The emerging service economy will require business and society to do some some fundamental restructuring. The organizations that got us to this point have been hyper-optimized into super-efficient production machines, capable of pushing out an abundance of material wealth. Unfortunately, there is no way to proceed without dismantling some of that precious infrastructure. The changes are already underway.
The great big shift-reset.
In The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion, John Hagel and John Seely Brown observe that return on assets, the measure of how efficiently a company can use its assets to generate profits, has steadily dwindled to almost a quarter of what it was in 1965. They argue that ever-improving digital infrastructure and social networks are causing profound social change that increases competitive intensity. Since this turbulent environment shows no signs of stabilizing, they say, the only sustainable competitive advantage is the rate at which a company can learn.
In The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity, Richard Florida points to a shift from an economy based on making things to one that is increasingly powered by knowledge, creativity, and ideas:
“Great Resets are broad and fundamental transformations of the economic and social order and involve much more than strictly economic or financial events. A true Reset transforms not simply the way we innovate and produce but also ushers in a whole new economic landscape.”
Jeffrey Immelt, CEO of General Electric, agrees.
“This economic crisis doesn’t represent a cycle. It represents a reset. It’s an emotional, raw social, economic reset. People who understand that will prosper. Those who don’t will be left behind.”
The good news is that although resets are initiated by failures — sometimes catastrophic failures, like we have seen in the mortgage system — they also lead to new periods of growth and innovation, built on new systems and infrastructure.
Whether you call it the Big Shift, the Great Reset, or the great big shift-reset, there’s little doubt that a fundamental economic restructuring is underway. There will be winners and there will be losers.
An age of abundance.
As we stand on the verge of a new era, it’s easy to disparage the old-school industrial economy. But let’s not forget that the industrial economy gave us an abundance of material wealth we now take for granted, including many things that were unavailable — and unimaginable — in previous centuries.
Economist J. Bradford DeLong points out that in the 1890s, even the richest of the rich could not go to the movies or watch football on TV, and traveling from New York to Italy took at least a week. In 1836, the richest man in the world, Nathan Rothschild, died of a common infection that would have been easily curable with modern antibiotics.
The material abundance we all enjoy was made possible by an industrial economy that focused primarily mass-producing material goods. The philosophy of mass production was based on Henry Ford’s big idea: If you could produce great volumes of a product at a low cost, the market for that product would be virtually unlimited. In the early days his idea held true, but eventually, every market gets saturated and it gets more and more difficult to sell them more stuff. By 1960, 70% of families owned their own homes, 85% had a TV, and 75% had a car.
As markets became saturated with material goods, producers found a new way to apply the principle of mass-production in mass-marketing. With a TV in nearly every house, producers had a direct line to customers. Customers became known as consumers, because their role in the economy was to consume everything that producers could make. Increasingly, this producer-consumer economy developed into a marketing-industrial complex dependent on consumer dissatisfaction and the mass-creation of desire for the next new thing.
New technologies of communication have splintered the channels of mass-communication into tiny fragments. It’s no longer possible for mass-marketers to reach out and touch all of their customers at once. The megaphone is gone. And with the rise of social networks and peer-to-peer communication channels, every customer can have their own megaphone.
To many mass-marketers this feels like a chaotic cacophony of voices, and it’s hard to be heard in the crowd. But to most customers it’s an empowering feeling to have a voice, to be heard. Even if a company ignores your complaint, the world will hear, and if companies don’t respond they will eventually feel the pain, as customers find new places to go to get what they want.
The producer-driven economy is giving way to a new, customer-centered world, where companies will prosper by developing relationships with customers by listening to them, adapting and responding to their wants and needs.
The problem is that the organizations that generated all this wealth were not designed for this. They were not designed to listen, adapt and respond. They were designed to create a ceaseless, one-way flow of material goods and information. Everything about them has been optimized for this one-directional arrow, and product-oriented habits are so deeply embedded in our organizational systems that it will be difficult to root them out.
It’s not only companies that need to change. Our entire society has been optimized for production and consumption on a massive scale. Our school systems are optimized to create good cogs for the corporate machine, not the creative thinkers and problem-solvers we will need in the 21st century. Our government is optimized for corporate customers, spending its money to bail out and protect the old infrastructure instead of investing in the new one. Our suburbs are optimized to increase consumption, with lots of space for products and plenty of nearby places where we can consume more stuff, including lots of fuel along the way.
While workers are being laid off in many industries, technology companies like Facebook and Google aresuffering from critical shortages, struggling to fill their ranks and depending heavily on talent imported from other countries that place a higher priority on technical education.
“The whole approach of throwing trillions of public dollars at the old economy is shortsighted, aimed at restoring our collective comfort level. Meaningful recovery will require a lot more than government bailouts, stimuli, and other patchwork measures designed to resuscitate the old system or to create illusory, short-term upticks in the stock market, housing market, or car sales.” ~ Richard Florida
We no longer live in an industrial economy. We live in a service economy. And to succeed in a service economy we will need to develop new habits and behaviors. And we will need new organizational structures.
A service economy.
Since 1960, services have dominated US employment. Today’s services sector makes up about 80% of the US economy. Services are integrated into everything we buy and use. Nine of every ten companies with fewer than 20 employees are in services. Companies like GE and IBM, who started in manufacturing, have made the transition and now make the majority of their money in services.
What’s driving the move to services? Three things: Product saturation, information technology, and urbanization.
Product saturation. When people already have most of the material goods they need, they will tend to spend more of their disposable income on services. Increasingly the products that companies want to sell us are optional; they offer not functionality but intangible things like status, pride of ownership, the new color that’s in this year, and so on.
And products, we have found, can not only make life easier, they can be a burden. When you own a house, you have to spend money to fix the roof or the plumbing. Where’s the fun in that? And moving can be a big hassle when you have a truckload of stuff to lug along with you.
Information technology. In addition, another, post-industrial revolution is delivering a new kind of abundance — an abundance of information, along with networks and mobile devices for moving that information around, and much faster processing that allows us to do more interesting kinds of things with the information we have.
And while at first this shift was driven by the kinds of things we traditionally think of as information containers, like documents and images, now it has exploded to include many things that were previously undocumented. Your network of friends and acquaintances, the efficiency of your car’s engine, the things you do, the places you go, the things you buy, what you think about them, and even your random throwaway thoughts are being captured in foursquare check-ins, tweets, status updates, photo and video uploads and other kinds of “data exhaust” that you may not even know you’re generating, simply by using your phone and other devices.
This digital revolution is ushering in all kinds of new ways to deliver, combine and mix up services, resulting in all kinds of enticing combinations: Streaming music, following other people’s book highlights, renting strangers’ apartments or cars by the day, negotiating bargain prices at 4-star hotels and much more.
Urbanization. In addition, there is an increasing trend toward urbanization. Throughout the world, city populations are growing much faster than rural populations. We are becoming an urban society and living more urban lifestyles.
Fifty percent of the world’s population today lives on two percent of the earth’s crust. In 1950 that number was 30%, and by 2050 it is expected to be 70%.
Why are people moving to cities? Because cities are where the action is. There are more jobs, and more kinds of jobs, available in cities, and even when the same job is available in the country and the city, the job in the city pays more. Urban workers make, on average, 23% more than rural workers. And the more highly skilled you are as a worker, the more you stand to gain financially by moving to a large city.
Also, if you happen to get laid off or your company goes out of business, as a worker it’s much easier to find a new job without having to pick up and move.
As work becomes more complex and more skills are required, cities become more attractive to companies too, because that’s where the skilled workers are. Cities pack a lot of people and businesses into a relatively small space, which is good for services companies in several ways.
Space: People living in small city apartments just don’t have a lot of room for products, and because they are making more money than their rural counterparts, they tend to spend more on services. Why take up space with a washer and dryer when there’s a laundry service right down the street?
Density: Urban density makes it more attractive for companies to provide a wide variety of services. For example, a cable company can wire a city apartment building and serve hundreds of households for a fraction of the cost to do the same thing in a suburb or rural area. Taxis find customers quickly in densely-packed urban enters. One city block can support several specialty stores and a variety of restaurants. And in a reciprocal loop, that wide variety of services makes cities even more attractive places to live.
Consider the quintessential industrial-age product, the automobile: For many, a symbol of individuality, status, personality and freedom. In suburban and sparsely-populated rural areas, a car provides you with unlimited mobility and choice. But in a densely-populated urban environment, a car quickly becomes more trouble than it’s worth. A permanent parking space in New York costs more than a house in many other areas.
Density creates demand for more services, like taxis, limousine services, buses and subways. It also creates opportunities for new services. For example, Zipcar is a car-sharing service that gives customers shared access to a pool of cars located throughout their city. RelayRide and Whipcar are peer-to-peer services that allow car-owners to rent their car to neighbors by the hour or by the day. Uber connects a network of professional limo drivers with city dwellers, who can order a car by SMS or mobile phone app. Orders are routed to the nearest available driver, payments are automated and driver tips included, creating a simple, easy, seamless customer experience.
Cars themselves will increasingly become platforms for delivering services. In 1995 GM created OnStar, an in-car subscription service that offers turn-by-turn directions, hands-free calling, and remote diagnostics. If your car is stolen, GM can track the vehicle, slow it down, or shut off the ignition remotely. But that’s just the beginning. Automakers will increasingly be integrating with digital services, and cars will become platforms for a broad array of apps and services that will help you lower your fuel costs, stream music, avoid collisions, find parking, notify you if friends are near, and a whole host of other things we can’t yet imagine. Ford announced recently that they are creating an open platform that will allow tinkerers and developers to electronically “hot-rod” their cars. And Google is working on cars that will drive themselves. How’s that for a service?
If a car can be a service, anything can.
The majority of business growth in the coming decades — new jobs and new businesses — will come from services.
Some people argue that the majority of services growth comes from low-wage jobs without much potential for growth. But according to the US Bureau of Labor Statistics, job growth will be led by health care, followed by professional, scientific, and technical services, as well as education.
Most companies today are designed to produce high volumes of consistent, standard outputs, with great efficiency and at low cost. Even many of today’s services industries still operate in an industrial fashion. Schools efficiently produce standardized students. Hospitals efficiently move the sick and injured through a diagnostic-and-prescriptive production line. Drive-through restaurants move drivers quickly and efficiently through an order-fulfillment pipeline.
But most of these services are not really services at all. They are factory-style processes that treat people as if they were products, moving through a production line. Just think of the last time you called a company’s “customer service line” and ask yourself if you felt well-served.
Sure, many services require some level of production efficiency, but services are not processes. They are experiences.
Unlike products, services are often designed or modified as they are delivered; they are co-created with customers; and service providers must often respond in real time to customer desires and preferences. Services are contextual — where, when and how they are delivered can make a big difference. They may require specialized knowledge or skills. The value of a service comes through the interactions: it’s not the end product that matters, so much as the experience.
To this end, a company with a service orientation cannot be designed and organized around production processes; it must be designed and organized around customers and experiences. This is a complete inversion of the mass-production, mass-marketing paradigm that will be difficult for many companies to adopt.
In Evolving to a New Dominant Logic for Marketing, Stephen L. Vargo and Robert F. Lusch describe a new paradigm they call service-dominant logic, a fundamental shift in worldview and orientation toward marketing as a social process, where products are not ends in themselves but means for provisioning services, the customer is seen as a co-producer, and knowledge is the source of competitive advantage.
In product-dominant logic, production is the core of the value-creation process, while customer service is a cost to be minimized. But in service-dominant logic, products are the cost centers, and services become the core value-creation processes.
Why such a fundamental shift?
Products are costly and require large investments of capital in R&D, factories, and manufacturing before money can be made.
Products are anchors. Investments in manufacturing take time to provide returns, and during this time period customer needs are likely to change. Investing in physical products “hardens” the offering and reduces the company’s ability to respond and adapt to changing customer preferences.
Investing in services “softens” the offering and increases the company’s flexibility. Since costs aren’t sunk into a single product, it’s easier to shift the offering and keep pace with their demands.
Like looking through a telescope the long way round, for many people who have become habituated to a product orientation, this inversion will at first feel unnatural and uncomfortable.
The good news is that there is huge room for improvement, and companies that dedicate themselves to improving services stand to make significant gains in profitability and competitive advantage.
According to an Accenture survey, customer satisfaction is declining in every area they measure, and 64% of customers have switched companies in the past year due to poor service. Only one in four people say they trust the companies with which they do business.
Another survey by American Express found that two thirds of customers have not noticed improvements in customer service, and that fewer than one in ten customers think companies are exceeding their expectations. An overwhelming majority of customers are willing to spend more to get excellent service, and more than half of them will switch companies to get it. The same survey also found that while 40% of customers are willing to tell their friends about good service experiences, even more of them — 60% — will tell their friends about poor service experiences.
It doesn’t take a genius to figure out that poor service will result in lost sales, and good service will result in repeat business. And for most companies, the biggest growth opportunities in the coming years will come through services.
A product is a service avatar.
The first step to a service orientation is to change the way we think about products. Instead of thinking about products as ends in themselves, we need to think of them as just one component in an overall service, the point of which is to deliver a stellar customer experience.
Today, we think of an avatar as the face or icon that represents you in your Twitter stream, or on your Facebook page. But the original word avatar comes from ancient Sanscrit, based on the root words ava (descent, coming down) and tatari (crossing over). The original meaning is the divine made flesh; an incarnation or physical manifestation of an idea or god. In Hindu belief, Buddha was an avatar of the god Vishnu — a physical manifestation of the deity descended to earth. Energy transformed into matter.
In the same way, a product can be considered as a physical manifestation of a service or set of services: a service avatar.
Products come with knowledge and services embedded within them. A car is the manifestation of years of learning, accumulated through research, crash testing, metallurgy, electrical engineering, design and a score of other disciplines, including good old trial and error. And as we have seen, a car itself provides the service of getting you comfortably from one place to another.
The ratio of knowledge to matter in any product increasingly favors knowledge. A modern car contains more computing power than the system that guided Apollo astronauts to the moon. Consider the difference between a TV and a TiVo. The knowledge and services embedded in a product are what gives the product its value. Consider an iPhone. Its value comes from the services it provides you: You can talk to friends, send messages to them, and access a wide variety of applications, songs, books and even movies if you care to. Having an iPhone allows you to carry around a whole city’s worth of services in your pocket. The job of the iPhone is to provision you with services.
The words we use to describe products are a dead giveaway. Think about the number of product names that are essentially verbs or job descriptions:
Products as verbs: You use an iron to iron things, a brush to brush things, and a bottle to bottle things. You ladle with a ladle and hose things down with a hose. You step on a step, drum a drum, handle a handle and grill with a grill. When you’re driving you brake with the brake, accelerate using the accelerator and steer with the steering wheel. You mail the mail, drink a drink, lock a lock and microwave things with the microwave. Cups cup things, nails nail things, and staples staple things. You tape things together with tape. A light gives light.
Products as job descriptions: A blender’s job is to blend things. A washer washes things and a dryer dries things. The lawn mower mows the lawn. The heater heats, the boiler boils and the air conditioner conditions the air. In your kitchen, the refrigerator refrigerates and the freezer freezes. At work, the copier copies, the scanner scans, the printer prints and the computer computes. The doorstop stops the door. Lipstick sticks to your lips and eye shadow shadows your eyes.
Products aren’t just things. They are servants.
“The Kindle is not a device, it’s a service” said Jeff Bezos in a recent interview. The Kindle is a physical manifestation and extension of the services Amazon provides to its customers; an avatar for Amazon services. On the Kindle, you can go to the store, browse for stuff, read reviews, and start reading a book, listening to music or watching a film in less than a minute. Kindle’s service aspect becomes even more clear when you use it with more than one device. Open a Kindle book on your iPad, and the service syncs to the last page you were on. It doesn’t matter what device you’re using, Kindle follows you from device to device and always remembers your place.
Services are co-created.
In a product-dominant world, value is exchanged in transactions between buyers and sellers. But in a service-dominant world, value is co-created by companies and customers working together. This kind of exchange requires a relationship, and the product is only an intermediate step in the value-creation process.
Value is co-created: A company can’t create value. Value is only created through exchange. The customer must participate in defining and determining that value. That car, beautiful as it may be, has value, in an economic sense, only to the degree that a customer is willing to pay for it. The company can only create an offer, value proposition or proposal. The customer must accept in order to create value. The bus can make an offer, but the customer still must step onto the bus for the value to be delivered.
Co-created value requires a relationship: Products can play a role in relationships — even a key role — but products can’t have relationships. The relationship between a company and its customers develops gradually, as customers build trust in the company and its ability to deliver on their promises over time.
The product is an intermediate step, not an end in itself: Even after a customer buys a product, they must learn how to use it, maintain it, repair it, and enjoy it. If the company is lucky, they will like it enough to tell friends about it, educate others, promote it, buy additional services around it and so on.
A service-dominant world changes the game significantly. Service-orientation is a fundamental shift and creates opportunities for new business strategies, new sources of competitive advantage, new ways of interacting with customers, and new ways of organizing work.
Everyone is a service.
In a service-oriented company, it makes sense to consider every aspect of the company as a service. Managers provide a management service. Engineers provide an engineering service. Designers provide a design service. Marketers provide a marketing service.
We have developed a tendency to think of flows in terms of process, but services and processes are not the same. Processes are linked, linear chains of cause and effect that, when managed carefully, drive predictable, reliable results.
A service is different. Processes are designed to be consistent and uniform, while services are co-created with customers. This difference is not superficial but fundamental. A process has only one customer, the person who receives the final result. A process is rule-bound and tightly regulated. The quality of a process’s output can be judged by the customer at the end of the line.
A service is at its core a relationship between server and served. Service is work performed in support of another. At every point of interaction, the measure of success is not a product but the satisfaction, delight or disappointment of the customer.
As if change wasn’t already difficult enough, service orientation for many companies will require a whole new approach to business partnerships.
Because services map to increasingly demanding customer preferences, companies must find ways to make them more granular, as well as easier to bundle with other services. Customers want services to be convenient for them, not for you.
Consider insurance. Even though insurance is a service, in many ways it is sold like a product. A product-dominant mindset says “we sell life insurance, car insurance and homeowner’s insurance. Our customers come to us when they need insurance.” But if a company can find a way to offer business partners insurance as a configurable service, a lot more options open up.
For example, Whipcar allows car owners to rent their car out when they are not using it. Part of the Whipcar service involves bundling car insurance along with the rental, which requires the “insurance service” be available on demand in increments as small as one hour. The more networked and linkable an insurance service, the more easily it can be blended and bundled with Whipcar’s other services.
PayPal is a super-granular payment service which is easy to plug in to any ordering system. Some of PayPal’s customers are so happy with the service, and so loyal, that they will not buy from merchants who don’t offer PayPal payment service. After all, buying from another vendor is usually just one click away.
Service networks also thrive by making a set of complementary services more easily available to customers. A restaurant does better if it’s within a short walk of a movie theater and shopping. Customers tend to like convenient clusters of services. For example, it’s nice if you can go grocery shopping, drop off your laundry and get a coffee in a single stop or within a short distance.
Making change happen.
The biggest impediment to service innovation is not a lack of ideas. It’s the inability of companies to deliver them the way they are currently structured. Service designer Ben Reason notes that “Coming up with innovative services is easy. What’s hard is getting companies to adapt.”
Industrial one-way mass-production logic must give way to the more reciprocal service logic before progress can be made. This is so exceedingly difficult that not many companies have successfully made the transition. It involves changing not only org structure but the company’s dominant culture and logic, a herculean task.
But change is possible.
IBM and GE led the way, with major organizational transformations in the 1980s and 1990s. IBM famouslydivested its last manufacturing operations in 2005 by selling its laptop division to Chinese company Lenovo, and more than half of GE’s profits come from services today.
Consider Cemex, a global cement company. What could be more industrial-age than cement? Cement is clearly a product, not a service. And perhaps the most obvious way for a cement company to compete is on price. But to customers, cement is only one aspect of a larger project. Customers don’t just care about cement, they want the right cement, in the right amount, at the right place and the right time.
Cemex wins customers with services like 24/7 delivery, ATM-like ordering systems, education and training for customers, and construction financing. Customers can order online and get text messages when cement is ready for delivery. Cemex will actively manage a customer’s cement inventory, to anticipate and respond to demand in real time. Cemex will provide pre-fabricated components like walls, ceilings and basements. And if a customer so desires, Cemex will carefully match the color and texture of older concrete roads and paths.
Where to start.
This kind of change can feel overwhelming to contemplate. But help is at hand.
In 1983, bank executive G. Lynn Shostack proposed a design tool called the service blueprint as a tool for service design. The service blueprint connects customer activities and touchpoints with a company’s “front stage” where services are provided, as well as “backstage” operations that support and enable the front stage.
The Service Research and Innovation Institute, a non-profit organization initiated by IBM, was formed to lead and support organizations through the massive transformations that will be required.
The Consortium for Service Innovation is a non-profit alliance of organizations focused primarily on facing the challenges of customer support services.
On the practitioner side, the Service Design Network was formed in 2004 as an international network of service design professionals, with the purpose of strengthening and developing service innovation practices. Their peer-reviewed publication, Touchpoint, is an excellent resource for service design thinking.
The Social Business Council is a peer-to-peer membership organization of business professionals that are directly involved in planning, leading and executing social business transformation initiatives.
Although the cogs and gears are still turning in many large companies, it is the result of momentum, not progress. The industrial economy is fueling new growth in some parts of the world, but it is leaving the US and Europe, and it’s not coming back. The time to change is not some day in the future, when you have reached a crisis of GM, Kodak or Greek proportions. The time to change is now, while you still have the financial resources to change assertively and proactively.
Excerpted from The Connected Company.