Introduction
The business-to-
business customer in
the service innovation
process
Claude R. Martin
David A. Horne and
Anne Marie Schultz
The authors
Claude R. Martin is the Winkelman Professor of
Marketing in the School of Business, at the University of
Michigan, Michigan, USA.
David A. Horne is Associate Professor of Marketing at the
California State University at Long Beach, California, USA.
Anne Marie Schultz is an Information Technology
Management Consultant at the University of Michigan,
Michigan, USA.
Keywords
Consultants, Customer, Innovation, Participation, Service
Abstract
This paper addresses a major impediment to business-to-
business service innovation. The focus is on the role played
by the client in a service dominant offering, compared to
product dominant offerings. Part of this concerns the
concept of customer input uncertainty includng the
diversity of customer demand and the customer’s disposi-
tion to participate in the innovation process. The paper
concludes by tracking and innovation process in a consul-
tation between a major global consulting firm and one of
its clients.
European Journal of Innovation Management
Volume 2 · Number 2 · 1999 · pp. 55–62
© MCB University Press · ISSN 1460-1060
55
A major impediment to designing and
assimilating a business-to-business service
innovation is understanding and adjusting to
the change in role played by the client in a
service dominant offering, as opposed to the
role for one of product dominance. The term
client is used to highlight a dual role played in
service consumption, compared to a singular
role of the customer for a product offering.
Previously, Martin and Horne (1992)
discussed a significant definitional problem:
what is a service? Using Neubauer’s four
attributes (Moeller, 1986) as a foundation
and seeking to avoid a definitional jungle the
definition used was of offerings that are tangi-
ble and concrete as products and those that
are intangible and abstract as services. This is
consistent with the observation of Berry
(1980) that for services “benefits are realized
not from holding or using a physical object,
but rather from the delivery of some effort or
the performance of a deed; services are con-
sumed but not possessed.” Indeed, we found
that use of the term “offerings” was a much
more acceptable way of handling the problem.
Fundamentally any firm can have a
product offering without a customer, the
product is merely placed in inventory or, in
the case of the consumer market, on the store
shelf. In most cases, a service offering is not
produced until the client makes the purchase.
This is particularly common for the business-
to-business client. The complexity is high-
lighted by the client playing two roles: that of
the customer and that of a co-producer of the
offering. In other words, clients not only
receive and consume the service offering, but
also serve as participants in its innovation,
production, and delivery. This basic concept
is best described by Norman (1984, p. 21):
…the client plays an interesting complex role in
the service organization, since he not only
receives and consumes the service but also
serves as a component in its production and
delivery.
The complexity of this role and its manage-
ment is further highlighted by the various
ways a client can participate in the production
function. These include specification of the
service, where the client participates at vary-
ing levels in specifying the nature and level of
the service offering; pure co-production,
where the client does some or all of the
physical or intellectual production of the
 The business-to-business customer in the service innovation process
Claude R. Martin, David A. Horne and Anne Marie Schultz
offering, including in some cases, substituting
for employees; quality control, where the
client participates not only in the origination,
but in the on-going production of the service
offering and its quality level; and/or market-
ing, where the client participates in the selling
of the service to other clients.
In this paper we focus on the innovation
process for business-to-business services and
the concept of customer participation in that
process. We propose that customer involve-
ment is a key construct in differentiating a
service innovation from that for products.
Specifically we address the following:
(1) The role of the customer in the innova-
tion process, including as a co-producer
of the service.
(2) The disposition of the customer to
participate in the innovation process and
strategies to enhance that participation.
(3) Different interdependence patterns
consisting of (a) the division of service
work between employees and customers,
and (b) customization versus standardiza-
tion.
(4) Client participation risk assessment.
(5) Where the service quality dimensions
(SERVQUAL model) of tangibles,
responsiveness, empathy, assurance, and
reliability fit in the innovation process for
services (Parasuraman et al., 1985, 1988,
1991).
(6) Accounting for the service production
model (SERVUCTION) in service inno-
vation, focusing on both the “on-stage”
servers and inanimate environment, but
also on the “backstage” of the customer
(Parasuraman et al., 1985, 1988,1991).
Previous research
In the product innovation literature, Feldman
and Page (1984) found a high involvement of
the customer in the evaluation phases of the
innovation process; Cooper and Kleinschmidt
(1988) found testing with customers in 2/3 of
the 252 product innovation projects;
Maidique and Zirger (1984) report that
continual, informal, in-depth contact with
leading customers throughout the develop-
ment process is a factor in success; Pinto and
Slevin (1988) identify “active client consulta-
tion” and “client commitment” as two major
factors critical to success; and Von Hipple
(1984) advocates both concept generation
and testing with major clients. From the
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European Journal of Innovation Management
Volume 2 · Number 2 · 1999 · 55–62
product innovation literature the implication
is clear that the customers’ role may be
critical.
Previously a significant difference was
found between successes and failures in
service innovations with greater customer
participation in successful offerings compared
to those that were unsuccessful (Martin and
Horne, 1993). However, a troubling finding
was the relatively low average scores for direct
customer participation for all innovations,
whether successful or not. It was expected, on
the basis of in-depth interviews conducted
prior to the study, that mean scores would be
considerably higher. The speculation at the
time was that perhaps the pressure to shorten
the development cycle led to the use of
surrogate measures of actual customer
participation, such as simulated test markets,
in-house or employee testing, or a single focus
group’s reaction. Here we offer an under-
standing that mixing findings for consumer
services with those from business-to-business
services was probably the main contributory
reason for our expectation not being met. A
careful review of the in-depth interviews
reveals that in the previous research the
concentration was on business-to-business
service innovations in that phase of the
research, but no such concentration or
attempt to differentiate the nature of the
innovation was undertaken in the latter stages.
The concept of customer input
uncertainty
Customer-induced input uncertainty is the
service organization’s incomplete information
about what, where, when, and how customer
input is going to be processed to produce
desired outcomes. This uncertainty reflects
incomplete information about the customer’s
supply of knowledge, material, skill, place,
time, relationship, and desired outcome
concerning service innovations. Service
design that relies heavily on reciprocal infor-
mation and material exchange between the
customer and service provider is most
vulnerable to uncertainties of customer input.
Defined scope
The initial step is to define the scope of the
innovation process in terms of the client’s
goals and the work the service provider will
perform to achieve those goals. In most cases,
these are project-oriented innovation goals.
The business-to-business customer in the service innovation process
Claude R. Martin, David A. Horne and Anne Marie Schultz
Thus, the definition of the scope must provide
a breakdown of phases, activities, and tasks
(with accompanying tools and techniques) to
achieve a business-to-business innovation
goal. Some of these can then be customized to
include or exclude detail specific to the partic-
ular engagement. Obviously, refinement of
these methodologies can represent significant
intellectual capital to a service innovator.
Project engagement management skills and
techniques are necessary to manage resources,
scope, tasks, schedules, and finances. In many
cases, clients lack these skills and knowledge in
their own organization. Obviously, all of these
are sophisticated techniques that require
extensive training and experience to achieve
service provider delivery. However, the
challenge is much greater for client personnel
to both learn and innovate at the same time
during the project engagement.
Defined roles
The next step is to have specific roles defined
for both service provider personnel and client
staff. The designation of each has a slightly
different purpose. Service provider personnel
roles are defined so the client understands the
skill set and activities of each provider
member for which the client is paying. The
client personnel roles are defined to inform
the client project engagement leader of the
skills and experience levels needed in order
for the project to be successful.
Analysis of customer input uncertainty
Larsson and Bowen (1989) report that input
uncertainty will vary with two environmental
variables:
(1) Diversity of customer demand.
(2) Customer disposition to participate.
Diversity of customer demand
Diversity of customer demand refers to the
uniqueness of customers’ demands, including
both the uniqueness of the customer to be
serviced and uniqueness of the desired out-
come. Particularly in the case of professional
services, such as management consulting,
every innovation project is necessarily
customized in terms of size, scope, activities,
and deliverables to meet the specific business
goals and constraints of each client. It is
because of the diversity of customer demand
that each innovation process is not subject to
generic contract.
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With such a wide range of unique customer
demands, many such service providers can have
very little specific information before a project
begins resulting in high input uncertainty.
Customer disposition to participate
Customer disposition to participate refers to
the extent the customer tends to play an active
role in supplying labor or information inputs
to the service production process. The
disposition to participate is driven primarily
by customer motivation, which stems from
two sources: customers find doing it for them-
selves intrinsically attractive; and customers
may feel that their active involvement is neces-
sary to guarantee quality. According to Lars-
son and Bowen (1989), the more actions the
customers tend to contribute the higher the
input uncertainty because the organization
has incomplete information before the service
encounter about what the customer actually
will do.
The design of the service operation can be
viewed in terms of different interdependence
patterns consisting of division of service work
between employees and customers and cus-
tomization versus standardization of service
actions and interdependencies.
Seamlessness and conflicts
An important concept that has emerged in the
service management field is that of seamless-
ness (which is defined as the uninterrupted
flow of services from innovation to production
to delivery to post-consumption problem
resolution). Seamlessness leads to higher
quality services, lower customer acquisition
costs, and higher customer retention rates
which flow to profitability. Larson and Bowen
(1989) identify a seamless flow of services from
innovation forward as involving “considerable
contact between the service provider and
customers; customers frequently participate in
service production tasks performed at the
organization-customer interface” (Bateson,
1995, p. 101). The reason why co-production
by employees and customers is the key to
seamlessness is clear: Service providers need
customer inputs so that the strategies they
employ align with customer’s legal, financial,
and cultural demands. Professional service
organizations can only act according to these
demands. However, in many service provider’s
innovation processes there is a loss of seamless-
ness because customers have marketing,
organizational, and human resource cultures of
 The business-to-business customer in the service innovation process
Claude R. Martin, David A. Horne and Anne Marie Schultz
their own that could be seamlessly bundled
but, the provider organization’s personality and
skill set prevents it from bundling its culture
with those of its customers.
The marketing, organizational, and human
resource cultures of customers need to be
core inputs into service provider’s innovation
process. This means the service provider must
come to understand those inputs because
overcoming input uncertainty leads to seam-
lessness in innovation and the subsequent
delivery of that innovation to the marketplace.
Once input uncertainty is overcome by way
of seamlessly bundling together the cultures
of customers and organizations, desired
outcomes are achievable. Larsson and Bowen
(1989) suggested that this bundling process
increases the quality of services. They suggest
that the more the customer is disposed to
participate the greater the amount of work
that can be shifted to the customer.
Table I is a list of sources of innovation
uncertainty for service provider organizations
and corresponding service concepts that can
resolve these uncertainties by tapping into the
marketing, organizational, and human
resource cultures of customers. The list is
applicable to most industries and was devel-
oped by Larsson and Bowen (1989, Table I)
to demonstrate the different ways that
customer inputs add value to the highly
customized work of services companies.
Analysis of customer output
Not only is there the issue of customer willing-
ness to participate in the production function,
but allied with this is the measurement of the
output from that participation. Here we
address the construct of customer productivity.
Table I
Corresponding service
Sources of uncertainty concepts that can resolve
for organizations these uncertainties
Incomplete information Input uncertainty
about: stemming from customers:
What to process Customers’ supply of output
Where to process it Customers’ supply of place
When to process it Customers’ supply of time
How to process it Customers’ supply of labor
Into what Customers’ desired outcome
Distributed where Customers’ desired place outcome
Distributed when Customers’ desired time outcome
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But what do we mean by productivity in a
service environment and particularly concern-
ing customer productivity? Typical ways of
measuring the productivity are, for example,
the number of vehicles coming off an auto
assembly line in a certain time period or the
costs per unit sold by a retailer. Such measures
do not work in service firms, because they have
nothing to do with the quality of the service
output. However as Lovelock (1991, p. 373)
points out, productivity measurements are
most often related to internal efficiency
measures of the performance of employees and
do not deal with client performance. In the
service-profit chain model (Heskett et al.,
1994) there is consideration of employee pro-
ductivity as an input to external service value,
but nothing dealing with client productivity.
Previously, we addressed this issue and
suggested that guidelines for accomplishing
increased client productivity might come from
the more widely developed theory and
research on increasing employee productivity.
Essentially we suggested focusing on the
client rather than the employee to reformulate
these guidelines (Martin and Horne 1992,
p. 29). Within that exercise we suggested
using clients instead of employees as the focal
point for productivity improvement tech-
niques such as behavior modification, under-
standing and accepting change, fitting the
service to client values, and client training.
Tracking an innovation process in a
consulting environment
We were privileged to be allowed by a major
global consulting firm to sit through the total
innovation process they undertook for a busi-
ness client. Here we report on our monitoring
of the various outcomes from stages in that
process and the problems, opportunities, and
solutions that resulted. It should be empha-
sized this process could also be applicable to
other types of service providers, such as finan-
cial institutions, system design firms, invest-
ment consultants, etc.
The project
Because of confidentiality, the client and the
service provider (consulting firm) cannot be
specifically identified. However, the intent of
the project was to innovate system require-
ments for a new application that would
replace one that was outdated. Specifically,
this engagement was established to help the
The business-to-business customer in the service innovation process
Claude R. Martin, David A. Horne and Anne Marie Schultz
client solve a complex and unique business
problem, meeting the high diversity of
demand characteristics. This was clearly a
project-oriented innovation effort. This was
the strong source of motivation for the client
organization to actively participate by provid-
ing the needed business-specific knowledge
throughout the process, thus ensuring the
overall quality of the innovation. Both high
diversity of demand and a high customer
disposition to participate characterize a
reciprocal service innovation and design.
However, this led to high input uncertainty
for this engagement.
Risk assessment
Initially a risk analysis was performed by the
service provider (the consulting firm) as input
to the development of the scope of the project.
This risk assessment included a customer-
input uncertainty analysis in order to deter-
mine the service provider’s business risk for the
engagement. The elements in this pre-project
client participation risk assessment included:
• Expected customer attitude.
• Customer participation.
• Percentage of team made up of customer
personnel.
• Percentage of project leadership made up
of customer personnel.
• Customer team members’ location relative
to service provider team members’ location.
• Customer project leadership.
• Customer personnel.
This risk assessment analyzed areas where
incomplete information from customer
uncertainty could affect the success of the
project. Quantitative factors determined the
level of risk associated with the project. High-
risk customer participation factors reflected
selections of difficult customer attitudes,
customer impacting of project success, high
percentage of team comprised of customers,
and customer and service provider not being
located in the same facility.
Customer innovation participation
problems
The project experienced problems with client
innovation participation. The service provider
established that the engagement was at risk
because of high client input uncertainty, but
only contractual changes were made to
address that risk. This input uncertainty
manifested itself and affected the contribution
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Volume 2 · Number 2 · 1999 · 55–62
of the client team members and the progress
of the project. In the early phases of the
project, much of the work was collaborative
between service provider analysts, client
system analysts, and client business system
users. Facilitated work sessions were used to
draw out system requirements and to design
innovative new business processes. As the
tasks became more complicated and more
detail began to emerge, there was often
confusion and frustration in these work
sessions about how detailed discussions
needed to be or when the appropriate time
was to discuss certain issues. While client
personnel were experienced in both using and
maintaining the current system, none of them
had ever been exposed to the innovation
approaches that the service provider was using
in the work sessions. This became apparent by
the end of the first two weeks of the project
when information gathering and current
situation analysis had been completed. Team
members were confused by both the individ-
ual tasks assigned to them and how those
tasks fitted into the “big picture.” Frustrations
and concerns were high; productivity was low.
This translates directly into a lack of
knowledge and skills of the methodology (and
tools and techniques that support it)
employed by the service provider. Ironically,
the methodology employed by this particular
service provider is very typical of the approach
we have found in use by other major consult-
ing and systems integration firms. The client,
however, had never been exposed to any
structured application innovation methods.
An assumption (made in the absence of
complete information) about the knowledge
and experience of the client personnel on the
project was judged to be incorrect.
Customer innovation corrective actions
The first attempt to resolve the gaps in the
knowledge and understanding of the client
personnel involved two corrective actions.
First, service provider analysts led overviews
for only the client systems analysts. Material
directly from the service provider’s training
class for their own personnel was given to the
client, along with samples of documents and
diagrams they were expected to create. The
‘”big picture” was stressed in these sessions to
alleviate some of the ambiguity about the
timing of tasks and when issues would be
addressed during the different phases of the
innovation project.
The business-to-business customer in the service innovation process
Claude R. Martin, David A. Horne and Anne Marie Schultz
The second corrective action was also for
the benefit of only the client system analysts.
Each work session that involved service
provider analysts, client analysts, and client
business/user specialists was preceded by a
pre-work planning session that was to discuss
the details behind the goals and techniques for
that day’s work session. Only the service
provider analysts and client analysts attended
this pre-work planning session. It was intend-
ed to help the client analysts understand the
detailed techniques (facilitation approaches,
diagramming techniques, data and process
modeling techniques, etc.) and help facilitate
the sessions. The hope was that the client
analysts would be able to strengthen the very
weak bridge between the service provider
analysts (who knew the desired output) the
client business specialists (who knew the
business specific information).
Continuing and new customer innovation
participation problems
Up to this point, the client innovation partici-
pation problems had affected the project in
two ways: team member morale was low and
the quality of the initial work products was
acceptable, but not strong. However, it was
anticipated that there would be opportunities
later in the development process to refine
these outputs to the level of certainty and
quality required to design a system. The
project was still on track with respect to
schedule, scope, and cost to the client.
Confidence began to dwindle as the team
entered the most challenging portion of the
project. The successful transition from the
client’s old system to the new system would
rely on the ability to collaboratively design a
new data model that corrected all of the
deficiencies of the existing system. The team
employed the same approach to this new
activity as they had on the previous ones:
client analyst “big picture” training, client
analyst “pre-work session planning,” and joint
work sessions to perform the actual work.
Facilitated innovative data modeling in itself is
a very difficult task when you have trained
professionals working together. The challenge
proved to be too much for the under-trained
joint service provider/client team.
Innovation sessions experienced several
false starts. A service provider data analyst was
replaced at the client’s request because of his
(perceived) inability to facilitate the sessions
correctly. The client team could not confirm if
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European Journal of Innovation Management
Volume 2 · Number 2 · 1999 · 55–62
the model was correct because they did not
have the sufficient background to translate the
model’s diagram back into the business rules
that describe the relationships between their
data. This pain and confusion went on for over
three weeks. This hampered the project sched-
ule by extending the time line for this task and
taking away resources from other tasks.
Too much training was required to improve
client innovation process participation in this
activity at the late stage of the project. To
resolve the impasse, service provider personnel
were trained by the client analysts in a data
modeling technique with which they were
familiar. Fortunately, learning a second data
modeling technique is a lot like learning a
second foreign language. Because the service
provider professionals were already pre-
disposed to formal data modeling, it was overall
less effort for them to be trained than for the
client to be trained. The downside to this
approach was that the technique employed by
the client analysts was at a lower level of detail
than was called for at this stage of the project.
This added more time to the schedule to
accommodate the detail. Eventually, an innova-
tive data model was in place that could be used
as an input to subsequent project activities.
Service quality impacts
The failure to address the client’s lack of
necessary skills in the innovation process
ultimately reflects on the client’s total service
experience. Impacts included schedule delays,
scope reductions, and a lack of confidence in
both the techniques employed by the service
provider and its personnel in delivering them.
In this case, the client’s expectations for
professional innovation tools and techniques
were not met. In our opinion, as observers, if
the client were to be asked to evaluate the
service with respect to client training and
education on five service quality categories
(Parasuraman et al., 1985, 1988, 1991), the
response would likely be as shown in Table II.
Analytical prescriptions
Instead of offering analytical prescriptions for
the specific and flawed innovation process
above, we instead are opting to use those
observations as a foundation for offering a
series of more general prescriptions for
business-to-business innovations. Hopefully
this will prove more useful to the reader. Our
focus in designing, planning, and delivering of
 The business-to-business customer in the service innovation process
Claude R. Martin, David A. Horne and Anne Marie Schultz
Table II
Service category Assessment
Tangibles Inadequate
Responsiveness Insufficient
Empathy Poor
Assurance Damaged
Reliability Suspect
client training and education is to improve the
role of the client in the innovation process and
to reduce impacts of client input uncertainty.
Assessing and monitoring input
uncertainty
Based on our observation of the service
provider/client innovation process above, we
predict that the initial area for a mistake is with
respect to risk assessment. A risk item dis-
cussed earlier is the degree to which customer
personnel are considered experienced and
trained. It is noted that customer disposition to
participate can be constrained by insufficient
ability (in knowledge, strength, skills, and
time); and by role clarity (understanding their
role in the service innovation process).
Prescription 1: Modify risk assessments to include
a specific dimension on client background and
exposure to structured innovation methods and
project management techniques. Review the
results of the assessment with the client.
Identifying risks without an accompanying
risk mitigation plan does not accomplish the
desired risk reduction. Risks identified for
client anticipation in the innovation process
require actionable plans to minimize the
likelihood of occurrence and the level of
impact. The only way to ensure that the plans
are actionable and realistic is to gain the
client’s consensus on the risk factors and
accompanying plans.
Prescription 2: Require risk mitigation plans for
all high-risk items in client participation in the
innovation process. Involve the client in the
European Journal of Innovation Management
Volume 2 · Number 2 · 1999 · 55–62
Comment
Tangibles should have included more client-oriented reference and
training materials describing the innovation methodology and
approaches. Specific tasks should have been identified, planned, and
executed to address the training gaps
This client required special needs in education and training that were
recognized too late in the process. Training that was performed was
“too little, too late”
There was lack of both willingness and ability on the part of certain
service provider personnel to recognize the gap and to deliver the
additional training which is above and beyond the “normal” template
for service innovation
The customer’s trust and confidence in the service innovation process
was damaged. This assurance deteriorated as the project progressed
Overall, the reliability of the service provider’s experience was dam-
aged. While the overall delivery promise may have been kept, the
experience of the client staff to achieve the desired results was far
more difficult than the client was promised and expected
review of the risk factors and the development
of the risk mitigation plan. Identify “client
training” as a risk mitigation approach.
A generic risk assessment will not uncover all
the client specific details related to the expect-
ed inputs and performance requirements for a
specific innovation project and client. In the
case described above, the service provider
calls for documenting assumptions that are
made with respect to the project approach
and the roles and responsibilities of the client.
It would be wise and necessary to document
the assumptions made in the absence of com-
plete information that exists in reciprocal
service delivery. However, capturing assump-
tions is not enough. Assumptions must be
linked to “moments of truth” in the project
plan and tracked accordingly. We would
advocate planning contingencies if an
assumption is wrong.
Prescription 3: Link service provider assump-
tions about client participation to specific
“moments of truth” in the plan where the
assumption will be tested. Track the assump-
tions against the plan and develop contingency
plans for bad assumptions.
Designing and delivering client-oriented
training
The variables diversity of demand and
disposition to participate are customer
characteristics external to the organization,
constituting constraints and contingencies to
which the design of the service innovation
must adapt. This adaptation can be both
61
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Claude R. Martin, David A. Horne and Anne Marie Schultz
anticipatory in start-up and reactive as the
service operations evolve over time. The train-
ing delivered during the course of the project
described above was reactionary, in response
to specific problems as they occurred on the
project. As a result, not all of the training truly
required for the client was delivered.
Prescription 4: Based on the client team compo-
sition, the activities to be performed in the
innovation process, and their experience with
the activities, determine the types of training
required as a part of the process start-up.
Once the required training has been identified,
it is necessary to determine the most appropri-
ate delivery schedule for the training. This will
depend on the depth and type of training
required. Examples may include pre-innova-
tion-process training and/or intermittent train-
ing. Either way, formal training, if required,
should be planned for as part of the innovation
process schedule. It is necessary for this train-
ing to be delivered to the right people, at the
right time, at the right level of detail to maxi-
mize the client productivity in the process.
Prescription 5: Schedule time, effort, and
resources for training as part of the formal
project schedule.
The ability to recognize potential risks for
input uncertainty and translate those risks
into potential training requirements requires
service providers proposing and designing
engagements involving innovation to look at
both sides of the equation. Historically, the
focus of many firms is to design projects that
accommodate what they want to deliver in the
way of innovation versus a client’s specific
needs.
Summary
Input uncertainty has the potential to inter-
fere with the success of reciprocal business-to-
business service innovation. However, in spite
of this uncertainty, service firms can attempt
to mitigate the risks associated with input
uncertainty. Firms that consciously perform
risk assessments with respect to customer
participation can put plans in place to reduce
those risks. In the cases where the risk has to
do with customer knowledge and skill for
participation in the process, client training
and education in the techniques to be used
can reduce input uncertainty and improve
client productivity in that process.
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