“Succeeding through Service Innovation – A service perspective for education, research, business and government” A White Paper by the University of Cambridge and IBM - June 2008

RESER members may have noted the results of the recent collaborative programme between the Engineering Department of the University of Cambridge and IBM on service innovation that culminated in their White Paper on “Succeeding through service innovation” issued in June 2008. This followed the Cambridge Service Science, Management and Engineering Symposium of July 2007 and the subsequent consultation process which was a collective effort. The authors hope it will be used by government, business and academic leaders as they develop service innovation roadmaps. Perhaps it will be appreciated also by the wide range of researchers represented in the RESER membership.

During the feedback stage Julian Arkell submitted the following comments which may be of interest to RESER Members. He applauded the conceptual rigour of the analysis underlying the concept of ‘Service Science, Management and Engineering’ (SSME), and the overall clarity of the Discussion Paper which appeared to be of a high standard to him as a non-academic. He then pointed to certain issues and factors that could with benefit be included in the consideration of the various elements of the programme.

Although four new key concepts were to be created (system, value, innovation, and SSME), he pointed out that they could founder on the underwater rocks or icebergs of traditional issues, including trade and economics, if their ‘marine sonar’ is not working properly.

Measurement of services: this is still in the dark ages and relies on proxies, some of dubious value. Essentially the units of many services and the quality of those units are still not even conceptually formulated, thus productivity measures of services are inadequate, including using the hedonic approach.

Some progress is being made on the value of services exports, as these measures do not rely on units and quality, though they do rely to varying degrees on proxies or imputations for the most difficult sectors such as banking and insurance.

The pricing of services can be quite different from those of manufactured goods or commodities. In some service sectors, prices have to include estimates of future costs and risk, which cannot be entirely reliable, and cannot be based just on past costs of production. Future legal changes can retrospectively affect the outcome, as well as other unknown risks which are unforeseeable. Where manufacturers offer packaged deals that include leasing, maintenance, replacement and recycling services, this is also especially significant.

Laws and the regulation of services: the infrastructure services are mostly highly regulated (including telecommunications, financial services and transport) as are health and the main professional services, and must be considered separately. Thus the influence and dialogue with sector regulators, and the competition authority are critical at the national level, and at the international level the development of international standards and the cooperation of regulators and supervisors is significant (eg in financial services IOSCO, BCBS and IAIS(2) ). The more complex the service offers become in relation to risks to health, safety, personal and other assets, the environment and so on, the more intense their regulation and supervision is likely to become.

Some of this is reflected in bilateral, regional and multilateral free trade agreements (FTAs). The standards are not developed by trade agreements but by other international bodies (ITU, WIPO, IATA, IASB and so on) that can influence the FTAs. Given the globalisation of services production and delivery, the maze of Bilateral Investment Treaties (BITS - about, 2,600), bilateral FTAs and large number of recent regional FTAs, some of them overlapping and with contradictory preferences and the equivalent of ‘rules of origin’ for services, this noodle-bowl situation can act as a barrier for SMEs planning to export or continuing to do so, especially through establishing a commercial presence abroad.

Presumably the programme will take into account the growing literature on knowledge intensive business services (KIBS), and their vulnerability to T-shaped professional experts who leave for other posts.

Under the general heading comes the rule of law, property rights, sound regulation, enforcement of competition law, and recompense for consumers in one jurisdiction damaged by the error or neglect of a supplier in another. As for the latter, the EU took some 30 years to develop suitably effective procedures for the regulated professions.

Also under this heading, in relation to high-skilled workforces, comes the regulation of educational diplomas and professional qualifications and licensing, which demands mutual recognition agreements (covering equivalence rather than harmonisation) for the movement of such practitioners between countries, that is very expensive, time consuming and difficult to achieve, and involves both government regulators and the private professional organisations.

Complex systems: the degree of interaction between notionally separate systems is of growing concern due to their vulnerability if contagion sets in between them. This concept of vulnerability is a developing concept distinct from hazard and risk – see http://www.asecinfo.org/index.html.

Under this heading the prevention and management of risk are very important. The insurance sector is at the heart of this, as well as being the intermediary for savings, efficient capital allocation and economic stability (see http://www.genevaassociation.org for research in this field).

Perhaps also coming under this heading are the growing importance of the Corporate Social Responsibility policies of large firms, and of the Sustainability Impact Assessments for new policies and trade agreements, for example as required under EU law for European Commission initiatives, that take into account economic, social and environmental aspects, based on the methodology of the University of Manchester (see http://www.sia-trade.org. Beyond this are the Millennium Development goals and the relief of poverty aims which overarch or encompass services regulatory and trade policies.

Economics of growth: here the concepts of growth diagnostics of economists like Dani Rodrik and Jeffrey Sachs must be taken into account in the globalisation context. Also the differential productivity increases between the manufacturing and services sectors (such as expounded by William J Baumol) which show that government services, health and education will take up increasing proportions of GDP in all economies, at whatever stage of development.

Baumol also makes the distinction between ‘inventions’, which may not lead to ‘innovation’ of products or processes, and the importance of the psychology of capitalism and entrepreneurship, to explain why many breakthrough inventions, some extremely ‘disruptive’, emanate from SMEs, whereas the high R&D spending of the large firms tends to produce step by step enhancements, often of inventions purchased from the SMEs entrepreneurs. He sees this complementarity as critical for growth. Prosumerism is part of this picture, where the consumer is part ‘producer’ by using machines such as petrol pumps, ATMs, kitchen equipment and home computers.

Consultations: it was not clear the extent to which SME entrepreneurs were consulted, particularly those that are innovators and/or exporters. By numbers, the majority of exporters are firms with under 500 employees ie SMEs. Even for them ‘glocalisation’ is important – a global approach and locally adapted services offers.

1. More information can be found online at www.ifm.eng.cam.ac.uk/ssme
2. Acronyms for: International Organisation of Securities Commissions, Basel Committee of Banking Supervisors, International Association of Insurance Supervisors, International Telecommunication