Trends and issues in the evolving

service innovation policy

Dr. Jari Kuusisto

FRONTIERS IN SERVICE CONFERENCE

October 2-5, 2008
Washington, DC, USA

1 Jari Kuusisto
 Outline of the presentation
• Introduction and background
• Economic performance of services
• Arguing the case for service innovation policy
• Key concepts and problem setting
• Services and innovation policy
• Developing effective service innovation policy
• R&D in Services – review and case studies
• Some indications from business cases

• Concluding comments

2 ©Jari Kuusisto
 Introduction and background

• This paper seeks to highlight some key developments in service

innovation policy
• The presentation build on the following papers by the author:

• (2007) Innovation Policy project in Services – IPPS 2006-2007, Draft Policy

Blueprint report, submitted for the DG Enterprise, European Commission.

• (2008) R&D in Services – review and case studies, A paper submitted for the
CREST • R&D in Services Working Group, DG Research, European Commission.

• (2008) Services and Innovation - Evolving Service Innovation Policy, Drivers and
Barriers, Horizontal and Framework Policies Stimulating Innovation in Service
Enterprises, Forfás, Dublin, Ireland.

• (2008) Towards High Performance Services - Implications for Innovation Policy, A

Review of Research Literature, Commonwealth of Australia, Canberra.

3 ©Jari Kuusisto
 Economic performance of services

Various perspectives to the topic

4 Jari Kuusisto
 Services role in the economy
• Service sector contribution to aggregate production and
employment keeps growing in developed economies
• They represent nearly 78 % of US economic output and a similar
proportion of employment

• Demand for services is growing in faster rate than demand for

manufactured products

• Many knowledge based industries that are believed to be crucial to

future prosperity, fall into the services sector
• There is a growing cohort of relatively poorly paid manual service
workers providing essential support for the more high value added
services and the economy as whole.

5 ©Jari Kuusisto
 Elements of economic performance
• Key elements of services economic performance

Services economic performance

Service industries Globalisation

- Enabling technologies - Offshoring of services
- Opening of the markets - Competition on skills

Service occupations Services-manufacturing dynamics

- Supply of relevant skills - Outsourcing
- New business models

Service activities
- Service functions across the Service innovation & productivity
industries - Multidimensional innovation

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 Arguing the case for service
innovation policy

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 Services are now recognised

• Policy makers are increasingly recognising that

services have central role in the economy

• A well-functioning services sector is key to the overall

economic performance of OECD countries and to the welfare of
its citizens.
• Reform of services sector policies provides an important
opportunity for policy makers to strengthen employment,
productivity and innovation.

Source: OECD, 2005, Growth in Services Fostering Employment, Productivity and Innovation

8 ©Jari Kuusisto
 There is a need for policy change

• Socio-economic importance of services is not reflected

• in services R&D which remains underdeveloped*
• as do the public support measures for service innovation

• Current policies are biased towards manufacturing

giving insufficient attention to non-technological R&D

• This systemic failure needs to be addressed and it

provides a rationale for service innovation policy

*According to official R&D statistics

9 ©Jari Kuusisto
 Service innovation policy rationale

THE SERVICES INNOVATION CASE

Intangibility leading to: Need for better integration of services

High uncertainty levels in innovation systems
Lack of transparency
Limited use of patents Lack of institutional recognition
Reduced awareness of its potential
Dominance of SMEs
Fragmented markets High rates of failure and business death
Obstacles to trade and
competition Lack of services !culture"
Financial accounting bias against
Limited role in R&D intangible assets
programmes

Source: Adapted from Rubacalpa (2006)

10 ©Jari Kuusisto
 There is a pressure to develop services
• Smile curve
• Intangible parts of the value chain are increasingly important revenue
generators for manufacturing industry

Rate of The value of manufactured

return
products is increasingly based
on intangibles

E.g., brand value of a Volvo, BMW,

Mercedes cars

After-sale
R&D Production Sales services

11 ©Jari Kuusisto Source: Takada, 2003.

 Key concepts and problem setting

Service innovation in policy context

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 Policy development

• Significant change in the policy scope

• From technology development towards much broader innovation policy
agenda
• Both direct and indirect policy measures are important

• Potential impacts are significant

• Many new industries as a policy target
• Many new dimensions of innovation as a policy target

• All forms of innovation matter, technological as well as

non-technological

13 ©Jari Kuusisto
 Challenges

• Novel policy area with very few existing instruments

• E.g. innovation vouchers that can be used for purchasing of expert
services

• Organisations that are delivering policy have little if any

experience in service innovation promotion
• They are facing a very steep learning curve

• Those who are benefiting from the existing innovation

policies are not necessarily keen for the change
• Broader agenda and wider target groups means that policy attention and
supports are spread across more thinly
• More recipients that are sharing R&D funding

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 Starting point - SERVICES
• Service innovation is multidimensional, and
• Any dimension can be driver, or hindrance to service innovation

Technology- and product

related dimensions

Customer Delivery system

interaction related
Service dimensions
related dimensions innovations

New network Organisation

and value chain related
configurations dimensions J. Kuusisto, 2005

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 Starting point - POLICY
• Any policy can can drive, or be hindrance to service innovation
• But very few policies recognise the influence they have on service innovation
• R&D policies tend to have technology bias

Service
innovation

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 Service concept in statistics
• Innovation policy for services
• We are talking about many policies addressing innovation
promotion across various service industries
Code NAICS Sectors (2002)

11 A g r iculture, Forestry, Fishing and Huntin g 53 R e a l Estate and Rental and Leasing

21 M inin g 54 P r o f e s s ional, Scientific, and Technical

Services
22 U t i lities 55 M anagement of Companies and
Enterprises
23 C o n structio n 56 A d m inistrative and Support and Waste
Management and Remediation Services
31-33 Manufacturing 61 E d u c ation Services

42 Wholesale Trade 62 H e a lth Care and Social Assistance

44-45 Retail Trade 71 A r t s, Entertainment, and Recreatio n

48-49 Transportation and Warehousing 72 A c c o m m o d ation and Food Services

51 Informatio n 81 O t h er Services (except Public

Administratio n )
52 F inance and Insurance 92 P u b l ic Administratio n

Source: NAIC Association (2008)

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R&D and innovation activities in services
• R&D in services is much broader
• Than the traditional R&D concept

Research institutions & education

- Skilled labour
- Basic and applied research, technological
and socio-economic research

Equipment / Service organisation Client organisation

technology supplier
- Technology related
R&D e.g., ICT
- Internal R&D - Joint R&D activities
- other non-R&D with the clients
activities aiming at
services development

Knowledge intensive services and

external R&D

- KIBS
- RTO!s

18 ©Jari Kuusisto Regulation and markets

© Jari Kuusisto, 2007
 Developing effective
service innovation policy

19 Jari Kuusisto
 Progress of service innovation policy

• Has already gained momentum in a number of developed countries,

including
• Australia, Finland, Germany, Ireland, Netherlands, Sweden and the United
Kingdom, and also at the European Union level.

• Several countries, OECD and EU, have launched high-level policy

documents addressing service innovation promotion.
• E.g. Finland, Ireland, Japan and Australia are emphasising service innovation
elements in their new innovation strategies.

• Non-technological and demand-driven innovation are recognised as

essential
• In tackling urgent national challenges such as
• Ageing population, international competitiveness and the renewal of
manufacturing.

20 ©Jari Kuusisto
 Targeting policy on specific types of
services
Prioritized service industries of national significance that could be further
strengthened by means of innovation policy

• Japan - Health and welfare, child care support, tourism and attraction of visitors
service, contents, business support, and distribution (six key sectors)
• Germany - ICT related services, knowledge intensive services, hybrid services
utilizing technology and innovative service elements
• Finland - Business to business services, knowledge intensive business services,
public sector services
• Australia - Tourism and knowledge intensive services
• Denmark / Sweden - Design and creative industries
• Netherlands, UK - Creative industries
• Norway - Design and tourism

21 ©Jari Kuusisto
 Promoting non-technological
innovation more broadly
• Adopt problem solving approach
• Multi-faceted problems require multi-faceted solutions
• Few problems can be solved by one policy actor
• Need for joint actions and co-operation
• Within government
• between levels and across departments
• With stakeholders

• Horizontal approach is key to service innovation policy

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 Moving service innovation policy
forward
• Linking the dimensions of service innovation systematically to policies and
development tools
Dimensions of service inovation
that needs to be addressed
•!New & innovative service concepts
• Delivery systems for services
• Organisational development and
innovations
• New networks and value chains
• Customer interaction
• Technology
Service
innovation
23 ©Jari Kuusisto
Relevant Policy areas
• Internal markets & competition
• ICT and networks
• Regulation
• R&D and innovation
• Education and skills
• SME and enterprise
• Enployment and qualifications
• Sustainable development
• IPR and IP management
• Knowledge and statistics
• Standards and regulations
• Regional policy
• Sectoral policies
• Taxation
Policy development tools
• Innovation strategy
• Policy frameworks
• White papers
• State budgets
• Government committees
• Informal networks and negotiation
• Monitoring systems
• Structurral development, (e.g.,
merging of ministries)
Other inter-governmental activities
• Mobilizing teams and networks
• Developing shared networks
• Building supportive structures
• Maintaining momentum
• Mobilising stakeholders
 R&D in Services
– review and case studies

DG Research
European Commission
February, 2008 (DRAFT)
Final report in print

24 Jari Kuusisto
 Report overview

• R&D in services report

 Introduction to services
 Statistical overview
 Literature review
 Survey of policies in participant countries
 Case-studies
 Policy implications

25 ©Jari Kuusisto
 Project overview
Brief summary of the key results
from the existing research

Survey of R&D in services Case studies in multinational enterprises -

in participant countries R&D activities and future needs

Synthesis report with policy implications

Dissemination of the research results

26 ©Jari Kuusisto
 15 case studies from 9 countries
COUNTRY Name Industry(i e s ) No. of
staff
BELGIUM VADIS Consult i n g 15
Creax Patent research, idea generation, 20
innovation studies, methodological
training, new technical marketing
studies, and innovation software
Quality Assistance Contract Resear c h 91
Defimedia e-business, e-marketing, e-learning 20
consultancy
Telemis Software program for medical image 30
management, and maintenance
support
DENM A R K BDO ScanRevisio n Accountancy and consultin g 750
FINL A N D YIT G r o u p Building systems, construction, 22000
services for industry, networks and IT
GERMANY Claas Agricultural engines and harvesters 8200
Deutsche Industrie Wartung Industrial maintenance and cleanin g 12600
Drees & Sommer Project management and real estate 850
consultin g
GREECE Singular Logic Software and related services 650
LITHUANIA Maxima LT Retail trade 23000
NORWAY Geelmyuden.Kiese Strategic Communications Consultin g 70
SWEDE N Ekelö w InfoSecurity 36
TFS Clinical Resear c h 300
TURKE Y IES Education and Education solution provisio n 114
Information Tech. In c .
TURKTRUST Information Electronic certificate service providing 30
Security Services Inc. and information technologies security

27 ©Jari Kuusisto
 Public funding and R&D in services

• Biased towards businesses that are carrying out

technology related projects
• such as software development, or services development in connection
with manufactured products

• Public supports for traditional services was limited

among the case businesses

28 ©Jari Kuusisto
 Number and status of dedicated R&D
staff
• Typical service firms have very small numbers of full-time
R&D staff, and much of the is carried out on part-time
basis in connection with customer projects.

• In the technology related services the number of full-time

R&D staff was clearly higher than in service firms in
general.

29 ©Jari Kuusisto
 R&D resources and their use

• The allocation and use of R&D resources portrays a wide

variety of different practices
• Organisational and personnel development seems to play a strong role
as an R&D activity.
• Skills and competences development can be more important than new
service development
• Technology related and software services had most
formalised R&D processes, with budgets and dedicated
staff in place
• In traditional and knowledge based services, internal development
projects are the key form of R&D and these are not typically recorded as
R&D costs

30 ©Jari Kuusisto
 Typical bottle-necks

• Cyclical nature of the business and lack of skilled

personnel
• Inefficient fragmented markets can create a barrier for the
take up of new ideas
• Too discipline-oriented organisation of R&D activities is
not good for services development
• Customers may prefer lowest price to improved services
• Benefits of new services can be demonstrated only after purchase
• Under developed service culture may hinder R&D in
service businesses

31 ©Jari Kuusisto
 Intellectual property management

• Technology related and software services stand out

• They use patenting, copyrights, standardisation, and software licensing
as protection methods

• Otherwise services IP protection is less formally

organised

• Typically competitors copy new service outcome in a

couple of months time
• Importance of lead-time advantage
• Importance of IP management and informal IP protection

32 ©Jari Kuusisto
 Public support for R&D in services
• Public research programmes could support R&D in
services much more than they currently do
• Co-operation with research institutions is more
appropriate in the fundamental level R&D projects
• For instance, in the development of theoretical frameworks that the
business can utilise in its business strategy development.
• In more applied research, co-operation with individual
academics were seen as more appropriate
• Planning horizon in public research is much longer than
the development cycle in the businesses.
• Too fixed research questions can be a problem
• In businesses the research problems often evolve during the process

33 ©Jari Kuusisto
 Future needs

• Increasing need for market research groups that are able

to track opportunities for new services and estimate
when the demand for new services will emerge

• Standards that can facilitate competitive markets and act

as drivers of innovation

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 Concluding comments

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 Service innovation policy approach is
evolving
• Towards broader perspective and horizontal approach

36 ©Jari Kuusisto
 Thank you for your attention!

jari.kuusisto@sci.fi

37 Jari Kuusisto