Ask most executives how innovation can spur their growth, and they'll immediately think about changes in their product lineup. Wrong. They should be thinking "services."
As a percentage of GDP today, services comprise 82% of our economic output. The number has been increasing for years. The crossover point from products to services actually happened in 1987. Yet when we think of innovation, most of us are still thinking products -- iPods, Mini Coopers, Treo's, and the like still dominate our mindshare about what's cool.
And yes, they are cool, but cool isn't what's making the most money or growing at the fastest rate these days. Look at General Motors (GM). In 2004, the carmaker lost $95 million on revenues of $193.5 billion. However, this loss was significantly underwritten by GM's financial-services arm, which made $2.9 billion, according to its annual report.
Yes, without financial services, GM's loss would have totaled $3 billion. The company's stock and bonds took a big hit in the aftermath of its earnings report, but I wonder what further damage would have been wrought had financial services not been there to buoy the company.
BIGGEST PROMISE. In terms of growth, GM's On-Star service has grown to 3.3 million subscribers that pay an average of $300 per year for it. Although On-Star had a slow start, it's now in ramp-up mode due to the decision to make it standard equipment on all GM vehicles -- that would be over 8 million per year. If just half of these drivers decide to keep the service, On-Star's revenue moves into the range of $2 billion, with profit margins that most certainly beat the industry average for automobiles.
And so it goes. For almost every leading big corporation -- and, paradoxically, especially those that make products -- growth in services holds the most promise for successful differentiation and sustained profitability for the future.
With this palpable shift to services in our economy, one would think that service providers would be looking to every tool available to drive better, faster, and cheaper innovation. Yet after studying over 150 services businesses over the last 18 months, my colleagues and I at Peer Insight have determined that service innovation as a discipline is still in its infancy. Here's why:
Dearth of Information
First of all, there just isn't a lot of information or rigor around the topic. While reams of books and articles abound on the topic of product innovation and product development, very few focus specifically on services and the distinctions therein.
And you would be hard pressed to find a course on service development or innovation on any B-school campus, reflecting the dearth of academic concentration in the area. Today, few universities even teach service management, and if they do, the emphasis falls to quality management and the operational excellence associated with existing service environments, never the invention and nurture of new service concepts. Further, there are few public forums where professionals involved in service innovation can learn from exemplars.
Second, although we have found that the best service innovators draw on the conventional wisdom associated with product development, most aren't using the latest tools, such as ethnographic research and rapid development techniques, to drive innovation. Just as important, they don't understand the basic distinctions between product- and service-innovation environments. Before rushing off to innovate in services, managers would do well to understand their uniqueness.
By far the biggest distinction between products and services is that services are intangible, and therefore much more complex when it comes to buying decisions.
Because you can't touch them and feel them ahead of consuming them, conveying the brand promise is paramount for service providers. This requires more brand savvy and investment than that for products. This is how you know the difference between a Ritz-Carlton, a Sheraton, and a Holiday Inn Express by just hearing their names. Largely business-to-consumer companies are further along the learning curve on this than business-to-business companies, who often think of brand management as just having a recognizable logo.
Things that make the offering tangible help facilitate the diffusion of intangible services. My business partner's favorite example of a service made tangible is the toothbrush he receives from his dentist after each visit that has the month he needs to return imprinted on it. The implicit message? "We care about you and your teeth -- let us serve you."
DISCREET EVENTS. Another difference from products is that with services, ownership isn't conveyed. Customers merely "rent" capacity for periods of time. Since people are so vastly different, service innovation requires extraordinary skill in anticipating customer needs, especially because of the wide range of situations confronted in the field. There are empathic design research methods that help discover which latent needs could be put to good use here. But they have yet to be deployed widely in the service sector.
A third difference is that with products, consumption is a discreet event that happens after the purchase is made. With services, supply and consumption happen simultaneously. This has enormous organizational consequences. It requires massive, 24/7 command, control, and logistical capabilities. Think of Hertz, Marriott International, or Citigroup. These are far different systems to build out than your average production line and require an even higher degree of cross-functional integration than found in manufacturing.
In service environments, the proverbial "customer journey" happens over multiple touch points. It's very complex. It often involves a large number of interactions between people and machines and among people. Therefore, services are much more dependent on big investments in information-technology development, as well as good old fashion employee training.
THINKING BIG. Finally, research and development groups don't tend to exist in most service companies. This makes it more difficult for innovation expertise to find a home. By comparison, product-based companies regularly invest billions to understand where their future revenue streams will come from.
Conversations I have had with managers of service innovation at many big companies suggest that the tendency is to support Six Sigma-type quality improvements. This approach can spawn incremental ideas, but never bold, game-changing concepts, or paradigm-breaking moves.
Just look how long it took for banks to get their ATMs to "speak" Spanish. It shows how difficult it is to implement rather easy improvements if there's little appetite and budget for innovation.
A View to the Future
So what should companies do to innovate, given the clear differences between products and services? There are a number of innovation tools, both old and new, that can be applied to service environments. My advice to anyone trying to innovate in a service environment would be to:
Get your senior leadership team's attention around the issue. Bold moves are impossible without their support.
Constrain the problem around where to play. Focus in terms of solving customer needs. What are the issues and opportunities? How do these relate to your current set of offerings? What's the competitive environment like?
Lay out the end-to-end customer journey you envision for the new service. Where will you be able to provide a compelling value proposition that can provide a more convenient solution or save customers time or money? How does this influence your potential business model? Zip Car reinvented the urban auto rental business with this type of approach.
Once you have a solid concept around the value you would like to provide, seek feedback from important stakeholders. Start with the end customer, of course, but also include other important players in the service environment's ecosystem. If FedEx hadn't acknowledged the critical role administrative assistants play in getting packages out, they never would have invented one of its critical management tools, FedEx Ship Manager.
There are a growing number of tools and metrics for service innovation. At Peer Insight, we're gathering evidence from dozens of companies that reveal many of the key principles of successful service innovation. We have organized them into 17 disciplines that allow companies to benchmark themselves. My next column will deal with how service managers can use this framework.