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For American growth, learning to innovate in a service economy

Henry Chesbrough is a professor at the Haas Business School, UC Berkeley, and author of Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era, released in January 2011 by Jossey-Bass. Follow him at @OpenInno or at www.openinnovation.net.

The U.S. economy desperately needs to create more jobs. Payrolls were up 103,000 jobs in December, according to the U.S. Department of Labor. These numbers provide some encouragement that job growth may be returning to the U.S. economy.

Not surprisingly, most of these new jobs were in services. The Department of Commerce estimates that--just like in most advanced economies around the world--more than 70 percent of employment in the U.S. comes from service firms, with the most recent growth in jobs led by leisure, hospitality and health-care workers. Services have long been a major piece of the employment puzzle, and the most recent data simply confirms that our economy will be even more service-focused going forward.

Unfortunately, business leaders know a lot more about innovating new products and new technologies than they do about innovating services. This was a problem that Paul Horn, IBM's head of research, confronted back in 2004. Although half of IBM's revenues were coming from its services, his 3,000 researchers were all focused on making new products and new technologies. Yet for our service-driven economy to grow and for America to maintain its competitive edge globally, it is critical that business leaders learn how to innovate in a service economy.

The first step toward successful services innovation is recognizing that the customer is at its heart. A service is intangible, and its value comes in the form of customer experience. Since experience is subjective by its very nature, this means innovating in services requires different tactics than innovating with products. Products are built to specifications, which come from averaging responses by a group of target customers whose involvement is "frozen" during the development phase. Services cannot be specified in this fashion. Leading service innovators have developed ways to engage customers throughout the innovation process, which has enabled them to harness this subjectivity and differentiate their companies from competitors all while creating more customer value. Lego is a good example. It reached an entirely new market when it allowed customers to modify its Mindstorms software, leading teachers to realize they could use the service to construct a curriculum for teaching robotics to middle-school students.

Yet a problem many companies face is that, since services are often provided face-to-face, growing services requires growing one's staff. There is one way around this, though: Open up the business, turning it into a platform for other companies or individuals to build on top of or work alongside. This allows you to provide one-stop shopping to customers for their range of needs, while still leveraging what you do best. Amazon, for example, allows merchants to use its internal tools to build Web pages and offer merchandise to its customers, who cannot tell whether the item they purchase is ultimately from Amazon (such as books) or elsewhere (such as jewelry).

For most businesses, this switch--focusing on service innovation, making customers central to the process and opening up to other companies--requires embracing a good deal of internal change. It will change your business model by requiring you to charge customers in new ways, switching from upfront payments for products to ongoing payments for subscriptions or services received, and perhaps finding additional revenue streams. In particular, opening up to outsiders will often require sharing financial risks and rewards with them, since your traditional competitors may become your new customers or partners in this revised business model. IBM's Global Services business has experienced this firsthand; it supports competitors' products at its customer locations, and shares technical information with competitors who support its products as well.

Managing this change will not be easy, but the Department of Labor employment data remind us that it's necessary. Services is the most likely source of growth for the U.S. economy going forward. Mastering the subtleties of open services innovation will provide a way to sustain competitive advantage while delighting customers.

By Henry Chesbrough

 |  January 25, 2011; 12:34 PM ET |  Category:  Business Leadership , Corporate , Economic crisis , Technology Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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