SERVICE INNOVATION

Service Innovation
• Considered by global executives to be very
important to achieving revenue targets and to
long-term success.
• Two-thirds expect spending on innovation to
increase in the next year.
• Service innovation is difficult to achieve.
• WHY??
– What are the fundamental differences between a
product and a service?
– Why do these differences present challenges to
innovation?
 Characteristics Manufacturers of tangible Service providers of
products intangible products

Nature and consumption of Consumption after Consumption as being

outputs production produced

Uniformity of inputs Higher control over inputs Inputs vary

Uniformity of outputs Automation allows for Customized outputs

uniformity

Nature of inputs Capital intensive Labor intensive

Measurement of Fairly straightforward More difficult

productivity

Why do these differences present challenges to innovation?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Challenges to service innovation
• Services are intangible and difficult to protect through legal
means.
• Good services are customized.
• Good service depends on consistency and capability of
service provider.
• High cost of failure.
• Experiments are visible and hence, easily copied.
• Expectations of short-term financial success.
• Innovation not a priority in resource allocation decision.
• Lack of organizational mechanisms to encourage
innovation.
• Low tolerance for risk and failure.
 Service Innovation
• What is service innovation?*
– Increase margins of delivering existing service
offerings – cut costs
– Create new kinds of high value service offerings –
grow revenue
– Improve skilled labor productivity in creating and
delivering service.
• Example of baggage handling.
• Why is IBM the leader in research and
thinking about service innovation?
* Jim Spohrer, Paul Maglio (IBM Almaden Services Research). “Service Science, Management and engineering
(SSME): An Emerging Multidiscipline. Presentation at SSME Conference, 2006.
http://www.slideshare.net/spohrer/spohrer-and-maglio-yorktown-20061020-v2
 Achieving Service Innovation*
• Value thinking
• Customers as co-creators of value
• New thinking that enables customers to do
new things
• Profitable innovation
• Knowing how to make it happen
• One innovative example…

* Professor Stefan Michel, IMD. http://www.youtube.com/watch?v=v_YIGIGIiTw

NEW SERVICE DEVELOPMENT SYSTEM
 Bank of America
Innovation & Development Team’s
Product & Service Innovation

Process?
• Components
– Structure
– Cycle time
– Off-site rehearsals
– Control branches
– Parallel testing
• Objectives
– Speed
– Minimal cost
– Learning
 ORGANIZATION?
• Protoype Centers
• Living Laboratories
– Experiments in 20 (+5) I&D Centers
– Five “express centers”
– Five “financial centers”
– Ten “traditional centers”
• National Rollout
 Management/Leadership?
• Headed by two senior VPs (Butler and Brady)
• Emphasis on innovation and profit objectives
• Strong moral support
• Indirect reporting to President
• Minimal Financial Commitment
– Budget of $8 million = 0.1% of revenue
– Branches pay for own experiments
 INCENTIVES/COMPENSATION
• Sales associates earn 30% - 50% of pay from point
based performance system.
• Initially experiments not included in point system.
• Then changed to fixed incentives based on team
performance.
• Then changed back to old system.
• Why??
– Part of the learning process
– Danger of on-line experimentation
 CULTURE OF THE BANK?
• Conservative “three piece suits”
• Zero Defect culture
– 4 million FINANCIAL transactions/day
– 99.9% success rate means ONE MILLION ERRORS/year
• Certainty of outcomes (variance is the enemy)
• Tension between delivering high-quality service
(no errors) and experimenting (margin for errors)
 MEASURING RETURN
• Direct measures
– Customer volume
– Increased revenue
– Decreased cost
• Indirect measures
– Reduced personnel turnover
– Customer satisfaction
– Bragging rights
 FACTORS THAT AFFECT LEARNING
THROUGH EXPERIMENTATION
• Fidelity
– Degree to which a model and its testing conditions
represent a final product, or service under
conditions of actual use.
• Cost
– Designing, building, running and analyzing –
including expenses for prototypes, laboratories, etc.
• Iteration time
– Time from initial planning of experiment to
availability of analyzed results for next iteration
• Capacity
– Number of experiments that can be carried out with
some fidelity during given period of time.
• Sequence
– Extent to which experiments are run in parallel or
series.
• Signal-to-noise ratio
– Extent to which the variable of interest is obscured by
other variables.
• Type
– Degree to which a variable is manipulated, from
incremental change to radical change.
• Skill
– Degree to which service providers understand and
consistently deliver experimental service
 DECISION
Should Butler and Brady accept the 10 branches?
Accept Decline
• Need additional experimentation • 25 branches too large for small group.
capacity; too many experiments per • Already too many experiments; need to focus
branch. on better pipeline, not simply bigger “pipe”
• Increases geographic diversity. • Bigger innovation market leads to more risk
• Increases possible experimental aversion.
controls. • Team first needs to prove it can be successful,
• Larger samples could increase fidelity then expand.
of experiments. • May drag down overall financial performance.
• More capacity leads to faster • New branches will distract team; they have
feedback. no control/authority and need to retrain
• Faster process because experiments people.
can run parallel. • No need to hurry, industry changes slowly,
• Need new laboratories, Atlanta is BoA already leading.
getting used to experiments. • Does senior management understand the
• Sign of commitment from senior system?
management.
 If they accept, what should they ask for?

If they decline, how do they turn the offer down?