Innovation in the Service Sector

At one of our first Management Innovation Lab gatherings in May 2006 at London Business School I was asked about what I saw happening in innovation in the service sector.  It is an interesting point.

First, it is worth remembering that service accounts for 85 per cent of the economy depending on your definition.  Every industry on the planet is being reinvented from the customer backwards in very profound ways.  It’s happening in TV where you don’t have to worry about schedules. It’s happening in financial services and to a lot of incumbent service companies that were protected in the past by regulatory barriers – think about insurance and financial services in general. It’s happening to companies that were protected by customer inertia in one form or another – think of universities.  The University of Phoenix in the United States has 110,000 students, 30-some campuses and a market value which is more than the endowment of the richest funded university in the United States, and that’s in one generation. The innovation imperative is probably as great there as anywhere else.  As entry barriers come down, there are a horde of new competitors, many of which are web-based, like Skype and all the rest ready to come in.

Even in service industries the management DNA isn’t very different. Look at the average call centre and tell me how it is different from an early 20th century production line – individuals sitting there counting their key strokes and their productivity, and there’s a strict protocol.  Sure, some of it is necessary, but they are basically pink- or white-collared factories.  The competitive threat isn’t fundamentally different in the service sector, and the challenge of changing their managerial DNA is much the same.