1. SERVICE INNOVATION

2. Service Innovation Considered by global executives to be very important to achieving revenue targets and to long-term success. Two-thirds expect spending on innovation to increase in the next year. Service innovation is difficult to achieve. WHY?? – What are the fundamental differences between a product and a service? – Why do these differences present challenges to innovation?

3. CharacteristicsManufacturers of tangible products Service providers of intangible products Nature and consumption of outputs Consumption after production Consumption as being produced Uniformity of inputsHigher control over inputsInputs vary Uniformity of outputsAutomation allows for uniformity Customized outputs Nature of inputsCapital intensiveLabor intensive Measurement of productivity Fairly straightforwardMore difficult McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Why do these differences present challenges to innovation?

4. Challenges to service innovation Services are intangible and difficult to protect through legal means. Good services are customized. Good service depends on consistency and capability of service provider. High cost of failure. Experiments are visible and hence, easily copied. Expectations of short-term financial success. Innovation not a priority in resource allocation decision. Lack of organizational mechanisms to encourage innovation. Low tolerance for risk and failure.

5. Service Innovation What is service innovation?* – Increase margins of delivering existing service offerings – cut costs – Create new kinds of high value service offerings – grow revenue – Improve skilled labor productivity in creating and delivering service. Example of baggage handling.baggage handling Why is IBM the leader in research and thinking about service innovation?IBM * Jim Spohrer, Paul Maglio (IBM Almaden Services Research). “Service Science, Management and engineering (SSME): An Emerging Multidiscipline. Presentation at SSME Conference, 2006. http://www.slideshare.net/spohrer/spohrer-and-maglio-yorktown-20061020-v2

6. Achieving Service Innovation* Value thinking Customers as co-creators of value New thinking that enables customers to do new things Profitable innovation Knowing how to make it happen One innovative example…innovative * Professor Stefan Michel, IMD. http://www.youtube.com/watch?v=v_YIGIGIiTw

7. NEW SERVICE DEVELOPMENT SYSTEM

8. Bank of America Innovation & Development Team’s Product & Service Innovation Process? Components – Structure – Cycle time – Off-site rehearsals – Control branches – Parallel testing Objectives – Speed – Minimal cost – Learning

9. ORGANIZATION? Protoype Centers Living Laboratories – Experiments in 20 (+5) I&D Centers – Five “express centers” – Five “financial centers” – Ten “traditional centers” National Rollout

10. Management/Leadership? Headed by two senior VPs (Butler and Brady) Emphasis on innovation and profit objectives Strong moral support Indirect reporting to President Minimal Financial Commitment – Budget of $8 million = 0.1% of revenue – Branches pay for own experiments

11. INCENTIVES/COMPENSATION Sales associates earn 30% - 50% of pay from point based performance system. Initially experiments not included in point system. Then changed to fixed incentives based on team performance. Then changed back to old system. Why?? – Part of the learning process – Danger of on-line experimentation

12. CULTURE OF THE BANK? Conservative “three piece suits” Zero Defect culture – 4 million FINANCIAL transactions/day – 99.9% success rate means ONE MILLION ERRORS/year Certainty of outcomes (variance is the enemy) Tension between delivering high-quality service (no errors) and experimenting (margin for errors)

13. MEASURING RETURN Direct measures – Customer volume – Increased revenue – Decreased cost Indirect measures – Reduced personnel turnover – Customer satisfaction – Bragging rights

14. FACTORS THAT AFFECT LEARNING THROUGH EXPERIMENTATION Fidelity – Degree to which a model and its testing conditions represent a final product, or service under conditions of actual use. Cost – Designing, building, running and analyzing – including expenses for prototypes, laboratories, etc. Iteration time – Time from initial planning of experiment to availability of analyzed results for next iteration

15. Capacity – Number of experiments that can be carried out with some fidelity during given period of time. Sequence – Extent to which experiments are run in parallel or series. Signal-to-noise ratio – Extent to which the variable of interest is obscured by other variables. Type – Degree to which a variable is manipulated, from incremental change to radical change. Skill – Degree to which service providers understand and consistently deliver experimental service

16. DECISION Should Butler and Brady accept the 10 branches? Accept Need additional experimentation capacity; too many experiments per branch. Increases geographic diversity. Increases possible experimental controls. Larger samples could increase fidelity of experiments. More capacity leads to faster feedback. Faster process because experiments can run parallel. Need new laboratories, Atlanta is getting used to experiments. Sign of commitment from senior management. Decline 25 branches too large for small group. Already too many experiments; need to focus on better pipeline, not simply bigger “pipe” Bigger innovation market leads to more risk aversion. Team first needs to prove it can be successful, then expand. May drag down overall financial performance. New branches will distract team; they have no control/authority and need to retrain people. No need to hurry, industry changes slowly, BoA already leading. Does senior management understand the system?

17. If they accept, what should they ask for? If they decline, how do they turn the offer down?