Policy Brief No. 3: Policies in Support of Service Innovation

Objectives and scope

This policy brief explores whether and in what ways innovation policy can contribute to the beneficial development of an innovative services industry in Europe, thereby contributing to growth and, ultimately, well-being. The focus on services recognises the economic importance of this industry for employment and growth in developed economies, where service sectors (i) typically account for about 70-80% of GDP and (ii) have been a major source of growth in the past decades (Sections 1.1 and 1.2). Against this background, the policy brief is rooted in the belief that further innovation in services can make important contributions to achieving the objectives of the Europe 2020 strategy to attain “smart, sustainable and inclusive growth”, i.e. enable economic growth without compromising environmental and social objectives.

The policy brief provides practical examples and evidence of the role policy can play (or should play) to enable and encourage innovation in services. The analysis concentrates on those sectors that are specified in the NACE Rev. 2 classification of business activities as Divisions G-U (Section 2.1.1). This comprises a heterogeneous group of business activities, including wholesale and retail services, business services, education and health services. The study team is aware of the conceptual challenge this definition implies, as “services” are also a very important competitive factor in manufacturing (for instance the provision of maintenance services after machinery has been sold). Even if the framework chosen for this policy brief and the examples presented do not explicitly take into consideration the services part of manufacturing, a large share of the presented evidence and conclusions drawn can easily be applied to this area of “services” as well. The policy brief does not address innovation in public services, as there will be another policy brief specifically analysing this area.

The brief begins with a discussion of the specific characteristics of the service industry and innovation in services and identifies the main drivers and barriers for service innovation (Section 3). It then presents the empirical evidence the study team has collected. First, specific innovation policies in support of services in place in different countries are introduced (top-down view, Sections 4.2-4.3); second, six case studies of innovative service companies from different sectors are presented. The study team has specifically explored the critical success factors for their innovation and the role which policy has played in enabling the innovations – the case evidence in Section 4.4 summarises this evidence. From a combined view of the policy and case study evidence, the policy brief draws conclusions about new developments in service innovation (Section 5.1) and makes recommendations about how these could be reflected in policy measures (Section 5.2). In this context, specific attention is paid to the role of European policy, while also highlighting at implications for national and regional innovation policy.
 

Drivers and barriers for service innovation

The policy brief identified the following drivers and barriers for service innovation. Policies that aim to further improve the framework conditions for service innovation can either concentrate on leveraging drivers (strength-oriented approach) or aim to address barriers and mitigate them as much as possible (weakness-oriented approach) – Section 3.4.
 

Examples of current policies in support of service innovation

Very few programmes or other initiatives in EU Member States explicitly address service innovation (Section 4.2).

Denmark: The Danish Innovation Strategy 2010-2013 contains references to services and the established ICE project (Innovation, Customers, Employees) has been providing a service innovation awareness raising function by publishing reports and articles in the field of service innovation. In an effort to promote service innovation, the Servicesinnovation 2011 conference was jointly organised by the Ministry of Science, the Council for Technology and Innovation and the Innovation Network Service Platform.

Finland: The SERVE programme has been promoting innovation in services companies since 2006. The focus has shifted from supporting existing and promising services companies to supporting new companies that are seen as pioneers on the market. The new Tekes Strategy, published in 2011, strives to rejuvenate Finnish industries by focusing both on new enterprises and forerunners. This new strategy focuses on areas in which the services sector can play a crucial role (natural resources and sustainable economy; vitality of people; intelligent environments; business in global value networks, added value by solution-based services and intangible concepts, renewing services and production by digital means).

Netherlands: The Programme for Reducing Businesses’ Regulatory Burden 2011-2015 attempts to diminish regulatory and administrative burdens that hamper business. This should positively affect service innovation activity. Moreover, the Ministry of Economic Affairs, Agriculture and Innovation has announced the so-called “Top Areas” policy strategy which focuses exclusively on nine economic sectors, including services sectors such as logistics and energy.

Sweden: The Swedish government has recently addressed service innovation, apart from using public procurement as a demand-side instrument to drive innovation: the strategy of the Swedish Competition Authority and its Direction for Procurement Issues addressed innovation procurement in 2007. This contributed, for example, to the procurement of innovative services in the energy sector.

Germany: Since 2008, Germany has placed more emphasis on the support for service innovation. The High-Tech Strategy 2020 focuses on several service sectors. The “Innovation with Services” programme, launched in 2008, provides funding of up to € 15 million per year for the service sector.

Asian countries: Asian countries often focus their efforts on the ICT-sector, leaving room for service innovation improvements in other domains. India, China and South Korea have recently devoted more attention to service sectors, however. Indian service sector reforms led not only to a perceptible improvement of productivity, but also to the enhanced performance of downstream manufacturing industries.
 

Case studies of innovative service companies

The case studies of innovative service companies, including large players and SMEs (Section 4.4) identified the following success factors for the innovations these companies introduced:

1. leadership that is committed to enhancing the innovation culture which can be promoted by the involvement of young employees in the decision-making process (see, for instance, Infosys);
2. concentration on and anticipation of customer needs in fields that have not yet been exploited (see, for instance, Asthmapolis);
3. learning by example: consider both successful and less successful examples, because continuous service innovation requires a persistent learning process (e.g. Webvan’s failure with respect to the importance of the incorporation of local circumstances and customer needs);
4. make use of internal sources of information: to facilitate internationalisation, innovation teams consisting of people from different regions or backgrounds can be an effective means for finding strategies to deal with cultural differences (e.g. Banco Santander).

The case studies are also proof of the heterogeneous character of service innovation and the different barriers to innovation that result from this. The policy brief concludes from this evidence that policy should focus mainly on addressing persistent barriers to service innovation in a more dedicated way, rather than aiming to support specific innovation activities in individual companies. The main conclusions and lessons learned from each of the service innovation case studies are:

Vattenfall (product, process and organisational innovation): R&D had an indirect effect on service innovation through the introduction of smart metering. This led to a more sustainable and reliable energy supply well aligned with customer needs. The case demonstrates the enabling role of ICT as a solid driver of service innovation. The Swedish public sector recognised the importance of public procurement as a demand-side tool to gear innovation towards sustainable growth objectives.

Infosys (process and organisational innovation): the objective of a new and integrated service delivery required a significant change of business model by creating a global delivery business model. This can be considered an organisational innovation. Since it was easily imitated, Infosys was required to further develop it, indicating that one of the relevant drivers of the service innovation is adaptive capacity.

Banco Santander (process, marketing and organisational innovation): due to the nature of financial services that can be easily adopted by others, permanent service and product innovation are needed in order to have the chance to utilise the white spaces in customers’ needs. As a consequence, one of the most important drivers of service innovation is deep knowledge of customer needs.

Netrisk.hu (process, marketing and organisational innovation): the Hungarian online insurance broker combines elements of product and process innovation: a new distribution channel (the internet) and a new logic for making choices about insurance products were combined to provide a better market overview and access to an already existing service. The innovation depended on the “e-readiness” of society (critical mass of internet users, e-skills, ICT infrastructure).

Quanta Computer (process and organisational innovation): smart logistics service innovation safeguarded a better embeddedness in the logistics hub of Taiwanese ICT firms.

Asthmapolis (product and process innovation): the main driver was the ICT-based open service innovation which provides a way for the public health system to procure and drive innovation from the demand side as well as for future service innovation in health care services.
 

Strategic responses for future innovation policy

The main conclusion of this policy brief is that the best way to encourage innovation in services is by removing (or at least reducing) identified barriers to service innovation as well as to the related policy design, and by creating optimal framework conditions for innovation, rather than introducing direct support measures for companies or other specific programmes for innovation in services. In particular, innovation policy at the European level should concentrate on optimising the framework conditions for service innovation. This cannot be achieved by innovation policy (in the narrow sense) on its own, but will inevitably require a coordinated approach involving different policy domains such as economic, competition, education, labour and social policy (Section 5).

This recommendation is linked with the basic observation that service innovation has a horizontal character which cannot simply be captured by focusing on R&D activities. With a view to the role of the European Commission, this implies that different EC services would have to get involved to further improve the framework conditions for service innovation. The policy brief makes the following recommendations to the Commission and Member States:
 

Recommendations addressed to European Policy (Section 5.2.1):

• Set specific objectives and targets for service innovation (as a means to encourage the debate and steer efforts in the right direction)
• Raise awareness: be a messenger of best practice and communicate the importance of service innovation
• Strengthen cooperation between different EC services responsible for regional as well as enterprise and industry policies to promote service innovation through the use of EU Structural Funds
• Consider innovative ways to ensure IP protection in online services
• Improve the statistical base for policy making: policy needs more and better comparable data about service sectors and service innovation
   

Recommendations addressed to Member States (Section 5.2.2):

• Increase efforts at carrying out evaluations of innovation programmes

• Promote collaborative research and innovation networks

• Contribute to the fulfilment of normative requirements for good governance with regard to service innovation

• Take into account the importance of the economic policy framework

• Apply regulation where needed and use public procurement to drive innovation

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INNO-Grips Policy Brief No. 3: Policies in Support of Service Innovation