The Royal Society, - the UK’s national academy of science, - recently released a report: Hidden Wealth: the contribution of science to service sector innovation. This excellent report represents the findings of a major study on the role of science, technology, engineering and mathematics (STEM) to innovation in the services sector. It is one of the most comprehensive investigations of the impact of services innovation in the 21st century.
The services sector is by far the largest in the global economy, comprising about 65 percent of the world’s overall GDP, and between 70 and 80 percent in countries with more advanced economies. Most of the working population in such countries are employed in services in one way or another, - roughly two thirds of all jobs in Brazil, Japan and the European Union and around 80 percent in the UK and the US.
This new report is very important and timely, given that the creation of well paying jobs is currently among the highest priorities not only in the UK, but also in the US and many other countries around the world. As the report says:
“Our main conclusion, . . . is that services are very like to remain central to the new economy, not least because we are at or near a tipping point: innovations now underway seem likely to change dramatically the way we live and to generate many services (though few can be predicted in detail at present). . . .”
The study revealed that STEM is omnipresent in the service sector, but, unlike the case in the industrial sector, its impact is rarely recognized:
“Scientiﬁc and technological developments (many of which originated in fundamental ‘blue skies’ research), have precipitated major transformations in services industries and public services, most notably through the advent of the internet and world-wide-web . . . However, the full extent of STEM’s current contribution is hidden from view - it is not easily visible to those outside the process and is consequently under-appreciated by the service sector, policymakers and the academic research community. This blind spot threatens to hinder the development of effective innovation policies and the development of new business models and practices in the UK.”
The Hidden Wealth study, as its very title indicates, makes the point that even though services constitute such a large portion of GDP and jobs around the world, their nature remains vague - hidden from view in plain sight as if it were some kind of dark matter. It is easier to define the services sector by what it does not include: it is not agriculture or fishing, and it is not manufacturing, construction or mining. Just about every other job is in services, such as:
“Investment banks providing ﬁnancial advice to clients, design consultants providing engineering expertise to construction ﬁrms, retailers providing online shopping and delivery of goods, and health and social care companies providing remotely monitored care for the elderly.”
Services are thus ubiquitous across many sectors of the economy, e.g., finance, healthcare, retail, creative industries, business support, education and transportation and logistics. Yet, their obscure nature makes it difficult to support innovation in services, and in particular it makes it difficult to support the kind of R&D in the services sector that has worked so well in the industrial sector. Why is that?
One reason might be because in the services sector, STEM capabilities are sort of in the background, embedded in human capital, as well as in information and communications infrastructures. You don’t quite see labs full of test tubes, or factories with lots of machines the way you do in industrial sector R&D.
But, we must also remember that we have been applying science and technology to the development and manufacturing of all kinds of products ever since the advent of the Industrial Revolution over two hundred years ago. In comparison, IT, - the services sector equivalent of the steam engine that powered the Industrial Revolution, - is only a few decades old. And, in my opinion, we can only seriously consider a Services, Information or Knowledge Revolution since the mid 1990s, when the Internet and World Wide Web took the world by storm, a very short fifteen years in historical terms.
To better appreciate the magnitude of the changes discussed in the Hidden Wealth report, let’s contrast research and innovation in the classic industrial age of the past couple of centuries, with their equivalent in the emerging knowledge age of the 21st century.
First, the bulk of R&D in the industrial economy has focused on natural and engineered physical objects. Through the contributions of science and technology over the decades, we can now build highly complex and sophisticated objects like airplanes, bridges and microprocessors made up of huge numbers of components. While continuing to pursue such work, our next challenge is to now apply R&D to market-facing, human-based organizational systems such as companies, industry ecosystems, government agencies, cities and economies.
Physically engineered products and systems are built out of well-behaved components that do what they are supposed to do most of the time. That makes it possible to generally predict the behavior of such systems under widely varying conditions. On the other hand, people, and the services they perform for each other are the key components in complex organizational systems. People and services exhibit a high degree of variance that makes such systems intrinsically unpredictable, and thus require new approaches to their design and management.
Another difference between classic and knowledge age innovation is the location where the research primarily takes place, in the spectrum between the lab and the marketplace. With industrial oriented R&D, the bulk of the design, development, testing and production of new ideas takes place in the lab and in factories. With physical goods, there is a time-delay between the creation of a product and its subsequent consumption in the marketplace.
Not so with services. The bulk of the innovation in services takes place in the marketplace, in a time and place much closer to where the services are consumed. It is hard to envision an ivory tower where new ideas for services are developed far away from the chaos of the marketplace. It is just not in the nature of what services are all about:
“Services may be considered intangible as they are frequently co-produced by the provider of the service and consumer (eg a design consultant working with a client manufacturing company to produce a new design). Services are, therefore, often produced and consumed simultaneously. This means it is very difﬁcult to deﬁne a service product and observe a moment at which the service product changed signiﬁcantly. More appropriate then, to think of services as entailing close, interdependent ‘supply and demand chains’—inter-related networks of suppliers and users, involving complex engagement patterns between different sets of actors, often within wider collaborative teams or networks.”
Much of services innovation involves tough complex market-facing problems. Consequently, such innovation is intrinsically multidisciplinary because that is the nature of the problems themselves. Generally, real world problems can not be neatly partitioned into the kinds of divisions, departments and disciplines that characterize the hierarchic organization of companies and universities. Hierarchic organizations make a lot of sense when pursuing deep, discipline-specific research in universities, or the development of discrete technologies, products and processes in companies. But, industrial age hierarchic organizations do not quite match-up with the multidisciplinary approaches needed to address customer needs and marketplace opportunities.
This point has been made in just about every study of innovation in the 21st century, such as this succinct observation in the 2004 US National Innovation Initiative. “Innovation”, it says, “is multidisciplinary and technologically complex. It arises from the intersections of different fields or spheres of activity.” The more universities and companies can break out of their organizational siloes, the more they will be inspired by messy, real world problems to come up with all kinds of new and potentially disruptive innovations.
In addition, most such studies have identified the power of collaboration and communities as one of the major forces driving innovation in today's environment. For example, a major conclusion of the 2004 IBM Global Innovation Outlook was that innovation is increasingly collaborative and open, as more and more, it results from people working together in new and integrated ways. Specifically, the report noted that “. . . close cooperation across an ecosystem will stimulate new business designs, as companies redefine what they do and what they rely on others to do.”
Similarly, one of the key themes that emerged in IBM's 2006 CEO study was that external collaboration is indispensable for innovation, with customers and business partners cited by the interviewed CEOs as top sources of innovative ideas. In today's fast-moving and highly competitive world, more and more businesses recognize that there exist a lot more capabilities for innovation in the marketplace than they could try to create on their own, no matter how big and powerful the company.
The collaborative nature of services innovation was a recurring theme in the Royal Society study:
“Services rely signiﬁcantly on external STEM capabilities to support or stimulate innovation - indeed they tend to innovate in more external and interdependent ways than manufacturing ﬁrms. This can take the form of bought-in expertise or technology and collaborations with suppliers, service users, consultants or the public science base. Through these ‘open innovation’ models, service organisations respond to the knowledge, science, and technology that they see being developed elsewhere (eg in other companies or universities), and use collaboration to solve their problems in innovative and competitive ways.”
The Hidden Wealth report eloquently makes the case that most of the economic value of breakthroughs in science and technology will likely be realized through services, and thus, this is the area around which most new, high paying jobs will be created. In conclusion:
“The main message of this study is that the contribution of STEM to service innovation is not an historic legacy, nor simply a matter of the provision of ‘human capital - important as the latter may be. STEM provides invaluable perspectives and tools that will help to nurture emergent service models and deﬁne future generations of services for the beneﬁt of businesses, government, and citizens.”