Mme3 Class3 Deh Hertog Knowledge Intensive Business Services As Coproducers Of Innovation

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International Journal of Innovation ManagementVol. 4, No. 4 (December 2000) pp. 491–528© Imperial College Press

KNOWLEDGE-INTENSIVE BUSINESS SERVICES ASCO-PRODUCERS OF INNOVATION

PIM DEN HERTOGDialogic Innovatie & Interactie,

Wilhelminapark 20,3581 ND, Utrecht,The Netherlands

e-mail: [email protected]

Received 20 December 1999Revised 3 February 2000Accepted 3 February 2000

In the unfolding knowledge-based economy, services do matter. But while they are increasinglyseen to play a pivotal role in innovation processes, there has been little systematic analysisof this role. This essay presents a four-dimensional model of (services) innovation, thatpoints to the significance of such non-technological factors in innovation as new serviceconcepts, client interfaces and service delivery system. The various roles of service firms ininnovation processes are mapped out by identifying five basic service innovation patterns.This framework is used to make an analysis of the role played by knowledge-intensive businessservices (KIBS) in innovation. KIBS are seen to function as facilitator, carrier or source ofinnovation, and through their almost symbiotic relationship with client firms, some KIBSfunction as co-producers of innovation. It is further argued that, in addition to discrete andtangible forms of knowledge exchange, process-oriented and intangible forms of knowledgeflows are crucial in such relationships. KIBS are hypothesised to be gradually developinginto a “second knowledge infrastructure” in addition to the formal (public) “first knowledgeinfrastructure”, though there is likelihood of cross-national variations in the spill-over effectsfrom services innovation in and through KIBS, and in the degree to which KIBS are integratedwith other economic activities. Finally, some implications for innovation management andinnovation policy are discussed.

Keywords: service innovation, innovation patterns, business services, knowledgeinfrastructure, innovation systems

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Introduction

This paper aims to contribute to a better appreciation and understanding of therole of services in innovation. Following a brief presentation of existing approachesto service innovation, the third section outlines a four-dimensional model thatallows for a better understanding of service innovation. This allows us to identifyfive basic service innovation patterns. Following this, an analysis is made ofthe role played by a sub-category of services that play a considerable role ininnovation, especially that involving their client firms, namely, knowledge-intensivebusiness services (KIBS). It is argued that KIBS function either as a facilitator,carrier or source of innovation. Through their almost symbiotic relationship withclient firms, some KIBS function as co-producers of innovation. It is furtherargued that in addition to discrete and tangible forms of knowledge exchange,process-oriented and intangible forms of knowledge flows are crucial in thisrelationship. A three-tiered model is postulated in which KIBS are graduallydeveloping into a “second knowledge infrastructure” in addition to the formal(public) “first knowledge infrastructure”. This model serves as a hypothesis thatneeds to be tested and refined, especially since as important differences betweenindividual countries can be noted as to the degree to which KIBS actually functionin this way. Finally, the paper considers some wider implications of the analysisfor innovation management and policy.

While the analysis is presented in largely conceptual terms, it is rooted inempirical research1 conducted throughout the 1990s on services, services innovationand the role played by KIBS in innovation processes of client firms. The variousexamples used here are taken from this research base.

Existing Approaches to Service Innovation

One helpful answer to the question “What does it mean to produce a service?”is provided by Jean Gadrey and collaborators (1995):

“to produce a service […] is to organise a solution to a problem (atreatment, an operation) which does not principally involve supplying agood. It is to place a bundle of capabilities and competences (human,technological, organisational) at the disposal of a client and to organisea solution, which may be given to varying degrees of precision”.

1See, for example, Bilderbeek and den Hertog (1992; 1996; 1997; 1998); Bilderbeek et al. (1994);den Hertog and Bilderbeek (1997; 1999); den Hertog et al. (1997; 1998); Hofman et al. (1998);Miles et al. (1995); Vlaar et al. (1997).

Knowledge-Intensive Business Services as Co-Producers of Innovation493

This definition makes it clear that apart from technological capabilities, humanand organisational capabilities are also important for providing services.Additionally, it allows for a differentiation between highly standardised serviceproducts or service formulas with quasi-good characteristics (e.g. fast food chains),and more customised services, often based on more tacit forms of knowledge.Moreover, the latter services often emerge as a result of co-production betweenthe actual service provider and its client, as many consulting and advisory servicesshow.

The analysis of services and service innovation has progressed quite remarkablyover the last decade. Although the attention given to services by researchersgrew from the 1970s on, they were long discounted in terms of technologicalinnovation. In 1984, Pavitt — introducing his sectoral taxonomy of technologicalchange — labelled the service industries as mainly supplier-dominated sectors.2

Similarly, the important theoretical contributions of Barras (1986; 1990) portraymost service sectors as initially supplier-dominated, and as receiving an impetusfrom manufacturing in order to be able to embark on subsequent phases ofinnovation processes.

As the field of service innovation studies has expanded, two results of significancehave emerged here. First, it has been recognised that although many servicesdeliver a — sometimes substantial — contribution to innovation processes, theyare not merely passive recipients of others’ innovations. Second, the emphasison technological innovation has been somewhat moderated by the recognitionof the importance of non-technological elements of, and approaches to, serviceinnovation. This resulted in a better understanding of the “peculiarities” of services(Miles, 1993), service management (Norman, 1991; Quinn, 1992), the significanceof interaction with clients (and of clients’ competences; cf. also Kline & Rosenberg,1986), the importance of recombination of existing elements in new services(Henderson & Clark, 1990) and other such points. More recently, Galloujet al. (1997) outlined six innovation models that could be used for describingservice innovation. They distinguish between radical innovation, improvementinnovation, incremental innovation, ad hoc innovation, recombinative innovationand formalisation innovation.

A comprehensive model for understanding innovation in services, and betterstill understanding innovation in services and other sectors in the same framework,is not yet apparent in this literature. Such a model is increasingly needed as

2Soete and Miozzo (1989) provided a more differentiated picture of the service industries distinguishingbetween supplier-dominated, scale-intensive physical networks and information networks, andspecialised/science-based services. Although this may be a helpful extension of the Pavitt taxonomy,it still remains a mostly technical (and sectoral) taxonomy.

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service functions can be seen to be prominent all over the economy, and thus,as service innovations are relevant — although to different degrees — in allindustries. Service innovation is equally relevant for manufacturing firms, whichincreasingly use innovation in service functions and features to differentiate theirproducts. In a similar vein, some business processes in service firms resemblethose in manufacturing, for example, administrative processing in back offices.A continuum rather than a strict distinction between manufacturing firms andservice firms — and the innovation models used for them — seems appropriatewhen discussing firm innovation.

The available models for thinking about service innovation do help identifythose dimensions which appear to be most relevant here. Accordingly, the nextsection sets out an (admittedly eclectic) conceptual model as a heuristic toolthat will enable us to discuss service innovation in general terms.

Conceptualising Service Innovation

Service innovation is rarely limited to a change in the characteristics of theservice product itself. Innovation often coincides with new patterns of productdistribution, client interaction, quality control and assurance, etc. But there arehuge differences in the specific patterns involved: what is important for introducingone new product onto the market might be totally irrelevant for others. Offeringa completely new service may differ considerably from offering an existing serviceusing a new distribution channel. In practice, most innovations appear to bea mixture of major and minor changes and adaptations of existing (service)products.

In order to discuss, map and analyse the diversity of innovations in greaterdetail and in a structured way, a four-dimensional model of service innovationis introduced (Fig. 1). Although conceptual, it is concrete enough to map serviceinnovation and discuss the practical development of new services or serviceinnovation policies, and has proved useful in this respect in discussions withpolicy-makers and service entrepreneurs (see, e.g. Bilderbeek et al., 1998a; 1998b).The four dimensions are presented first, followed by the linkages between them.3

Dimension 1: The service concept

Manufactured products (and processes) are typically highly tangible and visible,unlike most services. Admittedly, some service innovations are highly visible,

3Although most examples provided below are taken from service industries, service innovation isequally relevant for manufacturing industries.


Fig. 1. A four-dimensional model of service innovation.

NEW SERVICECONCEPT

(DIMENSION 1)

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especially where delivery of the product is involved (ATMs, etc.). Many othersinvolve more intangible characteristics, such as new ideas of how to organisea solution to a problem. Although a particular service concept may already befamiliar in other markets, the key thing is that it is novel in its applicationwithin a particular market. As usual, in innovation research, there are thornyproblems concerning when a product, function or concept is really new. Judgementscan vary according to whether and when it is new to the providing firm, newto the client, to the regional, national or global market and whether it involvesnew logic or scientific knowledge.

Some examples of “conceptual innovations” are:

• call centre services — these install, organise and recruit staff for their client’scall centre — which have emerged from temporary staffing offices on thebasis of their initial involvement with providing temporary labour for callservices;

• IT consultants who offer their client firms semi-standardised and incrementalplans for implementing e-commerce;

• Benetton’s development of a particular style of shopping outlets to give thebrand name its own character, to create a specific shopping environment thatis recognisable for their clients.

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Although not all service innovations have a strong novel conceptual element,conceptual innovations are much more likely to be found in service firms (orbetter service functions) than in pure manufacturing firms. Such innovationsare usually highly intangible — meaning that while in some cases, the serviceitself may have quite tangible elements, the new features have less to do withmaterial artefacts.

Dimension 2: The client interface

A second element of service innovations is the design of the interface betweenthe service provider and its clients. These interfaces are the focus of a gooddeal of service innovations, though innovation studies, with their focus on massmanufacturing, have tended to overlook the changes occurring in these interfaces.As a quite general phenomenon across a wide span of services, product offeringsare increasingly marketed and even produced in a client-specific way (even withclient-specific pricing) and delivered electronically as far as they have informationalcomponents.

In business services in particular, clients are often also part and parcel ofthe production of the service product. The way the service provider interactswith the client can itself be a source of innovation. Increasingly, there is noclearly identifiable point where the producer’s activity stops and the user’s activitybegins. This is of course particularly true where the business service itself isoffering support for innovation, e.g. in R&D and design services. With the highdegree of co-design and co-production of service products, it may be difficultto locate the innovation within service supplier or client: it is not unusual, forinstance, for service firms to site their staff within client organisations for periodsof time.

Examples of “client-interface innovations” include:

• the large-scale introduction of account management systems in professionalorganisations, such as economic consulting or IT firms, can in some casesbe interpreted as a renewal of the client interface;

• electronic data interchange (EDI), which represents an effort to establishcommon formats for electronic documents that allow for a wide range ofinteractions to be partially automated — including various elements of designas well as ordering and invoicing. Organisational challenges have made thetake-up of EDI slower than anticipated but a substantial industrial use hasdeveloped.


Dimension 3: The service delivery system/organisation

This dimension, involving service delivery system and organisation, is oftendirectly related to the preceding dimension — the linkage between the serviceprovider and its client (the client interface). Delivery is indeed one specifictype of interaction across the client interface (others include financial transactions,design inputs, after-sales, and so on). However, dimension 3 is different. It refersto the internal organisational arrangements that have to be managed to allowservice workers to perform their job properly, and to develop and offer innovativeservices. It is closely related to the question of how to empower employees,to facilitate them so that they can perform their jobs and deliver service productsadequately. On the one hand, new services may require new organisational forms,(inter)personal capabilities and skills. On the other hand, an organisation canbe designed and employees can be trained so as to leave room for innovationsand non-conventional solutions to practical problems.

Examples of “delivery system and organisation innovations” include:

• the large-scale introduction of home shopping services — or consumere-commerce — may cause a substantial change in the ways in which serviceprovider and client relate;

• introducing e-commerce in business processes may require serious businessprocess reengineering. E-commerce may not only have a substantial impacton the way in which the actual commercial transactions occur, but also theprocesses preceding and following the transaction;

• in more traditional shopping environments, the lengthening of retailer openinghours may have serious consequences for the type of customers it attracts,the type of products offered, the immediate availability of sales and after-sales service of different types, etc.

Dimension 4: Technological options

The fourth dimension is the centre of much analysis and debate, especiallyconcerning the degree to which service firms themselves in practice are givingshape to technology development. Clearly, service innovation is possible withouttechnological innovation; technology is not always a dimension. Nonetheless,in practice, there is a wide range of relationships between “technology” and“service innovation”. These vary from technology mainly playing a role as afacilitating or enabling factor, to something much closer to supply-push, technology-driven innovation.

Service firms also differ in their awareness of relevant available technologicaloptions, the degree to which they dispose of the necessary technology themselves

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or have access to the necessary knowledge and the degree to which they consequentlycan act as demanding customers and articulate their technological needs. Manyinnovations are driven by downstream service sectors and can surely be considereduser-dominated. In fact, users may play a crucial role in developing and implementingnew services, although some of the required technologies may come from suppliers.

Although IT is certainly not the only relevant technology in service innovation,IT is particularly pervasive. The numerous information processing tasks to whichit may be applied include many that are intrinsic to almost all economic activities.IT is thus often perceived as the great enabler of service innovation. Manycommentators who recognise the profound implications of IT for services still,however, consider this technology as typically supplier-dominated. It is true thatmany smaller and less innovative service firms are relatively less proactive whenit comes to incorporating new IT, though even here there is rarely the purelypassive process of absorption implied by the term “diffusion”. However, in manylarger and/or more advanced firms there is an extremely active process oftechnological development going on.

Examples of “technological innovations” include:

• large retail stores increasingly resemble financial services in their IT use. Forinstance, the UK supermarket Tesco has set up an Internet service provider,and many supermarkets are offering banking and insurance services;

• tracking & tracing systems enable transport service providers to monitor theprogress of their fleet and thus to manage their transport services more closely.

These examples of IT utilisation illustrate that service firms are not necessarilysupplier-dominated. This is especially true in the case of IT services themselves,like software houses. To a certain degree, software firms have to adapt theiractivities to new products from hardware companies, e.g. new generations ofchips. This involves near continual updating and — typically — expansion ofsoftware to exploit the facilities of new equipment. But the process of developingnew applications, new functionality, new interfaces, etc., is much more in thesoftware firms’ hands. It is also evident that sectors with a long experienceof IT investment are major sources of innovation — in the shape of newconfigurations of hardware, new software and applications, new interfaces, etc.A good example is the financial sector, which is a huge employer of softwareand networking staff.

Linking the four dimensions

Any service innovation involves some combination of the above-mentioneddimensions of service innovation. A complete new service will usually mean


that a new service delivery system will have to be developed, employees willhave to change the way they work or relate to customers (the client interface),the way IT is used in business processes, while a new service concept mayalso be involved. In addition to the meaning of these four dimensions as separateas discrete vectors of change, the linkages between these dimensions may beof even more significance.

Often these cross-linkages are forged in practice by those responsible formarketing, organisation development and distribution. For instance, launchinga new service concept (for existing or new clients) requires marketing expertise.Similarly, creating an adequate interface with clients and adapting the servicedelivery system require knowledge of how services are distributed (both in termsof where they are produced and of how they are delivered). The decision asto whether to develop new services requires organisational knowledge: can thecurrent organisation deliver the new service? What organisational changes mightbe needed?

A particular service innovation may display one dominant feature relatedto one of the four dimensions; quite likely, this particular feature will prompta set of changes in other dimensions, in order to bring about a successful innovation.Consider an example from the retail service sector. Intelligent cash registersand advanced data warehousing, as widely used by large companies, are basicallytechnological innovations (i.e. dimension 4). They allow for the creation of detailedclient profiles and personalised product offerings. But these applications cannotbe bought from the shelf and be readily implemented. They need to be combinedwith the specific shop formula employed (dimension 1), the way the retailerwants to communicate with its clients (dimension 2) and to train its employees(dimension 3), etc.

In practice, it may be the combination of the four dimensions that ultimatelycharacterises each particular service innovation. The weight of the individualdimensions and the importance of the various linkages between them vary acrossindividual services, innovations and firms. Similarly, the inputs required to linkthe dimensions in practice differ according to the type of service, and the extentto which the search and selection process (inherent in all innovation processes)is formalised.

Mapping Service Innovation Patterns

Just as service innovations are extremely varied, so is the role of service firmsin innovation processes diverse. The dominant view of innovation in servicesportrays the process as supplier-dominated, with service firms being dependenton their suppliers for innovative inputs which are to different degrees transformed

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into more or less innovative service offerings. However, our studies confirmthat the contribution of service firms to innovation is broader than this, especiallyif we include the non-technological aspects of innovation. Some services evenplay a role in the innovation processes of their clients, e.g. R&D, design &engineering services and some IT services. A typology4 of five innovation patterns,in each of which service firms play a different role, is presented below, anddisplayed in Fig. 2. Each of the patterns displays a different mix of linkagesbetween three types of actors:

• suppliers of inputs (equipment, capital, human resources, etc.);• the (innovating) service firms, and;• the clients of the innovative service product (another service or manufacturing

firm in the case of intermediate products, or final users).

Going from pattern 1 to 4, the influence of the client firm or final consumeron the innovation process gradually increases. Pattern 5 represents a somewhatdifferent situation as all actors in the value system contribute to a particularinnovation or are forced to accommodate it.

Supplier-dominated innovation (pattern 1)

Service innovations have traditionally been depicted as following this pattern:innovations (as a rule technological innovations) are derived from hardwareindustries in particular. These innovations from external suppliers are disseminatedand implemented by service industry users, who in their turn satisfy the needsof their clients. Examples of this pattern include:

• microwave ovens in catering, whose introduction has greatly extended thepossibilities for food preparation (and reheating) in cafes and restaurants;

• cash registers and mobile phones that have been assimilated into many smallfirms which otherwise use little new technology.

There are many similar examples with a clear “technology push”. Typicalfor this pattern is, at least initially, little scope for user industries to influencethe actual product supplied by the supplier. The adopting firm often has to bringabout some organisational changes in order to be able to use the innovation— to adapt its organisation, train its employees, etc. — and to offer more efficientand higher quality services as a result.

4This is to be considered a mapping device. Quite possibly, more patterns can be found.


Fig. 2. Patterns of services innovation.

ROLE OF:

INNOVATIONPATTERN

SUPPLIER SERVICE FIRM CLIENT FIRM(service or

manufacturing)

EXAMPLE

Supplier-DominatedInnovation

Introduction ofinteractive TVequipment; ITgoods; medicalrobots,tomography

Innovation inServices

Introduction ofnew shop formula,new pension andsaving schemes

Client-LedInnovation

Green bankingservices, door-to-door transportservices

Innovationthrough Services

Engineeringservices helpingoil & gas firms indesigning new oilrigs, etc.

ParadigmaticInnovation

Multifunctionalchip cards, sub-soiltransport services

LegendInputs forService Product

Supplier-Domination(push)

Implementationof new ServiceProduct/Organisation

Locus ofInnovationActivity

UserDomination(Pull)

User ofInnovativeService Product

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Innovation within services (pattern 2)

In this pattern, the actual innovation and implementation take place in the servicefirm itself. Such innovations may be technological, non-technological, or (asin many cases) a combination of the two. Typical examples of this pattern involvea new product, product bundle or delivery system, that is thought up in theservice firm itself (e.g. by a new business team), and implemented throughoutthe organisation, possibly with “innovation support” from outside.

Client-led innovation (pattern 3)

In this case, the service firm is responding to needs clearly articulated by itsclients. While, in a sense, every successful innovation is a reaction to a perceivedmarket need, for some service innovations, this is more clear-cut than for others.Some examples:

• door-to-door public transport services aimed at the business traveller, a clearanswer to the often-heard complaint “we would like to use public transport(the train) more often, but that pre- and post-train transport is too time consuming”;

• green banking services, to appeal to a growing number of individuals whowant to invest their (saved) money in a “socially responsible” way.

In these cases, the demands are expressed by segments of mass markets.In many other cases, the influence may come from a single client, which isoften the case in business services: for instance, a client may propose that atraining firm back up its face-to-face sessions with computer-based aids.

Innovation through services (pattern 4)

In this more complicated pattern, service firms influence the innovation processtaking place within the client firm. The provider of intermediate services mayprovide knowledge resources that support the innovation process in various ways,such as:

• providing an expert project manager with the necessary skills to implementan innovation;

• providing an innovative tailor-made software package;• providing training or written advice regarding product selection and

implementation;• providing advice on how to conduct the innovation process, or providing support

tools to foster creativity among teams in the client organisation.


Different modes of support coexist in providing such business services(— often KIBS). An engineering consulting firm supported an oil and gas companythat wanted to drill and explore in a “protected” area, helping them to findnew operational methods to meet the strict environment protection rules by reviewingexisting practice, proposing new operations, designing new methods, trainingthe operators of the client firm, actually heading the drilling operations, etc.Despite these inputs, much if not all of the actual innovation takes place atthe client site, and with its personnel (cf. Hoffman et al., 1998). In this case,the engineering firm facilitated the innovation process at the client firm. Acrossdifferent circumstances, the precise role (source, carrier, facilitator) of theintermediate service provider, and its degree of interaction with the client firm,may vary substantially (Bilderbeek & den Hertog, 1997).

Paradigmatic innovations (pattern 5)

This pattern involves complex and pervasive innovations affecting all actorsin a value chain profoundly: when driven by fundamentally new technologies,they are labelled technological revolutions or new technology systems (Freeman& Perez, 1988). But they may also be driven by regulations, resource constraints,and other dramatic changes that require innovation to take place across manyelements of the value chain, implying completely new infrastructures, new typesof knowledge and adaptation on the part of intermediate and final users. Forexample:

• if in a very densely populated area, the regular transport of goods is no longerpossible and the decision to switch to underground transport was taken, partiesacross the value chain would have to innovate and change practices. Manufacturersof transport equipment would have to provide completely new transportequipment; transport companies would have to change their service offerings,retrain their personnel, market their product in different ways; users wouldhave to change their behaviour and use of transport facilities;

• similarly, the switch from a few public TV channels towards multi-channelpay-per-view regimes require innovations and change of behaviour on manyfronts;

• the large-scale introduction of multi-functional “smart cards” would be anotherexample of a paradigmatic innovation.

The typology demonstrates the wide variety of roles of service firms in innovationprocesses. Since the way service providers and client firms interact is centralto the process of service innovation, both factors have to be taken into account.Further innovation patterns may be identified by, for example, taking additional

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variables into account. One such factor might be the role of government asa trigger for innovation, a role that can be quite important — as when innovationis promoted by R&D funding and/or procurement decisions, or through newregulations (e.g. those fostering environmental innovation). Another variable maybe the degree to which end-users are given the opportunity (or are forced) toco-produce particular services: the shift to “self-servicing” is an important aspectof services innovation. Many variations on these innovation patterns can befound in practice. Sometimes, for example, innovation takes place in individualservice functions (irrespective of whether it is a service or manufacturing firm),that might or might not be subsequently outsourced to specialised service firms.

Two such situations suggest additional patterns of service innovation. First,innovation in a firm’s internalised service function is quite a common pattern.All firms engage in a range of service activities — and sometimes this involvesinnovation. A capital goods manufacturer may have an innovative leasing scheme,dealer organisation, after-sales service or training sessions. Increasingly,manufacturing firms realise that the package of services offered around the actualgoods may be crucial to competitiveness. Quite frequently, the added value realisedwith these services is much higher than the margins realised on the capital goods.A second case is innovation in an outsourced service function, such as facilitiesmanagement, catering and cleaning, or even more strategic functions (e.g. temporarystaff, management, R&D). In most cases, more specialised service firms takeover these functions.5 In many outsourcing relationships, activities may be preciselyspecified and cost competition may be intense; in such cases, innovation is lesslikely. But in other cases, there is sufficient level of specialisation and scopefor economies of scale to provide incentives for innovative solutions. For instance,companies increasingly hire temporary labour, and increasingly, the troublesometask of managing these temporary workers and the associated paperwork canbe outsourced to a temporary employment agency. In their turn, such agenciesincreasingly understand the human resources required by particular clientfirms, and may even offer to completely take over the human resourcesmanagement function, training and hiring personnel, helping displaced staff tofind new jobs, etc.

The Role of KIBS

Knowledge-intensive business services (KIBS) form a category of service activitieswhich is often highly innovative in its own right, as well as facilitating innovation

5This pattern resembles the previous one but it goes a step further. In this case, the client firm influencesthe innovation taking place in the outsourced service function.


in other economic sectors, including both industrial and manufacturing sectors.In an earlier study (Miles et al., 1995), the innovative role of this categoryof services (KIBS) was substantiated, both through literature research and casestudies. KIBS industries were defined as:

• private companies or organisations;• relying heavily on professional knowledge, i.e. knowledge or expertise related

to a specific (technical) discipline or (technical) functional domain; and,• supplying intermediate products and services that are knowledge based.

KIBS actually cover a rather wide range of services.6 For instance, manyprofessional services can be considered knowledge intensive, be they technologybased or not. In other service sectors, specific segments with a relatively highprofessional component can be identified as intensive users of knowledge. Table 1gives an overview of KIBS.

The analysis of the role of KIBS in innovation processes brings into focusthe ways in which knowledge is produced and used in the economy, and therole of KIBS in these processes. The production of services is often the resultof a joint effort of the service provider and client (be it the client is the ultimateend-user, some intermediary in the client firm or in another firm altogether).In this process of co-production, the quality of the resulting service productlargely depends on the nature of the interaction between the service providerand client, and the quality of the communication process that is involved. Oneimportant role for KIBS is providing a point of fusion between more generalscientific and technological information, dispersed in the economy, and the morelocal requirements and problems of their clients. KIBS operate as catalysts whichpromote a fusion of generic and quasi-generic knowledge, and the more tacitknowledge, located within the daily practices of the firms and sectors they service.

One result of this interaction is that feedback from clients can shape innovationsin service firms, just as much as service firms can influence their customers’innovation. “Interactive learning” and “user-producer linkages” are importantnotions here.7 This two-way learning process is prominent where KIBS areconcerned, including the category of wholesale and retail trade of machinery

6In case studies performed since 1994, we have focussed on those KIBS that derive their intermediatefunction primarily from the production and transfer of technology-related knowledge, among others,engineering services and IT service firms. This sub-category of technology-based KIBS (T-KIBS) isonly occasionally considered within the existing bodies of research literature and policy practice ontechnological innovation.

7Thus, the literature on user–producer relationships (see, e.g. Lundvall, 1988; 1992) is especiallyrelevant for the study of service (mediated) innovation.

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and equipment.8 IT support services, management consultancy and technicalengineering, for example, typically work with their clients in highly interactiveways. Client firms and KIBS providers work together to find solutions to problemsand challenges. Through the interaction, the client’s knowledge base changeswhile the KIBS provider also gains more experience, learning more about thecharacteristics of a specific industry. The KIBS provider is thus enabled to refineand differentiate the services offered and methods used, to learn about newbusiness opportunities, upgrade his/her track record, etc.

As innovation processes involve parties with various gaps in resources andin innovation management capabilities, intermediaries (including various KIBS)may be employed directly to fill these gaps or less directly to help bridge them(Bessant & Rush, 1998). The type of bridging required varies:

• expert consulting, providing particular solutions to particular problems;• experience sharing, transferring what is learned in one context to another.

(The metaphor here might be that of bees cross-pollinating as they fly fromflower to flower);

• Accounting and bookkeeping• Management consultancy (not only concerning new technologies)• Specific building services (e.g. architecture, surveying, construction engineering, etc.)• Facility management services• Technical engineering services• Research and development services (excluding university-based R&D)• R&D consultancy services• Design (not only concerning new technologies)• Environmental services (e.g. environmental law, elementary waste disposal services,

remediation, environmental monitoring, scientific/laboratory services, etc.)• Computer and information-technology-related services (including software services)• Legal services (note that technology-related legal services form a growth area!)• Marketing & advertising• Exploitation and trade in real estate• Training (not only concerning new technologies)• Specific financial services (e.g. securities and stock-market-related activities)• Temporary labour recruitment services• Press and news agencies

Table 1. Knowledge-intensive business services: an overview.

Based on: Miles et al., 1995.

8The services “surrounding” the hardware are often as important as the hardware itself for implementingespecially complex systems and machinery.


• brokering, putting different sources and users in contact across a wide rangeof services and resources. (The metaphor here is that of marriage broker/dating agency trying to set up the most appropriate match between two partners.The degree to which the innovation agent is perceived as independent is importanthere, as his/her credibility is likely to diminish if there are particular standardsolutions being proposed or particular sources of supply advanced.);

• diagnosis and problem clarification, helping users articulate and define theparticular needs in innovation. Many user firms lack the capability to understandor prioritise their problems into a strategic framework for action and outsideagencies may be able to assist in this process. (A metaphor here would bethe general medical practitioner, whose main task is diagnosis and who thenprescribes a range of specialist treatments such as medicines, physiotherapy,diet, surgery, which are then actually delivered by others.);

• benchmarking, where the process of identifying and focussing on “good practice”can be established through an intermediary;

• change agency, where organisational development can be undertaken with helpfrom a neutral outside perspective.

Earlier, a differentiation was made — more specifically focussing on KIBS— between three roles played by KIBS in supporting innovation in client firms,namely: facilitator, carrier and source of innovation (Bilderbeek & den Hertog,1997; Miles et al., 1995). These three roles are briefly characterised below.

Facilitator

A KIBS firm is a facilitator of innovations if it supports a client firm in itsinnovation process, but the innovation at hand does not originate from this KIBSfirm nor is it transferred (from other firms) by this KIBS firm to the clientfirm. Examples include:

• a management consultant helping a client to introduce a new account managementsystem or developing a new service distribution channel;

• a technical engineering firm seconding a team of its engineers to work withthe technical engineers of the client to co-produce an innovative solution in,e.g. offshore platform construction or subsoil building.

Carrier

A KIBS firm is a carrier of innovation if it plays a role in transferring existinginnovations from one firm or industry to the client firm or industry even though

508 P. den Hertog

the innovation in question does not originate from this particular KIBS firm.Examples are:

• an IT firm implementing and customising advanced and innovative ERP software(SAP, BAAN) in a client firm;

• a management consultant specialising in CAD/CAM applications helping amajor client (a shipyard) to specify the exact user needs and technicalspecifications of a new CAD/CAM programme, and subsequently toimplement it.

Source

A KIBS firm is a source of innovation if it plays a major role in initiatingand developing innovations in client firms, usually in close interaction withthe client firm. Relevant examples here include:

• an advertising agency developing and implementing a completely new campaignfor a client;

• a provider of call centre solutions advising and actually implementing a newcall centre for a client.

Knowledge Resource Flows

In addition to discrete and tangible forms of knowledge exchange, process-orientedand intangible knowledge flows are crucial in their relationship between KIBSand client firms. This section draws on various contributions to identifydiscriminating dimensions which can help us grasp these processes, and relatethese to the four dimensions of service innovation considered in the third section.

The Nonaka and Takeuchi model of knowledge creation

Nonaka and Takeuchi (1995: 56–94) draw on the well-known distinction, pioneeredby Polanyi (1967), between tacit knowledge, which essentially represents “know-how” (the subjective knowledge), and explicit knowledge, “knowing about”(the objective knowledge). Explicit knowledge (available in the form of formulas,technical specifications, or embedded in equipment, computer programmes, andso on) is relatively easy to transfer and store.9 On the contrary, tacit knowledge

9Hales (1997: 4) criticises in this context “addressing knowledge as some kind of ‘stuff’ which can beheld and deployed in various ways”. Strictly, it is information that is being stored and communicated,and this information is only transformed into knowledge by an active cognitive process on the part ofthe user.


(made up of ideas, experience, facts, etc.) is highly personal and difficult toconvert; it cannot easily be codified, and can often only be observed throughapplication and acquired through practice and experience.

Nonaka distinguishes individual knowledge, possessed by single operators,from organisational knowledge. The latter includes both knowledge possessedby individuals, and the procedures, routines, strategies, etc., which are developedat a corporate level and shared by the members of the organisation. The processof knowledge generation is directly associated with the interaction betweenindividual and organisational knowledge: “human knowledge is created andexpanded through social interaction between tacit knowledge and explicitknowledge” (1995: 61). Four modes of knowledge conversion are identified,as depicted below in Fig. 3 (1995: 62–69):

(i) Socialisation — the development of tacit knowledge from tacit knowledge.This is a process of sharing experiences and thereby creating tacit knowledgesuch as shared mental models and technical skills (e.g. to teach somebodyhow to use a machine). Often, an individual can develop tacit knowledgethrough observation, imitation and practice, without much use of instructionallanguage.

(ii) Externalisation — development of explicit knowledge from tacit knowledge.This involves the rationalisation of tacit knowledge and its articulation intoexplicit concepts and formal models (e.g. to write an instruction manual).Externalisation is the core of the knowledge creating process, the“quintessential” knowledge-creation process, in which tacit knowledge becomesexplicit, taking the shapes of metaphors, analogies, concepts, hypothesesor models.

(iii) Combination — development of explicit knowledge from explicit knowledge.This involves the systematisation and conversion of one system offormalised concepts into another one. It may involve combining elementsfrom different knowledge systems together into a new framework, the“reconfiguration of existing information through sorting, adding, combining,and categorising of explicit knowledge”. (Associated skills will be thosewhich involve the ability to obtain a new formula, procedure or softwarefrom existing ones.)

(iv) Internalisation — the move from explicit to tacit knowledge. This occurswhen explicit knowledge is converted into specific know-how (e.g. discoveringhow to use a piece of equipment for specific or new needs). Internalisationis related to “learning by doing”: it is a process of embodying explicitknowledge into tacit knowledge and the individuals’ tacit knowledge basesin the form of, for example, shared mental models or technical know-how.

510 P. den Hertog

A dynamic element is added to this taxonomy so as to view organisationalknowledge creation as a continuous process, shaped by shifts between the variousmodes of knowledge conversion. Nonaka and Takeuchi (1995: 70–71) see thisprocess as involving:

• first, a socialisation mode, usually starting with construction of a “field” ofinteraction, within which the sharing of members’ experiences and mentalmodels is facilitated;

• second, an externalisation mode, triggered by meaningful “dialogue or collectivereflection”. The use of appropriate metaphor or analogy helps team membersto articulate hidden tacit knowledge that is otherwise hard to communicate;

• third, a combination mode is triggered by “networking” newly created knowledgeand existing knowledge from other sections of the organisation, therebycrystallising them into a new product, service or managerial system;

• finally, “learning by doing” triggers internalisation.

The tacit knowledge of individuals is seen as the basis of organisationalknowledge. The process of organisational knowledge creation requires an expansionof the space of interaction through which knowledge is fused and created, so

Fig. 3. Four modes of knowledge conversion and the “knowledge spiral” as conceptualised by Nonakaand Takeuchi (1995: 62/71).

TO:

Tacit Knowledge Explicit Knowledge

Tacit

Knowledge

Socialisation:

share experience,

discuss ideas,

opinions

Externalisation:

Articulate experience

In formal models;

Embed experience into equipment,

software, etc.

FROM:

Explicit

Knowledge

Internalisation:

convert models and formulas into

tacit skills;

learn/teach how

to use equipment

Combination:

reformulate

formal models and data, convert

codes, etc.


that it additionally takes place at the group, organisational and inter-organisationallevel. Thus, a spiral of knowledge creation is established, involving the fourmodes of converting tacit and explicit knowledge.

The Nonaka and Takeuchi model of organisational knowledge creation providesseveral insights relevant to the KIBS–client interface:

• First, it emphasises the combination of these different forms of knowledge.Various case studies of the relationships of KIBS to their clients (Bilderbeeket al., 1994; Miles et al., 1995) indicate that the more tacit forms of knowledgeflows are at least as important as the explicit, codified forms of knowledgeexchange.

• Second, it draws attention to interaction between individuals, team membersand employees from various organisations in creating knowledge new to thefirm. Studies of the functioning of, for example, engineering services (Hofmanet al., 1997; Vlaar et al., 1997) provide many examples of the knowledgebase of the client firm being constantly enriched by confrontation with theknowledge base of the KIBS provider. This mainly involves personal interactionsbetween professionals (and the client firm must possess professionals whocan maintain and enrich this dialogue).

• Third, it draws attention to the dynamic nature of the knowledge-conversionprocesses. The constant mixing, redefinition, linking, exchanging, reshapingand enriching of various forms of tacit and explicit knowledge in the courseof interaction10 is what typically happens where KIBS and their clients interact.KIBS can trigger and strengthen processes of knowledge conversion in clients(and vice versa). Often, when a client hires a KIBS, new project teams areset up, employees are forced to interact, to make tacit knowledge explicit,to think about new combinations of knowledge and their mental models arechallenged. KIBS, in other words, contribute to firm-level learning processes.They can provide new knowledge certainly, but they may also act as catalysts,which help internal communication and knowledge conversion.

10KIBS — especially management consultancies — are often (and sometimes justly) criticised forreselling the client’s own knowledge again to the client. However, the process of conversion andreconversion of knowledge may not be entirely fruitless! The sheer act of interacting with the KIBScan help processes such as socialisation, externalisation and combination. The interaction betweenclients and KIBS can establish a field in which knowledge resources are exchanged and dialogueestablished between various functions/experts (e.g. creating multidisciplinary project teams). Thiscan allow for combining existing pieces of knowledge already present inside and outside the company.And the tacit tricks of the trade can be interchanged just through the process of performing taskstogether (e.g. when in-house software developers are working together in project teams with externalIT consultants).

512 P. den Hertog

A multitude of knowledge flows

In practice, knowledge flows between KIBS and their clients are manifold. Someexamples are given in Table 2. Sometimes these resources — solutions to a(perceived) problem — are (in part) very concrete and tangible. This is thecase, for example, when the service product delivered is a software programme,written report, drawing or design, advertisement campaign, temporary expert,project plan, benchmark, or advice on a new organisation structure. However,the outcomes of the interaction between the service provider and client firmmay be much more complex and hard to pinpoint. More fuzzy outcomes orprocess-oriented forms of knowledge exchange can be important by-productsof the more concrete resources just mentioned, since explicit knowledge is oftenaccompanied by tacit knowledge. In other cases, knowledge resources are developedand interchanged in the course of the cooperation between the KIBS providerand client firm. Examples of the more fuzzy results that this can achieve are:improvement of a management team’s internal communications (they have beenable to build knowledge of shared language, metaphors, visions, objectives),better understanding of potential markets, know-how for applying equipment/systems, improved negotiating capabilities for discussing plans and actions withpartners, creation of R&D collaborations, building increased support (inside oroutside the firm) for a solution to a problem, improved reputation, new personalcontacts, introduction to expert network, knowledge institutions or policy-makers.

Many services cannot be packaged in the form of a written report or a pieceof software, but even when they can, it is common to find that implementationrequires various forms of more direct interaction. The content and quality ofthe service provided by a KIBS are substantially defined by the quality of thisinteractive process and the degree to which service professionals in client andservice provider relate to each other.

Four discriminating dimensions can be used to provide a more structuredview of the ways in which KIBS providers and client firms interact, and thevarious kinds of knowledge resource flows involved, namely:

(i) discrete/tangible versus form or process oriented/intangible knowledge;(ii) human embodied versus non-human (capital, written information) embodied

forms of knowledge resources;(iii) explicit/codified knowledge versus tacit/non-codified knowledge;(iv) contractual versus non-contractual forms of knowledge.

These dimensions of knowledge flows can be related to the four dimensionsof service innovations identified earlier.


Dimension 1: Discrete/tangible versus process oriented/intangible knowledgeresource flows

As is already clear from the foregoing, intangible — often process-oriented —knowledge resource flows are as important as their more tangible equivalents.Often the two are co-produced. A KIBS provider that offers a software solutionto a client firm will not only produce a knowledge flow in the form of a ready-made software package. The software developers will learn about the firm inwhich it will be applied, establish a working relationship with the in-house experts,possibly “en passent” advice on other topics, introduce the client to a networkof other users of similar software, etc. The software provider may use the clientas a reference (helping to maintain his reputation), fine-tune the software package,etc. Table 3 outlines some tangible and intangible knowledge flows using thefour dimensions of the service innovation model described in the third section.

Dimension 2: Human-embodied knowledge versus non-human knowledgeresources

The second dimension refers to the degree to which knowledge is “embodied”in humans. Human-embodied knowledge flows require face-to-face interaction

Table 2. Knowledge flows between service provider and client firms.

More or Less Discrete/Tangible More or Less Process-Oriented/Tangible

• Training• Benchmark• Project management• Software package• Advertisement campaign• Written report (e.g. feasibility study)• Project plan• Drawing/design• Advice (e.g. on new organisational structure)• Computation• Diagnosis• Product documentation (manuals etc.)• Secondment of a temporary expert• Use of an R&D facility

• Routine problem-solving as part of everydayproject work

• Improved capability to collaborate in projectteams

• Instruction when installing new machinery• Articulation/specification of needs (e.g. for

procurement)• Sparring partner (testing of ideas client firm)• Introduction to new networks of

professionals/user groups• Information on performance of competitors• Market information• Coupling to new partners• Knowledge on how to create support for

innovations• Insight on how to access research and

technology organisations, higher educationinstitutes and government

514 P. den Hertog

Table 3. Examples of tangible and intangible knowledge resource flows between service providerand client on the four dimensions of the service innovation model.

Service Concept Client Interface Delivery System TechnologicalOptions

Tangibleknowledge

flows

Campaign of anadvertisingcompany forpositioning a newshop formula on themarket.

Report deliveredby marketingbureau on marketprospects for anelectronic homeshopping service.

Marketing trainingfor front officeservice employees.

Installation of anew data miningsoftwareprogramme.

Intangibleknowledge

flows

Experience of hiredexpert on similarcampaigns in theindustry.

Invitation topresent the newservice on aninternationalmarketingconference (newnetworks, newcontacts).

Hired expert act as amirror e.g. by con-fronting the clientfirm with the qualityof the “service en-counter” as perceivedby competitors.

In house softwareteam brainstormswith hired experton new businessopportunitiesusing the newsoftware.

Table 4. Human- and non-human-embodied knowledge flows between service provider and client:Examples in terms of the four dimensions of the services innovation model.


Human-embodiedknowledge

flows

A managementguru gives avision onelectroniccommerce-basedservice conceptsin a face to facemeeting.

Organise a userpanel with afirm’s clients totest a prototypeservice.

Employees of theclient firm receive anon the job training(by external experts)on dealing withcustomers.

Instruction by amaintenanceworker on how tohandle the newcopier.

Non-human-embodiedknowledge

flows

Reading a reporton state of the artinnovationstrategies inservice firms.

Install a websiteto communicatewith (potential)clients.

An action plan by amanagementconsultant forreorganising the firminto well focusedSBUs.

A CD ROMcontaining aninteractive demo ofthe e-commerceencounter.


between service provider and client firm. Disembodied knowledge flows aretypically written down (a report, an action plan, an article in a magazine, anelectronic database) or incorporated in capital goods or a piece of equipment.Human-embodied knowledge flows are generally thought of as relatively importantin services in general. However, from the example, it can be gathered that writtencommunication and technology do play an important role as well, most oftenin combination with human-embodied knowledge flows. In Table 4, further examplesare given.

Dimension 3: Explicit/codified knowledge versus tacit/non-codified knowledge

The Nonaka and Takeuchi model stresses the conversion processes in whichtacit knowledge becomes explicit, recombined and is again internalised (in anenriched version). Discussion of economic transactions usually brings explicitknowledge to mind. But while there is rarely a price tag on the exchange oftacit forms of knowledge (which are much harder to pinpoint), they are at leastas important in the interaction between KIBS and their clients. Table 5 givessome examples.

Table 5. Examples of explicit and tacit knowledge flows between service provider and client firm onthe four dimensions of the services innovation model.


Explicit/codified

knowledgeflows

Read a chapter onlaunching newservice products inthe latest servicemanagement book.

Purchase the SAPcustomer relationsmodule fromBAAN company.

Obtain therequirements forobtaining an ISO9000 certificate forthe serviceorganisation.

Read the productdocumentation onhow to handle thenew colourphotocopier.

Tacit/non-codified

knowledgeflows

During a weeklycafe visit, twofriends — oneworking for ainsurance firm, theother in spaceresearch — discussarrangements forfinancing satellites.

Sharing the feelingbetween an externaland internal inter-active designer ofwhat “feels” as anappealing web sitedesign.

Participate in a one-day seminar on datawarehousing anddiscuss newopportunities with asoftware salesrepresentative.

Engineers of thecontractedengineering firmand oil companyshare bestpractices duringtheir two monthsat sea installing anew oil rig.

516 P. den Hertog

Dimension 4: Contractual versus non-contractual forms of knowledge

Another important feature of the knowledge flows taking place between KIBSand client firms is the degree to which these are part of a contractual relationshipor simply occur without a contract between KIBS and the client firm (Table 6).Most often, contractual and non-contractual forms of knowledge exchange coincide,and especially when KIBS have a more or less steady relationship with a client,the contractual knowledge flows are liable to be supplemented with more informaltypes of knowledge flows. This is not only the result of KIBS trying to linkclient firms, but also a matter of experts or professionals of both KIBS andthe client firm developing (trustful) relationships.

Table 6. Examples of contractual and non-contractual knowledge flows between service providerand client firm on the four dimensions of the services innovation model.


Contractualknowledge

flows

Contract anexternal designerto design a newline of differentlypositionedproducts.

Hire a marketingresearch firm toas-sees how manycustomers mightswitch toe-commerce.

Order consultancyfirm to improve clientfriendliness of aftersales servicedepartment.

Contract anengineering firmto help procure apiece ofmachinery/hardware.

Non-contractualknowledge

flows

Discuss newbusinessopportunitiesduring a meetingof a professionalassociation.

A software bureauspecialised in “callcentres” suggests tocontact aspecialisedtemporary workagency for poolmanagement.

A trainer discussesafter the training withthe management thesituations he/sheexperienced bycompetitors.

Experience as anexpert theadvantages of anelectronicboardroomsession, anddecide it to use itin one’s ownprojects.

There is little statistical evidence available illustrating the role KIBS playin co-producing innovations. Table 7 presents data from the Dutch StatisticalOffice, on the development of computer and related IT services, economic advisoryservices (business consultancy) and engineering and technical advisory services,over the period 1987–1994. It displays the speed at which the number of firmsand turnover of these industries have developed, and provides a substantial estimateof the turnover realised from knowledge transfer to the client firm or organisation.


Table 7. Number of firms (× 1000), turnover (in million guilders) and percentageof turnover with knowledge transfer in three KIBS industries in the Netherlandsfor the period 1987–1994.

Computer and Related IT Services

Year Number of Firms Turnover Turnover with Knowl.Transfer

1987 3,3 4 688 481988 3,9 5 163 541989 4,6 5 862 561990 5,0 6 608 561991 5,5 7 307 581992 5,8 7 550 561993a 6,9 8 008 591993b 8,5 8 777 581994 9,1 9 071 59

Economic Advisory Services (Business Consultancy)

1987 4,4 1 936 961988 5,5 2 216 961989 6,8 2 535 901990 7,7 3 070 921991 10,0 3 489 931992 11,6 3 924 951993a n.a. n.a. n.a.1993b 13,9 4 026 841994 15,5 4 420 83

Engineering and Technical Advisory Services

1987 n.a. n.a. n.a.1988 n.a. n.a. n.a.1989 7,5 7 191 851990 7,9 7 959 871991 9,0 9 076 951992 9,8 9 913 941993a 11,3 11 772 961993b 10,8 10 224 981994 11,4 10 392 98

Note: Comparisons over time are complicated by a shift in the Standard IndustrialClassification in 1993. Here, we include the figure for (a) the “old” and (b) the“new” industrial classification scheme. For each of the three industries, CBSdefined more precisely what activities involved knowledge transfer. For example,in computer and related IT services, database services and selling of hard- andsoftware are seen as activities in which not much knowledge transfer is involved,as opposed to activities, such as systems development and secondment of ITpersonnel.Source: CBS (1996: 94/95)

518 P. den Hertog

Table 8 is possibly even more intriguing: based on the make-and-use tablesin the national accounts, it gives some insight on the use of these three KIBSindustries by various client categories. Some remarkable patterns can be noticed,bearing in mind the size of the user industries (as revealed by their added valueand mean level of investment). Economic advisory services are used above averageby manufacturing, whereas banking and insurance firms use a relatively aboveaverage amount of computer and related IT services. It is interesting to seethat even in the well-developed Dutch service economy, the services of researchand scientific institutions (in the fourth column — these are largely public services)are geared relatively more towards the manufacturing than to the service industries.This brings us to the next question, i.e. whether KIBS are developing into asecond, private, knowledge infrastructure partly complementing and partlycompeting with the first, established, public knowledge infrastructure.

KIBS as a “Second Knowledge Infrastructure”

KIBS have come to play a central role in transferring and, in many cases, creatingand combining, knowledge resources in innovation systems. They are doing thisdirectly through their provision of services and indirectly through facilitatingthe mobility of highly educated personnel.11 The direct roles played by KIBShave much in common with the roles of organisations within the public knowledgeinfrastructure, such as research and technology organisations (RTOs) and highereducation institutions (HEIs). The latter two also play a role in diffusing knowledgeto the various firms and organisations they work with through contract research,educating students and providing training to personnel of client firms.

Given their role as co-producers of knowledge and innovation with clientfirms, the rise of KIBS can be seen as contributing to a new knowledge infrastructure.This new knowledge infrastructure is no longer largely constituted by RTOsand HEIs of different kinds, but also includes KIBS. In the context of thedevelopment of the knowledge infrastructure, we have postulated two hypothesesconcerning the role of KIBS in innovation processes (den Hertog & Bilderbeek,1997b: 31):

(i) KIBS will in practice gradually develop into an informal (private) secondknowledge infrastructure or knowledge base, partially complementing andpartially taking over the intermediary role traditionally played by parts ofthe more institutionalised, formal (public) first knowledge infrastructure.

11KIBS have high shares of highly educated staff, apparently with high levels of mobility.


Table 8. Use of KIBS by manufacturing and non-manufacturing industries in the Netherlands.

Source: CBS (1996: 96)

The use of Services Provided by: Size of UsingIndustries

Industry ComputerService/IT Firms

Engineering&

TechnologyConsultancy

Firms

EconomicAdvisory

Firms

Research&

ScientificInstitutions

% ofTotalValueAdded(1993)

% ofInvestment(Average

Level1986–92)

Manufacturing 1 375 966 954 1 324 19 17

— High tech 237 99 140 316 3 2

— Medium tech 693 410 513 654 7 7

— Low tech 445 457 301 354 9 8

Non-manufacturing 4 643 6 307 2 070 1 953 81 83

— Agriculture & fisheries

19 191 12 14 3 5

— Mining 161 114 4 15 3 2

— Construction & install.

140 52 91 29 5 2

— Utilities 122 193 46 53 2 4

— Wholes./retail./rep.

854 337 379 77 12 9

— Transp./wareh./comms.

521 273 36 25 16 11

— Financial services

470 218 2 29 4 4

— Business services

1 245 3 742 1 078 105 16 30

— Other services 1 031 1 041 416 1 601 19 17

Consumption inprivate households

0 212 0 0

Consumption inpublic sector

0 30 0 129

Exports 1 405 1 534 1 321 1 197

Total 7 423 9 049 4 345 4 603 100 100

520 P. den Hertog

This implies that this category of service firms would function as a diffusionagent or even as a source of innovation for their clients — contrastingwith the popular image of service firms as innovation followers.

(ii) The traditional distinction between public and private knowledge-based(advisory) services will gradually disappear. This could lead to a developmentin which not firms and institutions but networked service professionals —irrespective of the formal organisation to which they belong — will increasinglyact as carriers and sources of knowledge. This process of blurring of boundarieswill eventually result in a more flexible capacity of external KIBS professionalscooperating with internal KIBS professionals in providing knowledge-intensivebusiness services.

The notion of the development of a second knowledge infrastructure formsthe basis of a three-tiered model of the evolving role of KIBS in innovationprocesses, as given in Fig. 4 and elaborated in Table 9. This model needs furtherdevelopment and testing. While the shift from phase 1 to phase 2 is relativelywell-substantiated, phase 3 is much more an extrapolation from a few apparentvanguard developments. For instance, networks are emerging in which professionalsoperate rather loosely between organisations, sometimes combining variousassignments, and there seems to be increasing mobility of personnel betweenthe various organisations in the (now broadly defined) knowledge infrastructure.Given these trends, and the gradual shift from the first phase to the secondphase of KIBS development; it will be well to be prepared for developmentstowards the third phase.

There is some evidence of a blurring of the boundaries between servicesoffered by the public knowledge infrastructure and KIBS services. Nevertheless,the two infrastructures generally play different roles within innovation systems.Universities primarily have relations with large R&D-intensive manufacturingfirms and (in the case of social and administrative knowledge) the public sector.KIBS firms have a much broader spectrum of clients, including public authoritiesand some smaller firms. Large firms and other organisations benefitdisproportionately from both knowledge infrastructures. SMEs, with their relativelylow levels of internal competence and limited financial resources, often lackcapabilities for making effective use of KIBS, and typically rely on public orsemi-public sources for external knowledge.

The picture is complicated by evidence confirming that national innovationsystems differ considerably in the degree to which KIBS function as importantco-producers for other industries. At a macro-level, Windrum and Tomlinson(1999: 402) showed that the degree of integration between KIBS and other economicactivities differs considerably between the United Kingdom, Netherlands, Germany


Fig. 4. Three-tiered model of the role of KIBS in innovation processes.

Phase 1: Embryonic stage of KIBS development

Phase 2: KIBS as a 2nd knowledge infrastructure

Phase 3: Networked KIBS service professionals

KIBSPredecessors

PublicKnowledge

Base

PrivateKnowledge

Base

PublicKIBS

PrivateKIBS

Public KB Private KB

specialised KIBS func-tions provided internally

specialised KIBS func-tions provided internally

Public KB Private KB

internalKIBS professionals

internalKIBS professionals

external(-ized)KIBS professionals

522 P. den Hertog

Table 9. Some characteristics of the individual phases in the three-tiered model.

Phase 1: “Embryonic” Stage of KIBS Development

• Limited interaction between the public and private knowledge base• Limited number of intermediary knowledge institutions (mainly public) and firms• Emphasis in innovation processes on generating new knowledge• Predecessors of KIBS functions mainly coupled to well established categories of professional staff

(R&D, accounting, marketing, legal affairs, etc.) and to a substantial degree provided within thefirm

• Knowledge mainly interpreted as formal technical expertise (R&D)• Sectoral knowledge orientation dominates• Innovation policies mainly focused on supporting R&D/increasing knowledge bases

Phase 2: “KIBS as 2nd Knowledge Infrastructure”

• Interaction between public and private knowledge bases increasingly considered essential(“economies of scope in S&T”)

• Increasing number of intermediary knowledge institutions and firms• Emphasis in (interactive) innovation processes on generating new knowledge and diffusion• KIBS increasingly identified as a separate category of knowledge generators/diffusers, although a

clear separation between public and private KIBS remains• Explicit “make or buy” decision concerning provision of KIBS functions• Broadened definition of knowledge, various kinds of formal knowledge and tacit knowledge

(intangibles)• Knowledge orientation crosses sectoral boundaries. Network and cluster perspective starts to develop.• Broadening of innovation policies (more aspects, more actors)

Phase 3: “Networked ‘KIBS’ Service Professionals”

• Increasingly non separable and overlapping public and private knowledge bases• KIBS recognised as significant intermediate actors in innovation processes in public and private

sectors• Increasing combination of innovative service functions in new products and services. Normalisation

of innovation in service functions.• Public and private organisations & firms develop knowledge management systems and seek actively

the help of KIBS• Well developed user-producer linkages between internal-external KIBS professionals• KIBS professionals increasingly combine various roles (entrepreneur, scientist, consultant, staff

member) and function in a network of service professionals• Tasks traditionally performed by public policy-makers increasingly performed by semi-public (at

arms length) or private KIBS professionals


and Japan. They argue that those countries with strong, mutually beneficial linksbetween business services and other (most notably manufacturing) activities enjoyhigher spill-over effects from service innovation.

Implications for Innovation Management and Innovation Policy

The model just presented needs (further) empirical testing.12 Particular attentionneeds to be paid to cross-country differences in terms of institutional structures,and to the levels of integration of business services (especially KIBS) andmanufacturing. Further, the model should be linked to the distinction between“mode 1” and “mode 2” knowledge production in science and technology —provided by Gibbons et al. (1994). Their basic argument is that a distinctlynew set of cognitive and social practices in the production, legitimisation anddiffusion of knowledge is emerging. This so-called “mode 2” is different fromthose practices governing the largely Newtonian model of mode 1 or what manywould label as science (Gibbons et al., 1994: 2–3). The argument cannot easilybe summarised in one table,13 but Table 10 outlines some characteristics ofthe two modes of knowledge production.

12This is underway, in particular, in the ongoing RISE project studying “RTOs in the Service Economy”led by Dr. Mike Hales of CENTRIM, University of Brighton.

13Their wide-ranging analysis covers interaction between those involved in mode 1 and mode 2knowledge production and the role of IT in this; the expansion of both knowledge providers andknowledge users; the implications for “traditional” knowledge-generating institutions, such asuniversities, government research organisations and industrial laboratories; and the shaping ofinnovation policy.

Table 10. Some characteristics of “mode 1” and “mode 2” knowledge production (based on Gibbonset al., 1994: 3–8).

Mode 1 Mode 2

Problems set and solved in a contextgoverned by the (academic) interests of aspecific community

Knowledge produced in the context of application

Disciplinary Transdisciplinary

Homogenity Heterogenity

Hierarchical organisation Organisational diversity

More socially accountable and reflexive More socially accountable and reflexive

Quality determined mainly through peerreview judgements on a disciplinary basis

More composite, multidimensional quality control process

524 P. den Hertog

KIBS can be seen as a specific example of the “mode 2” variety of knowledgeproduction. They share many of the characteristics of the “mode 2” way ofproducing knowledge, most notably: its organisational diversity, orientation toapplications, and transdisciplinarity. The characterisation of “mode 2”, for example,as “problem-solving capability on the move” (Gibbons et al., 1994: 5) veryneatly describes what KIBS in practice are. This also brings us back to themore general description of what it means to produce a service — recall thedefinition of Gadrey et al. (1995): “to produce a service […] is to organisea solution to a problem […] to place a bundle of capabilities and competences(human, technological, organisational) at the disposal of a client and to organisea solution, which may be given to varying degrees of precision”.

Thus, the rise of KIBS has important implications for both innovationmanagement and innovation policy, including the following:

Innovation management

Since KIBS play a role as co-producer of innovation in some of the client firmsthey serve, questions arise concerning:

• Whether and how industries differ in their actual “consumption” of KIBS;• Whether KIBS play similar roles in co-production of innovation in all developed

countries;• Which are the vanguard KIBS industries; and which KIBS industries are most

likely to follow a similar development pattern in the near future?• How do in-house and outsourcing strategies, both in KIBS and client firms,

affect the scope for co-production of innovation?• What type of appropriability strategies do KIBS use themselves?• How do KIBS firms take stock of the lessons learned in the interaction with

client firms?

Innovation policy

As KIBS play a role in transferring knowledge in innovation systems, theremay be consequences for the way in which innovation policy is shaped. Givenindications that (some) service industries are particularly prone to use servicesof KIBS, innovation policy-makers might consider the scope for using KIBSfor realising their policy goals. This is especially so as “traditional” institutionswithin the public knowledge infrastructure seem less able to function in theservice economy, and are more geared towards servicing established manufacturingindustries. Among the questions that arise in this context are:


• How other bridging institutions — such as applied research organisations,government research labs, transfer agencies and even universities — copewith the rise of KIBS?

• To what extent KIBS can be used to perform knowledge transfer and innovationsupport programmes for government? If so, how?

• How to balance the innovation functions provided by KIBS and “traditional”(mode 1) institutions in individual industries and clusters?

These challenging research themes will hopefully fuel further debate on therole of services, and particularly KIBS, in innovation processes and innovationsystems.

Acknowledgements

The insights presented here are the result of discussions with Prof. Ian Milesand Rob Bilderbeek as well as various colleagues and former colleagues —especially Sven Maltha, Prof. Ruud Smits and Dr. Jos Leyten — and numerousfellow “services” researchers abroad. Most notable are those who participate(d)in the “Services in Innovation, Innovation in Services” (SI4S contract number:SOE 1-CT96-1015) and the “RTOs in the Service Economy” (RISE contractnumber: SOE1-CT98-1115) projects — both sponsored through the EuropeanUnion DG XII TSER programme — and the ongoing SIID project on StrategicInformation Provision on Innovation in Services, undertaken together withGroningen University and financed by the Dutch Ministry of Economic Affairs.The comments of the two referees have also proved useful. However, the textpresented here is the sole responsibility of the author and the usual disclaimersapply.

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