New business models and value creation a service science perspective


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New business models and value creation a service science perspective

  1. 1. 1Service science: on reflectionJames C. Spohrer, Stephen K. Kwan, and Haluk DemirkanIn this chapter, we reflect on the historical challenges and the future prospects for the sci-entific study of service phenomena. The growing dominance of the “service” componentof national economies and corporate revenues has spurred expanded interest in servicesystems and service innovation. Service innovations based on global-scale informationtechnology platforms are further fuelling interest in the scientific study of digitally con-nected service via cloud computing and smart phones. Practitioners and employers shouldbe aware of and take advantage of the emergence of service science, as more and moreuniversities around the world expand and deepen their service science-related curriculaand research.1.1IntroductionFor about ten years we have been working on creating a new transdiscipline to studyservice in business and society. A transdiscipline integrates aspects of many existingdisciplines (e.g., service marketing, service operations, service computing, serviceeconomics, service design, etc.) without replacing any of them. We have seen theJ.C. Spohrer ( )Almaden Services Research, IBM Research – Almaden, San Jose, CA, USAe-mail: KwanCollege of Business, San Jose State University, San Jose, CA, USAe-mail: stephen.kwan@sjsu.eduH. DemirkanThe Center for Services Leadership, Arizona State University, Tempe, AZ, USAe-mail: haluk.demirkan@asu.eduL. Cinquini, A. Di Minin, R. Varaldo (eds.), New Business Models and Value Creation: A Service SciencePerspective. Sxi 8, DOI 10.1007/978-88-470-2838-8_1, © Springer-Verlag Italia 2013
  2. 2. 8 J.C. Spohrer, S.K. Kwan, and H. Demirkanword “service” used in many different contexts – as adjective, noun and verb – anddefined in as many different ways. Yet precisely defining and measuring real-worldservice phenomena for the purpose of establishing a “science of service” remainselusive. Of course, aspiring “service scientists” are in good company: after manydecades biologists still cannot agree on their science’s definition of life; cognitivescientists and computer scientists still cannot agree on their science’s definition ofintelligence; economists still cannot agree on their science’s definition of value; andeven though physicists routinely measure energy and work, they still debate defini-tions within their own domain. Intuitively, many service researchers sense a connec-tion between a good definition of service and good definitions of quality of life, intel-ligence, value and work. Of course, the problems associated with precisely definingand measuring real-world phenomena should not be at all surprising; social scientistsroutinely remind scientists from other fields that the human enterprise of science it-self evolves over time by shifting paradigms or agreed upon ways of perceiving andthinking about the world.Nevertheless, service as the application of knowledge to create benefits for othersnaturally arises in the context of clearly identifiable entities, such as people, busi-nesses and nations, that possess knowledge and have information-processing andcommunication capabilities as well as resource-based capabilities, including de factoand enforceable property rights. These diverse entities opportunistically and system-atically interact to realise mutually beneficial outcomes (value cocreation). Simplyput, service phenomena arise in a real-world ecology of entities, their interactionsand their capacity for finding mutually beneficial outcomes.All businesses apply knowledge for the benefit of others. All business entities areservice businesses because all value is cocreated between interacting economic en-tities that possess information-processing and resource-integration capabilities putto work for the benefit of others (Vargo and Lusch 2004; Chesbrough and Spohrer2006; Spohrer et al. 2007). Even modern manufacturing and agriculture can be seenas vast global supply and demand chains interconnecting entities. An economic en-tity (also known as a service system entity) is a dynamic configuration of resources,including people, technologies, organisations and shared information (Spohrer et al.2007). Entities interact directly and indirectly by granting access rights to one an-other’s resources (Spohrer and Maglio 2010).For example, bus drivers transport passengers applying knowledge of driving andrules of the road; water utilities provide clean, safe drinking water to urbanites apply-ing knowledge of purification and pressurisation; doctors tend to patients applyingmedical knowledge; and schools help students learn by applying staged curricularand pedagogical knowledge. These examples all illustrate entities engaged in routineservice interactions. A sample list of what service can mean is depicted in Table 1.1.In spite of the diversity, a focus on service framed in terms of entities, interactionsand outcomes reveals some important commonalities. First, for complex service toevolve, service systems entities must have well defined rights and responsibilitiesto allow speedy dispute resolution. This allows entities to more readily experiment(e.g., succeed, fail, recover) and form extended networks as they interact and engagein service for service exchanges. Entities, such as people, businesses, universities,
  3. 3. 1 Service science: on reflection 9Table 1.1 Different meanings of “service”Service as a productHotels, telecommunication, IT, healthcare, financial, transportationCustomer serviceTaking requests, answering customer questions, responding to complaintsService derived from a tangible productAutos (transportation service), mobile phones (communication service)Service of product–dominant companiesValue added (e.g., repair and maintenance) to solutions (e.g., solving customer problems)hospitals, etc., are partially contained within larger entities, such as cities, statesand nations, that help enforce rights and responsibilities (Spohrer et al. 2007, 2011).They all apply knowledge, competencies and resources for the benefit of others,and engage in service for service exchange (value cocreation). For example, acrossnations, the populations can vary from hundreds of thousands (Iceland) to over a bil-lion people (China), with differences in the structures associated with transportation,water, food, energy, communications, buildings, retail, finance, health, educationand governance (Demirkan et al., 2011b, 2011c). In line with the service-dominantworldview (Vargo and Lusch 2004), the service system is viewed as the fundamentalabstraction of the study of value cocreation or service science (IfM and IBM 2008;Maglio et al. 2010; Spohrer and Maglio 2010). The idea of non-zero-sum interac-tions that is value cocreation is not new (e.g., collaboration, cooperation, etc.): valueemerges when entities work together for mutual benefit, the key being design ororchestration of these entities for effective value cocreation in constellations (e.g.,Normann and Ramirez 1993) and networks (Gummesson 2004). The value that ac-crues is determined by entities’ unique processes of valuing and derived in part fromunderstanding the interactions of entities that are known as service systems. Servicesystems are physical symbol systems that compute the changing value of knowl-edge in the global service system ecology (Spohrer and Maglio 2008). Basically,all these entities can be viewed as service systems that depend on value-cocreationinteractions to survive generation after generation and improve the quality of life ofthe people inside them by inventing better value-cocreation mechanisms for largeror smaller populations of entities in diverse environments. Typically they involvepeople, technology, organisations and shared information (also summarised as indi-viduals, infrastructure, institutions and information). The types of shared informa-tion include such things as language, laws, measures, models and so on. They areconnected internally and externally by value propositions, with governance mech-anisms that support and adjudicate the resolution of disputes. Viability of entitieswithin the ecology depends in part on their strategies for resource allocation and in-teraction with others, which influences their relative efficiency and growth or loss ofknowledge-intensive capabilities (Spohrer and Maglio 2008).
  4. 4. 10 J.C. Spohrer, S.K. Kwan, and H. DemirkanIn the interconnected world of today, if a nation, state or city were to becomecut off from the rest of the world, quality of life for the population would begin tosuffer almost immediately (e.g., punishment of governments and their populationsthrough isolation and trade sanctions, embargoes). There is a much greater degree ofinterdependence among service system entities today than in the past. Nearly goneare the days when a pioneer family would set out with a wagonload of supplies andtools and fashion a self-sustaining family homestead in the wilderness. Instead, to-day’s quality of life for most people (50% urbanites or city dwellers) is a functionof the quality of service from many systems such as transportation, water, food, en-ergy, communications, buildings, retail, finance, health, education and governance.In the world of today, quality of life is also a function of the quality of jobs (em-ployment levels) in each of those systems. Furthermore, long term, quality of lifeis a function of the quality of investment opportunities available to improve thosesystems year over year, so each generation benefits from a rising standard of living.Nearly gone are the self-sufficient family-operated farms, mills, mines, fisheries orfactories that use their local resources to create units of output to survive econom-ically. Today, even something as simple as a modern pencil or toaster is beyondlocal family-operated production capabilities, and smartphones and spacecraft arebeyond the capabilities of even most nations operating in isolation. Today, valueis truly cocreated in networks of entities, best viewed as nested, networked servicesystem entities for analysis and innovation purposes.In the following sections, we trace the evolution of the concept of “service” insociety, business and science from something to be aware of (and safely ignored inunderstanding the wealth of nations), to something to be measured (and isolated asdifferent and often less controllable and less desirable for the idealised wealth ofnations), to something to be innovated (and integrated back into our thinking abouteverything with respect to the sustainable wealth of nations), to being depended uponas the driver of growth (and put to the forefront). In conclusion, we present possiblefuture research directions for service science. As an emerging transdiscipline, ser-vice science draws on many existing academic disciplines whose researchers worktogether to holistically integrate the separate disciplinary parts into a new whole,while enhancing, but not superseding, any of the parts.1.2Service being ignoredDuring the agricultural and early industrial ages, domestic and professional serviceactivities were largely ignored by most but not all leading thinkers with theorieson the wealth of nations. For example, the writings of five authors, Smith, Ricardo,Bastiat, Babbage, Ruskin and Chandler, provide a useful diverse sampling of con-ceptions of life, work and wealth of nations spanning the late 18th to the early 20thcentury. This time span corresponds to great transformations in average quality oflife, as well as changes in typical institutions, technologies and skills in the USA
  5. 5. 1 Service science: on reflection 11and Europe. These five authors wrote about the way nations created wealth based onhuman strengths and limitations – physical, mental and social (or moral) effort.Smith (1776/1904) advocated increased specialisation. Smith argued that effi-ciently employing growing populations in the production of material goods was es-sential to the wealth of nations. Through division of labour, illustrated by the manu-facture of pins, productive labour exhibits increasing returns (e.g., specialised labourhas higher skill levels, less time lost in shifting occupations and greater opportunityfor discoveries). In contrast, musical and entertainment performances as well as sev-eral other human-oriented service activities (including churchmen and men of let-ters) illustrated unproductive labour that could not be profitably scaled in the sameway to increase units of output in a given time.Ricardo (1817/2004) extended Smith’s notion of division of labour between peo-ple to trade between nations. Ricardo clarified the concept of comparative advantage,and the opportunity to better balance the relative activity levels across the spectrumof national productive activities and investments. However, the focus was primarilyon units of agricultural and tchnological imports and exports, and not on immigra-tion, flows of people or flows of information between nations.Bastiat (1850/1979) criticised the views of Smith and Ricardo on value andwealth of nations, claiming that even simple material things embody the accumu-lated knowledge of many people. Bastiat was one of the first to recognise that allexchanges can be viewed as direct or indirect human knowledge-based service forservice exchanges, even when material things or money are exchanged, because inreality things embody the present or past applied knowledge and effort of peopleworking to benefit themselves and others, i.e., service.Babbage (1832/2012) wrote about the economics of machinery “to supersede theskill and power of the human arm”. Babbage advocated that the wealthiest in societymight benefit from a deeper understanding of the machinery on which their wealthand leisure was based, and then better invest to realise future prospects of even moreadvanced machinery. Babbage also studied the effect of machinery on reducing de-mand for labour; especially specialised manufacturing labour of the type Smith’sprescriptions would create. Babbage did consider the high-skill knowledge-basedlabour of engineers and scientists that created machinery to replace human physicaland cognitive labour to be a prized type of professional service for the wealth ofnations.More in line with Bastiat regarding the importance of service, Ruskin (1860/2012)concluded that the ultimate wealth of nations was its people. Ruskin wrote about thefive great professions of civilised nations from the perspective of their citizens: sol-diers defend, pastors teach, physicians heal, lawyers enforce justice and merchantsprovide. If free to immigrate, people, especially those disenfranchised in society,those who suffer or are oppressed, would move to civilised nations where the best ofthese service professionals practised. Ruskin suggested great professionals are de-fined by the great challenges they willingly take on in their work, including when todie in service of others: “For, truly, the man who does not know when to die, doesnot know how to live”. Gandhi was greatly influenced by Ruskin’s work, which hefound “impossible to lay aside”.
  6. 6. 12 J.C. Spohrer, S.K. Kwan, and H. DemirkanChandler (1977) documented the rise of professional managers and the servicethey provided to large firms (institutions) as a source of increased wealth for nations.The hierarchical structure of a nation’s military, churches and judiciary provideda model for transportation, communication, energy, finance and other commercialindustries at a national and global scale.Within Smith’s cultural context, the view that many service activities were ex-amples of “unproductive labour” and therefore defied profitable scaling by divisionof labour seemed like common sense. At the time, a high quality of life from mate-rial goods was enjoyed by only a few who were in positions to directly or indirectlycontrol the labour of others. High quality of life through material wealth was re-served for relatively few, who owned substantial property through inheritance; orowned productive land with servants, labourers or large families to work it; or pos-sessed the skills and tools of a successful craftsperson; or were shopkeepers ideallynear a town or city; or had the social contacts, skills and ambition to associate withscale-up businesses of the times, mostly in manufacturing or distribution. Many peo-ple were poorly educated and worked physically exhausting, hard lives, and manydied relatively young from ailments easily cured today. Cities offered expanded op-portunities, but unhealthy conditions spread disease and sickness, especially amongthe poor. The average person could either stay rooted to their home community andfamily, or seek out opportunities with associated higher levels of risk in cities, themilitary or the seas. In this era, the unimportance of service relegated it to the bottomof the society.1.3Service being isolatedAs the 20th century unfolded, Clark, Baumol, Leavitt, Zysman and Sen provideda set of updated perspectives on the changing nature of life, work and wealth ofnations. Through their writings and those of other influencers, service activities inbusiness and society were becoming a legitimate, economically and socially signif-icant area of study to be recognised and isolated from other activities and subject toempirical studies.Clark (1940/1957) challenged the status quo of largely ignoring the “service sec-tor” in assessing the wealth of nations. In nations with growing wealth and qualityof life for average citizens, government (defending and enforcing justice), education(teaching), health (healing), retail (providing), financial, transportation, communica-tion, public utility and even entertainment service activities significantly increased,as anticipated by Ruskin. With increased automation of agriculture and manufactur-ing, human labour was shifting to professional service activities, often employingscience and engineering skills in support of agriculture and manufacturing, as antic-ipated by Babbage. With growing wealth and concomitant desire for more leisuretime, families were able to afford to outsource more and more domestic service ac-tivities, as anticipated by Bastiat.
  7. 7. 1 Service science: on reflection 13Baumol and Bowen (1966) sounded the alarm first issued by Smith: if the wealthof a nation depended on two sectors, one in which labour productivity increasedover time (such as manufacturing activities) and one in which labour productivitywas stagnant (such as string quartets and other service activities), over time all labourwould be absorbed into the stagnant sector and the growth of national wealth wouldslow. However, by this time, in the mid-20th century, technology for recording anddistributing music was entering the technology infrastructure of nations, even homesand automobiles. Baumol (2002), recognising the increase in complexity of the en-vironment, later revised his model, as anticipated by Babbage, to include the effectsof research on improving the labour productivity even in supposedly stagnant sec-tors. Perhaps ignoring or working to slow the growth of the service sector was notthe best policy after all. Perhaps it was better to isolate it and study it separately,developing new methods of improving the efficiency of service activities.Levitt (1976) echoed the need to study efficiency improvements in service ac-tivities. Leavitt used fast-food restaurants as an example of new levels of efficiencyand labour productivity coming to service businesses. Furthermore, Leavitt chal-lenged the notion that a business could be classified simply as a manufacturing busi-ness (e.g., IBM) or a service business (e.g., Citibank), suggesting that all businesseshad some degree of front-office customer-facing service activities and some degreeof back-office internal activities more amenable to efficiency improvements. Levitt(1972) asserted that “There are no such things as service industries. There are onlyindustries whose service components are greater or lesser than those of other indus-tries. Everybody is in service.”Cohen and Zysman (1988) extended the ideas of Leavitt beyond the boundariesof a single firm, noting that manufacturing activities and service activities were con-nected in upstream and downstream networks. Specialisation was blurring distinc-tions and creating longer and more intricate networks of service and manufacturingbusinesses. Zysman further suggested that outsourcing service activities might bemore difficult where customer contact was required, and that reducing certain man-ufacturing activities in the value network to benefit from Ricardo’s law of compar-ative advantage might have a deskilling effect on nations that could inhibit futureinnovations and negatively impact the wealth of nations.Sen (2000) greatly expanded on a theme in Ruskin that increasing the capabilitiesof people, including their freedoms and opportunities, was not only a moral impera-tive, but essential to the wealth of nations. Sen investigated in empirical studies theinterconnections between (1) political freedoms (enforce justice), (2) economic fa-cilities (provide), (3) social opportunities (heal and teach), (4) transparency guaran-tees (enforce justice) and (5) protective security (defend). Again the logic of peoplevoting with their feet is practical evidence for this position.By the end of the 20th century, service was no longer being ignored; it had beenrediscovered, purified and isolated by many as an important component of the wealthof nations. In fact, beyond policymakers and economists, many other academic dis-ciplines had begun to zero in on service activities as an understudied area. Marketing,operations management, operations research, industrial and systems engineering,management of information systems, computer science, statistics, management of
  8. 8. 14 J.C. Spohrer, S.K. Kwan, and H. Demirkaninnovation, and design were all working to ensure their graduates hired into servicebusinesses or product businesses (with service offerings, such as finance, mainte-nance, field service, etc.) were better prepared. The quality of life of the averagecitizen, skills levels, types of institutions and the technology infrastructure availableto citizens in wealthy nations were greatly transformed. As Sen commented: “Welive in a world of unprecedented opulence, of a kind that would be hard even toimagine a century or two ago”. The notions put forward by the aforementioned au-thors were made more complex later on in the century and into the 21st century whentransborder trade in services became a more heated battle ground than conflicts overthe trade of manufactured goods and farm products.1.4Service being integratedAs the 21st century unfolds, governments, universities and companies have begunto integrate the work from separate disciplines into a new area called service sciencewith a focus on service innovation (IfM and IBM 2008; UK Royal Society 2009;Ostrom et al. 2010; IBM 2011; IBM Research 2004).Service innovations can improve customer–provider interactions and outcomesas well as stakeholder opportunities for colearning and codeveloping. Service in-novations increase both domain-specific knowledge and the ability of stakeholdersto apply that knowledge to realise mutual benefits. The need for both new domainknowledge and application knowledge is often summarised as “invention does notequal innovation”. Inventions are potential pathways for value cocreation (the “howto recipes” that are novel, non-obvious and useful), whereas great innovations mustcreate substantial benefits in business or society (the “actual feasts” that sustainablysatisfy needs, wants or aspirations for some period of time). Service innovations arenew and improved service inventions put into practice and scaled up rapidly; all thisrequires a deeper understanding of service systems. Service science aims to clarify“what is service innovation?”When first approaching the question, one finds few very relevant definitions ofservice innovation. The Finnish Funding Agency for Technology and Innovationdefines service innovation as “…a new or significantly improved service conceptthat is taken into practice. It can be for example a new customer interaction chan-nel, a distribution system or a technological concept or a combination of them. Aservice innovation benefits both the service producer and customers and it improvesits developer’s competitive edge.” Also, Ostrom et al. (2010) defines it as “…a ser-vice innovation can be viewed by some as a cost-efficient way to streamline in-formation exchanges, reduce mistakes, and ensure targeted levels of service qual-ity. Others perceive it as a loss of responsiveness and personal discretion that en-dangers job security and is detrimental to employee motivation and customer satis-faction.”
  9. 9. 1 Service science: on reflection 15Basically, service innovation is based on evolving customer behaviours and mar-ket trends. These changes are hard to predict accurately and the success of a servicecan hinge upon a small nuance that is hard to pinpoint (Demirkan 2010).As a discipline, service science starts with the practical study of stakehold-ers and their interaction patterns and outcomes. Stakeholder entities’ (e.g., busdrivers/passengers, water utilities/urbanites, doctors/patients, schools/students, etc.)interaction patterns involve systematic resource access (as part of transportation,utilities, health, education systems, etc.), which generate outcomes, both mutualbenefits and non-benefits that arise as either sustainable or unsustainable value-cocreation phenomena. Service science studies the evolution of the ecology of ser-vice systems, made up of stakeholder entities, interactions and outcomes, over multi-ple generations (Demirkan et al. 2011a). A key part of the historical high-level viewof service science is its multiple generation perspective.The most noteworthy societal service innovations in history, such as good gover-nance, healthcare and education, both increase sustainable value-cocreation betweenentities and improve average quality of life for individuals, generation over genera-tion. For our purposes, formal service system entities (e.g., people, businesses andnations) are recognised as legal entities by governments, have legal rights and re-sponsibilities to make, keep and break contracts, and are characterised by boundedrationality and path dependence with respect to their symbolic reasoning, communi-cation and learning capabilities. Informal service systems may or may not be recog-nised as legal entities by governments, but are composed of people with capabilitiesto access and exchange things and ideas (resources and more), as well as make, keepand break promises using natural language skills.Many members of the emerging service science community agree that one of themost fundamental and sustainable service innovation (thus value cocreation) mecha-nisms studied so far combines Ricardo’s law of association (comparative advantage)with human learning from experience (learning curves). Understanding this value-cocreation mechanism is not intuitive to many and requires study.For example, and paradoxically, if one “superior entity” does all activities bet-ter than other entities (uses less time and resources to achieve all goals), in mostcases as long as there are variations in relative performance capabilities across ac-tivities/goals, it makes mathematical sense for that superior entity to interact withothers to reap the benefit of the others’ inferior application of knowledge, or servicecapabilities! Through appropriate interactions, which heuristically allow each entityto do a little more of what it does best and a little less of what it does least well,all entities can use interactions and exchanges to realise both a small individual andlarge collective gains (saving time and resources).Doing more of what one “does best” also accelerates learning from experience(more experience, more improvement) and therefore the individual and collectivebenefits get bigger rapidly over time, up to a limit, as entities become more spe-cialised and dependent on complex technologies and rules of interaction to functionwell collectively. The limit is relatively quickly reached when overspecialisationand reliance on complex technologies and rules creates a “knowledge burden” forentities with finite lifespans that must transfer knowledge from one generation to the
  10. 10. 16 J.C. Spohrer, S.K. Kwan, and H. Demirkannext generation of entities, and when overspecialisation in large networks of inter-dependent entities lacks resiliency to the loss of individuals and groups of entities.Ecological collapse from loss of a single species is a biological equivalent. Mostpeople think of ecology in terms of living organisms, like plants and animals in anatural environment. However, the concept of ecology is more general and can beapplied to entities as diverse as the populations of types of atoms in stars to the typesof businesses in a national economy. Ecologies of entities and their interactions are,in general, complex objects of study on par with the human-made service systementities and human-made value-cocreation mechanisms.The learning and exchange of new technologies (infrastructure) and new systemsof rules (institutions) can have a profound effect on the knowledge people (indi-viduals) possess and apply to achieve mutual benefits within a changing culturalcontext of what prosperity and quality of life mean individually and collectively(shared information). Service science studies the ever evolving ecology of servicesystem entities, which (1) act in diverse stakeholder roles – customers, providers, au-thorities and competitors; (2) dynamically reconfigure access to diverse resources –people (individuals with skills and expectations), technology (infrastructure), or-ganisations (institutions with roles and rules) and cultural context (shared informa-tion); (3) have value proposition-based and governance mechanism-based interac-tions; and (4) transform expected and realised value-cocreation outcomes in path-dependent ways.Spohrer and Kwan (2009) define innovation as a measure of value (judgementof change). They also indicate that “innovation in service system ecologies (mul-tiple populations of interacting service systems) is a relative measure of the valueco-creation increase that results from a change. The types of changes can be thecreation of new types or instances of resources, service systems, value propositionsor governance mechanisms. The types of measures of value in rationally designedservice system improvements relate to the four fundamental measures of quality(customers), productivity (providers), regulatory compliance (authorities), and sus-tainable innovation (competitors). Examples of service system innovation include:(1) a loyalty program for an airline, (2) a self-service system at a bank (ATMs), air-port (tickets), or retail outlet (checkout scanning), (3) creating a financial servicesoffering, (4) creating a new franchise model, (5) creating a new type of businessor organisational structure, (6) specialising and streamlining a medical procedure toexpand the number of patients that can afford and hence seek treatment, etc.”Moreover, service science is an emerging transdiscipline that borrows from andtries to re-integrate multiple disciplines, such as marketing and behavioural sciences(customers), operations research and management sciences (providers), governanceand political science (authorities), game theory and learning sciences (competitors),psychology and cognitive science (people), industrial engineering and system sci-ences (technology), management of information systems and computer science (in-formation), organisation theory and administrative sciences (organisations), eco-nomics, law and historical sciences (past changes), foresight studies and design sci-ence (future possible changes), time use and labour studies, in light of anthropologyand demographic sciences (practice of what is presently valued most and how that
  11. 11. 1 Service science: on reflection 17shifts through the ages in different societies and contexts), to name a few of themany disciplines that service science draws on (but does not supersede) (Demirkanand Spohrer 2010).1.5Service being put to the forefrontToday, many modern service offerings are information and communication tech-nology (ICT)-enabled. The convergence of ICT innovation, design, development,execution, storage, transmission and reusable knowledge is creating new opportu-nities (Demirkan et al. 2009). They include redeploying people, reconfiguring or-ganisations, sharing information (e.g., language, processes, metrics, prices, poli-cies and laws) and investing in technologies. More specifically, ICT provides themeans to improve the efficiency, effectiveness and innovativeness of organisationsthrough: (1) making it possible for commoditisation of none-core competencies(e.g., outsourcing, out-tasking); (2) improving collaboration (e.g., inter- and intra-organisational workflows and business processes); (3) decreasing the risk of infor-mation security breaches; (4) facilitation of new types of services (e.g., Google, on-line banking); (5) separation of production and consumption of a service, thus stora-bility, transportability and access to knowledge-based services (e.g., tax software,online classes); (6) coordination of service systems (e.g., online broker systems, in-formation markets, open innovation platforms); (7) reduction of the costs of ser-vice production (e.g., semi- and fully automated call centres); (8) improvement ofcustomer-perceived service quality (e.g., ability to standardise elements of serviceas well as customise to the individual when appropriate); and (9) integration of cus-tomers into service creation and delivery (e.g., online educational services, healthinformation systems, business-to-business solutions) (Allen et al. 2006; Bræk andFloch 2005; Davenport 2005; Garcia-Murillo and MacInnes 2003; Garrison, 2000;Maglio et al. 2006; Soper et al. 2007). As the world becomes digitally connected, thesignificance of customer cocreation, open innovation and service-scaling phenom-ena is becoming more apparent, and empirical investigations can draw on new datasets and tools (Bardhan et al. 2010; Hsu and Spohrer 2009; Chesbrough 2011). ICTinnovations are making technology more service oriented and also enabling manyservice innovations.Basically business-to-consumer (B2C), business-to-business (B2B), business-to-government (B2G) and business-to-business-to-customer (B2B2C) service offer-ings, and many versions of value-cocreation configurations have been used morefrequently. All services – from knowledge-intensive professions (e.g., business con-sultant, physician, software engineer, legal counsel, financial advisor, teacher) to in-formation systems and technology services (e.g., self-service technologies, businessservices, web services, software-as-a service, infrastructure services, virtual com-puter resources, grid computing, cloud computing) – have characteristics that schol-
  12. 12. 18 J.C. Spohrer, S.K. Kwan, and H. Demirkanars have studied, looking for salient patterns (Bitner and Brown 2006; Demirkan etal. 2009; Fitzsimmons and Fitzsimmons 2007; Looy et al. 1998).• Many service offerings and interactions include high involvement of people fordelivery and usage. Human are the primary resources and stakeholders. Whilepeople can be unpredictable in their behaviour, the planning, design, delivery andsupport of any service require variability, heterogeneity or non-standardisation.• Service offerings and interactions are mostly something one cannot touch or feel,although they may be associated with something physical. For example, whilereceiving an education service, we also use books, notes, etc.• Unlike products, service offerings and interactions cannot be stored in inven-tory for later use. Therefore, management of demand and capacity, and pricingdecisions are very crucial in the provision of services.• Many service offerings and interactions are produced and consumed simultane-ously. This will also result in role interactions rather than things.• Many service offerings and interactions are delivered to customers with the col-laboration of distributed service providers.• Simultaneity of production and consumption of service offerings and interactionsoccurs in complex service environments due to interaction of people, processes,technology and shared information.Today’s highly competitive, global economy, with high customer expectations, dy-namically changing markets and technologies, and a fragmented regulatory environ-ment, increases the need for companies to be able to de-commoditise their assets andhave transitioned from a focus on goods to a focus on service offerings and inter-actions (Christensen and Raynor 2003; Vargo and Lusch 2004). The implicationsof this shift in offerings and interactions to technology innovation and managementpractice are dramatic (Table 1.2).Table 1.2 Transition from past to present (revised from Demirkan et al. 2009)From ToFocus on goods Focus on serviceCost reduction through manufacturing efficiency Revenue expansion through serviceStandardisation CustomisationMass marketing One-on-one marketingShort-term transactions Long-term relationshipsFunction oriented Coordination orientedLimited information-sharing capabilities Improved information-sharing capabilitiesApplication silos Integrated solutionsTightly coupled businesses Loosely coupled solutionsSale-contracts Rental-service level agreements
  13. 13. 1 Service science: on reflection 191.6Concluding remarks: future directionsThe growth of the service sector of the economy is truly a wonder of human history,on par with the agricultural revolution and the industrial revolution. Practitionerswith an interest in service innovation should be aware of service science, and monitorthe advancements in service-science related curricula and research results. The fieldis rapidly evolving. The numbers of “service”-focused schools, programmes, classes,and academic and professional associations, articles, conferences, talks and news aregrowing exponentially.Nevertheless, after just ten years, service science is still in its infancy. Typically,new scientific disciplines take about 30 years to mature. For example, computerscience is now a mature discipline, but when it started in the mid-1940s there wereno semiconductors, transistors, integrated circuits, software development tools orauthoritative compilations of algorithms, and no Internet. Until universities find afaster way to create new PhD students, it will probably always take about 30 years,which is three to five generations of students, to create a new discipline, especiallya complex transdiscipline like service science.As we look to the future, three advances are on the horizon: (1) new tools anddesign specification standards, (2) new open data sources and streams, and (3) newon-line textbooks with dynamic real-world problem sets.First, tools such as computer-aided design (CAD) systems for modelling and de-signing complex service systems are being developed. Nearly every product man-ufactured today is designed with a CAD system and has an associated CAD file.However, service offerings rarely have standard specifications. From enterprise ar-chitecture to business process specifications to new tools for designing buildings andwhole city simulations, this area of tool development and standard specification ofservice systems and processes is poised for change. These tools may be especiallyvaluable to policymakers working to understand regional innovation systems, espe-cially if alternative policies can be explored (Spohrer and Giuiusa 2012).Second, new open data sources and streams are becoming available. Businessesand governments are working to make more and more data sets available to re-searchers. For example, the new company Kaggle ( invitesresearchers with the slogan “We make data science a sport”. “Big data” initiativesin many nations are providing the data sets for complex service systems and stake-holder interactions to perform more and better empirical investigations, faster andcheaper (Demirkan and Delen 2012). Big data initiatives are growing because ofadvances made in the collecting, processing and analysis of lots of data.Third, while textbooks may seem like a 20th-century concept, disciplines do ad-vance by the creation of professional associates, and “books of knowledge” that distilthe concepts and best cases to help students rapidly learn about new fields. More andmore relevant textbooks and teaching materials for learning aspects of service sci-ence are appearing ever year (Spohrer 2012). Also, re-invented on-line textbookswith dynamic problem sets that use on-line data sources and CAD tools will linkthese three advances, expected in the coming decade.
  14. 14. 20 J.C. Spohrer, S.K. Kwan, and H. DemirkanThe goal of service science is to catalogue and understand service systems, and toapply that understanding to advancing our ability to design, improve and scale ser-vice systems for practical business and societal purposes (Demirkan et al. 2009). Thegrowth of service economies has broad implications for the operation of businesses,the creation of academic knowledge, the delivery of education, the implementationof government policies and the pursuit of humanitarian causes.In sum, the measured growth of “service” in society and business parallels a grow-ing global dependence on smarter (knowledge-intensive, digital) systems. Smartersystems integrate and apply knowledge (people and skills, technology and businessmodels) to realise benefits for customers, and so they can be referred to as productservice systems or simply “service systems”. Furthermore, the growth of complexnested, networked service systems also parallels trends in service outsourcing, self-service technologies, globalisation, urbanisation, technological augmentation of hu-man labour, knowledge intensity of high-skill work, and rewards for entrepreneurialcapitalism, especially when business models allow innovations to scale rapidly. Ser-vice science aims to provide fundamental knowledge and tools to better understandservice innovation scale-out and thereby shape public policy to guide the evolutionof interconnected service systems that improve average quality-of-life globally, gen-eration after generation. Service science has come far after ten years. It is hoped thatby working together better it will not take another twenty years for service scienceto become mature and make a positive and sustainable impact on society.ReferencesAllen P, Higgins S, McRaie P, Schlaman H (2006) Service orientation: winning strategy andbest practices. Cambridge University Press, New YorkBabbage C (1832/2012) On the economy of machinery and manufactures. Amazon DigitalServices. A Public Domain Book. Kindle EditionBardhan I, Demirkan H, Kannan PK et al (2010) An interdisciplinary perspective on IT ser-vices management and services science. J Manag Inf Syst 26(4):13–65Bastiat F (1850/1979) Economic harmonies. The Foundation for Economics Education, Ir-vington-on-HudsonBaumol, WJ (2002) Services as leaders and the leader of the services. In: Gadrey J, GalloujF (eds) Productivity, innovation and knowledge in services: new economic and socio-economic approaches. Edward Elgar, CheltenhamBaumol WJ, Bowen WG (1966) Performing arts: the economic dilemma. The Twentieth Cen-tury Fund, New YorkBitner MJ, Brown SW (2006) The evolution and discovery of services science in businessschools. Commun ACM 49(7):73–78Bræk R, Floch J (2005) ICT convergence: modeling issues. In: Amyot D, Williams AW (eds)Proceedings of the 4th International SDL and MSC Workshop, Ottawa, Canada, June2004, Lecture Notes in Computer Science, 3319. Springer, BerlinChandler AD (1977) The visible hand: the managerial revolution in American business. Bel-knap/Harvard University Press, Cambridge, MA
  15. 15. 1 Service science: on reflection 21Chesbrough H (2011) Open services innovation: rethinking your business to grow and com-pete in the new era, 1st edn. Jossey-Bass, Wiley, San FranciscoChesbrough H, Spohrer J (2006) A research manifesto for services science. Commun ACM49(7):35–40Christensen CM, Raynor ME (2003) How to avoid commoditization. Harvard BusinessSchool Press, BostonClark C (1940/1957) Conditions of economic progress, 3rd edn. Macmillan, New YorkCohen SS, Zysman J (1988) Manufacturing matters: the myth of the post-industrial economy.Basic Books, New YorkDavenport TH (2005) The coming commoditization of processes. Harvard Bus Rev 83(6):100–108Demirkan H (2010) Service innovation and the science of service. Korea Institute for Indus-trial Economics & Trade (KIET) Innovations in Service Industries Conference, Seoul,Korea, November 16Demirkan H, Delen D (2012) Leveraging the capabilities of service-oriented decision supportsystems: putting analytics and big data in cloud. Decis Support Syst Electron Commer (Inpress)Demirkan H, Spohrer JC (2010) Servitized enterprises for distributed collaborative com-merce. Int J Serv Sci Man Eng Technol 1(1):68–81Demirkan H, Kauffman RJ, Vayghan JA et al. (2009) Service-oriented technology andmanagement: perspectives on research and practice for the coming decade. Electron Com-mer Res Appl J 7:356–376Demirkan H, Spohrer JC, Krishna V (2011a) Service and science. In: Demirkan H, SpohrerJC, Krishna V (eds), The science of service systems (Series: Service science: research andinnovations in the service economy). Springer Science+Business MediaDemirkan H, Spohrer J, Krishna V (eds) (2011b) The science of service systems (Series: Ser-vice science: research and innovations in the service economy). Springer Science+Busi-ness MediaDemirkan H, Spohrer J, Krishna V (eds) (2011c) Service systems implementation (Se-ries: Service science: research and innovations in the service economy). Springer Sci-ence+Business MediaFitzsimmons JA, Fitzsimmons MJ (2007) Service management: operations, strategy, infor-mation technology, 6th edn. McGraw-Hill-Irwin, New YorkGarcia-Murillo M, MacInnes I (2003) The impact of technological convergence on the regu-lation of ICT industries. Int J Media Manag 5:57–67Garrison B (2000) Convergence to the Web is no longer just the future. College Media Rev38(3):28–30Gummesson E (2004) Return on relationships (ROR): the value of relationship marketing andCRM in business-to-business contexts. J Bus Ind Mark 19(2):136Hsu C, Spohrer JC (2009) Improving service quality and productivity: exploring the digitalconnections scaling model. Int J Serv Technol Manag 11(3):272–292IBM (2011) The invention of service science. IBM Centennial Celebration, IBM 100 Icons ofProgress. Available at Last accessed on September 13, 2012IBM Research (2004) Services science: a new academic discipline? The architecture of on-demand. Business Summit, T.J. Watson Research Center, IBM Corporation, YorktownHeights, NY
  16. 16. 22 J.C. Spohrer, S.K. Kwan, and H. DemirkanIfM and IBM (2008) Succeeding through service innovation: a service perspective for educa-tion, research, business and government. University of Cambridge Institute for Manufac-turing, CambridgeLevitt T (1972) Production-line approach to service. Harvard Bus Rev September/OctoberLevitt T (1976) The industrialization of service. Harvard Bus Rev 54(5):63–74Looy BV, Dierdonck RV, Gemmel P (1998) Services management: an integrated approach.Financial Times Pitman Publishing, LondonMaglio PP, Srinivasan S, Kreulen JT, Spohrer J (2006) Service systems, service scientists,SSME, and innovation. Commun ACM 49(7):81–85Maglio PP, Kieliszewski CA, Spohrer JC (eds) (2010) Handbook of service science (Se-ries: Service science: research and innovations in the service economy), Springer Sci-ence+Business MediaNormann R, Ramirez R (1993) From value chain to value constellation: designing interactivestrategy. Harvard Bus Rev July–August:65–77Ostrom AL, Bitner MJ, Brown S et al. (2010) Moving forward and making a difference:research priorities for the science of service. J Serv Res 13(1):4–36Ricardo D (1817/2004) The principles of political economy and taxation. Dover Publications,Mineola, NYRuskin J (1860/2012) Unto this last and other essays on political economy. Amazon DigitalServices. A Public Domain Book. Kindle EditionSen A (2000) Development as freedom. Anchor/Random House, New YorkSmith A (1776/1904) An inquiry into the nature and causes of the wealth of nations. W. Stra-han & T. Cadell, LondonSoper, D, Demirkan H, Goul M (2007) A proactive interorganizational knowledge-sharingsecurity model with breach propagation detection and dynamic policy revision. Inf SystFront 9:469–479Spohrer J (2012) Some books used in teaching aspects of service science. Blog post on: Ser-vice science research and education. 15 February. J, Kwan SK (2009) Service science, management, engineering, and design (SSMED):an emerging discipline – outline and references. Int J Inf Sys Serv Sector 1(3):1–31Spohrer J, Maglio PP (2008) The emergence of service science: toward systematic serviceinnovations to accelerate co-creation of value. Prod Oper Manag 17:238–246Spohrer JC, Giuiusa A (2012) Exploring the future of cities and universities: a tentative firststep. In: Proceedings of Workshop on Social Design: Contribution of Engineering to So-cial Resilience, University of Tokyo, Tokyo, 12 MaySpohrer JC, Maglio PP (2010) Toward a science of service systems: value and symbols. In:Maglio PP, Kieliszewski CA, Spohrer JC (eds) Handbook of service science. Springer,New YorkSpohrer JC, Maglio PP, Bailey J, Gruhl D (2007) Steps toward a science of service systems.IEEE Comput 40(1):71–78Spohrer JC, Demirkan H, Krishna V (2011) Service and science. In: Demirkan H, SpohrerJC, Krishna V (eds) Sciences of service systems. Springer, New YorkUK Royal Society (2009) Hidden wealth: the contribution of science to service sector inno-vation. Royal Society Policy Document 09/09. RS1496Vargo SL, Lusch RF (2004) Evolving to a new dominant logic for marketing. J Mark 68:1–17
  17. 17. 1 Service science: on reflection 23INNOVATION LABNew payment methods (m-Payments)MAINS Master, academic year 2008/2009People and companies involved in the InnoLab:Students: Paola Costantino, Jari Petroni and Francesco Piccioli CappelliCompanies: Intesa Sanpaolo, Banca CR Firenze, Ericsson Telecomuni-cazioni, Telecom Italia and SIA-SSBProfessors: Roberto Barontini and Giuseppe Turchetti1. The problemFollowing the e-commerce era, m-commerce (mobile commerce) has re-cently conquered a significant segment of the market. Mobile phones havebecome objects of daily use that users are practically never without. Banks,mobile operators, network operators and other mediators have developednumerous payment systems that are suited to these mobile devices, with theresult that today, in many cases, payments are no longer made with cash,credit cards or bank transfers, but with the comfort of the phone itself.The business potential resides mainly in the high penetration that mobilephones have achieved. In developed or emerging countries, almost the en-tire population has a mobile phone. Moreover, they are usually kept close athand, even when not used for calls or other services, thus rendering the mo-bile increasingly more available as a payment tool in comparison to others.A key factor for firms investing in the m-payment market is to achievea critical mass of customers and hence to be able to generate profits as soonas possible to compensate for the investments made to enter the sector. Forthis reason, the first applications to be launched were focused on the primarybenefits to customers of m-payments, namely flexibility and convenience.In this context, the workshop was conducted with the aim of analyz-ing and developing an innovative payment service based on the use ofthe mobile device as an alternative to conventional services such as cash,credit/debit cards, bank transfers, etc. Specifically, the team, having defineda perimeter of possible m-payment applications, focused on preparing abusiness case with the aim of providing concrete indications for potentialcollaborations between the project’s industrial partners.2. Work methodologyThe team researched the possible areas of application relating to the m-payment project: the analysis was mainly based on screening the materialcollected (information on successful and unsuccessful cases) and identify-ing key variables in an attempt to outline the main critical success factorsof each scenario.The work progressed with a subsequent focus on a single application,considered more advantageous both economically and strategically, in orderto prepare the business plan to present to a hypothetical venture capitalist.
  18. 18. 24 J.C. Spohrer, S.K. Kwan, and H. DemirkanThe intention was to provide concrete input for the potential develop-ment of a business project that would open new, untapped and highly prof-itable market opportunities.Following the work conducted by the team, it was decided to develop abusiness idea on the application of m-payments in large retail chains. Forthis reason, COOP Italy was involved in order to allow development of thecase study.The idea was to analyze unmet needs and services offered to COOP cus-tomers in order to implement these with the use of m-payments. Thereafter,the business potential of m-payments was assessed within the scope of largeretail chains, analysing different scenarios through a set of possible servicesconstituting the points of reference to map a business model.3. Proposed solutionTo develop the business idea, the needs of large retail chains were analyzedand were found to include reducing operating and administrative manage-ment costs, reducing congestion at checkout queues with a consequent in-crease in turnover, customer loyalty intended as customer satisfaction (im-proving the level of service) and increasing the customer base through newpartners and by means of the company’s image.Similarly, customer needs were also analyzed and the results were: con-venience understood as the ability to aggregate multiple functionalities in asingle tool, usability with quick user-friendly services that can be enjoyedwithout fear of making mistakes, information transparency, or rather, ac-cess to information and visibility of transactions, a clear understanding ofcosts, security and protection against fraud and theft, standardisation viathe scalability of services offered through the technology and standardisedprocedures, as well as integration with services that constitute a platformenabling the activation of other services.The program foresaw a subsequent focus on a range of services (primaryand accessory value-added) considered to be more advantageous both ineconomic and strategic terms.The primary service was defined in terms of creating an internal closedcircuit where payments could be made via mobiles in the contactless mode.This service is beneficial to large retail chains since it satisfies the needto reduce cash management costs with a view to eliminating commissionsand the current “war on cash”, minimising management activities throughvirtualisation of cards and loyalty through incisive marketing initiatives.Since a key factor for firms investing in the m-payment market is theattainment of a critical mass of customers, a closed circuit environment ren-ders the activation of incentive mechanisms feasible – such as point accel-erators, topping up phone credit, shopping vouchers and the virtual piggybank – to reward the use of mobile payments.