Technology, Leadership and Innovation in the Service Economy

At the end of January I gave a half-day seminar at MIT on Technology, Leadership and Innovation in the Service Economy.  I offered the seminar as part of MIT’s Independent Activities Period (IAP), a four week informal learning interlude between the fall and spring semesters that offers a variety of experimental short courses and seminars.

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.

Comments

[JP]

I would be very interested in attending your Imperial College presentation. When will it take place?

[Irving Wladawsky]

JP, here is the link to the Design London event, which is open to the public, on Tuesday, 16 February at 6:30 pm - http://www.designlondon.net/content.php?c=89. It should be very interesting.

[JP]

Thank you so much. I have already reserved a place. See you there.

[John Sanchez Chirinos]

A la fecha la administración Pública de los países en vías de desarrollo estan fomentando el uso de las TICS con el fin de agilizar los trámites burocráticos, el gran problema que se enfrentan es que los funcionarios públicos no tienen la formación tecnica adecuada para actualizarse frente a los cambios, esto por el desinteres de las Universidades de fomentar la interrelación de sus carreras con las nuevas tecnologías, no existe pues un plan que involucre el sector educativo que permita la inclusión tecnológica.

"...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..."

Congratulations Dr. Irwing Wladawsky-Berger¡

John Sanchez Chirinos
Lawyer.
Professor
Internet Law and Crime Computer
[email protected]
Lima- Perú

[YunzhiYang]

When I first heard of the term "service scicence", I got intereseted and checked it online but I did't get a quite clear picture. Thanks for inviting this topic and the contrast made between the industrial and service economies, it makes a lot of sense to me.
It seems that anything with humanity invloved in becomes complex and difficult to take control. Physical products are easier to make while customer-centered service is hard to design; a physical product is easier to be valued as useful or not while it's hard to put a black or white upon a corporation and business. On the other hand, humanity introduces a better life and better customer experience which benefit us in the new economy. It is exciting to see all the changes for better take place and the evolution happens in this coming decade.

[Henry Engler]

Irving,

Thank you very much for sharing your framework with us. When I consider all three categories and how they relate to many large, complex service companies, it would appear that we have a long, long way to go, particularly in terms of organizational structure and innovation in the marketplace.

I can best relate your framework to financial services which is considerably far behind in meeting some of the objectives you have laid out, at least for the largest financial institutions.

You will perhaps have noticed that there is growing customer dissatisfaction with the services provided by some of these large institutions, a fact that owes much to a view of the customer as more of a commodity in the supply chain than a real individual.

I truly believe that there is much work to be done, and consequently much value to be unlocked, in an industry that operates more as a traditional industrial firm than an advanced services organization in the 21st century.

Many thanks,

Henry Engler

[Irving Wladawsky-Berger]

I agree totally. The notion of customer experience and customer services as a key design objective sounds simple, but in fact it is very revolutionary. We are still stuck in the industrial age, even for services oriented industries like finance. Lots of new innovation to do here.

[Jim Spohrer]

As you point out, the challenge is designing complex systems that (1) have people inside, (2)interact with customers, and (3) depend on networks of other such systems. Three incredibly complex sources of variability, not under the control of the designer, who is trying to ensure sustained value creation as all the parts interact.

Divide and conquer approaches are practical for gaining local improvements, but more holistic approaches are needed to address global improvements, sustainability, and resilience to external shocks.

Thanks for your continued efforts to communicate the grand challenges associated with service science.

[Business Support Expert]

The world is moving from a technology to a know how driven strategy. This is why the service industry is playing the dominant role in sustaining desired lifestyles. Learning and growth vests in a business's human capital, information capital and organizational capital. Aligning and integrating these with the management and business processes needed to satisfy customer needs is what creates innovation, profitability and good service. Your categorization under the headings focus, design objectives and organization and culture, nicely consolidate what is required to provide a good service in the market place.