POLICY:Innovation in the service sector is seldom practised, yet services form the basis for all advanced economies.
At yet another conference on innovation in service industries, Minister for Finance Brian Cowen laid out a basic truth for Ireland, and every advanced economy. The future depends on service innovation. But "managing innovation in services is different from managing traditional R&D led activities", said Cowen.
The difference between innovating in manufacturing and innovating in services is turning out to be a key factor in how policy makers and companies understand their immediate future.
There is at least a 200-year history behind manufacturing innovation. It's an area surrounded by university labs, R&D budgets, EU research projects and nationally-funded prototyping facilities. Service innovation has none of these.
In fact, it's so different from manufacturing that few people yet know precisely what constitutes service innovation.
"Innovation in the product realm is a process you can easily understand," says Christine Kurjan of Irish service innovation company, Innovation Delivery Ltd (IDL). "You can hold a prototype in your hand and pass it around, but in the area of service innovation there is a lot of intangibility and therefore a problem with communicating it, particularly issues of quality around it."
Nevertheless the question for many advanced economies in a rapidly changing economic climate is: Who will harness service innovation fastest? And of course: how?
"Almost 70 per cent of the Irish workforce is employed in services activities and almost 40 per cent of our exports are services based," Cowen estimates, meaning that we are becoming hugely dependent on an area that is little understood.
That paradox, having an economy dependent on services yet funding, for the most part, non-service innovation activities, is not confined to Ireland.
"Services receive only 14 per cent of the UK R&D spend," says Chris Down founder of London-based service innovation design company Livework.
"Nobody has formally thought through what service innovation really means," adds Down who recently worked with the car manufacturer Fiat to "service-enable" the next generation Multipla.
In the case of the Multipla one of Downs' conclusions was that car keys are a barrier to service innovation in the auto-industry.
It might sound slightly arcane, so it's worth looking at the example further to show what the new discipline of service-enablement means.
"Keys restrict who can access a vehicle," says Down, stating the obvious. What is not obvious is what you can do once you decide that access is a good thing.
"We recommended that Fiat build into future car design the ability to open cars with a mobile phone. That opens up a new path for car manufacturers to enable service around cars," he argues.
The idea was, in fact, implemented by a new UK car-sharing service Streetcar which places Volkswagen Golfs around the city of London and rents them by the hour by sending an unlock code to customers' mobile phones.
By looking at access in a different way, regarding it not as a threat to the car but as an enabler, Livework and Streetcar have created an entirely new business model based on making cars available anywhere for any amount of time from an hour upwards.
The service became profitable after six weeks because car ownership and restricted access was taken out of the equation of efficient car use.
As well as building services into products, one of the biggest changes in the past five years, exemplified by Apple's iTunes MP3 player and music download service, services can also mean anything from making television programmes to being a general medical practitioner, or providing legal services on the high street, to providing public services in the HSE.
There are many more possibilities. The accountant filling out tax returns, the International Financial Services Centre in Dublin, the high street shop - they all provide services in our economy.
More than at any time in the past, it could be argued that the need to innovate applies to all of us, even the corner shop.
"Organisations are feeling the pressure and the demands of change," says Forfás chief executive Martin Cronin whose staff track innovation in the Irish economy.
"But it goes all the way down to, for example, your local doctor because he too is feeling pressure. Half of his patients will have researched their condition before they arrive in his surgery. That never happened in the past."
Getting a handle on service innovation, though, can be difficult because with such broad application, it naturally means different things depending on who you talk to.
For Cronin, the key factor is knowledge, "knowledge of what customers want today and tomorrow". Cronin also stresses the growing importance of a lifestyle economy and how to improve the customer's quality of life. For Downs, the issue comes down to creating a new sense of balance.
"Every economic activity should be balanced in a way that is sustainable financially, socially and environmentally," he argues. "Our obsession with buying, owning and throwing away products is not sustainable in any of these ways. Providing a service, on the other hand, can help solve social problems as well as financial ones and will not hurt the environment."
Josephine Green, a designer at Philips, the Eindhoven, Netherlands-based consumer products company agrees. "We can't go on relying on products," she argues.
"Product design is probably dead. Even if you look at our MRI scanners [the machines that are replacing X-rays in hospitals], we have now to think about what services we can build around them for the user.
"That might mean we design them, so that users can change the ambience around them so they feel more comfortable, change the colour scheme in the room. It's a simple example but it shifts the design priorities towards services."
At the Liffey Street, Dublin, branch of EBS Building Society, the mortgage provider has set up an innovation centre to test new service design concepts. "We worked with Innovation Delivery (IDL) on what we called empathy journeys, observing what happens in the branch, what really does happen," says Innovation Centre manager Kevin Johnson. The centre and IDL then came up with "hypothetical examples of what the journey could be like for branch members".
The difference is they did this based on feedback from members about what they actually felt before, during and after visits to the branch.
Johnson's conclusions from that exercise give another perspective on what service innovation means. "All processes have functional, rational and emotional elements," he says. "We've all been good at getting functional and rational processes right. Invariably, the weaknesses lie in the emotional despite all our decisions depending on emotions."
Service innovation encompasses, then, knowledge of customers' changing needs, responding to the emotional aspects of customers to create better experiences, understanding the new lifestyle economy, and creating sustainable activities. Keith Finglas also of IDL adds one more. "When you look at the business model, you might also look at innovation possibilities that have been overlooked."
The best known example of a product being converted into a service and changing a business model is Apple's iTunes, a product with a music download service. Latterly with the Apple iPhone, Apple has been able to take part of the network telephony tariff from its telecommunications partners. iTunes has had a powerful effect.
"Everyone I talk to in industry admires what Apple has done with iPod/iTunes," says Tim Ogilvie of US service innovation consultants Peer Insights. "We don't have a rich vocabulary for innovation, so a well-traveled story like iPod fulfills an important role in enabling a dialog."
Cronin quotes Ryanair and Dell as two examples of companies that not only changed business models, but which have also embraced the need for constant innovation.
So with successes like these and acknowledgment of service innovation's huge importance, there should be no question that economic policy will swing behind services at every level from the small regional company to the high street solicitor to the multinational agribusiness.
Traditionally however, the bulk of Government funding for competitiveness' initiatives goes into products. Science Foundation Ireland's spending, for example, is mostly concentrated in biopharmaceutical products and software development, though the latter has an increasingly important service component.
"The question is how do we focus on service innovation when the bulk of research euros goes into product," says Willie Golden, director of the Centre for Innovation and Structural Change at the University of Galway. "How we measure innovation is still predominantly geared towards product, for example the number of science and technology graduates, the number of patents. We need to be developing new sets of metrics to reflect changing realities."
On a policy level, there are question marks then over whether the right conditions are in place to foster an innovative climate in services. That may be about to change. Forfás, along with the Department of Enterprise, has set up a working group to review national innovation policy. The Services Strategy Group is due to report in the first half of 2008. "We're reviewing the policy area, as it was put together for manufacturing," says Cronin. "We want to see what might need to be changed for services."
Is a new policy initiative a likely outcome? "It's too early to say," he responds. Given the rapid gains services are making in the modern economy, that report can't come a moment too soon if only to bring services at least on a par with what is now the poorer neighbour, manufacturing."
Case study - the legal profession
Step 1
Mapping the eco-system: The first step, say Innovation Delivery experts Christine Kurjan and Keith Finglas, is to map the eco-system that your company works in. Understanding the network and needs of consumers and stakeholders can highlight the area most ripe for innovation.
Step 2
Generating ideas: The creative team generates ideas using various stimuli, including user insights, competitive landscape, and appropriate technologies, taking direct approaches as well as exercising lateral thinking.
Step 3
Prototyping: Service innovation has to be made real. "Services can be a little intangible," says Kurjan, "compared, for example, with product innovation where you get to hold something in your hand to evaluate it. It's important with service innovation to make the offer and its quality more tangible. To prototype the experience, the interactions in some way."
Step 4
Refinement. Kurjan recommends narrowing to a handful of most promising prototypes and refining those into potential new service elements iteratively with clients, partners and suppliers.
Step 5
Implementation. What more is there to do? Roll the new service out.
What then if the research uncovered a feeling among clients that solicitors were not available in a timely way. Whenever clients ring the solicitor is busy with someone else. The result is the client's confidence declines and with it, potentially, the firm's reputation.
"What you need to do with that information," says Finglas, "is find out why and then ask how it can be addressed through technology, business process or people. For example, what can technology do to help with that situation."
Here are the steps. Discover your firm's values and objectives, asking what do you want to achieve but also how? What values do you want to take forward, preserve or change?
The next step is to talk to your clients, partners and suppliers to get a sense of where innovation might have the most significant impact and to generate ideas. Sometimes this is referred to as finding the sweet spot, the innovation that will have the most impact on your business.
Simultaneously, it is important to research your environment.
In the case of a solicitors firm that might mean understanding the impact of immigration (does it suggest a new legal speciality?) or of technology.
Prototyping. New services can be prototyped to bring them to life.
For example. What if the firm recognises it does not have adequate expertise in a given area?
It could partner with another firm, but to assess the value of this option it could role-play a range of instances when it might be necessary.
Equally the response might be that technology could be used to give clients more comfort - for example by providing Instant Messaging or by showing the progress of a case in a secure online environment. These too can be prototyped using just a few design resources.
The next step is refinement which means improving the prototypes and assessing their merits for the business.
By this stage you are already three fifths of the way through your service innovation. Congratulations.
