Class3 : 2nd reading assignment : "Knowledge Intensive Business Services As Coproducers Of Innovation, Deh Hertog (2000)"
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Class3 : 2nd reading assignment : "Knowledge Intensive Business Services As Coproducers Of Innovation, Deh Hertog (2000)"

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Class3 : 2nd reading assignment : "Knowledge Intensive Business Services As Coproducers Of Innovation, Deh Hertog (2000)" Class3 : 2nd reading assignment : "Knowledge Intensive Business Services As Coproducers Of Innovation, Deh Hertog (2000)" Document Transcript

  • International Journal of Innovation Management Vol. 4, No. 4 (December 2000) pp. 491–528 © Imperial College Press KNOWLEDGE-INTENSIVE BUSINESS SERVICES AS CO-PRODUCERS OF INNOVATION PIM DEN HERTOG Dialogic Innovatie & Interactie, Wilhelminapark 20, 3581 ND, Utrecht, The Netherlands e-mail: denhertog@dialogic.nl Received 20 December 1999 Revised 3 February 2000 Accepted 3 February 2000 In the unfolding knowledge-based economy, services do matter. But while they are increasingly seen to play a pivotal role in innovation processes, there has been little systematic analysis of this role. This essay presents a four-dimensional model of (services) innovation, that points to the significance of such non-technological factors in innovation as new service concepts, client interfaces and service delivery system. The various roles of service firms in innovation processes are mapped out by identifying five basic service innovation patterns. This framework is used to make an analysis of the role played by knowledge-intensive business services (KIBS) in innovation. KIBS are seen to function as facilitator, carrier or source of innovation, and through their almost symbiotic relationship with client firms, some KIBS function as co-producers of innovation. It is further argued that, in addition to discrete and tangible forms of knowledge exchange, process-oriented and intangible forms of knowledge flows are crucial in such relationships. KIBS are hypothesised to be gradually developing into a “second knowledge infrastructure” in addition to the formal (public) “first knowledge infrastructure”, though there is likelihood of cross-national variations in the spill-over effects from services innovation in and through KIBS, and in the degree to which KIBS are integrated with other economic activities. Finally, some implications for innovation management and innovation policy are discussed. Keywords: service innovation, innovation patterns, business services, knowledge infrastructure, innovation systems 491
  • 492 P. den Hertog Introduction This paper aims to contribute to a better appreciation and understanding of the role of services in innovation. Following a brief presentation of existing approaches to service innovation, the third section outlines a four-dimensional model that allows for a better understanding of service innovation. This allows us to identify five basic service innovation patterns. Following this, an analysis is made of the role played by a sub-category of services that play a considerable role in innovation, especially that involving their client firms, namely, knowledge-intensive business services (KIBS). It is argued that KIBS function either as a facilitator, carrier or source of innovation. Through their almost symbiotic relationship with client firms, some KIBS function as co-producers of innovation. It is further argued that in addition to discrete and tangible forms of knowledge exchange, process-oriented and intangible forms of knowledge flows are crucial in this relationship. A three-tiered model is postulated in which KIBS are gradually developing into a “second knowledge infrastructure” in addition to the formal (public) “first knowledge infrastructure”. This model serves as a hypothesis that needs to be tested and refined, especially since as important differences between individual countries can be noted as to the degree to which KIBS actually function in this way. Finally, the paper considers some wider implications of the analysis for innovation management and policy. While the analysis is presented in largely conceptual terms, it is rooted in empirical research1 conducted throughout the 1990s on services, services innovation and the role played by KIBS in innovation processes of client firms. The various examples used here are taken from this research base. Existing Approaches to Service Innovation One helpful answer to the question “What does it mean to produce a service?” is provided by Jean Gadrey and collaborators (1995): “to produce a service […] is to organise a solution to a problem (a treatment, an operation) which does not principally involve supplying a good. It is to place a bundle of capabilities and competences (human, technological, organisational) at the disposal of a client and to organise a solution, which may be given to varying degrees of precision”. 1See, for example, Bilderbeek and den Hertog (1992; 1996; 1997; 1998); Bilderbeek et al. (1994); den Hertog and Bilderbeek (1997; 1999); den Hertog et al. (1997; 1998); Hofman et al. (1998); Miles et al. (1995); Vlaar et al. (1997).
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 493 This definition makes it clear that apart from technological capabilities, human and organisational capabilities are also important for providing services. Additionally, it allows for a differentiation between highly standardised service products or service formulas with quasi-good characteristics (e.g. fast food chains), and more customised services, often based on more tacit forms of knowledge. Moreover, the latter services often emerge as a result of co-production between the actual service provider and its client, as many consulting and advisory services show. The analysis of services and service innovation has progressed quite remarkably over the last decade. Although the attention given to services by researchers grew from the 1970s on, they were long discounted in terms of technological innovation. In 1984, Pavitt — introducing his sectoral taxonomy of technological change — labelled the service industries as mainly supplier-dominated sectors.2 Similarly, the important theoretical contributions of Barras (1986; 1990) portray most service sectors as initially supplier-dominated, and as receiving an impetus from manufacturing in order to be able to embark on subsequent phases of innovation processes. As the field of service innovation studies has expanded, two results of significance have emerged here. First, it has been recognised that although many services deliver a — sometimes substantial — contribution to innovation processes, they are not merely passive recipients of others’ innovations. Second, the emphasis on technological innovation has been somewhat moderated by the recognition of the importance of non-technological elements of, and approaches to, service innovation. This resulted in a better understanding of the “peculiarities” of services (Miles, 1993), service management (Norman, 1991; Quinn, 1992), the significance of interaction with clients (and of clients’ competences; cf. also Kline & Rosenberg, 1986), the importance of recombination of existing elements in new services (Henderson & Clark, 1990) and other such points. More recently, Gallouj et al. (1997) outlined six innovation models that could be used for describing service innovation. They distinguish between radical innovation, improvement innovation, incremental innovation, ad hoc innovation, recombinative innovation and formalisation innovation. A comprehensive model for understanding innovation in services, and better still understanding innovation in services and other sectors in the same framework, is not yet apparent in this literature. Such a model is increasingly needed as 2Soete and Miozzo (1989) provided a more differentiated picture of the service industries distinguishing between supplier-dominated, scale-intensive physical networks and information networks, and specialised/science-based services. Although this may be a helpful extension of the Pavitt taxonomy, it still remains a mostly technical (and sectoral) taxonomy.
  • 494 P. den Hertog service functions can be seen to be prominent all over the economy, and thus, as service innovations are relevant — although to different degrees — in all industries. Service innovation is equally relevant for manufacturing firms, which increasingly use innovation in service functions and features to differentiate their products. In a similar vein, some business processes in service firms resemble those in manufacturing, for example, administrative processing in back offices. A continuum rather than a strict distinction between manufacturing firms and service firms — and the innovation models used for them — seems appropriate when discussing firm innovation. The available models for thinking about service innovation do help identify those dimensions which appear to be most relevant here. Accordingly, the next section sets out an (admittedly eclectic) conceptual model as a heuristic tool that will enable us to discuss service innovation in general terms. Conceptualising Service Innovation Service innovation is rarely limited to a change in the characteristics of the service product itself. Innovation often coincides with new patterns of product distribution, client interaction, quality control and assurance, etc. But there are huge differences in the specific patterns involved: what is important for introducing one new product onto the market might be totally irrelevant for others. Offering a completely new service may differ considerably from offering an existing service using a new distribution channel. In practice, most innovations appear to be a mixture of major and minor changes and adaptations of existing (service) products. In order to discuss, map and analyse the diversity of innovations in greater detail and in a structured way, a four-dimensional model of service innovation is introduced (Fig. 1). Although conceptual, it is concrete enough to map service innovation and discuss the practical development of new services or service innovation policies, and has proved useful in this respect in discussions with policy-makers and service entrepreneurs (see, e.g. Bilderbeek et al., 1998a; 1998b). The four dimensions are presented first, followed by the linkages between them.3 Dimension 1: The service concept Manufactured products (and processes) are typically highly tangible and visible, unlike most services. Admittedly, some service innovations are highly visible, 3Although most examples provided below are taken from service industries, service innovation is equally relevant for manufacturing industries.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 495 characteristics of actual characteristics of existing marketing & distribution and competing services and potential clients NEW SERVICE capabilities NEW CLIENT CONCEPT INTERFACE (DIMENSION 1) (DIMENSION 2) TECH- NOLOGICAL OPTIONS org apab ies cap HRM (DIMENSION 4) ilit c an iliti ab isa es tio na l NEW SERVICE DELIVERY SYSTEM (DIMENSION 3) capabilities, skills & attitude of existing © Dialogic and competing service workers Fig. 1. A four-dimensional model of service innovation. especially where delivery of the product is involved (ATMs, etc.). Many others involve more intangible characteristics, such as new ideas of how to organise a solution to a problem. Although a particular service concept may already be familiar in other markets, the key thing is that it is novel in its application within a particular market. As usual, in innovation research, there are thorny problems concerning when a product, function or concept is really new. Judgements can vary according to whether and when it is new to the providing firm, new to the client, to the regional, national or global market and whether it involves new logic or scientific knowledge. Some examples of “conceptual innovations” are: • call centre services — these install, organise and recruit staff for their client’s call centre — which have emerged from temporary staffing offices on the basis of their initial involvement with providing temporary labour for call services; • IT consultants who offer their client firms semi-standardised and incremental plans for implementing e-commerce; • Benetton’s development of a particular style of shopping outlets to give the brand name its own character, to create a specific shopping environment that is recognisable for their clients.
  • 496 P. den Hertog Although not all service innovations have a strong novel conceptual element, conceptual innovations are much more likely to be found in service firms (or better service functions) than in pure manufacturing firms. Such innovations are usually highly intangible — meaning that while in some cases, the service itself may have quite tangible elements, the new features have less to do with material artefacts. Dimension 2: The client interface A second element of service innovations is the design of the interface between the service provider and its clients. These interfaces are the focus of a good deal of service innovations, though innovation studies, with their focus on mass manufacturing, have tended to overlook the changes occurring in these interfaces. As a quite general phenomenon across a wide span of services, product offerings are increasingly marketed and even produced in a client-specific way (even with client-specific pricing) and delivered electronically as far as they have informational components. In business services in particular, clients are often also part and parcel of the production of the service product. The way the service provider interacts with the client can itself be a source of innovation. Increasingly, there is no clearly identifiable point where the producer’s activity stops and the user’s activity begins. This is of course particularly true where the business service itself is offering support for innovation, e.g. in R&D and design services. With the high degree of co-design and co-production of service products, it may be difficult to locate the innovation within service supplier or client: it is not unusual, for instance, for service firms to site their staff within client organisations for periods of time. Examples of “client-interface innovations” include: • the large-scale introduction of account management systems in professional organisations, such as economic consulting or IT firms, can in some cases be interpreted as a renewal of the client interface; • electronic data interchange (EDI), which represents an effort to establish common formats for electronic documents that allow for a wide range of interactions to be partially automated — including various elements of design as well as ordering and invoicing. Organisational challenges have made the take-up of EDI slower than anticipated but a substantial industrial use has developed.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 497 Dimension 3: The service delivery system/organisation This dimension, involving service delivery system and organisation, is often directly related to the preceding dimension — the linkage between the service provider and its client (the client interface). Delivery is indeed one specific type of interaction across the client interface (others include financial transactions, design inputs, after-sales, and so on). However, dimension 3 is different. It refers to the internal organisational arrangements that have to be managed to allow service workers to perform their job properly, and to develop and offer innovative services. It is closely related to the question of how to empower employees, to facilitate them so that they can perform their jobs and deliver service products adequately. On the one hand, new services may require new organisational forms, (inter)personal capabilities and skills. On the other hand, an organisation can be designed and employees can be trained so as to leave room for innovations and non-conventional solutions to practical problems. Examples of “delivery system and organisation innovations” include: • the large-scale introduction of home shopping services — or consumer e-commerce — may cause a substantial change in the ways in which service provider and client relate; • introducing e-commerce in business processes may require serious business process reengineering. E-commerce may not only have a substantial impact on the way in which the actual commercial transactions occur, but also the processes preceding and following the transaction; • in more traditional shopping environments, the lengthening of retailer opening hours may have serious consequences for the type of customers it attracts, the type of products offered, the immediate availability of sales and after- sales service of different types, etc. Dimension 4: Technological options The fourth dimension is the centre of much analysis and debate, especially concerning the degree to which service firms themselves in practice are giving shape to technology development. Clearly, service innovation is possible without technological innovation; technology is not always a dimension. Nonetheless, in practice, there is a wide range of relationships between “technology” and “service innovation”. These vary from technology mainly playing a role as a facilitating or enabling factor, to something much closer to supply-push, technology- driven innovation. Service firms also differ in their awareness of relevant available technological options, the degree to which they dispose of the necessary technology themselves
  • 498 P. den Hertog or have access to the necessary knowledge and the degree to which they consequently can act as demanding customers and articulate their technological needs. Many innovations are driven by downstream service sectors and can surely be considered user-dominated. In fact, users may play a crucial role in developing and implementing new services, although some of the required technologies may come from suppliers. Although IT is certainly not the only relevant technology in service innovation, IT is particularly pervasive. The numerous information processing tasks to which it may be applied include many that are intrinsic to almost all economic activities. IT is thus often perceived as the great enabler of service innovation. Many commentators who recognise the profound implications of IT for services still, however, consider this technology as typically supplier-dominated. It is true that many smaller and less innovative service firms are relatively less proactive when it comes to incorporating new IT, though even here there is rarely the purely passive process of absorption implied by the term “diffusion”. However, in many larger and/or more advanced firms there is an extremely active process of technological development going on. Examples of “technological innovations” include: • large retail stores increasingly resemble financial services in their IT use. For instance, the UK supermarket Tesco has set up an Internet service provider, and many supermarkets are offering banking and insurance services; • tracking & tracing systems enable transport service providers to monitor the progress of their fleet and thus to manage their transport services more closely. These examples of IT utilisation illustrate that service firms are not necessarily supplier-dominated. This is especially true in the case of IT services themselves, like software houses. To a certain degree, software firms have to adapt their activities to new products from hardware companies, e.g. new generations of chips. This involves near continual updating and — typically — expansion of software to exploit the facilities of new equipment. But the process of developing new applications, new functionality, new interfaces, etc., is much more in the software firms’ hands. It is also evident that sectors with a long experience of IT investment are major sources of innovation — in the shape of new configurations of hardware, new software and applications, new interfaces, etc. A good example is the financial sector, which is a huge employer of software and networking staff. Linking the four dimensions Any service innovation involves some combination of the above-mentioned dimensions of service innovation. A complete new service will usually mean
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 499 that a new service delivery system will have to be developed, employees will have to change the way they work or relate to customers (the client interface), the way IT is used in business processes, while a new service concept may also be involved. In addition to the meaning of these four dimensions as separate as discrete vectors of change, the linkages between these dimensions may be of even more significance. Often these cross-linkages are forged in practice by those responsible for marketing, organisation development and distribution. For instance, launching a new service concept (for existing or new clients) requires marketing expertise. Similarly, creating an adequate interface with clients and adapting the service delivery system require knowledge of how services are distributed (both in terms of where they are produced and of how they are delivered). The decision as to whether to develop new services requires organisational knowledge: can the current organisation deliver the new service? What organisational changes might be needed? A particular service innovation may display one dominant feature related to one of the four dimensions; quite likely, this particular feature will prompt a set of changes in other dimensions, in order to bring about a successful innovation. Consider an example from the retail service sector. Intelligent cash registers and advanced data warehousing, as widely used by large companies, are basically technological innovations (i.e. dimension 4). They allow for the creation of detailed client profiles and personalised product offerings. But these applications cannot be bought from the shelf and be readily implemented. They need to be combined with the specific shop formula employed (dimension 1), the way the retailer wants to communicate with its clients (dimension 2) and to train its employees (dimension 3), etc. In practice, it may be the combination of the four dimensions that ultimately characterises each particular service innovation. The weight of the individual dimensions and the importance of the various linkages between them vary across individual services, innovations and firms. Similarly, the inputs required to link the dimensions in practice differ according to the type of service, and the extent to which the search and selection process (inherent in all innovation processes) is formalised. Mapping Service Innovation Patterns Just as service innovations are extremely varied, so is the role of service firms in innovation processes diverse. The dominant view of innovation in services portrays the process as supplier-dominated, with service firms being dependent on their suppliers for innovative inputs which are to different degrees transformed
  • 500 P. den Hertog into more or less innovative service offerings. However, our studies confirm that the contribution of service firms to innovation is broader than this, especially if we include the non-technological aspects of innovation. Some services even play a role in the innovation processes of their clients, e.g. R&D, design & engineering services and some IT services. A typology4 of five innovation patterns, in each of which service firms play a different role, is presented below, and displayed in Fig. 2. Each of the patterns displays a different mix of linkages between three types of actors: • suppliers of inputs (equipment, capital, human resources, etc.); • the (innovating) service firms, and; • the clients of the innovative service product (another service or manufacturing firm in the case of intermediate products, or final users). Going from pattern 1 to 4, the influence of the client firm or final consumer on the innovation process gradually increases. Pattern 5 represents a somewhat different situation as all actors in the value system contribute to a particular innovation or are forced to accommodate it. Supplier-dominated innovation (pattern 1) Service innovations have traditionally been depicted as following this pattern: innovations (as a rule technological innovations) are derived from hardware industries in particular. These innovations from external suppliers are disseminated and implemented by service industry users, who in their turn satisfy the needs of their clients. Examples of this pattern include: • microwave ovens in catering, whose introduction has greatly extended the possibilities for food preparation (and reheating) in cafes and restaurants; • cash registers and mobile phones that have been assimilated into many small firms which otherwise use little new technology. There are many similar examples with a clear “technology push”. Typical for this pattern is, at least initially, little scope for user industries to influence the actual product supplied by the supplier. The adopting firm often has to bring about some organisational changes in order to be able to use the innovation — to adapt its organisation, train its employees, etc. — and to offer more efficient and higher quality services as a result. 4This is to be considered a mapping device. Quite possibly, more patterns can be found.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 501 ROLE OF: INNOVATION SUPPLIER SERVICE FIRM CLIENT FIRM EXAMPLE PATTERN (service or manufacturing) Introduction of Supplier- interactive TV Dominated equipment; IT Innovation goods; medical robots, tomography Introduction of Innovation in new shop formula, Services new pension and saving schemes Green banking Client-Led services, door-to- Innovation door transport services Engineering Innovation services helping through Services oil & gas firms in designing new oil rigs, etc. Multifunctional Paradigmatic chip cards, sub-soil Innovation transport services Legend Inputs for Supplier- Implementation Service Product Domination of new Service (push) Product/ Organisation Locus of User User of Innovation Domination Innovative Activity (Pull) Service Product Fig. 2. Patterns of services innovation.
  • 502 P. den Hertog Innovation within services (pattern 2) In this pattern, the actual innovation and implementation take place in the service firm itself. Such innovations may be technological, non-technological, or (as in many cases) a combination of the two. Typical examples of this pattern involve a new product, product bundle or delivery system, that is thought up in the service firm itself (e.g. by a new business team), and implemented throughout the organisation, possibly with “innovation support” from outside. Client-led innovation (pattern 3) In this case, the service firm is responding to needs clearly articulated by its clients. While, in a sense, every successful innovation is a reaction to a perceived market need, for some service innovations, this is more clear-cut than for others. Some examples: • door-to-door public transport services aimed at the business traveller, a clear answer to the often-heard complaint “we would like to use public transport (the train) more often, but that pre- and post-train transport is too time consuming”; • green banking services, to appeal to a growing number of individuals who want to invest their (saved) money in a “socially responsible” way. In these cases, the demands are expressed by segments of mass markets. In many other cases, the influence may come from a single client, which is often the case in business services: for instance, a client may propose that a training firm back up its face-to-face sessions with computer-based aids. Innovation through services (pattern 4) In this more complicated pattern, service firms influence the innovation process taking place within the client firm. The provider of intermediate services may provide knowledge resources that support the innovation process in various ways, such as: • providing an expert project manager with the necessary skills to implement an innovation; • providing an innovative tailor-made software package; • providing training or written advice regarding product selection and implementation; • providing advice on how to conduct the innovation process, or providing support tools to foster creativity among teams in the client organisation.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 503 Different modes of support coexist in providing such business services (— often KIBS). An engineering consulting firm supported an oil and gas company that wanted to drill and explore in a “protected” area, helping them to find new operational methods to meet the strict environment protection rules by reviewing existing practice, proposing new operations, designing new methods, training the operators of the client firm, actually heading the drilling operations, etc. Despite these inputs, much if not all of the actual innovation takes place at the client site, and with its personnel (cf. Hoffman et al., 1998). In this case, the engineering firm facilitated the innovation process at the client firm. Across different circumstances, the precise role (source, carrier, facilitator) of the intermediate service provider, and its degree of interaction with the client firm, may vary substantially (Bilderbeek & den Hertog, 1997). Paradigmatic innovations (pattern 5) This pattern involves complex and pervasive innovations affecting all actors in a value chain profoundly: when driven by fundamentally new technologies, they are labelled technological revolutions or new technology systems (Freeman & Perez, 1988). But they may also be driven by regulations, resource constraints, and other dramatic changes that require innovation to take place across many elements of the value chain, implying completely new infrastructures, new types of knowledge and adaptation on the part of intermediate and final users. For example: • if in a very densely populated area, the regular transport of goods is no longer possible and the decision to switch to underground transport was taken, parties across the value chain would have to innovate and change practices. Manufacturers of transport equipment would have to provide completely new transport equipment; transport companies would have to change their service offerings, retrain their personnel, market their product in different ways; users would have to change their behaviour and use of transport facilities; • similarly, the switch from a few public TV channels towards multi-channel pay-per-view regimes require innovations and change of behaviour on many fronts; • the large-scale introduction of multi-functional “smart cards” would be another example of a paradigmatic innovation. The typology demonstrates the wide variety of roles of service firms in innovation processes. Since the way service providers and client firms interact is central to the process of service innovation, both factors have to be taken into account. Further innovation patterns may be identified by, for example, taking additional
  • 504 P. den Hertog variables into account. One such factor might be the role of government as a trigger for innovation, a role that can be quite important — as when innovation is promoted by R&D funding and/or procurement decisions, or through new regulations (e.g. those fostering environmental innovation). Another variable may be the degree to which end-users are given the opportunity (or are forced) to co-produce particular services: the shift to “self-servicing” is an important aspect of services innovation. Many variations on these innovation patterns can be found in practice. Sometimes, for example, innovation takes place in individual service functions (irrespective of whether it is a service or manufacturing firm), that might or might not be subsequently outsourced to specialised service firms. Two such situations suggest additional patterns of service innovation. First, innovation in a firm’s internalised service function is quite a common pattern. All firms engage in a range of service activities — and sometimes this involves innovation. A capital goods manufacturer may have an innovative leasing scheme, dealer organisation, after-sales service or training sessions. Increasingly, manufacturing firms realise that the package of services offered around the actual goods may be crucial to competitiveness. Quite frequently, the added value realised with these services is much higher than the margins realised on the capital goods. A second case is innovation in an outsourced service function, such as facilities management, catering and cleaning, or even more strategic functions (e.g. temporary staff, management, R&D). In most cases, more specialised service firms take over these functions.5 In many outsourcing relationships, activities may be precisely specified and cost competition may be intense; in such cases, innovation is less likely. But in other cases, there is sufficient level of specialisation and scope for economies of scale to provide incentives for innovative solutions. For instance, companies increasingly hire temporary labour, and increasingly, the troublesome task of managing these temporary workers and the associated paperwork can be outsourced to a temporary employment agency. In their turn, such agencies increasingly understand the human resources required by particular client firms, and may even offer to completely take over the human resources management function, training and hiring personnel, helping displaced staff to find new jobs, etc. The Role of KIBS Knowledge-intensive business services (KIBS) form a category of service activities which is often highly innovative in its own right, as well as facilitating innovation 5This pattern resembles the previous one but it goes a step further. In this case, the client firm influences the innovation taking place in the outsourced service function.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 505 in other economic sectors, including both industrial and manufacturing sectors. In an earlier study (Miles et al., 1995), the innovative role of this category of services (KIBS) was substantiated, both through literature research and case studies. KIBS industries were defined as: • private companies or organisations; • relying heavily on professional knowledge, i.e. knowledge or expertise related to a specific (technical) discipline or (technical) functional domain; and, • supplying intermediate products and services that are knowledge based. KIBS actually cover a rather wide range of services.6 For instance, many professional services can be considered knowledge intensive, be they technology based or not. In other service sectors, specific segments with a relatively high professional component can be identified as intensive users of knowledge. Table 1 gives an overview of KIBS. The analysis of the role of KIBS in innovation processes brings into focus the ways in which knowledge is produced and used in the economy, and the role of KIBS in these processes. The production of services is often the result of a joint effort of the service provider and client (be it the client is the ultimate end-user, some intermediary in the client firm or in another firm altogether). In this process of co-production, the quality of the resulting service product largely depends on the nature of the interaction between the service provider and client, and the quality of the communication process that is involved. One important role for KIBS is providing a point of fusion between more general scientific and technological information, dispersed in the economy, and the more local requirements and problems of their clients. KIBS operate as catalysts which promote a fusion of generic and quasi-generic knowledge, and the more tacit knowledge, located within the daily practices of the firms and sectors they service. One result of this interaction is that feedback from clients can shape innovations in service firms, just as much as service firms can influence their customers’ innovation. “Interactive learning” and “user-producer linkages” are important notions here.7 This two-way learning process is prominent where KIBS are concerned, including the category of wholesale and retail trade of machinery 6In case studies performed since 1994, we have focussed on those KIBS that derive their intermediate function primarily from the production and transfer of technology-related knowledge, among others, engineering services and IT service firms. This sub-category of technology-based KIBS (T-KIBS) is only occasionally considered within the existing bodies of research literature and policy practice on technological innovation. 7Thus, the literature on user–producer relationships (see, e.g. Lundvall, 1988; 1992) is especially relevant for the study of service (mediated) innovation.
  • 506 P. den Hertog Table 1. Knowledge-intensive business services: an overview. • Accounting and bookkeeping • Management consultancy (not only concerning new technologies) • Specific building services (e.g. architecture, surveying, construction engineering, etc.) • Facility management services • Technical engineering services • Research and development services (excluding university-based R&D) • R&D consultancy services • Design (not only concerning new technologies) • Environmental services (e.g. environmental law, elementary waste disposal services, remediation, environmental monitoring, scientific/laboratory services, etc.) • Computer and information-technology-related services (including software services) • Legal services (note that technology-related legal services form a growth area!) • Marketing & advertising • Exploitation and trade in real estate • Training (not only concerning new technologies) • Specific financial services (e.g. securities and stock-market-related activities) • Temporary labour recruitment services • Press and news agencies Based on: Miles et al., 1995. and equipment.8 IT support services, management consultancy and technical engineering, for example, typically work with their clients in highly interactive ways. Client firms and KIBS providers work together to find solutions to problems and challenges. Through the interaction, the client’s knowledge base changes while the KIBS provider also gains more experience, learning more about the characteristics of a specific industry. The KIBS provider is thus enabled to refine and differentiate the services offered and methods used, to learn about new business opportunities, upgrade his/her track record, etc. As innovation processes involve parties with various gaps in resources and in innovation management capabilities, intermediaries (including various KIBS) may be employed directly to fill these gaps or less directly to help bridge them (Bessant & Rush, 1998). The type of bridging required varies: • expert consulting, providing particular solutions to particular problems; • experience sharing, transferring what is learned in one context to another. (The metaphor here might be that of bees cross-pollinating as they fly from flower to flower); 8The services “surrounding” the hardware are often as important as the hardware itself for implementing especially complex systems and machinery.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 507 • brokering, putting different sources and users in contact across a wide range of services and resources. (The metaphor here is that of marriage broker/ dating agency trying to set up the most appropriate match between two partners. The degree to which the innovation agent is perceived as independent is important here, as his/her credibility is likely to diminish if there are particular standard solutions being proposed or particular sources of supply advanced.); • diagnosis and problem clarification, helping users articulate and define the particular needs in innovation. Many user firms lack the capability to understand or prioritise their problems into a strategic framework for action and outside agencies may be able to assist in this process. (A metaphor here would be the general medical practitioner, whose main task is diagnosis and who then prescribes a range of specialist treatments such as medicines, physiotherapy, diet, surgery, which are then actually delivered by others.); • benchmarking, where the process of identifying and focussing on “good practice” can be established through an intermediary; • change agency, where organisational development can be undertaken with help from a neutral outside perspective. Earlier, a differentiation was made — more specifically focussing on KIBS — between three roles played by KIBS in supporting innovation in client firms, namely: facilitator, carrier and source of innovation (Bilderbeek & den Hertog, 1997; Miles et al., 1995). These three roles are briefly characterised below. Facilitator A KIBS firm is a facilitator of innovations if it supports a client firm in its innovation process, but the innovation at hand does not originate from this KIBS firm nor is it transferred (from other firms) by this KIBS firm to the client firm. Examples include: • a management consultant helping a client to introduce a new account management system or developing a new service distribution channel; • a technical engineering firm seconding a team of its engineers to work with the technical engineers of the client to co-produce an innovative solution in, e.g. offshore platform construction or subsoil building. Carrier A KIBS firm is a carrier of innovation if it plays a role in transferring existing innovations from one firm or industry to the client firm or industry even though
  • 508 P. den Hertog the innovation in question does not originate from this particular KIBS firm. Examples are: • an IT firm implementing and customising advanced and innovative ERP software (SAP, BAAN) in a client firm; • a management consultant specialising in CAD/CAM applications helping a major client (a shipyard) to specify the exact user needs and technical specifications of a new CAD/CAM programme, and subsequently to implement it. Source A KIBS firm is a source of innovation if it plays a major role in initiating and developing innovations in client firms, usually in close interaction with the client firm. Relevant examples here include: • an advertising agency developing and implementing a completely new campaign for a client; • a provider of call centre solutions advising and actually implementing a new call centre for a client. Knowledge Resource Flows In addition to discrete and tangible forms of knowledge exchange, process-oriented and intangible knowledge flows are crucial in their relationship between KIBS and client firms. This section draws on various contributions to identify discriminating dimensions which can help us grasp these processes, and relate these to the four dimensions of service innovation considered in the third section. The Nonaka and Takeuchi model of knowledge creation Nonaka and Takeuchi (1995: 56– 94) draw on the well-known distinction, pioneered by Polanyi (1967), between tacit knowledge, which essentially represents “know- how” (the subjective knowledge), and explicit knowledge, “knowing about” (the objective knowledge). Explicit knowledge (available in the form of formulas, technical specifications, or embedded in equipment, computer programmes, and so on) is relatively easy to transfer and store.9 On the contrary, tacit knowledge 9Hales (1997: 4) criticises in this context “addressing knowledge as some kind of ‘stuff’ which can be held and deployed in various ways”. Strictly, it is information that is being stored and communicated, and this information is only transformed into knowledge by an active cognitive process on the part of the user.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 509 (made up of ideas, experience, facts, etc.) is highly personal and difficult to convert; it cannot easily be codified, and can often only be observed through application and acquired through practice and experience. Nonaka distinguishes individual knowledge, possessed by single operators, from organisational knowledge. The latter includes both knowledge possessed by individuals, and the procedures, routines, strategies, etc., which are developed at a corporate level and shared by the members of the organisation. The process of knowledge generation is directly associated with the interaction between individual and organisational knowledge: “human knowledge is created and expanded through social interaction between tacit knowledge and explicit knowledge” (1995: 61). Four modes of knowledge conversion are identified, as depicted below in Fig. 3 (1995: 62– 69): (i) Socialisation — the development of tacit knowledge from tacit knowledge. This is a process of sharing experiences and thereby creating tacit knowledge such as shared mental models and technical skills (e.g. to teach somebody how to use a machine). Often, an individual can develop tacit knowledge through observation, imitation and practice, without much use of instructional language. (ii) Externalisation — development of explicit knowledge from tacit knowledge. This involves the rationalisation of tacit knowledge and its articulation into explicit concepts and formal models (e.g. to write an instruction manual). Externalisation is the core of the knowledge creating process, the “quintessential” knowledge-creation process, in which tacit knowledge becomes explicit, taking the shapes of metaphors, analogies, concepts, hypotheses or models. (iii) Combination — development of explicit knowledge from explicit knowledge. This involves the systematisation and conversion of one system of formalised concepts into another one. It may involve combining elements from different knowledge systems together into a new framework, the “reconfiguration of existing information through sorting, adding, combining, and categorising of explicit knowledge”. (Associated skills will be those which involve the ability to obtain a new formula, procedure or software from existing ones.) (iv) Internalisation — the move from explicit to tacit knowledge. This occurs when explicit knowledge is converted into specific know-how (e.g. discovering how to use a piece of equipment for specific or new needs). Internalisation is related to “learning by doing”: it is a process of embodying explicit knowledge into tacit knowledge and the individuals’ tacit knowledge bases in the form of, for example, shared mental models or technical know-how.
  • 510 P. den Hertog TO: Tacit Knowledge Explicit Knowledge Socialisation: Externalisation: Tacit share experience, Articulate experience Knowledge discuss ideas, In formal models; opinions Embed experience into equipment, software, etc. FROM: Internalisation: Combination: convert models and formulas into reformulate Explicit tacit skills; formal models and data, convert Knowledge learn/teach how codes, etc. to use equipment Fig. 3. Four modes of knowledge conversion and the “knowledge spiral” as conceptualised by Nonaka and Takeuchi (1995: 62/71). A dynamic element is added to this taxonomy so as to view organisational knowledge creation as a continuous process, shaped by shifts between the various modes of knowledge conversion. Nonaka and Takeuchi (1995: 70–71) see this process as involving: • first, a socialisation mode, usually starting with construction of a “field” of interaction, within which the sharing of members’ experiences and mental models is facilitated; • second, an externalisation mode, triggered by meaningful “dialogue or collective reflection”. The use of appropriate metaphor or analogy helps team members to articulate hidden tacit knowledge that is otherwise hard to communicate; • third, a combination mode is triggered by “networking” newly created knowledge and existing knowledge from other sections of the organisation, thereby crystallising them into a new product, service or managerial system; • finally, “learning by doing” triggers internalisation. The tacit knowledge of individuals is seen as the basis of organisational knowledge. The process of organisational knowledge creation requires an expansion of the space of interaction through which knowledge is fused and created, so
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 511 that it additionally takes place at the group, organisational and inter-organisational level. Thus, a spiral of knowledge creation is established, involving the four modes of converting tacit and explicit knowledge. The Nonaka and Takeuchi model of organisational knowledge creation provides several insights relevant to the KIBS–client interface: • First, it emphasises the combination of these different forms of knowledge. Various case studies of the relationships of KIBS to their clients (Bilderbeek et al., 1994; Miles et al., 1995) indicate that the more tacit forms of knowledge flows are at least as important as the explicit, codified forms of knowledge exchange. • Second, it draws attention to interaction between individuals, team members and employees from various organisations in creating knowledge new to the firm. Studies of the functioning of, for example, engineering services (Hofman et al., 1997; Vlaar et al., 1997) provide many examples of the knowledge base of the client firm being constantly enriched by confrontation with the knowledge base of the KIBS provider. This mainly involves personal interactions between professionals (and the client firm must possess professionals who can maintain and enrich this dialogue). • Third, it draws attention to the dynamic nature of the knowledge-conversion processes. The constant mixing, redefinition, linking, exchanging, reshaping and enriching of various forms of tacit and explicit knowledge in the course of interaction10 is what typically happens where KIBS and their clients interact. KIBS can trigger and strengthen processes of knowledge conversion in clients (and vice versa). Often, when a client hires a KIBS, new project teams are set up, employees are forced to interact, to make tacit knowledge explicit, to think about new combinations of knowledge and their mental models are challenged. KIBS, in other words, contribute to firm-level learning processes. They can provide new knowledge certainly, but they may also act as catalysts, which help internal communication and knowledge conversion. 10KIBS — especially management consultancies — are often (and sometimes justly) criticised for reselling the client’s own knowledge again to the client. However, the process of conversion and reconversion of knowledge may not be entirely fruitless! The sheer act of interacting with the KIBS can help processes such as socialisation, externalisation and combination. The interaction between clients and KIBS can establish a field in which knowledge resources are exchanged and dialogue established between various functions/experts (e.g. creating multidisciplinary project teams). This can allow for combining existing pieces of knowledge already present inside and outside the company. And the tacit tricks of the trade can be interchanged just through the process of performing tasks together (e.g. when in-house software developers are working together in project teams with external IT consultants).
  • 512 P. den Hertog A multitude of knowledge flows In practice, knowledge flows between KIBS and their clients are manifold. Some examples are given in Table 2. Sometimes these resources — solutions to a (perceived) problem — are (in part) very concrete and tangible. This is the case, for example, when the service product delivered is a software programme, written report, drawing or design, advertisement campaign, temporary expert, project plan, benchmark, or advice on a new organisation structure. However, the outcomes of the interaction between the service provider and client firm may be much more complex and hard to pinpoint. More fuzzy outcomes or process-oriented forms of knowledge exchange can be important by-products of the more concrete resources just mentioned, since explicit knowledge is often accompanied by tacit knowledge. In other cases, knowledge resources are developed and interchanged in the course of the cooperation between the KIBS provider and client firm. Examples of the more fuzzy results that this can achieve are: improvement of a management team’s internal communications (they have been able to build knowledge of shared language, metaphors, visions, objectives), better understanding of potential markets, know-how for applying equipment/ systems, improved negotiating capabilities for discussing plans and actions with partners, creation of R&D collaborations, building increased support (inside or outside the firm) for a solution to a problem, improved reputation, new personal contacts, introduction to expert network, knowledge institutions or policy-makers. Many services cannot be packaged in the form of a written report or a piece of software, but even when they can, it is common to find that implementation requires various forms of more direct interaction. The content and quality of the service provided by a KIBS are substantially defined by the quality of this interactive process and the degree to which service professionals in client and service provider relate to each other. Four discriminating dimensions can be used to provide a more structured view of the ways in which KIBS providers and client firms interact, and the various kinds of knowledge resource flows involved, namely: (i) discrete/tangible versus form or process oriented/intangible knowledge; (ii) human embodied versus non-human (capital, written information) embodied forms of knowledge resources; (iii) explicit/codified knowledge versus tacit/non-codified knowledge; (iv) contractual versus non-contractual forms of knowledge. These dimensions of knowledge flows can be related to the four dimensions of service innovations identified earlier.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 513 Table 2. Knowledge flows between service provider and client firms. More or Less Discrete/Tangible More or Less Process-Oriented/Tangible • Training • Routine problem-solving as part of everyday • Benchmark project work • Project management • Improved capability to collaborate in project • Software package teams • Advertisement campaign • Instruction when installing new machinery • Written report (e.g. feasibility study) • Articulation/specification of needs (e.g. for • Project plan procurement) • Drawing/design • Sparring partner (testing of ideas client firm) • Advice (e.g. on new organisational structure) • Introduction to new networks of • Computation professionals/user groups • Diagnosis • Information on performance of competitors • Product documentation (manuals etc.) • Market information • Secondment of a temporary expert • Coupling to new partners • Use of an R&D facility • Knowledge on how to create support for innovations • Insight on how to access research and technology organisations, higher education institutes and government Dimension 1: Discrete/tangible versus process oriented/intangible knowledge resource flows As is already clear from the foregoing, intangible — often process-oriented — knowledge resource flows are as important as their more tangible equivalents. Often the two are co-produced. A KIBS provider that offers a software solution to a client firm will not only produce a knowledge flow in the form of a ready- made software package. The software developers will learn about the firm in which it will be applied, establish a working relationship with the in-house experts, possibly “en passent” advice on other topics, introduce the client to a network of other users of similar software, etc. The software provider may use the client as a reference (helping to maintain his reputation), fine-tune the software package, etc. Table 3 outlines some tangible and intangible knowledge flows using the four dimensions of the service innovation model described in the third section. Dimension 2: Human-embodied knowledge versus non-human knowledge resources The second dimension refers to the degree to which knowledge is “embodied” in humans. Human-embodied knowledge flows require face-to-face interaction
  • 514 P. den Hertog Table 3. Examples of tangible and intangible knowledge resource flows between service provider and client on the four dimensions of the service innovation model. Service Concept Client Interface Delivery System Technological Options Tangible Campaign of an Report delivered Marketing training Installation of a knowledge advertising by marketing for front office new data mining flows company for bureau on market service employees. software positioning a new prospects for an programme. shop formula on the electronic home market. shopping service. Intangible Experience of hired Invitation to Hired expert act as a In house software knowledge expert on similar present the new mirror e.g. by con- team brainstorms flows campaigns in the service on an fronting the client with hired expert industry. international firm with the quality on new business marketing of the “service en- opportunities conference (new counter” as perceived using the new networks, new by competitors. software. contacts). Table 4. Human- and non-human-embodied knowledge flows between service provider and client: Examples in terms of the four dimensions of the services innovation model. Service Concept Client Interface Delivery System Technological Options Human- A management Organise a user Employees of the Instruction by a embodied guru gives a panel with a client firm receive an maintenance knowledge vision on firm’s clients to on the job training worker on how to flows electronic test a prototype (by external experts) handle the new commerce-based service. on dealing with copier. service concepts customers. in a face to face meeting. Non-human- Reading a report Install a website An action plan by a A CD ROM embodied on state of the art to communicate management containing an knowledge innovation with (potential) consultant for interactive demo of flows strategies in clients. reorganising the firm the e-commerce service firms. into well focused encounter. SBUs.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 515 between service provider and client firm. Disembodied knowledge flows are typically written down (a report, an action plan, an article in a magazine, an electronic database) or incorporated in capital goods or a piece of equipment. Human-embodied knowledge flows are generally thought of as relatively important in services in general. However, from the example, it can be gathered that written communication and technology do play an important role as well, most often in combination with human-embodied knowledge flows. In Table 4, further examples are given. Dimension 3: Explicit/codified knowledge versus tacit/non-codified knowledge The Nonaka and Takeuchi model stresses the conversion processes in which tacit knowledge becomes explicit, recombined and is again internalised (in an enriched version). Discussion of economic transactions usually brings explicit knowledge to mind. But while there is rarely a price tag on the exchange of tacit forms of knowledge (which are much harder to pinpoint), they are at least as important in the interaction between KIBS and their clients. Table 5 gives some examples. Table 5. Examples of explicit and tacit knowledge flows between service provider and client firm on the four dimensions of the services innovation model. Service Concept Client Interface Delivery System Technological Options Explicit/ Read a chapter on Purchase the SAP Obtain the Read the product codified launching new customer relations requirements for documentation on knowledge service products in module from obtaining an ISO how to handle the flows the latest service BAAN company. 9000 certificate for new colour management book. the service photocopier. organisation. Tacit/non- During a weekly Sharing the feeling Participate in a one- Engineers of the codified cafe visit, two between an external day seminar on data contracted knowledge friends — one and internal inter- warehousing and engineering firm flows working for a active designer of discuss new and oil company insurance firm, the what “feels” as an opportunities with a share best other in space appealing web site software sales practices during research — discuss design. representative. their two months arrangements for at sea installing a financing satellites. new oil rig.
  • 516 P. den Hertog Dimension 4: Contractual versus non-contractual forms of knowledge Another important feature of the knowledge flows taking place between KIBS and client firms is the degree to which these are part of a contractual relationship or simply occur without a contract between KIBS and the client firm (Table 6). Most often, contractual and non-contractual forms of knowledge exchange coincide, and especially when KIBS have a more or less steady relationship with a client, the contractual knowledge flows are liable to be supplemented with more informal types of knowledge flows. This is not only the result of KIBS trying to link client firms, but also a matter of experts or professionals of both KIBS and the client firm developing (trustful) relationships. Table 6. Examples of contractual and non-contractual knowledge flows between service provider and client firm on the four dimensions of the services innovation model. Service Concept Client Interface Delivery System Technological Options Contractual Contract an Hire a marketing Order consultancy Contract an knowledge external designer research firm to firm to improve client engineering firm flows to design a new as-sees how many friendliness of after to help procure a line of differently customers might sales service piece of positioned switch to department. machinery/ products. e-commerce. hardware. Non- Discuss new A software bureau A trainer discusses Experience as an contractual business specialised in “call after the training with expert the knowledge opportunities centres” suggests to the management the advantages of an flows during a meeting contact a situations he/she electronic of a professional specialised experienced by boardroom association. temporary work competitors. session, and agency for pool decide it to use it management. in one’s own projects. There is little statistical evidence available illustrating the role KIBS play in co-producing innovations. Table 7 presents data from the Dutch Statistical Office, on the development of computer and related IT services, economic advisory services (business consultancy) and engineering and technical advisory services, over the period 1987–1994. It displays the speed at which the number of firms and turnover of these industries have developed, and provides a substantial estimate of the turnover realised from knowledge transfer to the client firm or organisation.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 517 Table 7. Number of firms (× 1000), turnover (in million guilders) and percentage of turnover with knowledge transfer in three KIBS industries in the Netherlands for the period 1987–1994. Computer and Related IT Services Year Number of Firms Turnover Turnover with Knowl. Transfer 1987 3,3 4 688 48 1988 3,9 5 163 54 1989 4,6 5 862 56 1990 5,0 6 608 56 1991 5,5 7 307 58 1992 5,8 7 550 56 1993a 6,9 8 008 59 1993b 8,5 8 777 58 1994 9,1 9 071 59 Economic Advisory Services (Business Consultancy) 1987 4,4 1 936 96 1988 5,5 2 216 96 1989 6,8 2 535 90 1990 7,7 3 070 92 1991 10,0 3 489 93 1992 11,6 3 924 95 1993a n.a. n.a. n.a. 1993b 13,9 4 026 84 1994 15,5 4 420 83 Engineering and Technical Advisory Services 1987 n.a. n.a. n.a. 1988 n.a. n.a. n.a. 1989 7,5 7 191 85 1990 7,9 7 959 87 1991 9,0 9 076 95 1992 9,8 9 913 94 1993a 11,3 11 772 96 1993b 10,8 10 224 98 1994 11,4 10 392 98 Note: Comparisons over time are complicated by a shift in the Standard Industrial Classification in 1993. Here, we include the figure for (a) the “old” and (b) the “new” industrial classification scheme. For each of the three industries, CBS defined more precisely what activities involved knowledge transfer. For example, in computer and related IT services, database services and selling of hard- and software are seen as activities in which not much knowledge transfer is involved, as opposed to activities, such as systems development and secondment of IT personnel. Source: CBS (1996: 94/95)
  • 518 P. den Hertog Table 8 is possibly even more intriguing: based on the make-and-use tables in the national accounts, it gives some insight on the use of these three KIBS industries by various client categories. Some remarkable patterns can be noticed, bearing in mind the size of the user industries (as revealed by their added value and mean level of investment). Economic advisory services are used above average by manufacturing, whereas banking and insurance firms use a relatively above average amount of computer and related IT services. It is interesting to see that even in the well-developed Dutch service economy, the services of research and scientific institutions (in the fourth column — these are largely public services) are geared relatively more towards the manufacturing than to the service industries. This brings us to the next question, i.e. whether KIBS are developing into a second, private, knowledge infrastructure partly complementing and partly competing with the first, established, public knowledge infrastructure. KIBS as a “Second Knowledge Infrastructure” KIBS have come to play a central role in transferring and, in many cases, creating and combining, knowledge resources in innovation systems. They are doing this directly through their provision of services and indirectly through facilitating the mobility of highly educated personnel.11 The direct roles played by KIBS have much in common with the roles of organisations within the public knowledge infrastructure, such as research and technology organisations (RTOs) and higher education institutions (HEIs). The latter two also play a role in diffusing knowledge to the various firms and organisations they work with through contract research, educating students and providing training to personnel of client firms. Given their role as co-producers of knowledge and innovation with client firms, the rise of KIBS can be seen as contributing to a new knowledge infrastructure. This new knowledge infrastructure is no longer largely constituted by RTOs and HEIs of different kinds, but also includes KIBS. In the context of the development of the knowledge infrastructure, we have postulated two hypotheses concerning the role of KIBS in innovation processes (den Hertog & Bilderbeek, 1997b: 31): (i) KIBS will in practice gradually develop into an informal (private) second knowledge infrastructure or knowledge base, partially complementing and partially taking over the intermediary role traditionally played by parts of the more institutionalised, formal (public) first knowledge infrastructure. 11KIBS have high shares of highly educated staff, apparently with high levels of mobility.
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 519 Table 8. Use of KIBS by manufacturing and non-manufacturing industries in the Netherlands. The use of Services Provided by: Size of Using Industries Industry Computer Engineering Economic Research % of % of Service/ & Advisory & Total Investment IT Firms Technology Firms Scientific Value (Average Consultancy Institutions Added Level Firms (1993) 1986–92) Manufacturing 1 375 966 954 1 324 19 17 — High tech 237 99 140 316 3 2 — Medium tech 693 410 513 654 7 7 — Low tech 445 457 301 354 9 8 Non-manufacturing 4 643 6 307 2 070 1 953 81 83 — Agriculture & 19 191 12 14 3 5 fisheries — Mining 161 114 4 15 3 2 — Construction & 140 52 91 29 5 2 install. — Utilities 122 193 46 53 2 4 — Wholes./retail./ 854 337 379 77 12 9 rep. — Transp./wareh./ 521 273 36 25 16 11 comms. — Financial 470 218 2 29 4 4 services — Business 1 245 3 742 1 078 105 16 30 services — Other services 1 031 1 041 416 1 601 19 17 Consumption in 0 212 0 0 private households Consumption in 0 30 0 129 public sector Exports 1 405 1 534 1 321 1 197 Total 7 423 9 049 4 345 4 603 100 100 Source: CBS (1996: 96)
  • 520 P. den Hertog This implies that this category of service firms would function as a diffusion agent or even as a source of innovation for their clients — contrasting with the popular image of service firms as innovation followers. (ii) The traditional distinction between public and private knowledge-based (advisory) services will gradually disappear. This could lead to a development in which not firms and institutions but networked service professionals — irrespective of the formal organisation to which they belong — will increasingly act as carriers and sources of knowledge. This process of blurring of boundaries will eventually result in a more flexible capacity of external KIBS professionals cooperating with internal KIBS professionals in providing knowledge-intensive business services. The notion of the development of a second knowledge infrastructure forms the basis of a three-tiered model of the evolving role of KIBS in innovation processes, as given in Fig. 4 and elaborated in Table 9. This model needs further development and testing. While the shift from phase 1 to phase 2 is relatively well-substantiated, phase 3 is much more an extrapolation from a few apparent vanguard developments. For instance, networks are emerging in which professionals operate rather loosely between organisations, sometimes combining various assignments, and there seems to be increasing mobility of personnel between the various organisations in the (now broadly defined) knowledge infrastructure. Given these trends, and the gradual shift from the first phase to the second phase of KIBS development; it will be well to be prepared for developments towards the third phase. There is some evidence of a blurring of the boundaries between services offered by the public knowledge infrastructure and KIBS services. Nevertheless, the two infrastructures generally play different roles within innovation systems. Universities primarily have relations with large R&D-intensive manufacturing firms and (in the case of social and administrative knowledge) the public sector. KIBS firms have a much broader spectrum of clients, including public authorities and some smaller firms. Large firms and other organisations benefit disproportionately from both knowledge infrastructures. SMEs, with their relatively low levels of internal competence and limited financial resources, often lack capabilities for making effective use of KIBS, and typically rely on public or semi-public sources for external knowledge. The picture is complicated by evidence confirming that national innovation systems differ considerably in the degree to which KIBS function as important co-producers for other industries. At a macro-level, Windrum and Tomlinson (1999: 402) showed that the degree of integration between KIBS and other economic activities differs considerably between the United Kingdom, Netherlands, Germany
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 521 Phase 1: Embryonic stage of KIBS development KIBS Predecessors Public Private Knowledge Knowledge Base Base Phase 2: KIBS as a 2nd knowledge infrastructure Public Private KIBS KIBS specialised KIBS func- specialised KIBS func- tions provided internally tions provided internally Public KB Private KB Phase 3: Networked KIBS service professionals external(-ized) KIBS professionals internal internal KIBS professionals KIBS professionals Public KB Private KB Fig. 4. Three-tiered model of the role of KIBS in innovation processes.
  • 522 P. den Hertog Table 9. Some characteristics of the individual phases in the three-tiered model. Phase 1: “Embryonic” Stage of KIBS Development • Limited interaction between the public and private knowledge base • Limited number of intermediary knowledge institutions (mainly public) and firms • Emphasis in innovation processes on generating new knowledge • Predecessors of KIBS functions mainly coupled to well established categories of professional staff (R&D, accounting, marketing, legal affairs, etc.) and to a substantial degree provided within the firm • Knowledge mainly interpreted as formal technical expertise (R&D) • Sectoral knowledge orientation dominates • Innovation policies mainly focused on supporting R&D/increasing knowledge bases Phase 2: “KIBS as 2nd Knowledge Infrastructure” • Interaction between public and private knowledge bases increasingly considered essential (“economies of scope in S&T”) • Increasing number of intermediary knowledge institutions and firms • Emphasis in (interactive) innovation processes on generating new knowledge and diffusion • KIBS increasingly identified as a separate category of knowledge generators/diffusers, although a clear separation between public and private KIBS remains • Explicit “make or buy” decision concerning provision of KIBS functions • Broadened definition of knowledge, various kinds of formal knowledge and tacit knowledge (intangibles) • Knowledge orientation crosses sectoral boundaries. Network and cluster perspective starts to develop. • Broadening of innovation policies (more aspects, more actors) Phase 3: “Networked ‘KIBS’ Service Professionals” • Increasingly non separable and overlapping public and private knowledge bases • KIBS recognised as significant intermediate actors in innovation processes in public and private sectors • Increasing combination of innovative service functions in new products and services. Normalisation of innovation in service functions. • Public and private organisations & firms develop knowledge management systems and seek actively the help of KIBS • Well developed user-producer linkages between internal-external KIBS professionals • KIBS professionals increasingly combine various roles (entrepreneur, scientist, consultant, staff member) and function in a network of service professionals • Tasks traditionally performed by public policy-makers increasingly performed by semi-public (at arms length) or private KIBS professionals
  • Knowledge-Intensive Business Services as Co-Producers of Innovation 523 and Japan. They argue that those countries with strong, mutually beneficial links between business services and other (most notably manufacturing) activities enjoy higher spill-over effects from service innovation. Implications for Innovation Management and Innovation Policy The model just presented needs (further) empirical testing.12 Particular attention needs to be paid to cross-country differences in terms of institutional structures, and to the levels of integration of business services (especially KIBS) and manufacturing. Further, the model should be linked to the distinction between “mode 1” and “mode 2” knowledge production in science and technology — provided by Gibbons et al. (1994). Their basic argument is that a distinctly new set of cognitive and social practices in the production, legitimisation and diffusion of knowledge is emerging. This so-called “mode 2” is different from those practices governing the largely Newtonian model of mode 1 or what many would label as science (Gibbons et al., 1994: 2–3). The argument cannot easily be summarised in one table,13 but Table 10 outlines some characteristics of the two modes of knowledge production. Table 10. Some characteristics of “mode 1” and “mode 2” knowledge production (based on Gibbons et al., 1994: 3–8). Mode 1 Mode 2 Problems set and solved in a context Knowledge produced in the context of application governed by the (academic) interests of a specific community Disciplinary Transdisciplinary Homogenity Heterogenity Hierarchical organisation Organisational diversity More socially accountable and reflexive More socially accountable and reflexive Quality determined mainly through peer More composite, multidimensional quality control review judgements on a disciplinary basis process 12This is underway, in particular, in the ongoing RISE project studying “RTOs in the Service Economy” led by Dr. Mike Hales of CENTRIM, University of Brighton. 13Theirwide-ranging analysis covers interaction between those involved in mode 1 and mode 2 knowledge production and the role of IT in this; the expansion of both knowledge providers and knowledge users; the implications for “traditional” knowledge-generating institutions, such as universities, government research organisations and industrial laboratories; and the shaping of innovation policy.
  • 524 P. den Hertog KIBS can be seen as a specific example of the “mode 2” variety of knowledge production. They share many of the characteristics of the “mode 2” way of producing knowledge, most notably: its organisational diversity, orientation to applications, and transdisciplinarity. The characterisation of “mode 2”, for example, as “problem-solving capability on the move” (Gibbons et al., 1994: 5) very neatly describes what KIBS in practice are. This also brings us back to the more general description of what it means to produce a service — recall the definition of Gadrey et al. (1995): “to produce a service […] is to organise a solution to a problem […] to place a bundle of capabilities and competences (human, technological, organisational) at the disposal of a client and to organise a solution, which may be given to varying degrees of precision”. Thus, the rise of KIBS has important implications for both innovation management and innovation policy, including the following: Innovation management Since KIBS play a role as co-producer of innovation in some of the client firms they serve, questions arise concerning: • Whether and how industries differ in their actual “consumption” of KIBS; • Whether KIBS play similar roles in co-production of innovation in all developed countries; • Which are the vanguard KIBS industries; and which KIBS industries are most likely to follow a similar development pattern in the near future? • How do in-house and outsourcing strategies, both in KIBS and client firms, affect the scope for co-production of innovation? • What type of appropriability strategies do KIBS use themselves? • How do KIBS firms take stock of the lessons learned in the interaction with client firms? Innovation policy As KIBS play a role in transferring knowledge in innovation systems, there may be consequences for the way in which innovation policy is shaped. Given indications that (some) service industries are particularly prone to use services of KIBS, innovation policy-makers might consider the scope for using KIBS for realising their policy goals. This is especially so as “traditional” institutions within the public knowledge infrastructure seem less able to function in the service economy, and are more geared towards servicing established manufacturing industries. Among the questions that arise in this context are:
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