Who takes ownership of Service Innovation?

One of the common challenges we face in my workshops is “Who takes ownership of Service Innovation”?  My initial template answer would be “It depends”.  Why?  Because every industry has its own structure, ecosystem participants, consumer behavior, government regulation on contestable and non-contestable parts of the value chain etc. We really need to understand the dynamics before prescribing a formula. Let me see if I can exemplify this complexity with my recent experience.

Recently I attended a “Smarter Cities” Roundtable hosted by IBM.  IBM’s “Smarter Planet” theme’s underlying tenet is “Service Innovation”.  Basically it is all about empowering consumers with valuable experiences be it be with utilities like (electricity, gas, water, refuse removal), health, education or transport services.

IBM’s Smarter Building theme focuses on offering sustainable and green experiences to consumers.  We can divide the building industry value chain into 2 main parts: 

- Pre-Build

- Post Build.

The pre-build value chain consists AECMEP community of Architects, Structural Engineers, Consultants, Mechanical Engineers, Electricians, and Plumbers and of course all material vendors and relevant regulatory agencies like BCA.  In the round-table, all these participants were very eager to architect, design and develop green and sustainable properties.  In fact they demonstrated savings of up to SGD 2 Million in some of their developments. To me they are quiet ahead of the curve in fulfilling their  “Green” mission.

But the issue is what happens in the post-build stage? Who is responsible for “Green Operation” on day to day basis?  Is it the owners, facility operators or utility retailers?

I think we need to segment the market into 3 categories as each may require different approaches.

1. Commercial Properties  (large factories, offices, shopping centers, food courts
2. Public Places   (Airports, Schools hospitals etc)
3. Residential units

The reason I tend to split is because each of these categories require different diversity and intensity of “Smarter Building” services. For eg: surveillance may not be so desired in homes compared to airports where security is very important. Similarly air quality services may be more important to hospitals compared to homes or public places.

For the commercial property category, the onus of offering “Smarter Building Services”  should  probably come from the owners themselves or their facility managers.  The facility managers should see such services as their key competitive advantage to attract and retain their tenants at competitive prices and other innovative service offerings that complements just the physical space. I would even recommend that an owner who owns a set of large commercial properties demonstrate strategic leadership by implementing   “Smarter Building Service Platform” that instruments, interconnects and creates substantial intelligence for the whole eco-system and facilitates collective competition. Please refer to my earlier posts on definition of “Platform”

Since some public places are owned by government and some by private entities, the strategy could largely be as discussed for category 1.

As residential segment is very sensitive to higher prices due to “Smarter Building” service additives, the issue may largely be dependent on government policy on how they want to tune it for public and private housing.  Most governments (including Singapore government) are in the process of de-regulating and liberalizing this segment making “Utility Retailing” a contestable business along with power generation as well. The transmission and distribution part of the value chain will remain as “Natural Monopoly” as it makes perfect economic sense.  Remember all types of utility businesses (including telecoms) were “Natural Monopolies” not too long ago but this is changing very fast and this creates opportunities for the private sector.

I believe “Utility Retailers” will then find “Smarter Building” service innovation offering as a great competitive offering to add to their portfolio.

Service Quotient Of A Firm

Before we embark on “Service Innovation” projects , we need make a  quantitatively and qualitatively assessment of what we need to do.  Its helpful to understand this block diagram.  In a goods dominated world what we have is a firm transforms the inputs to produce units of outputs and push them to consumers.

In a service dominated world we do have manufacturing world as it was ever before. In addition we also have “Service” machinery added to the transformation process that gets activated after the “Sale of Good”has been completed.

Though above is a broad general concept, it can have a few variations.   In some cases the good itself may be provided free but actual monetization may occur through service process. For example the BP monitor device maker can offer the device for free but monetization may accrue through his participation through a “Telemedicine Platform” business owner.

In some cases the good itself may seem to be not so tangible like electricity, gas, digital entertainment content. Some firms may offer only intangible goods (services) like banking or telecommunication.  However, the same concepts apply.

So in a service dominated world, the quantitative and qualitative assessment of “Service Capabilities” can be calculated as “Service Quotient”

 

Relatedness demands Ecosystem Approach To Innovation

In my previous post on “Theory of Relatedness”, we appreciated how all things in our life and our daily experiences are inter-related.

The industry leaders in their respective fields be it be car manufacturers, health care providers or government / agencies providing citizen services capitalize on this concept to gain competitive advantage or improve citizen experiences.

The leader who aspires to “control” or “orchestrate” his customer experiences aims to be the logical convergence point to which all his ecosystem participants and customers get attracted. Logically we can represent ecosystem and platform as in picture below.

 

We call this convergence point as “Platform”.    Obviously the platform leader is now faced with 2 key challenges to create and sustain this force of attraction.

1. It has to assimilate capabilities that offer compelling “Value Propositions” for its eco-system participants. Similarly the participants should be able to offer value propositions that attracts the platform leader.
2. Platform leader has to offer compelling “Value Propositions” to  its customers.

A platform is kind of sticky object which connects or gels together multiple parties of the ecosystem. It is also called as multi-sided platform. History is replete with many examples where businesses have taken “Platform” and “Ecosystem” approach for economic success in both traditional and digital world.

Lets start with shopping malls, a concept that was invented not too long ago. If you like an older example even airports are platforms.  The mall owner on one side attracts various types of retailers  (can also call them as Retail Service Providers or RSPs) like super markets , cineplex’s, food courts, event organizers, large book marts, niche fashion boutiques with a value proposition that co-located aggregation of various type of RSPs will guarantee good number of foot falls and all retailers will benefit from these increased foot falls. Consumers on the other side like the value proposition of malls as they can enjoy diverse shopping and entertainment under one roof.

The important point to note here is that the mall owner is more like a facilitator. He does not directly deal with end consumers but he deals with businesses. So this is a B2B platform. His customers or RSPs deal with end consumers. This arrangement is slightly different from the Toyota example we saw before but the fundamental premises of ecosystem and platforms remains the same.

The mall’s agenda is to increase the foot falls which can only happen if he can attract RSPs and if he could do that more consumers will visit malls which will attract even more RSPs. So there is a kind of positive “Network Effect” that benefits all eco-system participants.

“Network Effect” is one of the key value driver of “Platform Economics” and “Platform Based Business Models” . I shall delve on this important aspect in subsequent posts.

The other interesting observation here is there could be multiple platforms working together under different kind of arrangements. For example NTUC supermarket inside a mall is a platform of its own. It has its own eco-system of suppliers and customers.  Cineplex’s are another platform inside a mall.

The other observation is some eco-system participants may be more important than others.

For example in an airport however classy the airport may be , the air traffic controllers offer the most important service to guide safe take-off and landing of planes.

Microsoft Windows,  Google,  Apple, Amazon , Ebay, Facebook, Salesforce.Com.,  are all classic examples of successful platforms. Google started with Search platform but now has built a set of related platforms like Google+, Google Apps etc.

In my consulting engagements the big question that often comes up is “Where to Start ?”, since this whole idea of eco-system , multiple participants, platforms, complex industry dynamics etc clouds our thinking.

I see “Service Innovation” as a journey and not a destination.  Sales talk is typically “there are many ways to skin the cat”.  As an architect by profession I believe that there is only one right way to do things, That is the whole essence of architect profession.

I feel that any idea or concept whether small or big, simple or complex that has reasonable "Service Quotient" in the context of the firm or industry that drives value is a good start.  It also must fit into the framework of “Platform Thinking”, “Platform Economics” and “Platform Business Model” . We also need vision, leadership and commitment from strategic thinkers in senior management who are chartered with scaling up the "Service Quotient"  of their organisations.


1. The first rule to remember is "Do not start your discussion with technology". "Service Innovation" is non-technological side of innovation.  Remember the Service definition  :   “Application of competencies for the  benefit of other entity"

You may hear lots of terms like cloud, analytics, semantic web, mobile, social media tools etc They are all just tools to build something eventually. IBM is a great compamy that has extensive portfolio of on-the shelf and off-the shelf tools from research labs that can be leveraged.

2. The second  step on this journey would be to understand the principles, economic drivers and motivation behind service innovation and platforms. We will need organization wide training  to enable this process especially to those who are chartered with innovation.

3. The third step would be studying various platform case studies across various industries to draw parallels from value propositions that have been innovated.

4. The fourth step would be to understand  own industry and related industries and also the major players and participants.

5. The fifth step would be to understand the approaches and developing a roadmap specific to your intentions and desired outcomes. We will also need a lot of co-creation wokshops to develop the service value propositions, new business models that are relevant in your business context.

6. There could be issues related to standards, intellectual property rights, government roles, rules and regulations that have  to looked into.

We will go into "Service Quotient"  in my next post.

Theory of Relatedness

Having defined the term “Service” and “Service Innovation” in my previous posts, let us  try to understand the motivation for all B-School gurus to research into this topic so extensively. All claim that “Service Innovation” will be the most important competitive advantage for firms in the 21^st Century.

This does not imply that every firm or business have to innovate with the end consumers directly.  This does not make sense. What has a manufacturer of ball bearings used in a car do with end consumer?  The end consumer is only concerned with enjoying a good driving experience with the car.  However intelligent ball bearings can continuously monitor their condition and transmit warnings to the provider of the car (say Toyota) who in turn will advice customer to do a preventive maintenance. We see that there is an element of relatedness in all things we use. Even though a car has few hundred thousand parts, consumers are not interested in having a fragmented service experience with each of those parts suppliers.

What consumers would love is “Great Experience with Toyota”. Toyota has to take the lead here to innovate this “experience” for their consumers co-coordinating with other parts of their eco-system which is totally transparent to the consumers.

Another example we could take is healthcare and telemedicine. Physicians require data collated from different devices that measure different parameters like blood pressure, temperature, blood sugar etc though each of the specialized devices manufactured by different vendors. They offer no value in isolation. In fact they will be out of business if they do not participate and co-operate with the platform leader who provides telemedicine services.

If we think a little, this “Theory of Relatedness” applies in all walks of our life like education, healthcare, wellness, entertainment, government services etc.  In my previous post we saw an example of how TV makers are racing to build their content platforms taking cues from theory of relatedness.

This theory is equally applicable for B2C, G2C, G2B  and B2B scenarios.

This leads me to think that eventually there will be at least one platform leader in every industry who would strive to establish their dominance with consumers to gain market share.

I envision that in few years down the road Toyota’s core competency may not be car manufacturing but something else. What a transformation!

I think government policy makers and strategic thinker recognize this huge opportunity to build service science competencies, jobs and economic growth through this channel across various industries.

To be continued in next post !

What is Service ?

Before we understand “Service” we need to understand the term “Value”.

An economic value is the worth of a good or service as determined by the consumer.

“Use value” is the utility of consuming a good and if it is traded in markets every good has a “Exchange Value” .

We also have to be aware that term “Value” was defined by Adam Smith, Father of Economics,  years ago when the whole economy was primarily manufacturing and trading of goods. Michael Porter, the renowned Harvard economist then coined “Value Chain” as part of his “Competitive Theories” work. 

In a goods dominated world , a customer goes to a shop (or online shop), orders his goods, takes possession  and value-exchange  happens, i.e the customer pays the price and right of ownership to the said good changes. The customer is on his own after this point.  This is a key point.

So the classical economic “Theory of Firms “  infers value creation as a firm taking some raw material inputs doing some processing on it by leveraging its capital equipment , knoweldge and skills to produce some units of output that is passed on to next stage of value chain or sold to end customer finally. The value creation only happens within the walls of the firm before the good is sold.

Similarly the concept of “Supply Chain” is merely a support process to the main activity of value creation to aid efficient delivery and distribution of goods. I do not see how “Supply Chain” adds value from the consumer  perspective though effective modern effective supply chain improves operating margins of the firms.

Similarly I would argue that traditional marketing functions are only an aid to hasten the process of  “Value Exchange” through whatever activities they do. They do not add value in any way to the original good , from consumer point of view. In summary in goods dominated world value creation happens only within walls of the firm or chain of firms through application of knowledge and skills. For eg: taking gold ore and turning into pure gold or ornaments is a knowledge and skills intensive process that adds value to gold.

In the context of “Service” , we look at value creation from an expanded perspective.

In the  “Service Dominated World” , value is continually created  (may be should use the term Co-Created but do not want to complicate matters)   after the “Value Exchange” happens.

In “Service” context value for consumers means that :  after the value exchange has happened , they are assisted by some processes that makes them feel better-off than before. A very simple definition of Service could be -  “Application of competencies for the  benefit of other entity”

This is a very powerful idea. The reason is every service interaction with the consumer produces some intelligence which kind of self feeds as input into core value creation proceseses and thus producing even better service experience for customer’s next service interaction with that good. 

People familiar with Control System theory with feedback loops may be able to draw some parallels here.

What has happened here is, in the context of “Service” , the physical good merely gets relegated to second tier as a gateway that faciliates Service interactions. Service, rather than good becomes the basis of economic and social exchange. Another observation to keep in mind is value creation in the context of “Service” happens at the edges of the firm (consumer touch points) rather than within 4 walls of the firm.

The “Service Thinking” kind of expands  the classical “Theory Of Firm” itself which predominatly uses only raw materials as inputs. It is good to keep this perspective in mind as it will be useful when we dissect the anatomy of business model and re-construct business models incorporating “Service Thinking”.

Let me share an example to help understanding.

When I was a child  thirty years ago we went shopping for a black and white TV. We were extremely happy to get that “Dumb” TV  good manufactured and assembled somewhere. There were only 3 TV channels to watch and no concept of cable. In a sense as a consumer we were at the mercy of  TV Channel provider (the Service Provider).. Did the “Service Provider” ever care about the consumer ?

Contrast this experience with today’s TV purchase. We go to TV shop. We have pleasantly smiling lady welcoming us, sharing all catalogues, answering all questions politely, even arranging credit finance facility, with full warranty &maintenance service, promptly  delivered to home and assembled and installed by their own technicians. We are happy TV customer and we say what a great Service ?  Is it really Service Innovation ?  It is NOT !  What we just experienced is merely “Value-Added Services“ and not “Service Innovation.”  "Value-Added Services" are just sweetners created by the  marketing folks who want to increase the momentum of goods sales. Marketing folks jobs will get much tougher (because CEO's will charter them with the Service Innovation Agenda ) when they wake up in the "Service Dominated" world. Please note again that terms “Services” and   “Service” have different connotations.

Coming back to TV purchase !  Today when we purchase TV we do not look at just TV in isolation. We are more intersted in what kind of content platforms the TV can connect to and what experiences these content platforms offer.   It could be niche “Yoga” channels, “Fashion Channels” for your wife , or educational content or games for your kids. Some of the examples of rich consumer experiences would be other conveniences like “Rememberred play lists” , “Recommendation Engines” etc

The point is physical TV has been relegated to second tier and the platform that is able to offer innovative service has become important for consumers. Large TV manufacturers like Philips and Sony are scaling down TV manufacturing business and focussing instead on  building compelling content platforms for their consumers. This is a very good example of  “Service Innovation”.  Of course there are catalysts like internet and broadband etc supporting this trend..  But that is not the point.   There are some key learning points from this example to appreciate what “new types of value” this service model creates for consumers that were non-existent few years ago.

We as child, adults, in different roles such as students, teachers, architects,  policmen, fire fighters, citizens  etc and also as consumers of different industries like  transporation , housing, education, healthcare, food, entertainment, utilities, mobile, banking can fantasise many consumer experiences and value addition in various forms..  I can list few other examples but would like to hear from the audience.

My apologies for intentionally dropping  the word “Platform” here that has another set of profound meanings in the context of “Service Innovation”. We shall re-visit this later.

Service Innovation - An Executive Summary

All modern developed economies have gone through their transformation from their earlier Agro base to Industrial/Manufacturing to their current state where “Services” constitute approx 75% of their GDP.  Yet all developed economies are now depending on “Service Innovation” for their future growth.  Please note that I use the word “Service Innovation” and not “Services Innovation”.  Obviously there is a profound difference which is the first vocabulary to understand.

It is believed that “Service Science” is the next new innovation frontier and economic opportunity in the 21^st Century, similar to how transformative “Computer Science” was in the 20^th Century. It is estimated that around $ 3 Trillion worth of inefficiencies could be removed globally through effective application of “Computer Science” and “Service Science” together.

This blog tries to illustrate some of the key concepts that will be useful to strategic thinkers, business leaders, economic policy makers and Service Science practitioners.

Of course  I would be happy to engage in deeper discussion that can add value to our  “Service Innovation” journey