Haas School of Business

Leading Through Innovation

Investment Banking Serves as Case Study in Investigation of Services Innovation

Investment Banking Serves as Case Study in Investigation of 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 Fall 2007 issue of California Management Review, the Haas School's journal for business practitioners.

In services, innovation is a marathon, not a sprint.Jennifer Chatman, the Haas School's Paul J. Cortese Distinguished Professor of Management; Richard Lyons, Dean of the Haas School and former Chief Learning Officer of Goldman Sachs; and Caneel Joyce, a Haas School Ph.D. candidate, published their findings in an article titled "Innovation in Services: Corporate Culture and Investment Banking."

The article was cited by The Economist in October 2007 in a special report on innovation, in which the magazine quoted Lyons highlighting the importance of services innovation to fight commoditization. "Commoditization often occurs even faster in services than in physical products because innovations are easier to copy and there are fewer patent protections, lower front-end capital investments, and shorter product cycles," Lyons, Chatman, and Joyce write in the article.

Behavior as Product

In their article – an unusual collaboration between experts in finance and organizational behavior – the trio finds that innovation in services tends to be a more gradual evolution rather than a disruptive revolution. The researchers also argue that innovation in the services sector is more reliant on a culture that fosters innovation than innovation in manufacturing organizations.

"In services industries, behavior is the product," Lyons says. Consequently, the cultural and organizational foundations that guide behavior are essential for competing on innovation effectively, Lyons, Chatman, and Joyce write.

"Services are all about the people," Chatman explains. "And if the people don't have a mindset embedded with notions of innovation, then innovation is not going to happen."

Innovation Ignored

Although services accounts for approximately 78% of US gross domestic product, few researchers have examined innovation in the services industry, Lyons, Chatman, and Joyce found.

The idea for their article originated with Lyons in the summer of 2006, when he was spearheading the Haas School's Leading Through Innovation strategy as executive associate dean. As he became more convinced of culture's powerful role in fostering innovation, Lyons discussed the subject with Chatman, an expert in organizational culture. They agreed 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 three researchers decided to include a mini-case study of investment banking in the article.

Innovation in Investment Banking

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 such as consulting, law, and accounting.

"BusinessWeek declared in 2006 that innovation in services is rare, but that's not true in the context of investment banking," Lyons says. "If anyone in investment banking fell asleep ten years ago and woke up today, they wouldn't know how to do their job."

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

People, Not Products

That is true in part because services innovation is less tangible than product or technical 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 or technology, 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.

Because people play such an important role in services innovation, innovation in services is far more influenced by hiring and promotion decisions, leaders' behavior, and formal firm-wide reward and incentive systems than innovation in product or technology firms, Lyons, Chatman, and Joyce write.

Lyons, Chatman, and Joyce describe several pitfalls that can arise when services companies apply innovation techniques used by firms with physical products. For instance, technology companies often assign innovation to a particular unit, such as research and development. But that approach in services misses the systemic nature of innovation in services, which is much more distributed and thus affects the behavior of a much wider range of employees, according to Lyons, Chatman, and Joyce.

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

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