Monday, September 11, 2006

Service Innovation

There's quite a lot written about innovation - especially from the perspective of new product development. However, our economies and most of those of the developed world are switching rapidly to service-oriented economies, and the definitions of innovation and research on service innovation are very slim. We've only really had about 30-40 years of research on innovation in the product sector, and that work has produced some good thinking (Stage-Gate for example), but there's been little work done on service innovation while our business models have changed substantially.

I guess there's probably several reasons for the focus on product rather than service innovation. First, it's easier to define and manage a physical product as opposed to a service. Products can be created and churned out in rapid order with little variation, and can be changed or adapted quickly. Most services can't be easily moderated and rely on people to deliver, which introduces variation from the outset. Second, product innovation can be defended with patents and product protection, while it is hard to defend service innovation. If I offer the world a new service, it's usually not hard for others to copy it if they choose to. Third, many "services" have been deemed as too insignificant or too inexpensive to innovation. Most firms would prefer to throw more "low cost" people at this issue rather than improve the service or innovate around it. Well, over time, people will become your highest cost factor, and you'll need to find ways to innovate your service model just to keep your costs in line.

Peer Insight, a firm in Alexandria, Virginia headed by Tim Ogilvie and Jeneanne Rae, have tackled the question of service innovation head on. Through a lot of research and work with some leading firms, they've begun to compile a database on innovation projects and lessons learned within firms that are focused on service innovation. Some of those firms offer products and the services are secondary, and some are completely service focused. Peer Insight has recently published an executive summary of the work they've done so far, which you can request at their website. The executive summary presents some high level findings from the research they've done to date.

There are a couple of findings that were of interest to me, especially the "origins" of innovation and "intended market effect". For the work in the survey, they asked the innovators where their innovations came from. Over 70% of the innovations came from internal sources, as process improvements or planning for growth. 30% came from external sources, mostly as responses to competitive threats. Only 10% of the innovations were noted as "customer initiated". In a service company, where you'll live and die through the daily interaction with your customers and the value you add in each interaction, you'd have to believe that customers can create a number of ideas and recommendations for improving your service. Yet so far only 10% of the service innovation originate through what I'd consider an exceptionally important channel. Firms that focus on services and want to innovate would be well served to listen more closely and work with their customers to sustain innovation.

Second, the intendend market effect was interesting because it indicated that service innovation is still fiddling with the edges rather than any disruptive innovation. Over 85% of the innovations noted were incremental innovations or, generously, a breakthrough innovation. Most were "new to segment", which suggests the capabilities and ideas were already in play and the firm packaged them for a new segment. Only 15% were "new to world", which suggests that the service oriented firms are still playing it very carefully.

The synopsis goes on to note that there is a less well-defined development path for service innovations as opposed to products. In our methodology for innovation, we have a five step process - Generate ideas, Capture ideas, Evaluate ideas, Develop as products or services, Launch. In the "Develop" phase, new products go through a fairly sophisticated process of New Product Development managed by Stage Gate or other processes, enabled by Product Lifecycle Management applications. In most firms there is no corresponding New Service Development process and few systems or tools to support the process. Note that the "front end" of innovation for both types of innovation is the same - ideas have to be generated and captured and evaluated - but then the process really breaks down where service innovation is concerned.

Peer Insight is doing some great work around service innovation, and their work and thinking can be applied to any firm that provides services to their customers.
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posted by Jeffrey Phillips at 5:20 AM

24 Comments:

Anonymous Timothy Hyde said...

Thanks for the link through to Peer Insight. I was not aware of the site and thier study may be useful to my work.

Timothy Hyde

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Those approaches can work to a certain extent, but I think the problem comes before that stage. Large organizations were not built to innovate but rather to be efficient. In the future we will need to completely restructure them if we want them sustain innovation over the long term.

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