Discussion Paper Series

Services Innovation: A Reconfiguration of

Innovation Studies

Ian Miles

01-05

April 2001

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 Services Innovation: A Reconfiguration of Innovation Studies1

Ian Miles

Abstract

This paper examines some major trends in. and results of. the burgeoning literature on services
innovation. It draws substantive conclusions, such as:
• Services do innovate, technologically and organisationally, though there are substantial and
intelligible differences in innovation propensity and style across different classes of service
firm and sector.
• Many services are poorly integrated into innovation networks, for several reasons, but large-
scale service firms in many service branches do play important roles in orchestrating
innovation (mainly through their supply chains), and Knowledge-Intensive Business
Services (KIBS) play important roles in facilitating innovation across the economy.
• The rise of the service economy is leading to changes in innovation processes more
generally. Studies of services innovation help explicate this, while many received
(manufacturing-centred) approaches neglect significant phenomena here.
• Rather than draw a sharp demarcation between services and manufacturing innovation, study
of services innovation throws light on innovation processes across the whole economy.

Keywords: Innovation, services, knowledge-based economy, knowledge-intensive business

services

1
Originally presented at Nimegen workshop on Innovation in the Knowledge Economy June 2000
 A Services Innovation Manifesto

A spectrum is stalking European innovation studies. The monochrome world of

manufacturing innovation is being transfigured: infused with the colours of what we have
elsewhere called the “rainbow economy”.2

The study of service firms and industries, and of their innovation processes and location
in innovation systems, has been transformed in recent years. It has emerged from
Cinderella status, to draw on the common depiction of services as a Cinderella sector. It
has succeeded in attracting the attention and research efforts of a large number of serious
scholars.

Cinderella has decidedly come to the ball. Will she now slip docilely into the routines of
palace life? Do services simply constitute a new set of industries, in which we can carry
on familiar innovation studies as before? Or is an outsider going to challenge the rituals
and roles of the establishment? Will mainstream innovation studies be transformed?

Innovation researchers of the world lighten up: you have nothing to lose but your
knowledge claims.

2
Coombs & Miles (2000).

3
1 Early Years
The literature on services has developed massively since the mid-sixties.3 The theme of services
innovation, on which this paper focuses, is preoccupying both researchers and policymakers, as
part of the wider explosion of policy-related studies of the service economy.4 It is important to
recognise just what a transformation this represents.

In the immediate post-war period, manufacturing industry was still considered the wellspring of
economic growth, and the source of innovation. Services were categorised as the tertiary or
residual sector, with little role here. While some services were seen as supporting the economy’s
social and logistical infrastructure, others were either producing luxuries (consumption of which
grew as manufacturing industry’s productivity growth gives us time, material goods, and money),
or helping to limit social inequalities by providing mass health and education.

By the 1960s, the scale of service activities prompted the first systematic analyses of the “service
economy”, “producer services”, and “post-industrial society”.5 In general the growth of services
was seen as reflecting consumer demand growth. Beyond this, though, accounts of service sector
growth diverged widely. On the one hand services were seen as laggardly, unmodernised
activities, unable to participate in general productivity growth because of their low quality labour
and small-scale organisation. This was the view of many economists, and some analysts of
employment; it corresponded with entrenched lines of political thought both on the left and the
right. On the other hand, services were seen as superior products. Not only did demand for them
grow as society became richer; this demand reflected increasing consumer sophistication, and
accordingly the service labour force was seen as typically professional and/or socially skilled.
Neither account challenged the assumption that services tend to be technological laggards.6
Critics saw services’ low productivity growth as a drag on the whole economy; a more positive
interpretation was that they could absorb labour displaced as manufacturing industry automated.

3
Bryson & Daniels, (1998) compile a good deal of the literature on services. Unfortunately, their
collection does not have much to say on innovation issues.
4
See the EU and OECD websites. Other valuable studies include Rubalcabo-Berenejo (1999). Murphy &
Vickery (1999).
5
Bell (1973); Fuchs (1968), (1969); Greenfield (1966).
6
Even Greenfield (1966) in his pioneering study of business services gave very little attention to the role of
technological change in demand for such services.

4
Over the 1970s and ‘80s, these views became enmeshed in wider political arguments. On the one
hand were fears of deindustrialisation - Western economies losing their manufacturing industry to
newly industrialising countries, and becoming vulnerable in consequence - and of a services
burden - excessive taxes burden for public services stifling enterprise (and consumer services
feeding parasitically on equally excessive wage increases). On the other hand prophets of post-
industrial society argued that we should be preparing for a leisure society (with shorter working
lifetimes and more investment in arts and culture), or a caring society (with higher all-round
educational attainment and better social and economic planning).

Of more interest in the current context, however, is the emergence of a body of more empirical
analysis, which went beyond these rhetorical stances. Over the 1980s, and partly fuelled by the
provision of funds from the European Community’s FAST (Forecasting and Assessment of
Science and Technology) Programme, a series of major contributions were forthcoming.7

Two particularly influential UK contributors were Jay Gershuny and Richard Barras, each of
whom upset some conventional wisdom – though in retrospect they did not take the challenge
that services innovation poses to mainstream innovation studies quite far enough. Gershuny
effectively accepted a view of services as having largely been non-innovative. He launched a
critique of the post-industrialist notion that the growth of services was largely a matter of growing
consumer demand. He showed that, often, when specific sorts of consumer requirements (e.g.

7
FAST’s orientation to technology issues pushed many of the studies under its aegis towards innovation.
Also relevant, however, are other initiatives, like that of the National Academy of Engineering in the
USA, whose activities included a major conference on innovation in services in the mid-1980s, which
resulted in the volumes Guile & J B Quinn (1988a, 1988b); an American contribution which attracted
much attention was Faulhaber, Noam & Tasley (1986). There are many European initiatives, for
instance a programme of study into producer services in Belgium, and a substantial body of work
accumulated in the Netherlands, with contributions, for example, from Tordoir (1986). The Lille
researchers at IFRESI have made important contributions to understanding the role of consultancies,
and the service relationship, and a conference they organised in 2000 brought together a good deal of
work on these themes. A major theme of much European work on services has been the contribution of
producer services to regional development, a theme heavily represented in later phases of the FAST
programme: in addition to such conference and working papers as Lambooy and Tordoir (1985), see the
books by Howells (1988; Howells & Green 1989) and Illeris (1989).

5
entertainment, transport) were examined, there was not the expected relative growth in demand
for services (as opposed to manufactures). In many areas of consumer activity, there was actually
a shift of overall consumer expenditure away from purchase of services towards a purchase of
goods with which consumers could produce their own final services – thus the term “self-service
economy”. Absolute expenditure on these consumer services would still often grow with overall
growth in household expenditure (though some services, like laundries, were in decline); but
growth in consumption of manufactures was more rapid. The explanation for this, it was argues,
lay in lower levels of innovation in services than in manufacturing – lower productivity growth,
reflected in the relative increases in the cost of services as compared to similar manufactured
goods, and, arguably, slower improvements in quality of the final services. But service
employment would still grow in relative terms, because the labour productivity gains were so
much higher in manufacturing.8

There was here little challenge to the idea that services are generally non-innovative, though
examples of services innovation such as distance learning are discussed in this work. There was
little interrogation of the reasons why services innovation apparently lags behind that of
manufacturing. Many commentators took the “Gershuny” hypothesis to predict that all services
will eventually be displaced by self-services. Gershuny did, however, offer the hope that new IT
could transform the costs and quality of service products – Gershuny and Miles (1983) has a long
listing of examples. This was one trigger to scholarly studies of IT in service industries, though it
must be admitted that the very visible march of PCs and cash machines, for instance, was forcing
this upon our attention in any case. It was clear that the informational components of many
services could be the site of application of new IT, and thus at least these elements of services –
often very central ones – could be subject to efficiency and quality gains.

The other UK contributor of note in this period was, as mentioned, Richard Barras. He
specifically focused on IT-based innovations in services. While much of the attention to IT in
services concerned the impacts on employment – there were many estimates of the number of
jobs that might be displaced here, Barras instead proposed applying a conceptual model of stages
of IT use services, . While the Information Systems literature has many efforts to elaborate stages
theories of systems development, what Barras did was move this up a level, away from the
intraorganisational focus of most of this work, and towards more of an industry level. He

8
Gershuny (1978), Gershuny & Miles (1983).

6
introduced the phrase “reverse product cycle” to describe the process of IT-based services
innovation. Due to the information-intensity of services, services innovation has specific
features as reflected in the reverse product cycle (RPC). In this account, the application of new
IT in services is initially undertaken for reasons of back-office efficiency – but subsequent
learning processes lead to innovations resulting in product quality improvements and eventually
new products. IT effectively brings services into the industrial era – they begin to use an
industrial technology appropriate to their information-intensive activities; they come to organise
important parts of their work around this; and eventually, they become independent innovators
themselves.

Barras’ perspective has been highly influential, with many commentators content to use it as an
explanatory framework, without much critical scrutiny. The obvious importance of IT-related
innovation in services, and more generally, and the rise of many streams of research and policy
analysis dealing with “informatisation”, served to underpin its popularity; perhaps the uncritical
flavour of much of the IT literature contributed to the lack of critique of the RPC account. After
all, the RPC perspective did at least suggest some elements of a theory, in a literature that was
highly empiricist. It stepped beyond the mere listing of cases of IT applications in services. It
moved towards providing a conceptual framework with which services innovation – admittedly
IT-based - could be related to innovation in manufacturing.9 The view of services as non-
innovative might still often have some merit, but history was rendering it increasingly obsolete.

Thus the RPC account carries with it an explanation for its own success. The historical
development it described was forcing the view of services as non-innovative to give way to
accounts which saw them as potentially and often actually innovative, especially through the
application of new IT.

It is interesting to note that a major point of difference between Anglophone and Francophone
analyses of services and services innovation has been the stress placed by the former on
information-intensity, as we have seen – and by the latter on interactivity. It could be speculated
that this has something to do with the attitudes to service in the different cultures: but let us leave
this for another essay. Another line of analysis represented in FAST studies has been less
influential, at least in the English-speaking world. Taking the analysis of services innovation in a

9
Barras (1986, 1990).

7
different direction, it dealt with another underlying feature of (many) services that may influence
their innovation processes – the relation between service firms and their clients, their
interactivity.

The Lille group at IFRESI, for example, has conducted many studies of the service relationship as
a focal point of analysis. Other researchers have coined the term “servuction” to describe the
activities and procedures involved in producing and sustaining service relationships (mainly
supplier-client relations), with the intention of contrasting this with production, seen as activities
and procedures that materially transform objects. (Our use of the term interactivity is intended
to refer to this terrain of service relationships too.) As the servuction terminology also suggests,
such relationships are believed to be more important to service firms than those in other sectors.
Belleflame et al examined R&D in services, seeing innovation as potentially being servuction,
production, or both together.10 A sample of service innovations was identified, and the research
team sought to examine their development and characteristics. This study was path breaking in
several respects:
• It identified the importance of innovation in service relationships;
• And in so doing helped to specify these relationships as having material underpinnings in
social practices and relevant technologies;
• Without presupposing that these would necessarily be information technologies and IT-
centred innovations;
• And accepting that the services can be sources of innovation in their own right

Though there seems to have been little follow-up of this particular approach as applied to
innovation, the role of service relationships has been reasserted in some more recent studies,
especially from Francophone researchers.11 In any event, this rapid review of some developments
in the literature before the recent take-off of service innovation studies has noted the two
elements that underpin many accounts of the specificities of services, and thus of services
innovation – their information-intensity, and the interactivity of supplier-client relations. Of
course, these two features overlap – most of the latter relations are a matter of information
exchanges, except in those services performing physical and biological functions like transport,

10
Belleflamme, Houard & Michaux (1986).
11
Gallouj & Weinstein (1997) provide a useful review, comparing “servuction” to a number of other
formulations.

8
cleaning, surgery, and hairdressing. These features are addressed in many more recent studies,
and we shall examine some of these below under the broad headings of Services as Innovators
and Innovation Systems and Agents.12

2 Services as Innovators
2.1 Diversity of Theoretical Approaches
Services innovation is surely too diverse and rich to be encompassed by a single account,
especially one focusing on a single set of technologies. Nevertheless, for more than a decade, the
reverse product cycle (RPC) model has been widely taken to be the model of services innovation,
especially in the English language literature. Unusually, given the many critiques of the
conventional product and industry cycle models, the RPC account has been subject to very
limited critical analysis. This situation has been changed in recent years, and we can look
forward to much more theoretical pluralism, to the development of new approaches, and to the
systematic confrontation of these approaches with evidence.

The most sustained critique of the reverse product cycle approach comes from Upachalanan,13
who charts a diverse range of innovation strategies and trajectories across different firms and
innovations - while focusing on a “heartland” case of Barras’ model, IT innovations in Banking
services - a service and type of innovation that was prominently described in terms of the reverse
product cycle approach. He undertook detailed case studies of 15 Thai banks’ approach, over
some 15 years, to five IT-based innovations: Interbranch On-line, Automated Teller Machine,
Credit Card, Remote Banking , and Electronic Funds Transfer at Point of Sales services.

Four broad propositions were illustrated by means of these case studies, relating together the
characteristics of market competition and these innovation processes. The propositions are that:
the stage of innovation process, degree of product innovation and level of process innovation are
interdependent; the characteristics of an innovation process vary systematically with innovators’

12
These ideas were further developed in the course of the TSER’s SI4S project – the acronym stands for
Services in Innovation, Innovation in Services – where the discussions among a very lively group of
researchers – many taking a broadly neoSchumpeterian line of analysis – were most valuable. See
Boden & Miles (2000) and the SI4S website at http://www.step.no/si4s for more information and
research results.
13
Uchupalanan (1998, 2000).

9
dynamic competitive strategies for competition and growth; the competitive strategies underlying
the characteristics of the innovation process are strongly connected to the innovators'
sociotechnical contexts, organisational conditions and competitive environment; and the
innovation processes and underlying competitive strategies in an industry do not proceed in
isolation, but affect each other in various ways over time. The detail generated reveals, for
example, quite different patterns of radical and incremental, product and process, innovation over
time in different cases; quite different strategic actions by different firms within the industry, and
by the same firms with respect to different innovations; and complex interrelations between
particular innovation processes in their particular contexts.

Upachalanan himself makes very modest claims for the generalisability of the specific innovation
processes that he observes. He claims to have achieved a sufficiently rich description of a set of
particular empirical circumstances to warrant the term “model”, but this model is not claimed to
be an all-purpose one. Other patterns of innovation may well characterise other circumstances.
The study propounds an approach that does not presuppose one common set of causal structures
interacting in a particular way. Rather, it provides a framework for analysis of the interrelations
of innovation and competition, through the four propositions and the approaches developed
around them. This framework is applicable to all sectors of the economy, to very different types
of innovation and national contexts, and rests on no specific claims as to the uniqueness of
services innovation.

This Thai study also draws attention to the influence of regulatory environments in shaping the
innovations in question, and the tendency for many services to operate under quite distinctive
regulatory regimes as compared to most manufacturing sectors is another distinctive feature of
the sector. (Reasons for this include the information asymmetries associated with the difficulty of
demonstrating intangible products, the strategic importance and supposed natural monopoly
characteristics of some large-scale services, etc.) Regulation sometimes can spur the
development of business services – e.g. auditing, environmental, legal, and lobbying services.
But often regulation is seen as impeding services innovation – for example, in tying down the
core products of the service to particular kinds of document or certification. (Similar arguments
could be made about for example, professional standards and the formal rules of specific sports.)

10
The relationships can be even more complicated in public services, as demonstrated in a study by
Sally Wyatt.14 In her examples, broader policy considerations – including desires to reshape the
regulatory system of telecommunications, and the competitive situation of firms within it –
influenced not only the decisions made about the service functions required when government
administration is networked. These considerations also influenced the decisions about what
would be the object of the transaction – for instance, in one case, that a service agreement would
be entered into, rather than a more conventional supply of hardware and software. Innovation
researchers will surely be familiar with managers reporting that they have to think of their
products – be they molecules, machines, or meals – in terms of the service which the customer is
deriving from them, and of the other services (aftersales, design, marketing, etc) which they need
to manage alongside the physical production process. Wyatt shows the same process at work on
the part of the (service sector) clients in respect of the (service) product they are acquiring; and
the service definition can be intimately bound up with intentions as to the wider service
marketplace.

2.2 Diversity among Services

In a recent paper Faiz Gallouj and Jon Sundbo have examined the diversity of innovation patterns
in services. While they stress the specificities of services innovation – in particular the service
relationship – and suggest that there is increasing convergence between services and
manufacturing innovation, they distinguish between a number of service innovation patterns: 15

• The classic R&D pattern – mainly found in large firms producing standardised operational
services dealing with material or information – large-scale data processing, building
maintenance, etc. (We would argue that less standardised services such as large software
and telecommunications companies could be added to the list.) Gallouj and Sundbo further
distinguish between traditional/Fordist, and neo-industrial variants of this pattern.

• The service professional pattern – this especially characterises medium-sized professional

services, such as consultancy and engineering, who use specialised expertise and related
technical capabilities for problem-solving for clients. Here, the professional often follows
professional norms and adopts methods in what constitutes a collective innovation process.

14
Wyatt (2000).
15
Sundbo & Gallouj (2000), Gallouj & Weinstein (1997), Gallouj & Gallouj (2000), Gallouj (2000),
Sundbo (2000) – again taking mainly neoSchumpeterian perspectives.

11
• The organised strategic innovation pattern – this is most common, especially among large
service firms other than those discussed earlier. There is not an R&D department.
Innovations and an orientation toward innovativeness are inspired by the firm’s strategy.
Research is seen as a widely diffused task (many members of staff contribute toward
developing innovative solutions). Development, which typically requires more explicit effort
and time, is undertaken by ad hoc project teams.

• The entrepreneurial pattern – this involves the creation of small service firms around a
radical innovation, which they then produce and market as their main activity. These firms
do not have an R&D department. After their formation, innovation processes are generally
focused on the improvement of the initial radical innovation. Many IT services take this
form.

• The artisanal pattern - a much more supplier-driven process. This model describes many
small firms involved in operational services (cleaning, security, hotels, restaurants, etc.).
They have little or no deliberate innovation strategy; their innovations are generally
incremental and small ones, and often not reproduced more widely; or else they are, as
noted, supplier-driven.

• Finally, the network pattern. This involves a number of service firms establishing a
common resource with the objective of innovating, or developing innovations, for the
member firms . The service firms put the innovation activity in the hands of a professional
organisation – like the industrial research associations in manufacturing and construction.
This sort of model may apply, for example, in tourism (often with government support) and
in some financial services.

Like Upachalanan, Gallouj and Sundbo note that a given firm or industry may follow select
different patterns for different innovations. They argue, however, that some patterns are more
common than others, and that certain patterns are tending to become dominant in specific
contexts and more widely - the organised strategic innovation pattern and, in specific service
areas, to the service professional and artisanal patterns.

A more technological perspective on how different services might relate to innovation processes
examined how different service sectors might differentially adopt major new technologies and

12
reshape themselves through using them.16 The starting point here is a broad characterisation of
the sorts of transformations undertaken across the economy, and by services in particular. From
this, three (extremely aggregated) sets of transformative processes are identified. These are
associated with different types of technology, and innovation dynamics:
1. Physical Services. These effect physical transformations, mainly to maintain (preserve
through time) or transport (relocate through space) facilities, goods or people. (Retail and
wholesale trades combine distribution (physical storage and movement of products) with
exchange (transfer of ownership, an information function). Domestic service may well
include some elements of human services, when they involve personal care as well as
cleaning of households. These include both producer and consumer services.) These
services have long made use of automotive and energy technologies, and sometimes
included large players – like railway companies – who were active in R&D, though often
they were mainly influenced by innovations in manufacturing. In many cases, the Gershuny
“self-service” challenge has been felt as consumers acquired their own machinery.

2. Human or Person-Centred Services. These span social and community services (many
state-provided, like health, education and welfare) which aim to develop and maintain social
and physical well-being; together with a number of private consumer services which tend to
be oriented more to personal appearance (hairdressers, etc.) or to providing various 'home
comforts' as commodities (hotels, catering, and illicit and largely unrecorded services such as
prostitution). Some of these services have specific links to their own sets of technologies –
especially health services to pharmaceutical and surgical innovations, with health
organisations being intimately involved in innovations alongside manufacturers and public
sector researchers here. Organisational innovation has also been highly important, and has
been the subject of formalised research and innovation processes in sectors like health,
education, and social services. Until recent developments in IT, the highly person-specific
and non-routine nature of many of these services meant that “front-office” applications of
technology were often relatively restricted, but the large-scale administrative efforts
involved did make the public services here major leaders in massive back-office computer
systems and early experimenters in network technologies. In contrast, personal services

16
A recent statement of this approach is in Miles (1999). Some early analysis of IT use in services, which
informed the development of this approach, can be found as Miles (2000)

13
 have only recently begun to experiment with front-office IT systems (e.g. virtual reality
simulations of haircuts).

3. Information Services. These process information in various ways as their core functions,
rather than as a back-office or secondary “servuction” function. Three distinct types of
service activity can be distinguished, though as so often their boundaries are becoming
blurred. (1) The mass media, mainly distributing standardised data on a large scale
(cinemas, broadcasting, etc.) (2) Infomediaries (to apply the term in a rather non-standard
way) - organisations distributing large volumes of non-standard information to specific
recipients (telecommunications, and those financial industries who circulate symbolic
material such as property entitlements). (3) Knowledge services that produce and interpret
specialised information (some financial services such as accountancy firms, advertising,
marketing and consultancy companies, architectural, engineering and R&D services). Like
person-centred services, the information which they handle is often very client-specific, and
that they rely on considerable professional expertise – but they are generally producer
services. Information Services of all types have been early and extensive users of IT (and
previous generations of electronics and communications equipment) for amplification, visual
display, delivery and processing of information. In some cases new information services
have competed with traditional services like theatre, cinema; and new consumer “brown
goods” represent the focus of activities that can only roughly be described as “self-service”.
Supporting services such as broadcasting and the recording industries, have risen to the
status of major industries, while sectors like telecommunications and financial services have
used new technology to limit labour costs as well as to provide improved or new services, so
that their levels of output growth are much higher than their employment growth (if any).
As well as back-office IT applications, there has been much innovation at consumer
interfaces; and alongside the technological change has come change in organisation and, as
important, in regulatory policy.

This rather broad-brush account of long-term trends was complemented by another account,
which took off from and took issue with an early taxonomy of innovation and its view of services
innovation as all being supplier-driven.17 . Soete and Miozzo 18 argued for a differentiated view

17
Pavitt (1984). In a subsequent paper (1994), probably influenced by Barras, he did add a category of
“information intensive” firms which included finance, reailing, travel and publishing; and software
appeared in the “specialised supplier” group.
18
Soete & Miozzo (1989).

14
of the production and use of innovations within services, portraying the range of innovative
practices in services is as wide as that in manufacturing, and distinguishing between three
categories of service businesses :

1. Supplier dominated sectors e.g. public or collective services (education, health care,
administration), and personal services (food & drink, repair businesses, hairdressers, etc.),
together with the retail trade19.

2. Production-intensive scale-intensive sectors: involve large scale back-office administrative

tasks. These services in particular are suited to the application of IT, initially, at least, with
the aim of reducing costs. (b) network sectors: dependent on physical networks (e.g.
transport and travel services, and wholesale trade and distribution); on elaborate information
networks (e.g. banks, insurance, broadcasting and telecommunication services). Public
utilities, such as water and gas supply, may also be located in this group of firms, though
these are not usually taken to be service sectors. Such services play a major role in defining
and specifying innovations. Thus the suppliers of new technologies are to some extent
“service dependent” (p.16).

3. Specialised technology suppliers and science-based sectors: e.g. software and specialised
business services, laboratory and design services.20 The main source of technology is the
innovative activity of the services themselves. The innovations tend to be “user dominated”.

2.3 Services’ Diversity and Innovation Surveys

Though persuasive, the accounts outlined above have largely been based on impressionistic
evidence and industry knowledge. Systematic and large-scale survey data has only recently
begun to accumulate to any great extent. A few pioneering innovation surveys as long back as
the 1980s did include samples of services firms, though they did not really examine or explicate

19
The rise of major retail service firms, in some cases to be large transnational chains, has meant that
these can exercise sufficient market power to be significant sources of direction for their suppliers.
Thus UK supermarket chains are able to set quality standards and identify new products for their
suppliers. They have had a considerable impact, for example, in promoting various environmental
practices, organic foods – and recently, in first promoting and then inhibiting the use of genetically
modified organisms.
20
The “R&D Consultancy, technical testing and analysis” branch of services accounts for almost 10% of
current UK R&D - cf. Recent issues of Business Monitor MO14 London, HMSO.

15
the heterogeneity of services.21 We have gradually reached a situation where the exclusion of
services from such surveys requires justification, rather than being a routine affair. Certain
services – most often technical business services, less often professional services, personal
services, and social and community services - are covered in large-scale surveys, such as
Europe’s second Community Innovation Survey (CIS-2) in the late 1990s. (While a few countries
did include some services in CIS-1, by CIS-2 those services thought to be most innovative were
covered in 14 of the 15 EU member states, and some countries, such as the UK, went further and
included other market services such as retailing.).

The research issues have moved on from “do services innovate?” – that services can be
innovative is no longer at issue, though the judgement as to which services to target in surveys
suggests that there is still a tendency to write off some branches as being of no intrinsic interest.
More often, now, the questions are “how innovative are services? And “which services are most
innovative?. Elsewhere (Coombs and Miles, 2000) we have suggested that there is a historic
dichotomy between researchers (typically coming from the tradition of manufacturing innovation
studies) who tend to see services innovation as no different in substance from what they have
long studied - an assimilationist perspective – and those (often coming from a background in
services research) who argue for attention to the specificities of services innovation- a
demarcation perspective. While both groups may ask “what are the conditions of services
innovation, what are the motivations for and barriers to innovation in these sectors?”, they
approach the question in very different ways. Indeed, they are liable to differ concerning the
appropriateness of using innovation survey instruments originally designed for studying
manufacturing innovation. If what is at stake is a matter of degree, these may be perfectly
adequate; if we confront qualitative differences, they may fail to give us sufficient leverage to
grasp the major features. We could see the argument as concerning whether services innovation

21
The 1984 work by Yap in the UK, mentioned earlier, focused on the use of IT by services (and
inadvertently captured a small set of manufacturing firms in the sample). (See Miles, 2000a.) To the
best of our knowledge, pioneering extension of conventional innovation surveys to services (not
focused on specific technologies) was undertaken in the late ‘80s in the Netherlands (Kleinknecht et al,
1990). The OECD group working on innovation surveys (NESTI) in the early 1990s was able to drew on
Ausralian, Canadian and other surveys in preparing recommendations for integrating services into
innovation surveys. However, the result of this work was largely a matter of shoehorning services into the
innovation survey instruments designed in the first placein the context of manufacturing; there was little
weight given to suggestions as to the specific challenges associated with services innovation.

16
is till being treated seriously enough – it has been admitted into the statistical domain of
innovation studies, but on whose terms? Is it a grudging admission, as opposed to one that really
considers that the new entrant may have something new to contribute?

One study from authors who have adopted an assimilationist perspective, is nevertheless of
interest in that it draws upon a specialised Italian survey of services (undertaken in the wake of a
CIS-1 survey of manufacturing), and in that it examines the variety of services innovation. The
authors use factor and cluster analysis to group the service sectors (not firms – they were
constrained to work with aggregated data, and thus unable to examine intra-sectoral variation,
firm size issues, etc.), developing a classification scheme that is reminiscent of the Soete/Miozzo
typology.22 Four groups of service sectors are distinguished::23
1. “Technology users”. This least innovative group comes closest to conforming to the
archetype of “supplier dominated” services. It relies on the acquisition of technologies from
external sources, particularly from the manufacturing sector.. The sectors within this group
were: waste; land and sea transportation; security; cleaning; other business services; legal
services; other financial services; travel; and retail. This category comprised 80% of all
service firms and more than half of employment: its scale may help account for the view of
services as generally non-innovative.. (But note that a brief consideration of the list of
sectors here reveals many that feature highly innovative firms – airports, supermarket chains,
etc.)
2. “Interactive services”, another large group – together with the first group this accounts for
three-quarters of total employment. In these sectors, innovation is achieved through close
interaction with clients, rather than through internal R&D or technology acquisition. There is
a placed a heavy reliance upon developing software and/or acquiring know-how. Sectors here
included advertising, banks, insurance, hotels and restaurants.

3. “Science and technology-based services”. These are major generators of new technological
knowledge, and diffuse it to manufacturing and other services. Their innovation is typically is
effectively located “up-stream” in the knowledge generation chain, with close interaction
with public and private research institutions. The sectors involved included R&D,
engineering, and computing and software. Though this group accounted for less than 5% of

22
Evangelista & Savona (1998).
23
Postal and telecommunications services appeared to operate at the crossroads of the four main clusters,
perhaps because of the huge diversity between the two main groups collapsed together here.

17
 service sector employment, it contributed 30% of the total expenditures on innovation from
services.

4. “Technical consultancy services”. These combine characteristics of the S&T-based and

interactive sectors, carrying out internal in innovation efforts but drawing a great deal of
client knowledge. While all services may be said to be involved in problem-solving activities
of one sort or another for clients, the technical consultants’ main function is the provision of
technical answers meeting the specific needs of clients as their raison d’être.

The Italian researchers who conducted this study were able to compare their results with those of
an earlier survey of manufacturing innovation, and concluded that services show “more
similarities than differences” to manufacturing “with respect to basic dimensions of
innovation”.24 The study is interpreted as confirming the ability of innovation instruments,
originally designed to cover manufacturing innovations, to address service innovations – though
they do accept that in-depth, nuanced investigation could reveal areas of divergence between the
sectors. The study certainly does demonstrate that the conventional instruments can cast light on
services innovation – not least demonstrating the importance of relationships with clients for
some groups of service. But, like most other innovation surveys, it is highly constrained. For
example, we could argue that “delivery innovations” (or indeed innovation at the service
provider-client interface more generally) is a specific category of innovation that is poorly
captured in the conventional product innovation/ process innovation dichotomy. It is not
uniquely relevant to services, but innovations like cash machines, online banking, e-commerce,
and even pizza delivery and self-service shops and cafes show how pervasive it is to services.
New IT is particularly well suited to application to the information exchanges at the supplier-
client interface, and thus this has become a major focus of innovative effort. Unfortunately,
conventional instruments either neglect this area, or force respondents to see it as either product
or process innovation.25 The Italian researchers also suggest that service managers have
relatively few problems in distinguishing product and process innovations, a point that several
service researchers had argued (on the grounds that product and process, and indeed
consumption, are closely interwoven for many services). .

24
See also Sirilli, & Evangelista (1998).
25
This is presumably the rationale for CIS-2 asking service firms about “service innovation” rather than
using the product/process distinction addressed to manufacturers. Whether this was an optimal
response is debatable, since richness is lost for the sake of inclusiveness.

18
Another study that used results from an industrial innovation survey covering private services, in
this case in Germany, did focus on the “service relationship” (Hipp et al, 2000). We turn to this
in a moment: first let us consider the question of different types of innovation.

This survey added a question about organisational innovation to the standard ones on product
(service) and process innovation, and Hipp herself checked the classifications against open-
ended data concerning the nature of the innovations. There was over 90% agreement between her
identification of firms as innovators/non-innovators and their self-identification, indicating that
service firms (in Germany at least) do have an understanding of innovation broadly in line with
the standard (and arguably manufacturing-biased) academic understanding.26

Hipp disagreed more with the firms’ classifications for what types of innovations were involved,
especially problems reflecting in differentiating between process and organisational innovations
(cf. also Preissl, 2000) – for example, are intra-company communications networks organisational
innovations (as firms often thought) or process or procedural changes(as some other firms
thought). Hipp adopted a narrow definition of organisational innovation – these are innovative
changes in the structure of the organisation, not simply procedural changes, such as Total Quality
Management or ISO 9000 (often seen by respondents as organisational, but classified by Hipp as
process innovations). Examples of organisational innovations, then, were establishing a new
profit centre, or amalgamating divisions within a company – changes where technologies usually
play marginal roles, and which some researchers might not consider to be comparable with
technical innovations. In Hipp’s reclassification, process innovation (80% agreement with firms’
own classifications) was most frequent, followed by service (product) innovation (77%
agreement), and with organisational innovation (63.5% agreement) well behind. The distinction
between service and process innovation is thus reasonably robust (though we still have doubts as
to where innovations at the client interface should be classified) but between process and
organisational innovation is more problematic in services (and elsewhere?).27

26
Analysts of CIS-2 data have been very concerned by variations across countries (and over time in the
case opf one country), in firms’ propensity to state that they have innovated; a plausible suggestion is
that the connotations of the term (or its linguistic equivalent) are more fluid than would be ideal.
27
Sirilli and Evangelista (1998) argued from their study of innovation in Italian services, that most firms
could distinguish service from process innovation

19
As for the “service relationship”, this survey departed from other studies in that it examined how
far the service function is tailored to specific client requirements by different firms. The
respondents were asked to specify how much of their output was standardised and how much
adapted to specific clients. These researchers were able to work with firm level data, and thus as
well as demonstrating that services subsectors do vary in broad terms, they showed that within
sectors firms also vary between those whose output is much more standardised, and those who are
more specialised. 28 Table 1 displays exemplary results.

The study went on to examine the relationships between the pattern of innovative activities, and
such variables as firm size, service branch, and – this is an element missing from other studies -
the firm’s emphasis on standardised, partially customised or bespoke services. Among the
conclusions were:

• Wholly Standardised firms in Trade, Transport and Communications, Technical Service and
Other Business Service sectors are below average in levels of innovation, especially in
service and process innovation.

• Other Trade, Transport and Communications, and the ‘Other’ service firms are close to the
average. Those Transport and Communications firms providing Customised and Bespoke
services are more likely to innovate, particularly process innovation.

• Banking and Insurance and Software firms (including the Wholly Standardised firms) are
more likely to innovate - particularly service and process innovation. Banking and Insurance
firms also seem more likely to introduce organisational innovations than do other firms.

28
Hipp et al, (2000); see also Tether at al (2000), and for more general discussion of the survey in
question, Licht et al (1995).

20
 Table 1 Firm Size, Sector and Standardisation-Particularisation

Size and Sector Standardised Custom- Be-

Wholly Largely ised spoke N.

1-9 employees 27% 34%↓↓ 30%↑ 10%↑ 387

10-49 employees 24% 39%↓ 28% 8% 747
50-249 employees 22% 48%↑↑ 24%↓ 7% 588
250+ employees 27% 46%↑ 24% 5%↓↓ 423
Other Services 31%↑↑ 42% 24% 4%↓↓ 482
Trade 29%↑↑ 44% 21%↓↓ 5%↓ 602
Transport & Comm. 26% 44% 27% 2%↓ 314
Banking/Insurance 22% 49%↑ 23% 4%↓ 189
Other Business Sers 18%↓↓ 45% 28% 10% 204
Other Financial Sers 14%↓↓ 22%↓↓ 46%↑↑ 18%↑↑ 100
Technical Services 11%↓↓ 35%↓ 28% 27%↑↑ 149
Software 6%↓↓ 33%↓↓ 44%↑↑ 18%↑↑ 110
All Firms 24% 42% 26% 7% 2,150

Notes:
1) ‘Wholly Standardised’ (WS) service providers – 535 firms that declared all of their
sales were due to ‘standardised services’.
‘Largely Standardised’ (LS) service providers – 900 firms which declared at least two
thirds, but less than all, of their sales were due to standardised services.
‘Bespoke’ (BS) service providers – 159 firms that declared more than a third of their sales
were due to ‘bespoke services’.
‘Customised’ (CU) service providers – 567 remaining firms, mainly those that earned a
relatively large proportion of their income from ‘partially customised’ services.
2) The arrow symbols indicate significant differences between the observed proportions
and those ‘expected’ if there were no difference between size classes and sectors in the
distribution of firms by ‘standardisation-particularisation’ classification. Upwards arrows
(↑) indicate the observed proportion was significantly greater than that ‘expected’, whilst
downward arrows (↓) indicate the observed proportion was significantly smaller than
expected. Single arrows indicate the significance was between 10 and 5%, and double
arrows indicate the significance w as between 0% and 5%.
Source: Hipp et al (2000)

21
• The propensity to innovate in Technical Services appears to have an unusually flat profile
across the size distribution of firms.29 Apart from the sector’s Wholly Standardised firms, the
smaller Technical Service firms are more likely to innovate than similarly sized firms in other
sectors. Large Technical Service firms are closer in terms of innovation to similarly sized
firms in other sectors.

We earlier discussed efforts – e.g. Gallouj and Sundbo (2000) - to classify services’ innovation
processes into a number of strategic types. Typically, the organisation of innovation within
services is reported to rarely involve the procedures and institutions typically described for (large
and/or science-intensive) manufacturing firms – that is, R&D departments and specialised
research mangers and management tools.30 Survey data can now also be brought to bear on the
structure of innovative efforts among services.31

Analysis of CIS-2 dataset for the UK indicates that services put proportionally more effort into
technology development activities other than R&D, than do manufacturing firms. Some service
sectors (close to the Italian “S&T services” group) do have very high R&D intensities, and are in
many respects similar to the hi-tech manufacturing sectors in this and some other ways. Thus,
R&D Services, Computer Services, and Business Activities are among the top sectors for total
technology spend, and also have unusually high expenditures on training, machinery and (with the
exception of Business Activities) on market introduction of innovations. Financial and other
information-processing services (including business services) emerge as major consumers of
“other external technology”, presumably largely a matter of software and related systems, and
associated with their high IT use.

Despite fairly high correlations between the various expenditures on technological innovation at
firm level, marked sectoral difference among these different categories are evident - see Table 2.

29
Similar results appear to apply in the UK CIS-2 survey results, in as yet unpublished work by Tether and
colleagues at CRIC, who are analysing the CIS-2 data set for the EC. Indeed, IT services seem to
display a negative relationship between propensity to innovate and size – a rare result indeed.
30
Sundbo, J, 1998, The Organisation of Innovation in Services Aldershot, Edward Elgar
31
Miles & Tomlinson (2000 ).

22
 Table 2 UK Services Technology Activities, CIS2 data (1997)

% of turnover (ordered by final column)

Innovation-related acquisition of: Market Total

R&D: Machinery Other Training introduct. Technol.

& external Of Innovation
Sector Intra- Extra-
mural mural equipment technoly. innovation Spend

73 Research & 24.60 3.24 6.87 0.81 0.65 7.08 46.86

Development
67 Aux.Financial 0.10 0.03 4.01 14.85 0.10 0.03 25.48
Intermediaries
71 Renting of 0.01 0.00 1.32 1.39 0.01 0.00 16.95
Machinery
74 Business 2.37 0.00 4.15 2.62 0.46 0.04 12.25
Activities
72 Computer & Rel. 6.40 0.25 1.56 0.66 0.57 0.54 12.19
Activities
37 Recycling 0.63 0.08 1.96 0.01 0.01 0.00 5.83

51 Wholesale 0.08 0.00 0.12 0.91 0.63 0.81 4.94

65 Financial 0.14 0.00 0.12 1.38 0.36 0.00 4.46

Intermediaries
66 Insurance & 0.00 0.00 0.16 2.51 0.04 0.02 3.85
Pensions
64 Post & 0.32 0.00 0.84 1.38 0.21 0.50 3.71
Telecomms
60 Land Transport 0.00 0.00 1.29 0.13 0.06 0.02 3.00
61 Water Transport 0.00 0.00 0.04 0.15 0.05 0.00 2.99
55 Hotels & 0.02 0.00 0.01 0.01 0.02 0.00 2.01
Restaurants
70 Real Estate 0.17 0.02 0.29 0.23 0.05 0.04 1.80

45 Construction 0.05 0.01 0.07 0.01 0.02 0.00 1.35

52 Retail 0.00 0.00 0.02 0.01 0.00 0.02 1.08

40 Electricity, Gas 0.04 0.01 0.37 0.08 0.00 0.00 0.85

and Water
62 Air Transport 0.03 0.00 0.02 0.03 0.01 0.10 0.67

50 Sale of Motor 0.04 0.00 0.00 0.25 0.01 0.00 0.57

Vehicles etc
41 Collection, 0.07 0.05 0.10 0.05 0.01 0.00 0.47
Purification
Entire Population, 0.73 0.05 1.25 0.58 0.15 0.30 6.75
inc. manufacturing

23
3 Innovation Systems and Agents
3.1 Systems

As with innovation studies more generally, the study of services innovation has been increasingly
concerned with the role of innovation networks and systems.32 The services innovation field is
evolving in much closer relation to the study of innovation in general (i.e. mainly manufacturing
innovation!), and is being seen as contributing to the development of a line of thought whose
theoretical and policy relevance continues to be “hot” (despite some efforts to dampen
enthusiasm). The recognition that innovations are typically produced in competitive
environments in which individual actors are examining the strategies of others, and using a range
of informational and other sources to inform and organise their innovative efforts was apparent in
Upachalanan’s study, cited above, for example. Associated with this recognition is the perception
that many innovations are essentially the result of collaborative activity, not just the efforts of
heroic entrepreneurs and inventors, or pioneering firms. Collaboration ranges from joint
ventures, through collaborative R&D projects, to joint efforts in setting standards and mobilising
the sociotechnical constituency required to bring an interdependent complex of innovations to
market at the same time.

Here it does seem possible to make some very crude and broad generalisations about services, as
follows:33
(1) Some producer services play extremely important roles as intermediaries in innovation
systems- especially technology-based services. We take up this theme in the next
subsection.

(2) Some services are well-networked into innovation systems, and may even play important
roles as orchestrators of innovation across supply chains (e.g. large supermarket chains
dictating the use of EDI, or of particular environmentally sensitive production methods, on
the part of their suppliers).

(3) But many services are not well-linked into the standard technology-oriented innovation
systems, and the main systemic impetus to innovation they receive may be a more or less
weak one coming from professional associations and similar network structures.

32
A recent collection that takes up this theme is Metcalfe & Miles (2000) op cit.
33
Cf. Miles, 1999, op cit.

24
The relatively poor articulation if many services into innovation systems may help to explain why
in some studies, and in some countries, the rates of innovation among services recorded in Oslo-
manual type surveys are typically lower than for manufacturing (though see below). Even while
we may dispute these indicators, features of many services (intangible products, knowledge- and
client-intensive production, etc.) may play a role But we argue that there is a general tendency
for services to become more like other sectors, however, in terms of innovative capacity and
effort. The historical tendency for many services to be supplier-driven innovative laggards may
nevertheless have generated a legacy that some firms in these sectors still have to overcome.

For example, in innovation systems terms, the institutional and informal structures that support
innovation may be poorly developed for services as compared to other sectors. The systems for
production of knowledge resources are typically less oriented to services – consider the Industrial
Research Associations, University departments and research groups, and scholarly journals
devoted to manufacturing and its sub-branches as compared to those aimed at services. Systems
for protection (and diffusion) of innovation-related knowledge are similarly manufacturing-
oriented.34

One source of evidence for the general assertion that services – other than innovative KIBS - are
poorly articulated into innovation systems comes from an analysis of the first round of the UK
(Technology) Foresight Programme in the 1990s.35 Roughly half of manufacturing firms were
involved in or aware of Foresight, but only a quarter of service firms, according to a survey study.
This sample is probably biased toward more innovative companies, and suggests that even
innovative service firms are only half as linked into Foresight as equivalent manufacturers. Of
actors involved in Foresight exercises, those services that were traditionally not technology-
intensive - though they are liable now to be making use of IT – seem to have more problems in
accessing technological expertise. Their technology vision is relatively short-term. In contrast,
highly IT-based services (e.g. Communications) are more like manufacturing in terms of their access
to innovation systems. Those reliant on motor power and other traditional technologies
(Construction and Transport) display a mixed pattern - Transport appears to be relatively well-

34
Miles et al (2000); Andersen & Howells (1998).
35
Miles (1999).

25
networked, while Construction appears more disarticulated (corresponding to familiar complaints
about the sector).36

Even Knowledge-Intensive Business Services (KIBS) may not universally be well-linked into
innovation networks. New technology based KIBS are liable to differ from more traditional
firms, as evidence from a UK survey of three types of KIBS seems to bear out Table 3 (based
upon a small sample, admittedly) shows accountants to be less well-linked to other sorts of
organisations than the more technologically-oriented KIBS. The exception is in terms of links to
professional/trade associations, which play a vital role in legitimising and quality controlling the
profession (similarly for architects). (The low links to Universities are particularly notable in the
light of a comment frequently heard from academics, that in this sector it is the University
accountancy departments who tend to generate innovation rather than the practitioners! On the
other hand, some practitioners seem fairly loath to source employees from accountancy
departments…). Larger firms, predictably, appear better networked than smaller ones.

The really large service firms, in many sectors, do play important roles as orchestrators of
innovation in their supply chains – driving innovations in manufacturing (e.g. railway companies
shape the activities of the suppliers of locomotives and carriages), in IT systems (banks shape
ATM and network hardware and software), and agriculture and forestry (food and furniture
retailers have influence on the environmental practices of farmers and wood suppliers, as well as
on the food manufacturing sectors). Some highly interesting analyses of the interplay of
supermarkets, biotechnology companies, food manufacturers and others, in the divergent courses
of development of genetically modified tomato products, has recently been forthcoming from
Mark Harvey.37

The analysis of services location in innovation systems has begun, but requires much more
development.38 If many services are, for whatever reason, disarticulated from key elements of the
national innovation system, they will often lack access to knowledge, human resources, and
networks to help guide their use and creation of new technologies and organisational practices.
This structural problem may contribute to lower rates of innovation, which would otherwise be

36
There is of course a mixture of manufacturing and other non-service firms in these groups.
37
Harvey (1999); a book on The Tomato by Harvey, Beynon and Quilley is awaited with relish.
38
Cf. Hauknes (2000).

26
expected to converge more rapidly with those of other sectors as their technology-intensity
increases. We may expect policy interventions and spontaneous network development in the
future: and thus, probably, an accelerated rate of services innovation.

3.2 Agents of Innovation

The term KIBS is of uncertain origin, but it has come into widespread use since the 1995 EIMS
study,39 which specified that these services played important roles in innovation systems. It has
been long established that these are among the most, if not the most, intensive adopters of new
IT: they are leading users of innovation from other sectors, and as vanguard users of highly
configurable technologies they have played important roles as pioneering agents in the shaping of
IT software and systems. They can be sources of innovation, generating new knowledge, as in
contract R&D services. Furthermore they can be agents of innovation, playing critical roles in
the processes somewhat misleadingly known as technology transfer (and the parallel transfer of
techniques and other organisational innovations). In other words, the issue is not just how far
these services are themselves innovative, but also whether KIBS are critical for innovation in
manufacturing and other industries! From being portrayed as at best lagging elements or
peripheral outposts in innovation systems, such services are now recognised as being able to
perform important roles as intermediaries and nodes in such systems.

Such services’ roles in facilitating innovation across the economy have been until recently
neglected by innovation studies.40 Contract R&D services form a particularly dramatic example,
having received very little attention, even though they now account for a considerable share of
industrial R&D. In a rare study of these services, Howells41 has suggested that their role is
evolving both quantitatively and qualitatively. Not only are they becoming more numerous and
active, as more users outsource R&D requirements. Their role is becoming more strategic,
moving from very simple lab testing and basic technical functions to far more active involvement
in technical specification and design; indeed, there are cases of such firms taking the lead in
defining product innovations, and then mobilising a constituency of manufacturers and retailers to
realise the innovation.

39
Miles et al (1995).
40
An exception in the technology transfer literature is Bessant & Rush (2000).
41
Howells (1999).

27
 Table 3 Institutional Links of Three Types of KIBS in the UK

Responses to the question: “In addition to clients and suppliers, which of the following types of
organisation do you interact with to gain knowledge?”
(percentages citing each type)

Accountants Architects Engineers

University/higher education institutes
No.of employees: "1-14" 20.0 42.3 78.7
"15-49" 11.5 42.1 81.3
"50+" employees in branch 33.3 66.7 95.0
A similar company (to respondent’s own)
No. of employees: "1-14" 60.0 53.8 71.4
"15-49" 34.6 36.8 68.8
"50+" employees in branch 33.3 50.0 65.0
Professional/Trade Associations
No. of employees: "1-14" 80.0 96.2 50.0
"15-49" 100.0 100.0 87.5
"50+" employees in branch 100.0 100.0 95.0
Government Sponsored Organisations or Programmes
No. of employees: "1-14" 30.0 34.6 50.0
"15-49" 38.5 52.6 68.8
"50+" employees in branch 46.7 66.7 75.0
Consultants
No. of employees: "1-14" 60.0 84.6 64.3
"15-49" 80.8 94.7 75.0
"50+" employees in branch 66.7 100.0 80.0

28
But many other services – including the much-maligned management consultancies, alongside
such obvious candidates as IT facilities management, training, engineering, and design services –
also play important roles in supporting the selection and implementation of new technologies by
their clients. Den Hertog points out that often they are more than stores of knowledge about
available technologies and their use, though the roles of locating, selecting and translating
knowledge resources can be vital ones.42 As well as being “ carriers” of innovation, some KIBS
facilitate innovation processes within companies by helping to confront organisational and
cognitive barriers to change. Some KIBS go further in terms of coproducing innovations with
their clients. This can range from helping achieve a fusion of industry- or firm- specific
knowledge with more generic knowledge (about the characteristics of technological solutions to
problems such as those confronted by the clients), to actually generating new knowledge in areas
such as environmental impacts of industrial wastes, properties of materials, software for virtual
reality and other advanced IT applications, and so on. (Parallel social knowledge is, perhaps,
generated by some market research and marketing companies.)

The e-commerce field is a particularly interesting example. Here, KIBS play roles ranging from
aesthetic design to creation of leading-edge software, from helping to configure in-house
databases with standard frameworks of representation of trade data to managing and maintaining
fileservers and interactive interfaces that are pushing at the limits of available technology.43
(Again, the role that other services can play in contributing to innovation and diffusion across the
economy – a role supposedly reserved for manufacturing industry – is illuminated by e-
commerce. Just as motor car manufacturers have notoriously brought their component suppliers
into an electronic supply chain, large retailers have prompted their suppliers of consumer goods
(and their own intermediate requirements) into dealing with them through online networks. It is
thus not uncommon for a supply chain that is ultimately providing such consumer goods as
foodstuffs or household consumables, to be turned into a network governed by Electronic Data
Interchange or similar media of e-commerce, typically a “hub-spoke” models of electronic
trading driven by a service industry, and extending across many other sectors.).

42
Den Hertog (2000); den Hertog, & Bilderbeek (2000).
43
Ettore Bolisani has made important contributions to analysing this particular innovation system in a
“knowledge” perspective: see for example Bolisani et al (1999).

29
Den Hertog, like Bolisani, examines KIBS in terms of a Nonaka-like model of knowledge
processing. But beyond the intriguing development of classifications of different types of
knowledge-related activity, he and his colleagues go on to suggest that we need to think of KIBS
in terms of more than just being interesting agents of innovation, or even as crucial bridges in
innovation systems. The argument is that KIBS are gradually evolving into a second knowledge
infrastructure, partially complementing and partially displacing the intermediary roles traditionally
played by the more institutionalised, knowledge infrastructure of government labs, RTOs and HEIs.
They hypothesise that the traditional distinction between public and private knowledge-based
(advisory) services will gradually erode.

4 Conclusions

Research on services, and research on services innovation, has become a lively area, with
fragmented lines of enquiry coming together and conventional wisdom challenged. The diversity
of services, of their innovation processes, of their roles in innovation systems, is beginning to be
acknowledged and explored. Services innovation research is increasingly articulated into the
broader trends in innovation studies, and its challenges to some of the mainstream assumptions
and instruments are being accepted – or at least debated. We briefly examine some of the
implications.

4.1 Measurement

Much of the literature on services innovation has stressed its distinctiveness. Case study work
has often stressed its unusual features as compared to received accounts of innovation patterns
and dynamics based on the study of manufacturing firms. So far innovation survey research,
however, has demonstrated many points of similarity, and only a few points of divergence,
between innovation in services and in other sectors.

One possibility is that the surveys to date have not adequately managed to address the
distinguishing features of services innovation. They have thus underestimated the extent of
novelty, elided the new patterns that more sensitive tools could reveal. The survey instruments
inadvertently stress the sectors’ similarities. They fail to reflect their points of difference –

30
simply because the indicators employed do not really address these points (e.g. the extent of
interactivity, or “delivery” innovations).

Innovation surveys – and enquires more generally – might do well to examine some of the
features attributed to services innovation a little more closely. The service relationship as a site
of innovation has been poorly addressed. Even delivery innovations, of such importance across a
wide spectrum of services, are hard to capture in a product/process enquiry. And the innovations
can span relationships with suppliers and collaborators as well as with clients and the objects of
marketing efforts. (This underlies much of the interest in supply chain management, external
knowledge management, e-business, and e-commerce.) Similarly, we need to address the
specific features associated with the regulatory context, the intangibility of many products, IPR
regimes, and so on.

But are these specific features of service sectors – or, rather, aspects of (or areas for) innovation
that are neglected more generally? In many respects all sectors are acquiring similar
characteristics, as they mutate away from their traditional forms – the adoption of new IT and of
various new management styles is token of this. Innovation in manufacturing and in services does
not necessarily have to be sharply demarcated:

• The features of innovation that characterise service firms often characterise services
functions in manufacturing industries. (We noted above that service firms are less likely to
organise their innovative efforts through the institutions of R&D departments and research
mangers which have been often described for (large and/or science-intensive) manufacturing
firms. The organisation of innovation of “service” functions in manufacturing and
extractive sectors – functions like distribution, management of transactions, marketing,
design, etc. – has also typically not fallen within the ambit of conventional R&D
departments, with their emphases on very narrowly defined product and process innovation.
Indeed, the managers often think of innovation in such functions not n terms of “R&D” and
rather as “project development”, quality management, or “business re-engineering”. Yet it
is likely that innovation in such activities is an increasingly prominent feature of innovative
efforts more generally – as the point about e-business makes clear.

• Furthermore, as more managers in all sectors repeat the litany that what they are really
doing is providing customers with services, we can expect such an emphasis to grow. We
have argued elsewhere that in many respects, the features of manufacturing and service

31
 processes are increasingly convergent. If correct, this suggests that a good deal of innovation
is poorly captured by traditional instruments. We should move beyond the polarised
assertions that there is either nothing new about services innovation, or that its study requires
a complete rethink of the established wisdom, to consider how innovation dynamics are best
grasped across all sectors.

4.2 Substantive Research Issues

The Services Innovation Manifesto light-heartedly introduced at the beginning of this paper is an
invitation to help construct and operationalise an agenda for research. Among the lines of
research suggested by the review above we wish to highlight:
The scope for further establishing and validating taxonomies of (service) innovators,
innovations, and innovation processes. While IT-related innovations are central to most
services, it is important to consider the diversity of such innovations and the various
trajectories that are developed, and to examine non-IT technological innovations.
Organisational innovations cry out for more systematic analysis.

The need for better understanding of service relationships and innovation processes. The
processes of interaction between service supplier and client vary across different classes of
service and specific transactions. But they are also dynamic, and there has been very little
examination of the deployment of different competences and actors across the course of an
innovation-related service transaction.44 From the perspective of KIBS firms, we could
examine the ways in which the requirements and likely behaviour patterns of “end-users” are
identified and/or constructed, and the role this plays in shaping services innovation.

The mobilisation and interaction of numerous service suppliers around major projects. The
innovation process in such cases is likely to be a series of related innovation processes,
undertaken in a whole system of innovating agents. This sort of “distributed innovation
process”, to borrow Rod Coombs’ term, is common in many large and complex activities –
such as the introduction of e-commerce systems (and the sorts of online financial service
described by Upachalanan), in the environmental and engineering dimensions of major

44
DPhil research being undertaken by Tanat Dhiensiri at PREST is unpiecing the interplay of a range of
service actors – primary, strategic, and situational agents – in the course of the transfer of water
treatment technology to Thai firms. He uncovers a changing pattern of knowledge resources and flows
over five stages of the transfer process.

32
 projects (e.g. in construction activities), and in many public service arenas such as health
services.

The organisation of innovation in (different types of) services. Despite reservations about
generalising about services, the typical structures of service innovation clearly do not follow
those depicted for manufacturing innovators. (Though these accounts may equally not apply
to many manufacturing firms, or the treatment of service innovation within such firms.).
Despite some recent studies examining these themes, we have very limited knowledge of the
strategies being pursued, and the structural and other factors that are behind these. The
issues of knowledge management and protection of IPR are also raised here.

If the hypothesis of KIBS forming a second knowledge infrastructure is correct, then this
suggests major changes in innovation systems. Among topics to be investigates are the
internationalisation of KIBS, the uneven development of these services in sectoral and
geographical terms, the public interest issues related to the privatisation of knowledge and
the reduction of some public good activities that may ensue, and the challenges to public
sector knowledge services.

Given the growth of services and their importance in the economy, and the maturation of services
innovation studies, we anticipate that these studies will increasingly be related to, and by, the
mainstream innovation literature. The same may happen to the more fragmented studies of
specific types of services innovation – e-commerce , engineering services, logistics, knowledge
management, and others around which a specialised literature (often involving practitioners,
software engineers, etc.) has grown.

What is important is that the integration of services innovation themes into the broader field – and
the adoption of instruments and tools from innovation studies into the services field – does not
take place solely within the frameworks of mainstream innovation studies. The specific and
sometimes novel features and trajectories of innovation in service firms and functions need to be
recognised. Certainly services innovation studies can benefit from more use of the sorts of survey
instruments and managerial models developed in manufacturing innovation studies. But studies
of innovation in service firms, and in the service components of the manufacturing economy, can
learn from the specific contributions made by services innovation researchers. The
“reconfiguration of innovation studies” which our title announces is, we believe, underway. It
involves a continuing expansion of the dialogue that has already begun between specialists in

33
services and what we have referred to above as the “mainstream”. It will result in a richer
analysis of innovation processes, and allow the questions posed above to be examined free of - at
least some of - the preconceptions that have so long dogged the field.

34
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