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Bringing Open Innovation to Services

December 16, 2010 | Henry Chesbrough | Strategy
The world's developed economies are increasingly oriented around services, with services comprising more than 70% of aggregate gross domestic product and employment in the Organization for Economic Cooperation and Development countries. As a result, both individual companies and entire economies face the challenge of how to innovate in services.

In earlier work, the author has argued for the concept of open innovation--that companies should both organize their innovation processes to be more open to external knowledge and ideas and also let more of their ideas and knowledge flow to the outside when not being used internally. Yet initial discussion of open innovation contrasted it to traditional R&D and product development; this had the effect of placing the focus more on product and technology innovation than on service innovation. Open innovation works somewhat differently in service businesses, in part because the role of the customer is different; in a service business, the customer is often involved in an iterative process with the company that results in a customer experience. In addition, innovation processes work differently in services. Few companies have formal R&D operations for the services they provide, and the customer may need to participate throughout the service innovation process.

Some of the concepts of open innovation apply readily to service innovation. For example, Amazon. com has not only created open service innovation by bringing the "outside in"--think of customer reviews on Amazon.com and third parties selling products via Amazon's site--but also by taking the"inside out," by, for example, using internal knowledge and infrastructure to create a business selling cloud computing services to other companies. Companies interested in moving toward open service innovation can try techniques such as working closely with customers to develop new solutions for them; focusing offerings on utility for customers, rather than on products; and embedding the company in a customer's organization. Companies that have traditionally been product oriented may need to make some organizational changes, such as changing service pricing, as they move to a more service-oriented approach.
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