Innovation and Convergence

The end of innovation?

Most people will have heard of Moore’s law:

“the number of transistors packed onto a computer chip doubles approximately every two years.”

(indeed, this is a key driver behind the increase in computing speed and capacity and reduction in cost of processing which has in turn driven a lot of the technological transformation that we have seen over the years)

However, in an interesting 2020 paper by Bloom et al, the hypothesis is raised that:

“…research effort is rising substantially while research productivity is declining sharply. ?The number of researchers required today to achieve the famous doubling of computer chip density is more than 18 times larger than the number required in the early 1970s. More generally, everywhere we look we find that ideas, and the exponential growth they imply, are getting harder to find”

• Are we simply running out of new ideas?
• What does this mean for business??

There is only so far that businesses can keep growing by just continuing to do what they always have done.?Not only are both customers and natural resources are finite, but also, the world is changing.?Hence the path to growth must often be driven by doing new things – creating new business models.

Linking this back to the point about innovation becoming harder: What if there isn’t an infinite supply of new business models to drive growth?

If you can’t find new ideas, borrow existing ones?

A lot of innovation has always come through borrowing ideas from elsewhere rather than coming up with something genuinely new – or joining together ideas which may not be obvious partners.?Indeed, there is a term for this: ‘recombinant innovation’ (or recycling perhaps?), and I think we are seeing this a lot in business.

I have written before about how professional services organisations are moving towards delivering their services as a ‘product’ both to support non-linear growth, and to smooth the traditionally ‘lumpy’ revenue streams that they tend to face (the ‘productization of services’).?Interestingly – I have also started to see quite a lot written about the ‘servitisation’ of products.?Putting aside my personal bugbear of made up words entering common parlance (productization; servitization… ), this seemed like an interesting topic to explore.?

• Is there some sort of grand convergence occurring??
• Are all businesses becoming more alike?

1.??????Productization of services

I was recently listening to a podcast where I learned about the Baumol effect. ??An interesting takeaway from this was a number of observations about efficiency and productivity in the service sector.?A great analogy is used:

In 1826, when Beethoven’s String Quartet No. 14 was first played, it took four people 40 minutes to produce a performance. In 2010, it still took four people 40 minutes to produce a performance. Stated differently, in the nearly 200 years between 1826 and 2010, there was no growth in string quartet labour productivity.

For service businesses to grow, there seem to be a couple of possible routes:

a) Do things more efficiently

(doing the same things better)

From the string quartet example, it may be seen that this is not always possible.?Automation may help in the delivery of some services – but herein lies the challenge of achieving non-linear growth in a sector where the main input is human capital.

You might argue that to generate more revenue, the string quartet need to perform their Beethoven piece to more paying audiences.?Perhaps they can just play faster and more often??You could argue that the service they are providing here isn’t really the Beethoven that their audiences want… but this principle seems to have worked for the Reduced Shakespeare Company – in fact – if anyone comes across ‘Speed Beethoven’ performances in the future: remember, you heard it here first!?

This does bring me to the other main route for growth in service businesses:

b) Business model innovation

If you can’t do the same things better – then the other option is to generate revenue by doing different things.?

What we are seeing a lot of here, as previously discussed, is the ‘productization of services’ which I have written about in the past in more detail here:

2.??????Servitization of products

Historically,?product businesses have focused on growing margin through driving out cost efficiencies.?Likewise, this ‘doing things more efficiently’ approach can only go so far, and the ‘doing different things’ leads us to the ‘servitization of products’.?At the simplest level (leaning on a lot of google based research which is often my go-to on coming across a made up word), servitization seems to generally describe the addition of services into sales of a product focused business – at its simplest, a bundling of goods and support services, and at the more extreme end of the spectrum, the sale of ‘solutions’ or ‘outcomes’.

This isn’t in fact all that new: for example, Rolls Royce’s ‘power by the hour’ a business model is now over 60 years old.?Here, rather than selling engines to its customers, Rolls Royce took the approach of offering a complete engine and accessory replacement service on a fixed-cost-per-flying-hour basis.

Everything as a service?

Perhaps this IS a grand convergence: into ‘Everything as a Service’ (or XaaS as I have seen it abbreviated)

I quite like the way that SAP depict this evolution below: moving from traditional business models, via bundling of goods and services, through subscriptions driving a regular revenue stream, to a more streamlined, uniform view of business process.

Indeed – with the RISE business model for S/4HANA, you could argue that SAP are moving towards ‘eating their own dog food’ on this front, evolving from the traditional perpetual licence plus maintenance business model (with the occasional side order of consultancy services) to a subscription / SaaS model (depending how deep down the cloud route a client wants to go).

It's interesting to note however that for all the talk of the rise of 'outcome based engagements', I have yet to really see much of this in action. Sure, we have evolved away from delivering T&M based service engagements... but not much further than to fixed price or consumption based models.

The ERP impact

Here is where the boundaries of traditional industry focus start to blur. ?For example in SAP, in service industries, there have long been requirements to support usage based billing models against projects – so this functionality might well suffice for a product business introducing a simple subscription model (if the rating / charging model is not too complex). New functionality such as Solution Orders also help, in acting as a central data object representing the overall contract with the customer, and bringing together what have traditionally been disparate transaction data objects (product sales; service projects; after sales service contracts...) on SAP.

However, I think the main challenge in offering services, or outcomes is one of cost attribution and management, with the need to ensure that the company is actually making a decent margin on delivering the ‘outcome’. Costing for such services is a lot more complex that simple product/service costing, whether totalling up the cost of raw materials, labour and overheads to manufacture a product, or accounting for time and expenses against the delivery of a traditional service.

… all of which brings us neatly back to Moore’s law… that very exponential growth ?in the power of technology now gives us the ability to process, store and analyse more data in real time; as sensors become more affordable, IoT devices automatically capture this data; finally allowing businesses to accurately account for the delivery of 'outcomes' without reliance on after the event allocation of costs.