Practice Currently Fails Perception: A Study of Services Innovation In Australia

 Accurate analysis around innovation activity in services and the services industry in the Australian economy is very difficult to track down.

Firstly there are issues of definition of what the services industry actually constitutes and possibly lots of overlap with other supposed “non-service” categories such as Agriculture, Manufacturing and Mining & Resources.

Secondly there is a paucity of understanding of how the innovation systems in services industries typically operate. In one sense the services sector has been a victim of its own success – because it has been steadily growing and has not been in decline like, for example, Automotive Manufacturing Sector, it has not ended up being the focal point for in-depth studies about its innovation characteristics. 

On the definition side, the Australian Bureau of Census and Statistics writes.. “a service industry produces services valuable to consumers as a final product, such as services provided by cafes and restaurants, or valuable to other service and goods producers as an intermediary input, such as wholesale trade and accounting services.”  Hardly helpful!!

While ABS reports that in 2012 services made up 71.2 percent of Gross Value Added economic activity and provided jobs for 86.1 percent of employed persons, there is only poor data and limited understanding about the operations of the many services sub-sectors, which are increasingly niche focused and which also increasingly defy simple ABS categorisation methods.

As I started to look for detailed data and evidence to better understand the dynamics of the local services sector and its innovation practices I quickly started to draw a blank. I googled various variations on the theme of innovation research into the Australian Services Industry and how it operates. No detailed papers or articles appeared.  I was shocked. I was unable to find any sources that could provide me with any meaningful definitions or insight or indeed any understanding of what and how the services sector, the largest contributor to Australian GDP, operates today and how it is positioned for the future.

Rhetoric abounded about the services industry and its importance and value. But just how it made that contribution was not in the least bit clear to me and this in an industry that contributes ...well... I am going to average the rhetorical claims that abound.....an estimated 75% of Australia’s GDP.

So could I be wrong about this? Was I missing something?

I mentioned this to Ian Birks, CEO, the Australian Services Roundtable. He verified much of my thinking and also reflected on how poor understanding is of how services companies innovate.

So over the last 15 months with the ASR and Ian Birks kind support and mentoring, I embarked on a journey to see if sufficient data could be gathered to give some shape and understanding to the services industry sector with the intention of learning how it works and how and in what way it innovates, our purpose being to provide insight to the Australian Services Industry from which the sector as a whole can benefit and in the process assisting government to formulate industry innovation policy for this vital part of the economy.

We titled the initiative, the Australian Services Roundtable Services Innovation Index and I am pleased to bring the results of the first Index to you as part of the ASR Services Summit 2014.

A quick summary of the demographics and profile of the Index participants to commence.

The inaugural Index measurements are based on data compiled from a 38 question on-line survey with a total of 110 participating organizations drawn from the ASR membership and my industry innovation subscription service numbering just under 11,000. The organizations chose to participate voluntarily in return for access to a copy of an Executive Report of the findings of the Index.

80.00% of the organizations who responded came from industry, 11.0% from Government and 9% from NGOs.

In terms of primary industry categorisation, there was a good spread of whole of services sector with 60% from what might be broadly categorised as Professional Services (Architects/Design/Engineering, Banking and Finance and Creative Industries), pleasingly 15% from the Education Sector and 11% from Government.  IT constituted 6%.

73% of the participating organizations had revenues below $50million - what ASR would characterise as SMEs -  with 10% above $500miliion and pleasingly 75.0% of the actual survey participants came from senior executive management or board level.

Thus the inaugural Index has a strong senior leadership bias which as you will hear later is vitally important to the practice of innovation and its outcomes in the services industry.

The survey questionnaire was constructed to collect data around two main themes, how the services industry perceived innovation and how the services industry practised innovation. 

Let me deal with the perceptions of innovation first.

When asked to agree or disagree with the statement Innovation is a core business value in our organization, 80% agreed with the statement.

This is quite a remarkable result when compared to the results of a research project I carried out for the ASR in 2008 across all industry sectors under the title of “Are Australian managers creative or innovative?”

In that survey participants did not see innovation as a component of the basics of business at all, rather they saw new revenue generation and products and services as the drivers and innovation as something quite distinct from core business.

So, it would appear that in the space of 6 years, innovation has moved from the edge of business thinking to the core of business thinking especially in the services sector.

Even more encouraging, 97% say innovation is important to their organizations and when asked whether they considered their organizations to be innovative against their peers over 77% agreed. Clearly service industry organizations are competing very strongly on the notion of “being innovative”.

34% say innovation has had a significantly positive impact financially and 90% say it has a positive impact generally.

So it is fair to say innovation as a business or organizational fundamental is perceived extremely well by leaders in the services industry.

When asked what the biggest drivers of services innovation in their organizations were, 47 organizations rated leadership and people as their main drivers, 23 rated technologies whilst only 21 rated the competitive markets in which they operated.

This would seem to indicate something of an industry bias towards innovative activity being an internally driven dynamic in most organisations surveyed as opposed to a more external focus This begs the question - do Australian services industries observe global trends of their competitors as closely as they might in an increasingly competitive global economy?

Perhaps the most disappointing indicator is when asked to characterize the performance and growth over the last 5 years of their organizations, only 16% described it as very good with 75% describing it as fair to good only.

Whilst I will propose this trend in some ways might be explained by the disconnect between the perception and the practice of innovation in the industry, it is also a trend in which the Government should engage deeply in order to set policies and design incentives that can harness and deliver the productivity and opportunities the largest contributor to Australian GDP, the Australian services industry, has to offer.

Let’s now explore the practice of innovation as opposed to the perception.

Only 17% of organizations have someone allocated with specific responsibility for innovation – mostly as part of a broader set of responsibilities within larger corporations - while 53% of organizations say it’s everyone’s responsibilities

Importantly 29% say there is no formal responsibility for innovation in their organizations. Only two organizations indicated they had specific innovation departments.

This immediately flags a lack of serious consideration by leaders about the practice AND management of innovation.

1/3 of services industry organizations don’t perceive innovation as a practical organizational or business discipline, rather something that operates innately and is intangible.

Often, where this is the case,organizations use continuous improvement euphemistically to describe their innovation efforts. Continuous improvement focuses on error, risk reduction and the elimination of uncertainty. Innovation on the other hand is driven by idea creation, breakthrough thinking and implementation of the new. As a result, a business-as-usual culture focused on continuous improvement will constrain real innovation endeavours.

70% of organizations focus their innovation endeavours on new revenue streams and new product and services with 32% focused internally on costs, efficiency and supply chain improvements.

Organizations say innovation success comes mainly from new products and services - top rating by 10 points followed by business model innovation (markets. Distribution channels) and new revenue streams.

When asked where the innovation ideas came from to drive this success, customer driven problem solving top rated followed by ideas generated directly by senior leadership with internal R&D a poor third. Interestingly, market disruption did not rate at all and joint ventures with academia scored a zero.

Importantly here, it is worth noting  the nomination of senior leaders as playing a vital and  active role in idea generation.

To support and drive these endeavours and successes, what innovation related activities do services organization engage in?

Some very interesting results emerged from this question.

Over 75% of organizations engage in idea creation or brainstorming with 62.0% engaging in strategic innovation planning suggesting organizations have a propensity for a high level of discourse around the topic of innovation.

Yet, the survey revealed only 25% on average of all participant organizations employed leadership and innovation training or used technology to facilitate and support idea creation or measured innovation outcomes – all vital essential elements in the development and implementation of deliberate innovation.

Further when asked how innovation activities were financed within the organization over 81% indicated they were only financed on a project by project basis or simply chalked up as overhead when they happened and not financed at all.

This is a strong signal that whilst innovation maybe perceived as a core business value, its practice is typically only supported on an ad hoc basis with little support for the development of skills and capabilities required to implement it. 

So what the ASR Services Innovation Index has surfaced is a real disconnect between the perception and rhetoric of innovation and the practice of innovation and I suspect this applies to industry in general as well.

This disconnect is characterised when an organization externally and publically articulates innovation as a core business value, yet attaches no value to it internally - failing to engage whole of organization thinking in how innovation is going to be led, managed, financed and implemented.

This gap is further exemplified by the responses to questions on services innovation productivity.

How many new internal processes and new products and services did you implement in the past 12 months?

Out of 110 organizations participating, only 4 indicated they had implemented new internal processes; only 3 indicated they had launched new products and services..

Clearly there is an important area of investigation as to why there is such low innovation outputs for the amount of innovation activities organizations engage in upfront with strategic innovation planning and idea creation..

On actual service components within products and services offering, 43% of organizations surveyed offered services only. Where products and services were offered in combination, 59% of organizations integrated their services offering across the product range. With integration this high, the question that should be asked is whether Australian services industries are ignoring service innovation opportunities..

Finally in the survey, we explored how important technology is in driving innovation and change generally in organizations.

There is no surprise when 94% of respondents said it is having a huge impact with 85% of service industry organizations saying it is playing a highly important role in services innovation.

Participants wrote

“Technology has completely changed the way our services and products are delivered.”

“Technology has changed the landscape and opened up the local and national markets to international competition.”

“Technology is changing the regulatory compliance legislation which is affecting the products and services provided nationally and competition within industry”

Comments such as these illustrate the scope and breadth of the epicness of the role of technology and the enormous potential opportunities it offers this sector.

So in summary, and after some initial analysis, we believe that the first Australian Services Roundtable Services Innovation Index surfaced five major understandings  in relation to Australian service industry organizations and their innovation journey.

They are:

• The existing innovation rhetoric of organizations does not appear to match innovation outcomes with relatively low levels of outcomes for the effort spent.
• Innovation in services is poorly financed and operates on an ad hoc basis at best.
• The role of leadership in the organization is reported as critical. Enlightened and committed leadership in which leaders are actually involved in generating ideas is absolutely crucial for innovation to have any chance of success.
• Innovation implementation in Australian organisations is generally insufficiently supported due to a lack of commitment in developing the organizational skills and capabilities to drive implementation.
• The highest levels of innovation success are reported when innovation is externally focused and designed directly around new products and service and new revenue streams

It is fair to say against this backdrop, there appears to be a good understanding of how innovation practice works. One survey participant summed it perfectly when he listed the following as essential elements.

“Market analysis to determine new and untapped markets and distribution channels.

Creation of new business models to address flexibility in dealing with changing market trends and landscapes, resulting in a flow on effect to meet market demand for new product and support services which then lead into productivity and cost efficiency.

These elements are VERY important in addressing and creating an innovative product or service.

Foremost though is the identification of new revenue streams to tap into and create a strategy and business model to support on-going success.”

In closing, ASR strongly believes that there is scope and a need for continued and more in-depth research and analysis of services innovation dynamics. The high level of commitment to the principles and techniques of innovation by respondents is a clear signal that our services industry recognises the need to be at the front of the innovation race. The more worrying outcome trend however is that implementation; funding and measurement of innovation dynamics are far less sophisticated – almost crude in most cases. This is where some kind of industry intervention is needed to ensure that 75 percent of our economy is heading in the right direction, not treading water.

 An Executive Summary of the survey outcomes is now being authored and if you wish to receive a copy please contact me at rk@ralphkerle.com