Service Innovation: The Next Big Thing

IBM, Oracle, and other tech companies have formed a new nonprofit consortium dedicated to the advancement of this hot concept

When most consumers and corporations think of innovation, sleek, user-friendly products such as Apple's (AAPL) iPod come to mind. But leading companies, innovation consultants, and academic researchers are shifting their focus from products to services as the next hot area. The Mar. 28 launch of the Service Research & Innovation (SRI) Initiative, an ambitious Silicon Valley nonprofit founded by executives at IBM (IBM) and Oracle (ORCL), is a sign that the concept of service innovation is quickly becoming top-of-mind, at least among executives at high-profile companies in the technology industry.

"People have a good idea of what technological innovation is," says Jim Spohrer, director of service research at IBM's Almaden Research Center. "But service innovation is more hidden."

Though the phrase is not yet widely recognized in the business world, the concept of service innovation isn't new, as Spohrer illustrates with the example of the lightbulb. "The average person knows the story of Thomas Edison, the inventor and innovator who came up with the lightbulb. People don't tend to think of the related service innovations—getting lightbulbs into houses and schools, setting prices for the electricity services to keep them lit. That's all service innovation," he argues.

More recent examples, though most people wouldn't think of them under the phrase, are outsourcing and the shift toward self-service.

Not a "One-Company Thing"

IBM conceived of the consortium as a way to bring tech executives, academics, and government funders together to support curricula and research in the fledgling field. Spohrer and his colleagues had been working on a related project, the Service Science Management Engineering initiative, to encourage service-science education in schools. And about a year and a half ago, IBM contacted two trade groups, the Technology Professional Services Assn. and the Service & Support Professionals Assn., to connect with other companies developing new service models.

"IBM realized that service innovation isn't a one-company thing," says Thomas Pridham, senior vice-president, Advanced Programs of the Service & Support Professionals Assn., and executive director of the SRI Initiative. In other words, IBM realized that, to fully understand how the field of service innovation was evolving, it needed to be part of the broader community. The SRI Initiative, Spohrer points out, has always been conceived as a separate entity from IBM, despite being the brainchild of IBM executives.

Pridham brought in executives from Oracle and other members of the Technology Professional Services Assn., and word of the SRI Initiative began to spread. The fledgling organization now includes representatives from leading tech companies, including Hewlett-Packard (HPQ), Microsoft (MSFT), and Cisco (CSCO). Universities such as Arizona State University and the University of Maryland are also involved, as well as international government bodies, including the European Commission, the executive body of the European Union.

Becoming a Web 2.0 Community

While the initiative's first concrete project is hosting a symposium, The Challenges & Opportunities of Services Research & Innovation, on May 30, at the Santa Clara Convention Center, the groups aims to do more than organize talks and gatherings. The initiative hopes to grow to be "an open, Web 2.0 community," in Pridham's words, and a clearinghouse for research reports and other information on models of service innovation. (The initiative lives online at

Such an information resource could help service innovation evolve from a fairly common business practice into a more formally recognized field, by allowing researchers to uncover profitable patterns among companies implementing innovative services.

And the SRI Initiative's future online social-networking and public archive features could distinguish the SRI initiative from earlier industry groups, such as the San Carlos (Calif.)-based Consortium for Service Innovation, founded more than a decade ago. That nonprofit organization's list of tech benefactors and advisers has some crossover with that of the SRI Initiative (Microsoft and Cisco, e.g.). It offers white papers, workshops, and conferences for members to learn how to improve their customer-service programs, as well as a members-only wiki to share ideas. The SRI Initiative's plans to formally involve educational institutions and government funders to collaborate with corporations—perhaps the next step in gaining widespread acknowledgement for both the idea and practice of "service innovation"—should further distinguish the two organizations.

No Overnight Success

But even with the growing number of consortia with service innovation in their titles, the concept won't achieve the recognition of say, management theory or supply-chain analysis overnight.

"It's a very broad field," says Jeneanne Rae, president of Peer Insight, a service-innovation research firm based in Alexandria, Va. "There's no quick elevator pitch for defining 'service innovation.' It's extremely complex and involves many diverse environments and the management of diverse types of people."

While academics and business leaders could afford to ignore the study of service innovation in the past, when the U.S. economy was driven by manufacturing, the situation is changing. Recent statistics illustrate that services, in a wide spectrum of industries, are becoming a dominant force in the U.S. economy. The latest data from the Bureau of Labor Statistics (published in December, 2005) projects that the service-providing sector of the U.S. economy will see the highest employment growth by 2014.

Growing Notice from Academia

The 10 industries with the most dramatic salary growth are all in this service-providing sector, ranging from employment services to education to health care. In contrast, employment in the manufacturing sector is expected to drop 5% by 2014, and goods-producing industries will decline to 13% of total American employment in the decade 2004-14, down from 15% in 1994-2004. And the trend is global: Service workers now outnumber farmers for the first time, according to the January, 2007, issue of Global Employment Trends, a newsletter published by the International Labor Office.

Economists and academics are paying attention to such changing stats, evident in the increasing number of research papers written on service innovation. A year ago, for example, organizers of the Frontiers in Service conference in San Francisco, the largest service innovation thinkfest in the world, received 181 abstracts of research papers to be considered for presentation. This year, the number of proposals for the conference which takes place Oct. 4-7, 2007, nearly doubled—to 309.

"Service innovation simply reflects the new playing field of business," Rae says. She points out that technological advances, which allow for service innovation opportunities such as live instant-messaging with a consumer representative while shopping online, combined with consumers' increasing demands for faster and better services, have made service innovation an important part of top companies' competitive strategies.

How to Jump on the Bandwagon

"Consumers' increasingly higher expectations demand business models in which services are seen as added value to products" from cars to personal electronics to clothing, Rae says.

So it's not just technology companies that can benefit from service innovation. At the recent Service Innovation Design & Development conference in San Diego last week, Rae presented a chart of the revenues of top nonenergy firms in the U.S., from Wal-Mart (WMT) to General Electric (GE). On average, in 2005, the 10 companies Peer Insight analyzed saw 65% of 2005 revenues from services. Moreover, those companies saw an astounding 85% of 2005 profits from services, according to Rae's proprietary research.

So where does a company eager to jump on the service innovation bandwagon begin? The newly minted SRI Initiative has come up with suggested paths of action, stated as the organization's own goals. For corporations, the SRI proposes setting and funding long-term research and development budgets. For academia, the SRI suggests service-centered courses and degrees. For government bodies, the SRI prescribes sponsoring university and applied-research organizations. All three entities should ideally foster commitment to participating in service research projects alongside each other.

While the strategies put forward by the SRI Initiative are tailored to technology companies, corporations in other fields could use them as an early guide to navigating the new field of service innovation.

Before it's here, it's on the Bloomberg Terminal.