Spring/Summer 2008

Power of Ideas

Secrets of Services Innovation

Professors find culture, gradual change are key to services innovation


When most people hear the word "innovation," a cool new gadget usually comes to mind. But what about innovation outside of the technology industry? Do the same strategies for innovation apply for firms and workers in the services sector?

Given that services account for about three-quarters of the US economy, three Haas School researchers decided to tackle that question in an article for the 50th anniversary issue of California Management Review, the Haas School's journal for business practitioners.

In an unusual collaboration between finance and organizational behavior experts, Haas Professor Jennifer Chatman, newly appointed Dean Richard Lyons, and Ph.D. candidate Caneel Joyce find that innovation in services tends to be a gradual evolution rather than a disruptive revolution. The trio also concludes that the services sector is more reliant on a culture that fosters innovation than manufacturing organizations.

"In services industries, behavior is the product," says Lyons, formerly a Haas finance professor and chief learning officer at Goldman Sachs. Consequently, the cultural and organizational foundations that guide behavior are essential for competing on innovation effectively, Lyons, Chatman, and Joyce write in their article titled "Innovation in Services: Corporate Culture and Investment Banking."

"Services are all about the people," adds Chatman, the Haas School's Paul J. Cortese Distinguished Professor of Management. "And if the people don't have a mindset embedded with notions of innovation, then innovation is not going to happen."

Although services account for approximately 78 percent of US gross domestic product, Lyons, Chatman, and Joyce found little previous research on services innovation.

Their article began with Lyons in 2006, when he was spearheading the Haas School's Leading Through Innovation strategy as executive associate dean. Lyons discussed culture's powerful role in fostering innovation with Chatman, an expert in organizational culture. They decided to explore the topic further with Joyce, a Ph.D. candidate in organizational behavior, in an article for the 50th anniversary of California Management Review, which focused entirely on innovation.

After Lyons became chief learning officer at Goldman Sachs in November 2006, the trio added a mini-case study of investment banking to the article.

From their case study, Lyons, Chatman, and Joyce identify four fundamental enablers of innovation in the investment banking industry: client demand for services that span boundaries; broad and deep client relationships; tight integration between service design and execution; and the vision of innovation articulated at the top. The authors suggest that those enablers likely apply to other professional services industries.

"BusinessWeek declared in 2006 that innovation in services is rare, but that's not true in the context of investment banking," Lyons says. "Innovation in investment banking has been breathtaking - not because of radical innovation, but because of an accumulation of hundreds and even thousands of small innovations."

"In services, innovation is a marathon, not a sprint," Lyons adds.

That is true in part because services innovation is less tangible than product innovation. "Services innovation is not just a new product that you can hold in your hand, but a new approach," Chatman explains.

Without a physical product line, monitoring quality and consistency is more difficult in a services firm, the authors note. Therefore, innovating in service organizations requires that norms and values guide behavior to ensure quality, consistency, and reliability.

Concludes Lyons: "You need a culture of innovation at a services firm to foster innovation that operates at the firm-wide level."


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Prof. Jennifer Chatman and Dean Rich Lyons

Jennifer Chatman, a Haas School professor, and Richard Lyons, newly appointed Haas School dean, collaborated on a study on innovation in the services sector

"Innovation in investment banking has been breathtaking not because of radical innovation, but because of an accumulation of hundreds and even thousands of small innovations"
Richard Lyons, newly appointed Haas School dean