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 products

Service providers
of intangible
products

Nature and
consumption of
outputs

Consumption after
production

Consumption as being
produced

Uniformity of inputs

Higher control over

inputs

Inputs vary

Uniformity of outputs

Automation allows for

uniformity

Customized outputs

Nature of inputs

Capital intensive

Labor intensive

Measurement of
productivity

Fairly straightforward

More difficult

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-

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
Teams
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
Need additional
experimentation capacity; too
many experiments per
branch.
Increases geographic
diversity.
Increases possible
experimental controls.
Larger samples could increase
fidelity of experiments.
More capacity leads to faster
feedback.
Faster process because
experiments can run parallel.
Need new laboratories,
Atlanta is getting used to
experiments.

Decline
25 branches too large for small
group.
Already too many experiments; need
to focus on better pipeline, not
simply bigger pipe
Bigger innovation market leads to
more risk aversion.
Team first needs to prove it can be
successful, then expand.
May drag down overall financial
performance.
New branches will distract team;
they have no control/authority and
need to retrain people.
No need to hurry, industry changes
slowly, BoA already leading.
Does senior management

If they accept, what should they ask for?

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