Monday, April 02, 2007

Service Innovation?

Business week has put out an article on concept being called Service Innovation. The general concept of service innovation isn't new, but now that there is a consortium of top tech companies (IBM, Cisco, Oracle etc) creating what will be know as the Service Research and Innovation Initiative. Jim Spohrer, the director of Service Research at IBM uses a classic example to describe this hidden and not widely recognized term:

"The average person knows the story of Thomas Edison, the inventor and innovator who came up with the light bulb. People don't tend to think of the related service innovations—getting light bulbs into houses and schools, setting prices for the electricity services to keep them lit. That's all service innovation."

Most people equate innovation with production innovation. There are in fact several categories, or ways to classify innovation, however, to me the concept of service innovation seems like just a specific type or slice of business model innovation. I read through the article and found more information about the consortium but not a lot on the title concept of the article, so I thought I would put some thought into it.

First reset your thinking on the concept of a business model. There are many definitions, and miss-uses for the term but the best description I have found is from Alex Osterwalder at Arvetica. There is also a great diagram. In short Alex defines a business model as:

A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.

Next, you need to understand what business model innovation is. Here is a nice short description of business model innovation from Business Innovation website.

In some cases the innovation rests not in the technology or product or service, but in the business model itself. Business model is a broad-stroke picture of how an innovative concept will create economic value for the ultimate user, for the firm and its shareholders and partners. It considers the infrastructure required to move the product/service to the market in a manner that it both easy and convenient for customers and profitable for the firm.

If you want to understand more about business model innovation, here are a couple more excellent (free) resources: Global CEO Study from IBM, Permanent Innovation e-book by Langdon Morris at Innovation Labs.

Where business model innovation focuses on many aspects across the entire value stream service innovation seems to focus in not only on specific components of the business model focused on delivering value to the companies customer. So is it yet another new concept - likely not, but is it important in the new economy? Definitely!

After thinking about how they (vaguely) described service innovation, I tried to think about experiences I have had in this space and came up with one while working at Toyota Financial Service.

For a period of time a few years back, I was part of a representative team in the early stages of what I would call a competitive consortium service innovation initiative. The official name for the initiative was/is Route One. It was a partnership agreement between financing arms of the top 4 auto manufacturers in North America. (GMAC, Ford Financial, Chrysler Financial and Toyota Financial Services). Think about this for a moment and you will understand the magnitude and difficulties with something like this. The goal was to create a single interface for auto dealerships to finance with not only the big 4 but with any other Financing agency that wanted to join. The dealer could send financing applications out to any participating members through a single interface. The system was to also interface with their internal/in-house dealer management systems, and also help manage the application all the way through contract once a financier was selected.

A great win for dealers but also for participating members. The founders of course split the cost of building the app. (much less than if they tried to build some or all of the components themselves), and would actually receive revenues from the application at a point when the initiative was revenue generating. All participating members would gain from having potential access to new financing deals, and financiers would be forced to compete based of service and finance offerings rather than forcing the dealers to choose upfront. Ultimately it would mean a better deal for the end customer.

To me this felt like a great example of service (and business model) innovation. I always find working through my own examples helps me evolve my thinking on a specific topic. I would be interested in hearing other examples of how readers felt they were involved with service innovation.


Jason said...

At DHL everything revolves around service innovation. Our business is simply moving envelopes and boxes, so we have to work hard to innovate. One thing we have done is to develop support applications/process for our customers to better reach their customers. Example: Specific tools to allow computer vendors to collect laptops under warranty. Because we make it easy for the Computer vendor to work with their customers, we gain the business of moving that laptop in a box.

Kevin Donaldson said...

Thanks for the comment Jason. I have read about how companies like DHL and UPS as well I think are starting to move from just being a shipping logistics company to more of a supply chain company. I believe its UPS that is now not only shipping computers for the manufacturers but also doing the repair work in some cases. I am trying to remember where I read that - think it was 'the world is flat'.