Interactive innovation in financial and business services: The vanguard of the service revolution

Abstract The concept of the reverse product cycle, as a theoretical model of innovation in services, is developed further in this paper, using the vanguard sector of financial and business services as a case study example of how innovation operates as an interactive process. The parallels between the emerging Service Revolution and the nineteenth century Industrial Revolution are explored in order to identify the key characteristics of the vanguard sectors in each technological revolution. The particular nature of the new techno-economic paradigm based on information technology is then identified, leading to a discussion of the unique conjunction of factors favouring financial and business services as the vanguard sector of the Service Revolution. The central part of the paper then offers an elaboration of the reverse product cycle model, stressing the interactive nature of the innovation process as it reflects the prevailing technological opportunities, market conditions and industry structures within the adopting sector. The example of retail banking is used to illustrate how the innovation cycle proceeds, from increases in efficiency through improvements in service quality to the generation of new network service products. There is then a discussion of the question of the optimal industry structure for innovation, suggestion that in the reverse product cycle large corporations are likely to dominate the early stage of incremental process innovations, whereas later in the cycle there is an important role for small entrepreneurial firms to advance more radical process and product innovations. The concluding section summarises six major characteristics of the Service Revolution, and suggests how it may proceed from its first to its second phase as the focus of innovation shifts from the vanguard sector of financial and business services to a much broader range of “higher level” knowledge-based services, many of which are currently delivered by the public sector.