Billion Dollar Innovation

A Finnish study profiled twelve U.S. companies to give insight on how successfully applied service innovation can bring in the big bucks

Some months ago, I got a call from Peter Westersträhle, science and technology attaché at the Embassy of Finland in the U.S., explaining that his country wanted to become one of the most competitive service economies. Tekes, the Finnish Funding Agency for Technology & Innovation, and both the thought leader and first mover in the development of European service innovation policy, had established in March, 2006, a €100 million initiative, "Serve," to study and support service innovation. Tekes is now busy sponsoring research, funding projects, and fostering collaborations among business, government, and academia around the world in order to support innovation in Finnish service industries.

Working closely with Tekes staff, our assignment was to develop a dozen case studies profiling innovative U.S. service companies that yielded insight and examples for how innovation had been applied to bring about new value. Market segments were chosen that mirrored key sectors in the Finnish economy: insurance and financial services; professional services (called "Knowledge Intensive Business Services" in Europe); wholesale and retail trade; and logistics. Businesses under a billion in revenue and with a B to B orientation were of particular interest.

While the individual cases are intriguing, to say the least, the more interesting thing to me was the set of patterns that were revealed when looking at the group as a whole. See what you think as you read the report.

The IT Factor

Key findings of the report included the Internet emerging as an important distribution channel in almost every case. The services era has ushered in service availability whenever and wherever you like. Although the majority of these companies were not dot-coms per se, investments in cultivating online business were the norm for this group of innovators.

In a larger context, information technology has become the new factory for service businesses in that automation helps to "productize" (i.e., make more repeatable) innovative concepts. IT also helps scale services. We saw relatively small investments in the development of IT engines beget enormous returns because of the potential to add new customers and transactions globally at very low cost.

One other key finding is a pattern in which the customer replaces the direct competitor as the dominant reference point for strategy and innovation. There are three underlying reasons for this shift.

First, competition is coming from new and unexpected sources, so disruption from someplace—and not necessarily a place you'd expect—is a given.

Second, customers are more sophisticated and demanding than ever before. Expectations are regularly informed by outside benchmarks such as how fast you can order tickets online or how easy your iPod is to use, not necessarily accepted industry standards. (For example, as financial-services firms have introduced Web services, they've realized their customers demand a level of service set by Amazon (AMZN) and Google (GOOG)—not by their industry peers.)

Finally, the proliferation of systems allows for information-driven business models that can provide a user with much more control, and control is a big deal these days given our hectic lifestyles. For the businesses we studied, the main source of insight in developing control points was referencing the needs of end users, not the competition's offer.

Value Propositions Worth Pursuing

Across a diverse set of businesses, a special set of service innovation patterns stood out. Here they are:

Seventy-five percent of the companies studied provide a service that manages some element of complexity in their customer's operations, allowing them to focus on their core competencies. For example, wholesale e-tailer Sitoa has built a Web 2.0 digital marketplace that within hours can connect thousands of product suppliers with retailers who want to offer their products.

Bank of America's (BAC) Keep the Change program helps consumers handle the difficult task of saving by providing an automated solution to the complexity (whether cognitive or logistical) that previously had inhibited millions of people from the practice.

Fifty percent of the exemplars offer solutions that directly help their customers enhance their productivity. ServiceBench provides outsourced modules for post-sales service that include field-service management, parts and repair management, and warranty and claims management for companies such as Whirlpool (WHR). NineSigma connects clients to global innovation networks as they look for the means to leverage technology or outside knowledge in new ways.

Seventy-five percent provide tools that increase transparency into their client's operations, enabling them to empower employees as well as to react to changes faster through greater visibility into their businesses. MyBizHomepage's Web-based financial management dashboard updates the financial performance of its clients through a link to QuickBooks each time they log in. Their clients have been known to check this practically on the hour. Consulting firm Crowe Chizek has unveiled a suite of analytical applications that allow enterprises to understand performance at individual franchises or facilities across a range of service industries, from health-care providers to automobile dealerships.

Removing Uncertainty

Fifty percent of the service exemplars studied developed ways to help remove or minimize uncertainty in their customer's operations. Total Quality Logistics (TQL) has transcended the historically poor standards of the trucking industry by facilitating truckload freight shipments through hiring and training the best logistics managers in the industry and by building an IT platform that gives its clients 24/7 visibility into their freight shipments. TQL clients have absolute assurance when their goods will arrive, which helps them focus on their core business activities. In this fast-growing industry, TQL has grown at a 50% compound annual rate since its founding 10 years ago and expects to pass the $1 billion revenue mark in five years.

Finally, many of these service innovators are actively managing strategies to enhance stickiness and engagement with their customers. Through effective market segmentation, Ingram Micro (IM), the world's leading wholesale distributor of information technology products, has organized its value-added resellers into communities that converse over the Web. Through this social networking forum, they advise each other on a host of issues that then can be supported by Ingram Micro's product line and service offerings within the broader context of a relationship with the company.

It is important to note that stickiness doesn't necessarily have to confine itself to companies that have a big e-commerce presence. At Mattel's (MAT) American Girl, the concept of deep customer engagement is embodied in everything the company offers, from services for the dolls (hairstyling, wellness, and accessories) to services for the little girls and moms that buy the dolls (birthday parties, café services, and musical productions). They let you check out but never leave!

The country of Finland should be thanked for its willingness to share this information with the world.

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