Innovation in Services Through the Looking Glass of Innovation Studies

Executive Summary • Services dominate advanced economies, accounting for about three quarters of their gross value added and employment. Discounting government and other public services, private sector services account for about half of economic activity in advanced economies. Moreover services are the only part of advanced economies to have expanded in terms of employment in recent years, as manufacturing, mining and agriculture continue to contract. • Services were long thought to be laggards with regard to innovation – they were assumed to be uninteresting adopters of existing technologies rather than producers of new technology. This perception still exists, and is a major reason why innovation in services remains under-researched. • Services are, however, enormously diverse. Indeed, it has been observed that services occupy the top and bottom of the economy, and provide the best jobs and the worst jobs available. • Many services are small firms which compete in local markets with other similar firms. These firms tend to be unsophisticated with regard to their technology base, organizational arrangements and innovation strategies. It has been suggested that these firms are often locked into this situation by a combination of weak managerial and workforce skills, coupled with undemanding customers, all of which means the firms have neither the incentives nor the abilities to escape into higher value added activities through innovation and developing more sophisticated technological and organizational structures. • In contrast, some services are amongst the most sophisticated business in the world. We discuss two broad types of sophisticated service firms: systems firms and knowledge intensive service firms, such as professional services. • Systems firms are typically large businesses in industries such as banking and insurance, airlines, and supermarket retailing. These firms are based on very detailed divisions of labour, have highly sophisticated operating routines and have a heavy dependence on technologies, particularly Information and Communication Technologies (ICT) but also logistics in the case of supermarkets and airlines. New technologies have often transformed these industries, an example being how the introduction of direct selling of insurance by Direct Line led to the transformation of that industry in the late 1980s and 1990s. • Knowledge intensive service firms are at the heart of a great many innovation activities. These firms exist in activities such as legal and accountancy services, engineering and design, advertising, market research and management consultancy. Heavily dependent on the knowledge and expertise of their professional employees, these firms …