Customer perspectives on service innovation

Customer Perspectives on Service Innovation Panel Moderator: Stephen Ezell, Peer Insight LLC Panelists: Jaako Villa, OvalTime Ursula Oesterle, Swisscom Mobile Jim Marsden, Hewlett-Packard Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 1 All rights reserved April 27, 2007

Some Key Findings from The Tekes Research 1. Customers – not direct competitors – are the central reference point for strategy in the services era. • The customer experience is the critical output of the services era 2. Innovative service concepts that shift the boundaries of which party performs a given task in the value chain are powerful (e.g.) • Assume complexity on behalf of your customers • Shift your complexity onto customers; make them perform tasks for you 3. In the services era, information technology is the factory and the Internet are the roads and trucks. • Focus on the “information value chain” the same way a manufacturing firm would think about its physical supply chain. Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 3 All rights reserved April 27, 2007

Traditional value chain vs. modern value chain1 Inputs / Assets / Product / Traditional Raw Core Service Channels Customers value chain Materials Competencies Offering Goal: Maximize market share from existing competencies … and profits will surely follow (won’t they?) Inputs / Assets / Customer Customer Modern Channels Offering Raw Core Priorities Priorities value chain Materials Competencies Goal: Business designs with greater customer relevance … which is where the profits are Note 1: Adapted from “The Profit Zone”, by Adrian Slywotzky, Three Rivers Press (1997) Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 4 All rights reserved April 27, 2007

What is a customer experience (cX)? Services have many intangible elements. Customer experiences are the indelible imprint left on individuals by our services. More precisely, customer experiences are: • An ongoing relationship; • Defined by multiple touch points; • Which evolve over time; • Are perceived distinctly by different individuals, and • Frequently rely on technology as an enabler. Ultimately, customer experiences are the smallest unit of measure for your brand … driving loyalty and profitability more than any other factor. Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 5 All rights reserved April 27, 2007

Most companies design customer experiences from an operations- centric perspective1 … Core Service Information Consultation Order-taking Hospitality Safekeeping Billing Payment Exceptions 8 Supplemental Attributes • Linear path • Follows logical stages • Uses systems logic – Focused on optimization • Includes 8 supplemental attributes Note 1: Lovelock & Yip (1996) Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 6 All rights reserved April 27, 2007

… but customers experience services through a different lens… Customers distinguish five dimensions of service quality1 Tangibles Responsiveness Empathy Core Service Reliability Information Consultation Order-taking Hospitality Safekeeping Billing Payment Exceptions Assurance “Only customers judge (service) quality; all other judgments are essentially irrelevant.”1 Note 1: “Balancing Customer Perceptions and Expectations,” Zeithaml, Parasuraman, and Berry (New York: The Free Press, 1990) Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 7 All rights reserved April 27, 2007

Most of the customer reference points are hidden from us your promise explicit reference their prior points experience latent (what the price point signals) reference (fear of looking bad) points (social needs) (security needs) (status needs) To be successful, businesses need to get beyond the explicit reference points of their customers and develop a base behavioral model that is predictive of customer behavior. Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 8 All rights reserved April 27, 2007

New research approaches are needed for customer-centricity Macro ution distrib ch t budge t resear s for mo s group video market ethnography research Latent Explicit empathic focus research groups ped untap or ty f ortuni tion opp a innov Micro Source: Alan South, IDEO London Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 9 All rights reserved April 27, 2007

For the Acela, all 10 points on the customer journey had to be mapped and designed … not just #8, Riding Case Example: Too much focus here ignores the totality of the Amtrak Acela customer experience Customer Journey 1 2 3 4 5 6 7 8 9 10 Riding Learning Planning Starting Entering Ticketing Waiting Boarding Arriving Continuing For example: There was no car rental facility at the Rt. 128 terminus, so Acela had to help establish the service before opening. Source: Jeneanne Rae, Peer Insight/IDEO Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 10 All rights reserved April 27, 2007

Is homo rationalus a mythical creature? (part 1) The Harvard MBA dilemma: A. Earn $150k per annum – your classmates earn $175k [OR] B. Earn $125k per annum – your classmates earn $100k Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 11 All rights reserved April 27, 2007

Is homo rationalus a mythical creature? (part 2) Game of chance dilemma: • Bet $50 • Get a 50/50 chance to win • Winning bet earns $125 • Losing bet loses $50 • You can play 20 times Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 12 All rights reserved April 27, 2007

People don’t want goods or services, they want EXPERIENCES! “When you think about purchasing material goods versus purchasing an experience, which makes you happier?” Research supported by: Material National Science Foundation Grant Goods Directed by: Leaf Van Boven, Experiences Department of Psychology 34% University of Colorado at Boulder 57% Note: From “To Do or to Have? That is the Question,” by L. Van Boven and T. Gilovich, 2003 Journal of Personality and Social Psychology, #85, p.1197. Copyright 2003 by the American Psychological Association. N=1,263 Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 14 All rights reserved April 27, 2007

Why do experiential purchases make people happier than material purchases?1 1. Experiences are more open to positive reinterpretation • As people adapt to material advances, it requires continued increases to achieve the same level of satisfaction (Frederick & Lowenstein, 1978). Previous experiences exist only as mental representations and are more disposed to positively reinterpret them over time. 2. Experiences are more central to one’s identity • Experiences provide greater “hedonic value” (greater satisfaction) because they contribute so much more to the construction of the self than material possessions 3. Experiences have greater “social value” • Experiences more effectively foster the successful social relationships that are closely associated with happiness than products do. 1Note: “From “To Do or to Have? That is the Question,” by L. Van Boven and T. Gilovich, 2003 and “Experientialism, Materialism, and the Pursuit of Happiness” Journal of Personality and Social Psychology, #85, p.1197. Copyright 2003 by the American Psychological Association. N=1,263 Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 15 All rights reserved April 27, 2007

The “missing middle” philosophy methods ? concepts techniques How does cX work get done in large organizations? Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 16 All rights reserved April 27, 2007

Here’s what you can expect to find in Next Generation cX Design Developing the cX operating model Filling in the missing • Integration with business strategy middle • Integration with brand • Integration with innovation • Integration with CEM Nailing the business case for cX investments The end of cX as a • Affordable loss / return on learning faith-based initiative • Tie-in to big performance measures • Embedding in executive compensation New capabilities that are emerging One-off experiments are • Predictive models of customer behavior OUT, capabilities are IN • Using community to bypass bureaucracy • Creating capacity to experiment • Customers (or even countries) as labs • Co-creating value with customers • Storytelling and visualization Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 17 All rights reserved April 27, 2007

Strong use of cX design correlates to successful outcomes 30 27 We found that the use of a 24 25 single frame – Customer 23 Experience Design – was a key differentiator between success and Evidence of robust customer 20 experience design in use for 92 18 mediocrity recent service innovation projects projects 15 25 most successful projects 67 other projects 10 5 little or no some solid most evidence evidence evidence evident Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 18 All rights reserved April 27, 2007

10 attributes of successful service innovation 1. Start with unmet user needs, not new ideas 2. Research methods are based on deep customer empathy (e.g., ethnography) 3. Focus is on the customer journey – not merely your own touch points 4. Emphasis on identifying and winning the moments of truth 5. Rapid, low-fidelity service prototyping 6. Open innovation – including the customer in the earliest stages 7. Open innovation – bringing together a unique value network 8. Creating evidence of the brand attributes within the touch points 9. Use of storytelling to convey the experience intent 10. Overcoming metrics that run counter to creating compelling experiences Copyright 2007 Peer Insight LLC Innovation in Services Conference Peer Insight page 19 All rights reserved April 27, 2007

Customer perspectives on service innovation

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