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Managing Innovation in Services JAMES BRIAN QUINN AND BRUCE R. GUILE Short of cash for a movie and dinner out a New Yorker stops at an automatic teller machine to make a cash withdrawal on Saturday eve- ning before going on to the theater. At 11:00 p.m. a California resident calls the catalog department of a store in Maine and orders, for express delivery to his house two days later, an item at a total price not much different from the price he would pay at a local department store. An automobile mechanic stands at a computer terminal in the service bay, checks a data base catalog concerning the car currently on the lift, confirms that the local wholesaler has the necessary replacement parts, and orders the parts all without leaving the service bay. An executive from Spain travels for an annual checkup to a medical facility in Cleveland, Ohio-the city's largest private employer, draw- ing 6 percent of its customers and 10 percent of its revenues from foreign patients. The trading day closes on an average day at the New York Stock Exchange 250 million shares changed hands. The reconciliation proc- ess documenting trades, accounting for securities documents, ver- ifying values the exchange process has set-continues into the evening and by morning of the next day the process begins all over again. Services today account for 70 to 75 percent of all economic activity in the United States, and large services industries such as communications, transportation, health care, financial, and professional services have become capital intensive and technology based. As the chapters in this volume dem

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2 JAILIES BRIAN QUINN AND BR UCE R. GUILE onstrate, innovation is crucial to success in the services industries and is in many ways similar to innovation in goods industries. Like the floor of a manufacturing plant, the teller floors of a bank may be considered, at the most basic level, production centers amenable to process and productivity improvements through careful application of new technol- ogies. And just like a new household appliance, machine tool, or aircraft- a new commercial data base, kidney dialysis procedure, or communication service can be an extremely advanced product technologically. All these products goods and services-pass through similar processes of invention, development, design, packaging, testing for customer acceptance, justifi- cation in the user's environment, distribution, diffusion, upgrading, and post . . sa. .e servicing. The chapters in this volume illustrate that many of the principles that have proved so essential to innovation management in product or manufacturing environments are equally important in services. Among these are (1) devel- oping a clear vision of the technological need in an atmosphere that tolerates the false starts, failures, and experimentation necessary to develop new tech- nologies; (2) maintaining a close interactive relationship between developers and users of innovation; (3) designing in an integrated fashion for both productivity efficiencies and quality of output; (4) utilizing multiple ap- proaches (or parallel development) to improve the quality of technological solutions, team motivation, and the probability of ultimate success; (5) keep- ing innovative organizations small scale, flat, and open to new ideas; (6) developing a high degree of internal technical expertise to participate in and evaluate potential solutions; (7) creating strong external linkages to both domestic and foreign sources of technological expertise such as suppliers and universities; (8) empowering champions or championing teams to drive the innovation process; (9) maintaining the continuity, balance, and enthu- siasm of the innovating team; (10) providing the patient, long-term (3 to 5 year) support that technological innovations require; and (11) not over-man- aging technological innovations with detailed, rigid, progress plans, but being willing to move incrementally and opportunistically as problems and oppor- tunities emerge. Increasingly, managers in services industries must understand the inno- vation process and learn to manage technological development with a balance of insight, analysis, and instinct. The chapters provide some useful examples of how successful services enterprises such as AT&T, Federal Express, Citicorp, Bell & Howell, and the New York Stock Exchange have proceeded. NEW PRODUCTS AND PROCESSES The chapter by Carl Nehls describes the development and implementation of Federal Express's COSMOS IIB system that allows tracking of packages

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MANAGING INNOVATION IN SERVICES from pick-up through delivery. The system, developed over 7 years, has elements of both product innovation and process innovation. From a product innovation perspective, COSMOS IIB allows Federal Express to offer cus- tomers real-time, precise information about the location of a package anytime between pick-up and delivery. As a production process innovation, electronic custodial tracking substantially increases Federal Express's ability to control and transport packages efficiently. In addition, COSMOS JIB's systematic collection and electronic encoding of data also allow virtually real-time ef- ficiency analyses of Federal Express's entire transport operation. In short, product and process innovations are often linked in services. An appreciation of both aspects is crucial for effective management of innovation and the financial evaluation of an innovation's outcome. The chapter by Paul Glaser raises a similar set of issues. In the case of Citicorp's development of automated teller machines (ATMs), the product is the teller-client transaction the exchange of money or financial documents relating to personal or business finance. ATMs provided a process innovation that changes the nature of the company's product delivery system making the product available at more hours and locations with more predictable waiting times for users than a human teller system allowed. Particularly noteworthy in organizational terms was Citicorp's decision during the 1970s to establish a wholly owned subsidiary to develop the technology. As part of the pervasive mythology about services, one does not normally think of banks as having a substantial internal technological capability. But in Citi- corp's case the development of this capability was obviously a key element . . . . In its innovative success. In their chapter Frederick Fellowes and Donald Frey describe a classic challenge in business technology keeping (or expanding) a market in light of changing demands and product technologies. Threatened by other firms in the microfiche publishing business and by new entrants offering catalog data bases, Bell & Howell reevaluated its entire approach to the automotive parts catalog publishing business. In the process the company discovered how a properly conceived system could provide significant efficiency im- provements in automobile repair operations. Much of the hardware needed for the new system was "off the shelf." In this case the heart of the story is not the development of a new widget, but the company's persistent and iterative efforts to understand its customers' activities and to offer a system that could be tailored to, and justified in, the customer's business environ- ment. As in many cases of technological development, initial expectations about what the new technology could offer were incorrect. It took both patience and serendipity to discover exactly what kind of system would add substantial value to automobile repair operations and thus justify the custom- ers' purchase of Bell & Howell's parts catalog in electronic form rather than on microfiche or paper.

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4 JA]IES BRIAN QUINN AND BRUCE R. GUILE Express package delivery, retail banking, and automotive repair involve relatively concrete production processes. At one level, the same is true for a stock exchange. Connecting buyers and sellers, verifying and documenting trades, and handling or storing securities are processes that can be charac- terized as production activities centered on transactions. Christopher Keith and Allan Grody describe the incremental process of innovation at the New York Stock Exchange spanning more than 100 years from the Morse code ticker to modern program trading. Process innovations often occurred in response to pressures for more Exchange capacity, which when achieved generally led to new "product" or services innovations, which in turn created dramatic increases in demand. Keith and Grody note, however, that an exchange if its market processes are operating properly- creates another important product that is not directly related to the production aspects of executing transactions, an exchange is a mechanism for determining value. The NYSE, in particular, occupies a central position in determining stock values, and through the Dow-Jones averages provides an important measure of the health of the U.S. economy and its relationship to other global financial systems. The importance of worldwide knowledge about, and confidence in, the quality and reliability of the services of the NYSE forces technological innovation at the Exchange to be a paradigm of innovation in a fish bowl. Mistakes (almost inevitable in any development process) can be very costly and visible; hence, new processes are carefully scrutinized by a variety of interested parties, both on the Exchange and at more distant vantage points. Based on their confidence in the NYSE's system, parties will participate or take their business elsewhere. Witness the attention paid to some of the unexpected impacts of program trading that showed up in the market crash of October 1987 and the reluctance of individuals to return to the market later. The degree of risk and the public's interest in its systems forces a degree of conservatism and incrementalism in innovation at the NYSE that might seem overly cautious in other environments but is probably essential given the character of the Exchange. The chapter by Richard Larson takes a different view of innovations affecting service production processes. Larson focuses on a technology- the technology of operations research and examines its application to three functional areas in a variety of service businesses. The chapter pro- vides examples of operations research applications in logistics, work force planning, and services related to goods production. Larson examines these problems both as technical and investment decisions, providing infor- mation about returns on investment as well as the complexities of imple- menting solutions in a services environment. Operations research (OR) is an example of a "soft" technology of great importance, the widespread application of which is intimately coupled with the diffusion of the com- puting capability necessary for many applications. Larson's review of

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MANAGING INNOVATION IN SERVICES - Ssuccessful OR applications some yielding very impressive returns on investment is very provocative and suggests the range and potential payoffs of unexploited opportunities for this technology in virtually every service environment. STRATEGY, STRUCTURE, AND TECHNOLOGY The five chapters discussed above deal mostly with specific technological innovations. The remaining chapters deal more with the development and organization of entire services industries and their relationship to other policy parameters rather than with the application of a particular technology in one organization. The chapter by John Davis details the emergence of the cellular telephone industry in the United States and illustrates the long time horizons (15 years) and huge investments (hundreds of millions of dollars) necessary for innovation in the large services industries. In the cellular tele- phone industry the government's regulation of telephone service providers and its allocation of the available frequency spectrum dramatically shaped the development of this industry in the United States and the world. But the issues raised by Davis's analysis are not unique to cellular telephone service. Other services industries are among the most regulated industries worldwide. The financial, transportation, and communications industries in particular are subject to a type and amount of regulation not usually applied to goods industries. Although there are often good reasons for regulation in these industries, the fact that another layer of complexity is added to decision processes affecting innovation often slows and changes technological intro- ductions, with profound competitive effects. In these industries, innovation is not likely to be helped by abolishing regulation everyone would lose if the frequency spectrum fell into chaos for lack of orderly allocation or in- terconnect standards. But, as the Davis chapter illustrates, there may be substantial opportunities for improving technical innovation by enhancing the responsiveness of regulatory processes. Juan Murillo's review of the evolution of bridge construction and design in Europe and the United States bears some similarities to the development of cellular telephone service. In the case of bridges the government affects innovation primarily through its standard setting and procurement pro- cesses' Virtually all bridges are bought by governments and, as public works, these must meet strict cost, safety, and durability criteria as defined by public policy processes. Procurement practices and liability concerns have combined with outmoded standard setting practices to erode seriously providers' ability to innovate. In particular, the requirement that design and construction be provided by separate firms has had a dampening effect on both design and construction innovation. Technological advance is important to this industry, and the most important opportunities for im

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6 JA]IES BRIAN QUINN AIMED BRUCE R. GUILE proving the technology used in U.S. bridge design and construction may lie in changing government procurement practices in ways that encourage more experimentation, backed by professional testing facilities that are credible to all parties. Murillo also notes the high costs that are incurred for the industry and the nation as a result of failure to deal with highly litigious participants. The chapter by Thomas Doorley, Alison Gregg, and Christopher Gagnon examines the implications of information technology for a number of profes- sional services firms. The chapter provides data not available elsewhere on professional services firms and shows how professional firms' strategies, market positionings, and organization practices can affect (and be affected by) new technology developments. Particularly interesting is the observation that there are few economies of scale for firms in professional services, thus suggesting why applications of computer and information technologies do not show expected productivity returns in professional services. Much of the benefit from investigating technology in professional services industries shows up as quality improvements or increased services flexibilities, not measured in national productivity statistics. The chapter moves beyond that argument, however, to suggest how the activities of professional services firms can be segmented by functions so that one can analyze where "value added" or "productivity improvement" potentials can be most attractive for the appli- cation of new information technologies. The chapter concludes with an anal- ysis of the barriers to effective implementation of information technologies in professional services firms, particularly noting how the partnership struc- tures, which most professional services firms use, exacerbate problems in implementing technological change. The introductory chapter by James Brian Quinn summarizes some mea- sures of the importance of technology in the services industries broadly and then focuses on the particular interactions between services and manufac- turing. It notes that some 75 percent of most manufacturers' internal costs and external purchases are for services activities. By using the new services technologies available, manufacturers can significantly decrease their costs and enhance their own value added Quinn posits that the successful man- ufacturers of the future will be those who most effectively integrate flexible manufacturing systems and services technologies. The chapter suggests how technological advances in services have already forced major changes in the entire world economic order and, more particularly, in the structure of U.S. industry. It poses that integrated use of services and manufacturing tech- nologies may already be leading to the "remanufacturing of the United States." The chapter demonstrates a variety of ways in which services tech- nologies have created specific opportunities for increased competitiveness both in the services industries and at the interface with manufacturing. It presents a structure for looking at these relationships in new ways, a series

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MANAGING INNOVATION IN SERVICES 7 of concrete examples of significant applications, and macroeconomic data about the benefits this interrelationship has offered. SUMMARY AND CONCLUSIONS Virtually every technological advance of the modern age is applied in services industries. Advances in communications and computing, medical care and delivery, transportation systems, energy production, and pollution control are all applied in or central to the development of services industries. The chapters in this volume illustrate several important lessons about man- aging innovation in services. At the level of the production process, the chapters by Nehls, Glaser, Keith and Grody, and Fellowes and Frey illustrate that many innovations in services involve an intimate combination of both product and process tech- nologies. These cases (especially those by Keith and Grody, Glaser, and Nehls) dispel any remaining myths about services and services-oriented busi- nesses not needing their own in-house technical personnel, and in some cases, R&D capability. The core competencies of successful services firms will increasingly have to include a substantive ability to invent and apply tech- nologies. No small part of this competency, of course, will be the ability to work effectively with highly sophisticated technological suppliers and with both technologically sophisticated and unsophisticated customers. Many ser- vices firms now perform the role of systems integrators designing, imple- menting, and operating sophisticated information, transportation, distribution, or financial systems that integrate the activities of geographically dispersed and highly diverse customers and suppliers. Effective competition, and the company's ability to add value in this environment, will increasingly depend on the engineering and technological management the company can bring to bear throughout its system. At the industry level, the chapters by Murillo, Keith and Grody, Davis, Doorley et al., and Quinn help a reader understand how changing business structures often pose major new strategic threats and opportunities for ex- ecutives and regulators. From these chapters one can conclude that successful exploitation of the new services technologies will require development of an array of new organizational forms and relationships-including new coalition modes, government-industry consortia, cross-industry competition, disinter- mediation possibilities and moves to transactional and functional (versus industry) regulation modes. All this will create exciting new challenges for managers in services, manufacturing, and the professions over the next de- cades. This volume demonstrates in detail that services are a technologically dynamic portion of the U.S. economy and implicitly argues that a new set

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JAMES BRIAN QUINN AND BRUCE R. GUILE of assumptions should exist in policy debates: that significant opportunities exist for improving U.S. economic performance through intelligent and sys- tematic application of advanced technologies in the services industries and at the services-manufacturing interface. A companion volume to this book- Technology in Services: Policies for Growth, Trade, and Employment- focuses on the public policy questions that affect services industry growth and performance.