For a while now, I have been thinking about how technology and innovation can best be applied to services. It is a subject I come back to repeatedly in this blog. My interest started several years ago, when we launched a number of efforts in IBM to help create a research and academic discipline around services. We coined the term Service Science, Management and Engineering (SSME) to highlight the interdisciplinary nature of this emerging discipline. We usually refer to it as just Service Science.
A number of universities have already organized different kinds of Service Science programs, such as Services Management and Consulting at NC State University and Information and Service Design at UC Berkeley. Several additional schools around the world are in the process of launching such programs.
My interest in technology-based services innovation was heightened last summer when I read an excellent report, Hidden Wealth: the contribution of science to service innovation, based upon a study sponsored by the UK Royal Society. I found Hidden Wealth to be one of the most comprehensive studies anywhere on the promise of technology and innovation to services, and its potential impact to 21st century economies.
The study used Hidden Wealth in its title to make the point that even though services constitute such a large portion of GDP and jobs around the world, their nature remains vague. Services are ubiquitous across many sectors of the economy, e.g., finance, healthcare, retail, creative industries, business support, education and transportation and logistics. However, services are neither easily visible nor well understood. Consequently, it makes it difficult for universities, companies and policy makers to support the kind of research, education and innovation programs in services that have worked so well in the industrial sector of the economy.
The Hidden Wealth report spurred me to try to better understand the challenges of R&D and education in services. I thought hard about the contrast between research and innovation in the industrial economy versus the service economy. I tested my ideas in seminars that I gave to at MIT and Imperial College last Fall. They were a decent start, but I was not satisfied and thought the seminars could be much improved. I continued to work on them, and I am now much happier with the version that I just gave at MIT, and will give later in February at Imperial College.
The service sector is by far the largest in the world’s economy. Services comprise 64 percent of GDP overall, about twice as large as the industrial sector. The service sector represents over 70 percent of GDP and jobs in advanced economies and close to 80 percent in the US. In addition, services are becoming an increasing share of the revenues of companies around the world. In IBM, for example, services now constitute close to 60 percent of revenues, nearly double the percentage it was a decade ago.
Why then has it been so difficult to support the kind of research and innovation in the service sector that has worked so well in the industrial sector? While there are many potential answers to this question, I think that the main reason is that the subject is so new. We should not forget that we have been applying science and technology to the development and manufacturing of large varieties of physical products ever since the advent of the Industrial Revolution over two hundred years ago.Services, on the other hand, have been primarily based on labor through all this time. While we have long been applying science and technology to services, it has been on a much more limited basis, such as ATMs, reservation systems and telephone exchanges.
We have only been able to start thinking broadly about technology and services since computers came on the scene. IT has been the key force behind innovation in services much like the steam engine helped launch the Industrial Revolution. But, let’s not forget that the IT industry is only several decades old. And, in my opinion, we can only seriously consider something like a technology-based revolution in services since the mid 1990s, when the Internet and World Wide Web took the world by storm. Fifteen years is a very short time span in historical terms.
Let me summarize the way I have been contrasting the key differences between research and innovation in the industrial and service economies. Initially, I started out with six different categories, but more recently, I simplified them down to three.
Focus: Physical Systems versus People-based, Organizational Systems
The bulk of R&D and innovation in the industrial economy has focused on natural and engineering physical systems. Our biggest scientific advances have been in the physical and biological sciences. In engineering, we have learned how to build highly complex physical objects like airplanes, cars, bridges, skyscrapers and microprocessors made up of huge numbers of components.
Service or organizational systems are quite different. While they also include extensive infrastructures and lots of technologies, people constitute the major part of their components, if not the most distinctive.
The presence of people in organizational systems makes them quite different from classic, physically engineered systems. People’s behaviors will generally exhibit lots more variations than the components of a physical system, which subjects complex organizational systems to significantly higher degrees of variance. In other words, the components of these systems are changing all the time. As a result, such systems are intrinsically emergent or unpredictable, and their design, analysis and management require major new innovations.
How do you then deal with these new kind of market-facing, people oriented complex systems? First of all, you need to know what is going. Fortunately, we now have access to vast quantities of information. We have the ability to gather huge amounts of information about the real-time behavior of organizations and markets, which we can then analyze and model with powerful supercomputers so we can make better informed, more intelligent and smarter decisions.
We now have all kinds of new tools at our disposal, from inexpensive mobile devices and sensors to high bandwidth wireless networks to gigantic data centers in the cloud. They are enabling us to significantly increase our efforts in applying science and technology to complex organizational systems to better understand their properties and improve their design and operations.
Design Objectives: Product Quality and Competitive Costs versus Positive Customer Experiences
The industrial sector of the economy is oriented toward the production of physical goods. Product excellence and competitive costs are its key design objectives. Much of industrial oriented R&D is thus focused on innovations in development, testing and manufacturing that will result in products with increased performance, efficiency and quality.
While product excellence and competitive costs are also important to services, they are not enough. The service sector is oriented toward consumption, that is, toward people, who are both the providers and the consumers of services. Therefore, the overriding design objective for good service systems has to be a positive customer experience. Improved customer service, delivered with higher quality and efficiencies must be the objectives of a successful services oriented organization, whether it is a business, hospital or government office.
Most industrial R&D takes place in labs and factories, but that does not work for services. The bulk of research and innovation in services has to take place in the marketplace, where the people who consume and provide the services are. The marketplace is truly the research lab for innovation in services, the place where new service ideas have to be developed, prototyped and tested.
While advances in technology are now enabling us to bring major innovations to services, most of their really hard issues are not technical at all. They are human. A well designed, well engineered, and well managed service system must be primarily centered and optimized around people, whether we are talking about a patient in a healthcare system, a customer of a business, or a citizen dealing with the government.
Most people and companies associate design with physical objects. We have to learn how to extend the concept of good design to now apply to services, so we can achieve the positive customer experiences we are after.
Organization and Culture: Hierarchic and Siloed versus Multi-disciplinary and Collaborative
Much of services innovation involves complex market-facing problems. Consequently, such innovation is intrinsically multi-disciplinary because that is the inherent 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 classic 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 multi-disciplinary approaches needed to address customer needs and marketplace opportunities.
The hierarchic organization that prevailed in the 20th century was appropriate to a production oriented, industrial economy. Things changed relatively slowly. Authority, information and most new ideas flowed down from a small group of executives in headquarters. But with accelerating technology and market changes, as well as the increased global competition, the hierarchic organization model does not work so well. 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.
Companies have to become much more flexible and adaptable to be able to respond to to the rapidly changing environment around them. They have to recognize that collaboration is indispensable for innovation, both within their own boundaries and beyond. In today’s environment, the real expertise in markets and services is not in headquarters, and often not even in universities and research labs, but out there where the rubber meets the road, - with the people involved in development, manufacturing, sales and customer service.
To capture such expertise, companies need to implement a more collaborative approach to innovation involving employees at all levels of the company. They need to reach out to customers, business partners and others in their external ecosystem who will often be the top sources of new ideas. In today's fast-moving and highly competitive world, there exist a lot more capabilities for innovation in the marketplace than a company, no matter how big and powerful, can create on its own.Our new abilities for applying science, technology and innovation to services will hopefully result in major advances, that over time will be as profound as those following the advent of the Industrial Revolution. This emerging services revolution is full of promise, but we are still in its very early stages. We have much to learn and much to do. Making that promise a reality is one of our most exciting challenges in the 21st century.