Service Innovation - Manage your Service Portfolio

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A Whitepaper from Anerian, LLC.

January 2010

Leading Through Service Innovation

For more information contact Naomi Stanford ([email protected])


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Executive Summary

Services are the dominant driver of the US economy. According to the Bureau of Labor andStatistics, services make up 80% of our economy and the 10 industries with the most dramaticsalary growth are all in serviceproviding sectors. Many organizations provide services to

internal and/or external customers but fail to ever identify themselves as service organizationsand thus miss opportunities to lead and innovate in their market space.

Although services require the same treatment as products: design and development, testingand market research, and refinement over time, organizations rarely have formal processes,roles and practices for developing, managing or innovating their services as a portfolio.

Additionally, organizations that offer products have introduced and adopted formal, full lifecycle development processes for bringing to market new products and implementing newtechnologies, which service organizations have, for the most part, failed to do.

As organizations begin to view themselves as deliverers of services, the need for the sameformalities product organizations have becomes more apparent. Without a formal, full lifecycledevelopment process for their services, organizations fail to maximize return on investment,infuse discipline into the development process and manage expectations and customer needs.

We have found that successful service organizations adopt a few key practices:

Services Perspective understand their business as a collection of services (a portfolio), andhave a clear view on what drives service development

Innovation infuse innovation practices throughout the lifecycle to build unique offerings tomaximize convenience, loyalty and value

Portfolio manage their service offerings as a portfolio, much as IT and product portfoliosare managed with categories, criteria, and key metrics,

Process adopt a full lifecycle process for service offerings from concept innovation andbusiness cases through checkpoint reviews at key milestones

Cultural readiness invest time and effort into ensuring their culture can adapt to thechanges that innovation requires

Consequently these organizations innovative capacity and the value of the services they offerdepends upon a strategic mindset that takes into account the clarity of factors such as theaudience, intent, scale, actors and experience persona provided by a service. The graphicbelow illustrates how these elements combine to build the service innovation strategy.


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Copyright Anerian, LLC 2010 3

In conjunction with the elements outlined above, successful service providers are able tounderstand how a portfolio of inward and outward facing services, responding to external andinternal factors, combine to deliver value to the customer. As an organizations innovativecapacity increases so also can the value provided by a service.

We conclude that adopting a service portfolio model, using a full lifecycle process forlaunching/improving services and most importantly employing innovation techniques improvesbusiness efficiency, increases return on investment (ROI) and sustains a positive clientexperience.


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Introduction

A macroshift is underway, impacting business and society at large. Ervin Laszlo defines thisdynamic of global change in his book, Macroshift , as "a shift that is allembracing, rapid, andirreversible, extending to the far corners of the globe and involving practically all aspects of

life."1 Laszlo believes that change of this sort is driven by technology, but cannot be solved bytechnology. Examples of this trend include, but are not limited to, organizations moving fromselling products to delivering experiences, from backroom/closed door innovation to openinnovation along with an emphasis on new growth platforms over new products.

As organizations begin to respond to this changing reality, they must consider how they deliverservices as well as products to their customers and stakeholders. Based on an assessment ofdozens of firms and service offerings, organizations that are responding well to the wideningfield of services, have incorporated five critical elements into their service strategy. Theelements and their relationship appear in the graphic below.

1 Macroshift: Navigating the Transformation to a Sustainable World, September 2001


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These critical elements include:

Intent what is the focus and purpose of the service?o The basic principle of beginning with the end in mind and being clear on who the

target customer is, applies to service strategy as it does in many other

discussions and decisions relating to general organizational strategy.Surprisingly, many organizations fail to build shared understanding around thisfoundation element before moving into service design and implementation.

Scale the practices and processes are in place to support implementation at a microand macro level

o Our interviews with executives across sectors reveal that even the organizationsinvested in fostering innovation and promoting change can underestimate theimpact of an innovation. Novel concepts and approaches to service delivery aresuccessful at a project or program level but are not then leveraged across an

entire organization. Thus, they are unable to spur systemwide changes,hindering the return on investment.

Actors those stakeholders who are instrumental the service cycle including:suppliers, partners, sponsors, bloggers, editors, customers, and promoters included

o A detailed examination of all the critical contributors and recipients of a serviceenables organizations to rethink the role and specific function(s) they can andshould play in service delivery. This exploration yields insights into informationexchanges, process handoffs and new partnering models allowing, in somecases, an organization to making a small change to its role in delivery, that canhave a gamechanging impact on the value provided to the customer.

Persona the unique service experience based on a competitive analysis and acharacter that the service provider wants to deliver

o In line with this shift to examining a customer experience, organizations have theopportunity to be intentional and explicit about what they want customers tosee, taste, smell, hear and feel during their interactions with service providers.In an increasingly competitive market, this detail and distinction can have a hugeimpact on attracting new customers and maintaining their loyalty.

In conjunction with the elements outline above, successful service providers understand how aportfolio of inward facing and outward facing services responds effectively to the operationalcontext 2 employing five principles:

2 A detailed description of our approach to using this model to articulate an organizations service strategy appearsin a separate white paper entitled, Our Approach to Service Innovation.


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1. A Services Perspective understanding their business as a collection of services (a portfolio),and having a clear insight into what drives service development

2. A Portfolio Approach managing their service offerings as a portfolio, much as IT andproduct portfolios are managed with categories, criteria, and key metrics

3. A Full LifeCycle Process adopting a full lifecycle process for service offerings from concept

innovation and business cases through checkpoint reviews at key milestones4. An Innovation Mindset infusing innovation practices to build unique offerings that

maximize convenience, loyalty and value5. A Cultural Capability investing time and effort into ensuring their culture can adapt to the

changes innovation requires.

Adopting these principles significantly improves the overall impact and value of the servicesdelivered.

A Services Perspective

Services are the dominant driver of the US economyaccording to the Bureau of Labor Statistics servicesmake up 80% of our economy and the 10 industrieswith the most dramatic salary growth are all inserviceproviding sectors. The chart to the rightshows that employment and GDP has been driven byservices and what is referred to as the experienceeconomy (an extension of services). And the trend isglobal: for example, in many countries service workers now outnumber farmers for the firsttime.

Demand continually increases for private, nonprofit and public sector organizations to developa better understanding of what their customers need and desire. For example, the US PostalService directly competes with private sector shipping companies like UPS and FedEx. In thiscompetitive field each companys differentiation point requires they pay close attention to theservices they provide, the variety of services offered, and their ability to execute on theirservices with greater and greater efficiency and customer value.

And within the US Government, the Open Government Directive recently released by the Officeof Management and Budget calls for increased transparency, participation and collaboration onthe part of all federal agencies. This directive creates yet another opportunity for federalagencies to consider how they can meet these objectives in a manner that complements theirmission.

Driving improved customer experience are the opportunities available in, for example, creatinga web presence and utilizing social networking tools. Not only does technology have thepotential to enhance customer experience, it simultaneously offers the possibility of offeringservices in a way that save money and/or increase revenue, and expand an organizationsdefinition of services.


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Thus unique service offerings are being developed fueled by shifts in the market and the desireto continually find convenience, simplicity and better ways to improve costs and the customerexperience. Innovation is the most critical component of successful service firms as theycontinually strive for improvement, differentiation and to identify the qualities and servicecharacteristics that will keep the customer coming back for more.

Generally service innovation is evident in one (or a combination of) four types, examples ofeach are given in the next section:

Renewing the types of interactions with stakeholders Delivering services in a unique way Leading the pack in new service models Leveraging talent networks to increase capacity

And innovation within the public sector has two notable characteristics:

It successfully addresses an important problem of public concern It inspires successful replication by other governmental entities. 3

Innovative organizations, whether public or private, invest time and effort into designing theirservices, and improving the customer/stakeholder experience. Below are some serviceinnovation exemplars.

3 The Ash Institute for Democratic Governance and Innovation at the John F. Kennedy School of Government at

Harvard University recognizes the top 50 Government Innovations each year. Representing the work of city,county, state, federal and tribal government agencies, the top 50 are selected from a pool of 600 applicants. Thecriterion used to select these awardees is referenced here.


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Renewing the types of interactions with stakeholders

Civic Banking has made Caja Navarra (they use CAN as their US brand) one of the fastestgrowing financial institutions in Spain as they haveimplemented five rights for clients:

1. The right to choose: clients are allowed to allocate30% of the banks profits according to their account;

2. The right to know: clients know how much the bankearns from them;

3. The right to accountability: clients know and hold thenonprofits and charities accountable when theycontribute;

4. The right to participate: CAN helps clients who wish to volunteer find a suitableorganization that fits their desires;

5. The right to traceability: clients are given the knowledge and ability to decide whereinvestments are placed.

Mapping Evapotranspiration from Satellites

The State of Idahos Mapping Evapotranspiration from Satellitesproduces detailed images of evapotranspiration, enhancing theunderstanding of local and regional waterdemand issues.

Water experts have long had a saying: "If you can't measure it, youcan't manage it." But they also have long known that determining how much water is diverted

from rivers and how much is pumped from wells is an inexact and expensive science. Now, amethod developed by the Idaho Department of Water Resources and the University of Idahothat uses surfacetemperature readings from government satellites is letting officials measurehow much water is lost from a piece of land through evaporation and through transpiration, therelease of water vapor by plants.

Water resource managers in Idaho and other states see the method as the best way to measurewater consumption to help settle growing regional disputes over water supplies withoutlawsuits. More than 90 percent of the water used in Idaho's 3.4 million acres of irrigatedagricultural land is consumed by evaporation and transpiration. The data already have been

used to help Idaho planners evaluate the impact of population growth, protect salmon andsteelhead habitat and settle questions in the conflict between groundwater irrigators andsurfacewater irrigators in the Magic Valley. Previously, officials had to look at wellpumpingrecords and electricity use to estimate each irrigation district's usage. Now they can measurewater consumption field by field with greater precision and less cost. . 4

4 http://www.idahostatesman.com/environment/story/901339.html


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Delivering services in a new way

Buying health insurance has become such a complexdecision that BlueCross and BlueShield Florida is tryinga new sales tactic: storefronts near big malls.

"Today's far higher deductibles and the fact that fewer employers even offer coverage meanswe have to help people navigate health decisions face to face and balance price and quality thatfits their needs," says Michael Guyette, senior vice president of sales for the state's biggestprivate health insurer. 5

GoArmyEd

Harnessing webbased technology into a onestop virtual portalenables the US Army to provide online, secondary educationalsupport, tuition, and other services, while efficiently streamliningadministrative functions for the benefit of soldiers.

The Army Continuing Education System (ACES) launchedGoArmyEd.com on April 1 2006. GoArmyEd puts soldiers one clickcloser to obtaining their education anytime, anywhere they are stationed. Participating schoolsaccess GoArmyEd to announce classes for soldier registration, manage class enrollments,submit grades, verify and prepare invoices for Army payment, and access centralized supportfor troubleshooting soldier issuesall from one integrated location. The primary advantage ofGoArmyEd is equal 24hour access to tuition assistance (TA) regardless of the soldiers

geographical location and greater visibility with improved accuracy in management of tuitionassistance dollars. 6

5 Albright, M. (2009). Blue Cross and Blue Shield Florida moves into hightraffic storefronts. St Petersburg Times.July 7, http://www.tampabay.com/news/business/retail/article1016195.ece

6 http://www.goarmyed.com


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Leading the pack in new service models

Just a few years ago the notion that you could persuadeupwardly mobile professionals to share cars would haveseemed as farfetched as being able to unlock a car

with a telephone. But what started as a counterculturemovement in places like Cambridge, Massachusetts andPortland, Oregon has gone mainstream.

You can now find Zipcars in most major U.S. cities, including Seattle, San Francisco, Atlanta,Chicago, and New York, and in college towns like Ann Arbor and Chapel Hill, as well as in Britain.

Zipcar's annual revenues are $130 million, and the company is growing about 30% a year. 7

Wraparound Milwaukee

Wraparound attempts to reduce costly and arguably ineffectiveresidential care options by offering a host of individualized treatmentsthat allow youth to stay with their families. Additionally, the programencourages family members to play a more active role in thetreatment process, as members of the care planning team.

Wraparound Milwaukee is a social service program that was launchedin 1995, designed to serve an annual 1300 youth with diagnosablemental health disorders such as depression, attention deficit disorder, or learning impairmentsthat prevent normal functioning in home, school, or outside community settings. Over 50% ofthese children come from families at or below the federal poverty line. Eligible youth arealready being treated by two or more social service systems and are often in the process ofmoving to more formal residential treatment centers, correctional facilities, or psychiatrichospitals.

7 http://www.mutualfunds.biz/2009/08/26/news/companies/zipcar_car_rentals.fortune/index.htm?postversion=2009082708


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Leveraging talent networks to increase capacity

The American Girl Store retail chain has successfully adopted experiential marketing andcustomer experience design innovations across their instore and direct media channels(catalog and internet). By selecting a story and multiple ways of bringing that story to

customers, they have created a truly unique and memorable instore experience for theircustomers.

On average, customers are willing to travel 36 hours to visitone of three stores, and an average store visit lasts over 2hours The US retail average is less than 20 minutes, butcustomers pay multiple visits.Services for the customers & the dolls themselves include:

A Doll hair stylist A caf that serves sophisticated yet girlfriendly food

with customized doll sized seats A theatre that has 2 original live musical productions written by Broadway playwrights,

based on American Girl stories Attention to the care of nonconsumers with concierges handing Game Boys to brothers

as they enter the store A focus on stories stories are so intertwined that American Girl will not sell a doll

separate from its book

United States Department of Treasury New Markets Tax Credit Program

The Treasury Departments New Market Tax Credit (NMTC)Program provides incentives, on a competitive basis, to induceprivatesector, marketdriven investment in business and realestate developments located in distressed communities. TheNMTC program, established by Congress in December 2000,permits individual and corporate taxpayers to receive a creditagainst federal income taxes for making equity investments ininvestment vehicles known as Community Development Entities(CDEs). The investor receives a credit totaling 39 percent of thecost of the investment. CDEs must apply to the Treasurys Community Development FinancialInstitutions (CDFI) Fund, which administers the NMTC program, to compete for this allocation

authority. The organizations receiving awards have identified principal service areas that willcover nearly every state in the country, as well the District of Columbia and Puerto Rico andplan to invest in renewable energy projects, charter schools, health care facilities,manufacturing companies, and retail centers.

Viewing an organization through a service lens and prioritizing innovation to supportsustainable health and growth in any sector are ineffective as stand alone activities. Expandingthe service view to a portfolio perspective, designing a service with a lifecycle model in mind


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and attending to how organizational culture supports innovation and change are the supportingactivities that make innovation viable.

A Portfolio Approach

A service portfolio is the totality of formal internal services and external services that comprisemuch of the organizations ultimate value production. Formal services are those that aredeemed to be important enough to have budgets, owners and at least some level of consistentapproach for development, delivery and sun setting.

Interestingly informal research and interviews with service providers have shown that formaldevelopment methods are not applied consistently to an organizations service portfolio. Forthe most part new service offerings are generated in a fairly ad hoc way by marketing orcustomer support or a smart individual in the organization with a lot of energy and passion orbased on a market or customer event. This style of information innovation has its benefits:teams feel empowered, it can at times reduce time to market and it feels like progress is being

made quickly.

This unsystematic approach misses the mark. Because:

Services are not viewed as a portfolio Connections are not managed across the enterprise Formal processes are not adopted to manage the lifecycle Roles are not clear as to who is ultimately accountable for concept through sunset,

including ROI, design, development, innovation, delivery and training and support

A higher value approach is to treat services much like products as a portfolio, with capital andinformation system investments based on a theory of value, an estimated investment, and anassumption of differentiation and or need.

Service Portfolio Model

A substantial portion of the activities of an organization relate to their service offerings. Wesee these service offerings in a collection referred to as a service portfolio including internalservices and client facing services. There are four basic categories of these service types thosedelivered:

1. To individuals2. To social networks3. To the enterprise4. For social good

A portfolio view of the services helps organizations determine where to focus, where there aresynergies across the enterprise, where there are gaps in offerings and the scope and scale ofinvestments necessary to achieve the goals. These goals can be efficiency, productivity, market


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leadership and or cost containment. In the absence of the high level view however, it is likelythat opportunities may be missed.

Spending the time to identify and audit the portfolio helps the organization see the variouscomponents and make effective strategic decisions and investments.

A Full LifeCycle Process

Companies have adopted a full lifecycle development process for products. These processeshave been refined and matured over the years to incorporate total quality, statistical processcontrol, six sigma and client centered design techniques. There are also similarly very formalprocesses for information systems these include the Software Development LifeCycle, SpiralDevelopment and Agile Development techniques.

These approaches are targeted at managing for results by way of teaching the organization andinstilling formal principles, practices and processes for the development effort with an eye

towards meeting timelines, budgets and expectations. There are formal methods and tools forgathering requirements, developing an overall architecture, detailed designs and requirementsspecifications. Each then has formalized development methods for managing the team throughthe process. Lately a lot of these approaches have been upgraded to engage customers andother participants earlier and more often throughout the lifecycle to ensure effectiveadoption.

Just recently organizations are starting to see the value of adopting these same principles andpractices to their services portfolio and offerings. For example LRA Worldwide is anorganizational development and research firm that focuses on Customer ExperienceManagement (CEM). They refer to their process as Moments of Truth when a company and

customer interact, the customer learns something that will strengthen or weaken the futurerelationship and the customers desire to return, spend more, and recommend the company toothers.


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The graphic below illustrates in column 1 the typical stages of lifecycle management andcompares (in column 2, 3, 4) three types of application. Each cell, within columns 2, 3, and 4gives an example of use of that aspect of the life cycle

Product

Development

Technology

Implementation

Service Offerings

Portfolio AnalysisMany technologyand pharmaceutical

Many large ITorganizations

Few service firms

Business Case Above a smallinvestment threshold

Above a smallinvestmentthreshold

Infrequently withlittle rigor

Feasibility study Formal and often Formal and often Informally

Design reviews Above a smallinvestment threshold

Above a smallinvestmentthreshold

Informally

Development plan All All Sometimes

Checkpoint reviews All All Informally

Sunset process For hardwareproducts especially

Often handled byway of conversions,or upgrades

Rarely for serviceofferings

Organizations taking a systematic lifecycle approach to their service portfolio reap severalbenefits:

It helps infuse a level of discipline

It enables the entire team to see the service in the context of the value chain or supplychain.

It orients the entire organization to a customercentric mindset, whether the customeris internal or external to the organization

It allows for targeted investments to address the root cause of problems in the deliverychain.


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A Cultural CapabilityDeveloping and delivering innovative services as a portfolio, within the context of a full lifecycle approach usually means two interrelated shifts:

1. Redirecting a variety of internal practices, processes, policies, procedures, and

performance measures towards a targeted customer group (or groups)

2. Channeling the culture to reflect an outsidein perspective i.e. delivering a satisfyingcustomer experience based on customer needs, rather than delivering from an insideout perspective i.e. delivering what the organization thinks the customer wants.

Both shifts take time, commitment and other resources and, of the two, channeling the cultureis the more challenging. However, trying to achieve innovative services and innovative servicedelivery without simultaneously aligning the culture to meet that goal will result in less thanoptimum success. Equally trying to channel the culture without redirecting the formalinfrastructures will not result in service innovation success.

Ensuring cultural capability to deliver innovative services is a fourstep process:

1. Identifying: determining and agreeing what the strengths of the culture are and its pathdependency.8

2. Understanding: assessing how these strengths currently add value to the servicesoffered and how they might need to be shaped and reinforced in line with changes inthe business processes and systems.

3. Shaping: reinforcing through work process changes, leadership role modeling, andincentivizing the desired changes in culture.

4. Nurturing: responding to any signs of back tracking, acting to encourage and grow thedesired culture through a range of formal and informal methods.

Conclusion

Services drive our economy, our employment and in many ways have been a substantial driverof innovation in the past decade. We have invested hundreds of billions of dollars in ITplatforms over the last thirty years enabling companies to bring new service offerings to marketwith a faster time to value. Adopting a portfolio model, a full life cycle process for launchingservices and adapting new innovation techniques will improve business efficiency, ROI andimpact for the client as well as strengthen long term relationships.

8 Path dependency describes the history and legacy of the organization. Culture can only be changed within

certain boundaries that relate to past experiences, contexts, constraints, and capabilities. So, for example, theculture of a retail bank cannot easily be changed into the culture of an investment bank.


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Works Cited:

Anthony, Scott D., Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman. The Innovator'sGuide to Growth, Putting Disruptive Innovation to Work. Boston, Massachusetts: HarvardBusiness Press, 2008. Print.

Chesbrough, Henry. Open Innovation . Boston, Massachusetts: Harvard Business SchoolPublishing Corp, 2006.

Ezell, Stephen, Tim Ogilvie, and Jeneanne Rae. Seizing the White Space: Innovative ServiceConcepts in the United States Technology Review 205/2007. Helsinki, Finland: Tekes / TheFinnish Funding Agency for Technology and Innovation, 2007. PDF file.

Global Employment Trends , International Labor Office: January 2007

Kaminer, Aeriel. "Queen for a Day in Rented Finery." New York Times. New York Times Online,11 December, 2009. Web. 18 December, 2009.http://www.nytimes.com/2009/12/13/nyregion/13critic.html?scp=8&sq=dress&st=cse

Pine, Joseph, and Gilmore, James. The Experience Economy . 1999.

Rogers, Everett M. Diffusion of Innovations, Fourth Edition. New York: The Free Press, 1995.Print.

Silverstein, David, Philip Samuel, and Neil DeCarlo. The Innovator's Toolkit. Hoboken, NewJersey: John Wiley & Sons, Inc., 2009. Print.

Wortham, Jenna. "A Netflix Model for Haute Couture." New York Times. New York TimesOnline, 8 November 2009. Web. 18 December, 2009.

www.peerinsight.com The Discipline of Service Innovation.

Service Innovation - Manage your Service Portfolio

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