few others are looking at ‘Service’ not just as a sector in need of domain‐specific solutions but as an integral part of a company’s value chain that can have a significant impact on business. They are thinking of a time in the future when business transformation services will be so fine tuned that each service function can be quantified in a company’s accounting books in the profit and loss column in a standardized manner. This calls for a different way of conceptualizing Services than we are used to doing and for a workforce with new skills. It also requires service companies to acknowledge Innovation in a more apparent manner than has been the case. According to Hertog and Jong’s,

[Since] R&D is less associated with creating new services or new service development…[it] implies that, in practice, important services’ R&D and innovation activities are hidden behind labels such as business development and service improvement without being recognized as services’ R&D. (Howells & Tether, 2004; Tether, 2003; Den Hertog, 2000)9

The overall focus of Hertog and Jong’s paper is very interesting: how do service companies develop and maintain successful R&D and innovation activities? The authors selected the Randstand Group for their case study, which was part of a larger project the aim of which was to understand “the apparent ‘underinvestment’ of European business firms in R&D.”10 During their investigation, Hertog and Jong realized that since Randstand thought more in terms ‘business development’ and not R&D (as a product company would have done), its innovative ideas were embedded (in effect hidden) in various activities such as optimizing large scale administrative processes, business concept development, co‐innovation with major clients, and creating an open corporate culture. In other words, innovation in service firms is embedded (not in R&D) but in business‐ or domain‐specific service functions, and it is for that reason that companies like IBM are investing a lot of time, energy, and money in understanding service functions in their entirety.

In the last couple of years IBM has taken a lead in a number of initiatives to ensure that Service Innovation stays high on the agenda of government, universities, and industry. For instance, in May 2004, IBM Research and Business Consulting Services (BCS) organized a summit that brought together university professors from the fields of computer sciences, operations research, industrial engineering, mathematics, management sciences, decision sciences, social sciences, and legal sciences to explore the possibility of creating a new discipline to fuel the next wave of innovation. That new discipline came to be known as Service Science, and it is expected that Service Science will draw on the current work going on in pockets of business, engineering and computer science schools. The principal assumption behind the summit’s focus on the academic front was that firms (interested in offering business transformation services11) will require a workforce with new (multi‐ disciplinary) skills together with new business models, processes, strategies, and workforce

9 Pim Den Hertog and Gjalt De Jong, Ibid. P.1.

10 Ibid., P. 5.

11 IBM calls it Business Performance Transformation Services (BPTS) and expects the market for those services to grow to at least US$500 billion. See IBM Research, Op cit., P. 7.

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management methods. Furthermore, in March 2007, IBM and Oracle along with the Technology Professional Services Association (TPSA), The Service and Support Professionals Association (SSPA), 15 leading technology companies, and academic researchers launched the Service Research and Innovation (SRI) Initiative, with the aim of increasing funds for service research, development, and innovation in the technology industry. 12

Slowly but surely government and research organizations of several countries where the service sector contributes handsomely to the nation’s economy are beginning to realize the significance of Service Innovation. Besides the US, other countries that come to mind include Finland, the UK, Norway, Japan, and Germany to mention only a few.13

Drivers of Service Innovation Although not limited to, the biggest push for Service Innovation is coming from the following global developments:

1. Alignment of business need and technical capability/technology

2. Rise of service jobs

3. Cost‐cutting and savings strategies by themselves are no longer effective mechanisms for staying competitive in the international market

4. Technology per se cannot create new and innovative business designs, services, and products to differentiate and expand business or respond quickly to change

12 See “New consortium formed to address critical gaps in services research, innovation and education” (March 29, 2007) http://www‐03.ibm.com/industries/education/doc/content/news/pressrelease/2371973110.html [August 2008]. Another initiative that is worth mentioning is that undertaken by the Consortium for Service Innovation for collaboration among multiple stakeholders. See http://www.serviceinnovation.org/about/mission.php [October 2008].

13 Tekes – The Finnish Funding Agency for Technology and Innovation – has introduced the Serve programme for funding research pertaining to the ‘development of innovative service concepts and cutting‐edge service sector efforts with Finnish companies.’ For further details see Tekes, “Service Innovations – Innovative Business” (March, 2007) www.tekes.fi/eng/publications/serve_engl.pdf [October 2008]. For similar initiatives in the UK, see DTI, Op cit., for Germany see Walter Ganz, “Designing New Services Service Engineering ‐ The Holistic Approach on Service Research in Germany” (May 30, 2007), http://forums.thesrii.org/srii/board/message?board.id=community_news&thread.id=23 [October 2008]. For Nordic countries see http://www.cfa.au.dk/SERVINNO/Servinno.htm [October 2008] and “AT‐ONE Service Innovation” (October 24, 2007) http://www.service‐innovation.org/?page_id=2 [October 2008]. For Japan as well as a few other countries, see Kazuyoshi Hidaka, "Trends in Service Science in Japan and Abroad" (National Institute of Science and Technology Policy Quarterly Review No. 19, April 2006) www.nistep.go.jp/achiev/ftx/eng/stfc/stt019e/qr19pdf/STTqr1903.pdf [October 2008]. Finally, for a study of 38 UK and 70 US service firms, see Joe Tidd and Frank M. Hull, "Managing Service Innovation: The Need for Selectivity Rather than Best Practice" (January 17, 2007) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=915012 [October 2008].

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5. Innovation is very high on the agenda of CEOs14 and CIOs15

IT Service Companies & Service Innovation While the idea of commoditizing ‘service functions’ in a client organization is, indeed, very exciting for IT service companies, they also realize that unless their Service Innovation offerings improve business performance, clients will just not be interested.

A few years ago, many Indian IT service companies witnessed a dramatic growth in their business largely due to the high volume of ‘outsourced’ IT business from the US and Europe. Back then, the outsourcing of certain IT processes was definitely a form of Service Innovation, and it has served both the IT service providers and its customers very well.

If one looks at the path IT service companies have taken, we see a pattern. For the most part, IT service providers have developed their capabilities in back‐office processes to cut costs/improve quality of IT solutions and in solution accelerators to fasten the pace of time‐to‐market for clients. However, going forward, IT service providers realize that they need to respond to a different type of clientele – one who is looking for business transformation services.16 IT service providers will, therefore, need to not only map their notion of Service Innovation to their client’s notion of business value but also consider:

1. Investing in strengthening their business transformation capabilities in order to help clients radically change their business model and gain competitive advantage

2. Engaging with clients in a co‐innovation/partnership or risk‐mitigation business model to develop solutions for problems that are specific to their clients

14 In a survey conducted by IDC, Product/Service Innovation ranked 3rd highest (after Sales Productivity and Customer Care) on the agenda of CEOs. Cited in “Agenda for 2008: ‘Selling’ Joins ‘Innovation’ and ‘Customer Care’ at the Top” http://blogs.idc.com/ie/?p=124 [October 2008]. This chapter is part of a larger study by Per Andersen entitled “Nordic Quarterly Executive Service, 2Q, 2008” (May 2008) http://www.idc.com/getdoc.jsp?containerId=N520802Q [October 2008].

15 In a recent survey conducted by Gartner, the CIOs of leading companies were asked to identify their priorities for 2008. Creating New Products or Service (Innovation) was their third priority after Improving Business Process and Attracting and Retaining New Customers. For further details see Gartner, “Making the Difference: The 2008 CIO Agenda” (January 2008) P.6 http://www.gartnerinsight.com/landing2.asp [October 2008].

16 For a snapshot of differences in Service Innovation initiatives among IT companies, see Navi Radjou, Op cit., P. 5.

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Concluding Thoughts In one form or another, IT service companies are constantly innovating in order to keep up with the dynamic requirements of their clients. To some extent many of them are already offering services that help clients make incremental though significant changes in their business process, model, and strategy.

However, with greater alignment between clients’ business need and technology, wider acceptance of Service Science as a discipline in universities, and with the adoption of service (innovation)‐ friendly laws by government, we are likely to see Service Innovation take the form of comprehensive (as opposed to piece‐meal) business transformation services.

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