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 653

SERVICES IN THE NEW INDUSTRIAL

ECONOMY

Ian Miles

‘Manufacturing matters’,’ but ‘So do services’. The future of industrializa-

tion is the future of both these increasingly intertwined and interdependent
activities. Rather than a post-industrial society, we are seeing a new mode
of industrialization encompassing and integrating manufacturing and
services. This article considers the prospects for services in the new
industrial economy, 2 focusing on innovation in services. Services have
frequently been considered to be relatively poor in economic perform-
ance. However, regarding services as laggards is decreasingly useful when
considering contemporary services, many of which are the major users,
carriers and promoters of many classes of innovative hardware. New
services (such as software and telematics) are performing vital roles in the
diffusion of new technologies, techniques and organizational styles. This
article outlines some trends in the service economy, examines the special
nature of services, considers how services are changing their products and
processes, and assesses emerging strategies for organization and trade in
services.

Services have grown to dominate the employment of industrial countries, even the
leading manufacturing economies of Germany and Japan (Table 113.Although there
are problems with measuring service output, these activities are dominant in this
respect too. Even among developing countries, it is only in the poorest (the World
Banks ‘low-income economies’) that service output averaged a lower share of GDP
(a still substantial 31% in 1989) than agriculture or industry.” This article focuses on
services in industrial countries, although there is a growing literature on their
importance in the developing world.5
Services are therefore important in terms of employment and output, within
national economies. How about in world trade? It is often assumed that services are
difficult to trade, and indeed a far smaller proportion of services is traded than of
manufactures (less than 10% as opposed to almost 50%). Nevertheless, official

Ian Miles is Associate Director of the Programme of Policy Research in Engineering, Science and
Technology (PREST) at the University of Manchester, Mathematics Tower, Oxford Road, Manchester
Ml3 9PL, UK (Tel: +44 61 275 5904; fax: +44 61 273 1123).

FUTURES July/August 1993 0016-3287/93/06653-20 @ 1993 Butterworth-Heinemann Ltd

654 Services in the new industrid/ economy

TABLE 1. SERVICE EMPLOYMENT TRENDS: SERVICES AS % OF TOTAL EMPLOYMENT

Distributive Personal Social

services services services services services

France
1960 3.5 16.8 7.9 16.0 44.1
1987 9.0 20.1 7.9 26.4 63.4
Germany
1960 3.4 17.5 7.4 10.3 38.6
1987 7.7 18.1 8.1 21.6 55.4
Japan
1960 3.3 18.5 7.5 8.2 37.4
1987 10.2 25.1 10.2 13.0 58.6
Netherlands
1960 4.2 20.4 8.5 14.7 47.8
1987 10.8 21.3 6.5 28.4 69.1
Sweden
1960 3.5 19.4 8.4 16.3 47.7
1987 7.2 19.2 5.9 35.1 67.3
UK
1960 4.4 20.6 6.0 15.8 48.8
1987 10.4 21.3 10.1 25.3 67.0
USA
1960 6.4 22.2 11.3 21.2 61.1
1987 13.6 21.5 12.5 26.0 73.5

Average
1960 4.1 19.3 8.4 14.6 46.5
1973 6.5 20.3 7.8 20.2 54.8
1987 9.8 20.9 8.7 25. l 64.5

Source: Elfring (1992), Table 2.1.

statistics show services trade to be both large and to have grown rapidly in the
1980s (Table 21, with ‘other private services and income’ growing more rapidly than
the total. This category contains not only labour and property incomes, but also
business services such as consultancy, communications (including telecommuni-
cations), and professional and technical services.

Services: wave of the future or dead weight of the past?

The classic account of the rise of the services sector, the theory of post-~ndustr;a/
society, suggested that with growing affluence, people’s needs become more
sophisticated; their expenditure shifts to services, perhaps because these are
‘superior products’, perhaps because people become satiated with material con-
sumption. This leads to a shift in the overall pattern of demand in the economy
away from goods (in relative terms) and towards services, leading to the growth of
the services sector.
Employment becomes increasingly centred on services not only on account
of this shift in demand, but also because of the automation of manufacturing;
services should soak up workers displaced from manufacturing. Increased employ-
ment in the tertiary sector leads to a ‘march through the sectors’-jobs move from
primary to secondary and to tertiary sectors, as societies evolve from agricultural
to industrial to service economies. An upgrading of the labour force was expected
to result from this process, with more white-collar and professionai workers (since
service jobs were typically seen as skilled interpersonal work, if not as professional

FUTURES July/August 1993

 Services in the new industrial economy 655

TABLE 2. COMMERCIAL SERVICES TRADE BY REGION (US$lOg)

(A) TOTAL COMMERCIAL SERVICES TRADE

Exports Imports

Value Average annual % Value Average annual %

change change
1987 1980-87 1987 198047

67 6.5 North America 72 9.0

21 1 .o Latin America 22 - 3.5
309 4.5 Western Europe 282 5.0
12 1.0 Africa 11 - 10.0
11 0.0 Middle East 20 - 2.0
80 7.5 Asia 105 6.5
4 3.5 Poland, Hungary, Romania 4 2.0
505 5.0 World 515 4.5

(B) TRADE IN ‘OTHER PRIVATE SERVICES AND INCOME’

Exports Imports
1970 1987 1970 1987
1.9 14.7 North America 2.0 14.6
0.7 5.2 Latin America 1.1 5.3
10.1 115.7 Western Europe 7.9 84.6
0.4 1.9 Africa 0.9 3.7
0.3 4.9 Middle East 0.4 8.6
1.2 23.9 Asia 2.1 28.3
0.2 2.1 Poland, Hungary, Romania 0.1 1.7

Source: GATT, lnterffatioffat Trade 1988-1989, Volffme I (Geneva, GATT, 1989)

jobs). This view celebrated services as superior products, the wave of the future.
Not surprisingly, the account was favoured by many public sector administrators,
educationaiists, and other service professionals, and it achieved popularity as their
numbers burgeoned in the 1960s and 1970s. It anticipated continued growth in
demand for servicesb
A contrary line of analysis, which has returned to popularity of late, asserts
that the growth of the services sector reflects the failure of services to modernize,
rather than increases in consumer demand. Econometric analyses yield little
evidence for a shift in consumer demand from goods to services-the elasticities of
demand for goods and services seem roughly equivalent. But employment in
services may grow, nevertheless, because productivity growth is lower in the
services-as reflected in the relative increase in the price of marketed services as
compared to goods. Thus, as both services and manufacturing industries expand
their output, services take on relatively more workers, producing a shift in the
distribution of employment. The reason for low productivity growth remains
controversial, but one argument was that it reflected the relatively low level of the
workforce, in terms of skill and training. ’ The image of service work is thus the
converse of that portrayed in the post-industrial analysis; services are stuck in the
past rather than the wave of the future. For those writers in the UK and the USA
who see the growth of services as a burden on the manufacturing economy, the
analysis becomes one of de-industrialization, with re-industrialization being seen as
a matter of restimulating manufacturing industry. (We would add that achieving
this goal would almost necessarily involve the development of new services as
well!)
The sharply contrasting visions of services are in part possible because of the

FUTURES July/August 1993

656 Services in the new industrial economy

wide variety of things contained within the ‘services sector’-from domestic

service and hairdressing to internal commodity brokerage and engineering consul-
tancy. Even at a fairly aggregate level, it is apparent that specific categories of
service employment display different trends, suggesting that a single account is
inappropriate. Thus, consumer services employment in many countries was fairly
stagnant for much of the post-war period, during which the greater part of the
growth in services employment can be accounted for by producer services (grow-
ing rapidly from a small base) and public services-see Table 1. During the 1980s
consumer service employment boomed (briefly?), as did that in some producer
services (especially financial services-in large part giving rise to the ‘yuppie’
phenomenon, incidentally), while public service employment growth practically
halted and in some cases declined.
A multifactoral account is thus in order. The growth of services needs to be
related to these different classes of services, and the patterns of evolution of
demand for them. For example, the growth of producer services evidently indicates
a growing demand for such services from other firmsPincluding manufacturing
firms-and thus implies the increasing dependence of economic activity on these
services. (Of course, public services may be of considerable indirect importance,
for example in supplying an educated and healthy workforce.) The future of
services is similarly complicated: we need to examine the nature of these disparate
activities in a little more detail.

What is special about services?

Given these different classes of services, is there any point at all in grouping these
activities together under the same label? One reason to do so may simply be to
draw attention to the fact that a large number of significant activities are being
missed out by the preoccupation with manufacturing industrialization. There are
more compelling reasons, however.
The ‘service(s) sector’, or ‘tertiary sector’ is the third of the three great sectors
defined by Clark, Fisher, and most subsequent economists.” The first two of these
sectors are relatively easily defined. The pn’mary sector extracts raw materials (and
sometimes goods) from the environment via activities such as mining and agricul-
ture; the secondary sector transforms raw materials into goods, buildings, infra-
structure and physical utilities like water and electricity supplies. For early com-
mentators, the third great sector could simply be seen as the residual activities, and
often it was discounted as an unproductive residuum. But we can attempt to
characterize the services sector in terms analogous to those used for the other two
great sectors: the tertiary sector comprises those industries which effect transfor-
mations in the state of material goods, people themselves, or symbolic material
(information).9
This definition points to the variety of things that might be regarded as service
activities, but there are a number of characteristics which many services share-or
have traditionally shared. (The Economist once suggested that services were things
that could be bought or sold, but not dropped on one’s foot!) Table 3 lists
characteristics that are often seen as typical of services, or even as defining features
of services. It has always been possible to find exceptions to these: for example,
dental services provide people with very material products (false teeth and fillings),
utilize various new and old technologies, require technically expert workers, and so
on. But one or other ‘peculiarity’ does apply to practically every service activity.

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 Services in the new industrial economy 657

TABLE 3. SPECIAL FEATURES TYPICALLY ATTRIBUTED TO SERVICES

Service production
Technology and plant Low levels of capital equipment; heavy investment in buildings
Labour Some services highly professional (especially requiring inter-
personal skills); others relatively unskilled, often involving casual
or part-time labour. Specialist knowledge may be important, but
rarely technological skills
Organization of labour process Workforce often engaged in craft-like production with limited
management control of details of work
Features of production Production is often non-continuous and economies of scale are
limited
Organization of industry Some services state-run public services; others often small-scale
with high preponderance of family firms and self-employed

Service product
Nature of product Non-material, often information-intensive. Hard to store or
transport. Process and product hard to distinguish
Features of product Often customized to consumer requirements

Service consumption
Delivery of product Production and consumption co-terminous in time and space; often
client or supplier has to move to meet the other party
Role of consumer Services are ‘consumer-intensive’, requiring inputs from consumer
into design/production process
Organization of consumption Often hard to separate production from consumption. Self-service
in formal and informal economies commonplace

Service markets
Organization of markets Some services delivered via public sector bureaucratic provision
Some costs are invisibly bundled with goods (eg retail sector)
Regulation Professional regulation common in some services
Marketing Difficult to demonstrate products in advance

Services are also very diverse. Table 1 presented trend data for different
classes of services based on a mix of their functions and the markets they serve.
We find it helpful to use a rather more elaborate typology to think about the
dynamics of change. Table 4 presents a cross-classification of the branches of the
services sector in terms of two dimensions. The first reflects the different markets
and quasi-markets which services may serve-basically, consumer markets, inter-
mediate (producer) markets, and state orpublic service allocative mechanisms. The
second reflects the different production processes-transforming the state of
physical objects, people or codified information-they may centre on. The classifi-
cations are meant to be indicative more than absolute since the situation is in flux.
For instance, as the structure of markets is changing-for example, provision of
human services such as health and education can be organized as private con-
sumer services or as public services. Similarly, other services may move between
being final consumer or intermediate producer services. As households gain con-
sumer equipment, equipment maintenance may cease to be purely a producer
service; while in contrast laundry services have declined in terms of consumer
markets and increasingly become specialized producer services.
Let us briefly outline some of the features of the three main groups of service
as seen in terms of these aspects of production. Physical services primarily main-
tain (preserve through time) or transport (relocate through space) facilities, goods
or people. Retail and wholesale trades combine distribution (the physical storage
and movement of products) with exchange (transfer of ownership, largely an
information function). Domestic service may well include some elements of human

FUTURES July/August 1993

658 Services m the new industrial economy

TABLE 4. A CLASSIFICATION OF SERVICES ALONG TWO DIMENSIONS: TYPES OF PRODUCTION

PROCESS AND TYPE OF MARKET STRUCTURE

Market type Production type

Physical service Person-centred Information service

State Welfare General government

Hospitals Broadcasting
Health, medical education

Consumer Domestlc service Barbers etc Entertainment

Catering
Retail trade
Post

Mixed Laundries Real estate

Hotels Telecommunications
Repairs Banking
Insurance
Legal services

Producer Wholesale trade Engineering and

Physical distribution and architectural services
storage Accountancy
Miscellaneous professional
services

services, when they involve personal care as well as cleaning of households. These
include both producer and consumer services. Human or person-centred services
span social and community services (health, education and welfare) which set out
to develop and maintain cognitive abilities and social and physical well-being,
together with a number of private consumer services which tend to be oriented
more to personal appearance (hairdressers etc) or to providing various ‘home
comforts’ as commodities (hotels, catering, and illicit and largely unrecorded
services such as prostitution). Many of these services, it will be apparent, are state-
provided. information services span three types of service activity, whose historical
boundaries are increasingly becoming blurred. First are the mass media, mainly
distributing standardized data on a large scale (cinemas, broadcasting etc). Second
are organizations distributing large volumes of non-standard information to speci-
fic recipients (telecommunications, and those financial industries which circulate
symbolic material such as property entitlements). Third are knowledge services
which produce and interpret specialized information (some financial services such
as accountancy firms, advertising, marketing and consultancy companies, archi-
tectural, engineering and R&D services). They resemble person-centred services in
that the information which they handle is often very client-specific, and that they
rely on considerable professional expertise. These are generally producer services.

Are services laggards?

Several views of the role that services will play in the future portray these sectors as
essentially lagging behind manufacturing industry. The tendency for services to
display lower productivity growth than manufacturing is seen as prime justification
for these viewpoints. Let us consider two approaches, however, which go beyond
this observation-one to examine trade-offs between goods and services, one to
project an innovative future for services.
Other things being constant, differences in productivity growth between

FUTURES July/August 1993

 Services in the new industrial economy 659

manufacturing and services sectors mean not only that the share of services in
total employment will grow, but also that the price of services will increase relative
to that of goods. Indeed, it is easy to chart such a differential trend in statistics for
most advanced countries.1° Cershuny went on to argue that a likely consequence
of this shift in relative prices is a shift of demand from services fo goods (where
these are substitutable&note that this is in complete contrast to the post-
industrial viewpoint. Classic examples include the shifts from public to private
transport, from cinemas to home entertainment, from laundries to home washing.
Many of these innovations have been described as involving ‘self-services’ with the
final service being produced by the consumer’s own efforts using new equipment,
rather than being purchased. ” Talk of the ‘self-service’ economy is somewhat
exaggerated, since the amount of work going into choosing a TV programme is
probably rather less than that involved in going to the theatre, although where
physical services are involved the term is more appropriate.
Cershuny demonstrated shifts in consumer expenditure towards goods within
categories of expenditure (like entertainment and transport), undermining the post-
industrial viewpoint still further. This might well mean problems for services
employment: the fortunes of many consumer services have indeed been quite
uneven, with employment in many personal services, and also in public transport
and some entertainment sectors (eg cinema), diminishing in Western societies. If
the trends with respect to consumer services continue, and are perhaps extended
to other areas of the service economy, then labour-intensive services may
continue to be outcompeted by high-productivity manufacturing, and thus fail to
provide the anticipated compensatory employment opportunities. The 198Os,
however, actually saw a boom in certain consumer services (eg restaurants and fast
foods) despite the continuing pace of consumer goods innovations (such as
microwaves and associated convenience foods). But the Gershuny analysis may
still have plenty to teach us.
Consider the ‘goods-services’ balance in terms of the typology described in
Table 4. Physicalservice~transport, domestic services etc-have been subject to
competition from new consumer goods such as the motor car and household
appliances. While these goods have been associated with some new services
(garages, repairs), the impulse has very much been from manufacturing industry
competing with traditional services. In contrast information services-entertain-
ment in particular-have been subject to competition from a combination of new
consumer goods such as TV and hi-fi, together with new services such as broad-
casting and the recording industries. This indicates the importance of ‘software’
(the term ‘dataware’ is probably more useful13 in association with electronic and
microelectronic innovations, as compared to those based on cheap motor power.
The Cershuny analysis focuses on self-services produced with the consumer’s
own equipment, and has little to say about, for instance, the role of self-services on
the service provider’s premises (eg restaurants, supermarkets, and now banks with
automated teller machines-ATMs). Its outlook for the future has perhaps been
too apocalyptic, missing out on the scope for growth in consumer services and
implying a rapid introduction of teleshopping and telebanking and, perhaps, of
similar self-service innovations in human services like health and education. But
the analysis provides a helpful insight into the role of technological innovation in
the service economy.
Barras also sees the development of services as driven to a large extent by
technological innovations in manufacturing, but is more sensitive to changes in the

FUTURES July/August 1993

660 Services in the new industrial economy

TABLE 5. BARRAS’S VIEW OF THE REVERSE PRODUCT CYCLE IN SERVICES: ILLUSTRATIVE

COMPUTER APPLICATIONS

Stage of cycle 1. Improved efficiency 2. improved quality 3. New services

Period 1970s 1980s 1990s
Computer Mainframes Online systems; minis Networks
technology and micros
Sector
applications:
Insurance Computerized policy Online policy quotations Complete online service
records
Accountancy Computer audit; internal Computerized manage- Fully automated audit and
time recording ment accounting accounts
Local government Corporate financial Departmental service Public information
systems (eg payroll) delivery (eg housing services (eg videotex)
allocation)

Source: Barras (1986a).

relationship of the sectors over time. In contrast to the description of services in

Table 3 he notes (from UK data) a tendency in many private services for the
balance of new capital expenditure to be shifting away from plant (buildings etc)
and towards equipment (office computer and communications systems etc). This is
reminiscent of trends in manufacturing at the time of the early industrial revolu-
tion: it was only after factories were built to group together activities on a large
scale and under new systems of control that technological innovation in the
machinery being used became the leading factor in industrialization. Perhaps new
technologies are being used to similar effect in services (which might also be seen
to have been undergoing a long period of mainly organizational innovation).”
Particularly important are new information technologies (IT), where over three-
quarters of investment expenditure in the UK and the USA derives from services.13
Barras argues that in service industries the innovation process takes the form of
a ‘reverse product cycle’, with process innovation preceding product innovation,
as services adopt products developed by the manufacturing sector, which subse-
quently spur change in service provision (see Table 5J.l’ Thus a first stage in service
innovation often consists of the use of new technologies generated (and often first
applied to similar service processes) in other sectors, and is centred on increasing
the efficiency of the processes of production or delivery of existing services. A
second stage moves on from this, as the new production systems allow for
increases in the quality of the service-for example, in the frequency and volume
of information provided to clients, in the availability of the service outside normal
office hours (ATMs are a case in point). A third stage sees new services being
produced from the industry, often because it becomes apparent that the data
being processed by IT can be put to other applications (eg online data services) or
reworked in various ways (eg to provide a more flexible service).
The Barras model fits the experiences of financial and other information
services in particular, and also sheds light on the process whereby new services
have grown out of the internal data processing or communications departments of
firms-for example, the emergence of online databases and other telematics
services from publishing and automobile companies, among others.rh But the
implication that services are passive recipients of innovation from other sectors, at
least until they become proficient with new IT, has never been entirely true.
Transport and telecommunications services, for example, have long engaged in
R&D, as well as being the recipients of innovations stemming from R&D in the

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 Services in the new industrial economy 661

manufacturing sector. While services appear to engage in little R&D, on the whole,
if one examines official statistics, these data do not capture as R&D much of the
software development and more organizational innovation-related activities of
services. Alternative estimates for the USA suggested that, although in terms of
R&D as a percentage of sales, the top IO sectors are all primary or secondary ones,
four of the top 10 sectors in terms of total R&D spend are services. Of the 10 largest
sectors in terms of total sales, the highest R&D-to-sales ratio is that of ‘other
business and professional services’, the 10th largest sector.”
The two approaches outlined above see services as being, or having histori-
cally been, laggards when it comes to innovation. Why should so many services
appear to be laggards, and are they doomed to remain so? Consider Table 3: many
of these characteristics might account for services lagging behind manufacturing.
For instance, those services based on low-quality (and thus low-pay) labour may
have little incentive to invest in expensive equipment, while those employing large
number of professionals such as doctors or teachers might find that these pro-
fessional groups are empowered to resist technological changes which they
perceive as against their interests. Small firms and self-employed people are usually
late adopters of new technologies, public sector organizations are not noted for
their dynamism, and so on. These statements are caricatures, as is evident from
considering the fast rate of change in medical technology, the role of public
organizations in pioneering computer and networking technology, and the like. But
there may be more than a grain of truth in them, nevertheless.
The specific features of the service process and product must also be related to
the prospects for technological change in services. Discussing the Cershuny
hypothesis we suggested that physical services were particularly amenable to
innovations involving the application of motor power, and information services to
electronics innovations. Human services, in contrast, typically being produced
together with, and highly ‘tailored’ to, individual clients, are often very different. (A
notable exception is health services, where pharmaceutical, radiological and surgi-
cal innovations have played very important roles.) Earlier technological revolutions,
associated with cheap motor power and cheap mass information delivery, have
not been very applicable to the core tasks of human services (peripheral functions,
such as ambulance services and large-scale payment and invoicing systems are
another matter). To process highly specific data about individuals has required the
active involvement of service workers.
However, the IT revolution, based on microelectronics’ ability to deliver cheap
information-processing power, may be changing this. Until recently, costs were so
high that computerization was applied only to the most large-scale, basic and
routine administrative tasks, and their equivalents in financial and other infor-
mation services. ‘Automation’ in service industries mainly involved application of
machinery to extremely limited physical storage and cash transactions (eg vending
machines, automatic tailors). But the availability of cheap personal computers with
sophisticated and user-friendly software, and growing access to mobile communi-
cations and data networks look set to bring automation to a much greater range of
service functions. Earlier generations of computer equipment were widely criticized
for cumbersome procedures and inflexibility in dealing with individual cases. Now it
is increasingly possible to use IT systems to match services-insurance policies,
bank accounts, teaching packages, even medical diagnoses-to specific needs.
Additionally, many services are freed of traditional constraints of space and time-
videotex systems, for example, may allow one to teleshop or telebank. Since IT

FUTURES July/August 1993

662 Services in the new industrial economy

makes it possible to tailor many services more closely to the individual require-
ments of clients, ‘automation’ may be thought to be an inappropriate term-but
this has not prevented commentators applying it to manufacturing industry’s use
of IT in shifting to flexible ‘small-batch’ production.
The various branches of the services sector in many respects diverged in their
application of motor power and electronic technologies. But, despite differences of
emphasis and in rates of diffusion, IT may be applied to much more general effect
across different services.lR We cannot survey the whole range of applications that
are emerging, ly but some rough pointers as to the sorts of innovation that may
stem from this technological revolution can be provided.
In physical services, computers have long been applied to the back office
accounting and exchange tasks that surround their core functions. In a ‘reverse
product cycle’-like manner, these applications may set the scene for innovations
bearing more on the core functions. Thus now that electronic cash registers and
scanners”’ have been widely introduced into supermarkets, they are being linked
to the office systems being used for stocktaking, and in some cases to automated
warehouses and much wider systems of supermarket automation. New systems of
‘transport informatics’ go beyond simple accounting of the timetables and where-
abouts of vehicles, providing advanced routeing and tariffing procedures, backed
up by mobile communications, ‘smart cards’ and other innovations.2’
The large-scale human services which have so often been organized under
the auspices of the welfare state have long been major computer users for large-
scale administrative data-processing applications (payroll, pensions, passports,
driving licences and the like), and for planning (for example, managing housing
systems and waste disposal services, monitoring epidemiological and environmen-
tal statistics). The recent availability of cheap microcomputers is leading to some
integration of services as service workers are enabled (privacy rules permitting) to
access information from different databases on the same client. More advanced
information systems are being employed to assist decision making when con-
fronted by the complex details of individual clients-for example, expert systems
to aid medical diagnosis and prescription, and to speed up the task of assessing
individual entitlement to welfare benefits. Other applications involve the client’s
own use of equipment: public access terminals displaying information on library or
other service provisions; interactive teaching aids based on microcomputers and
related systems: and in several countries citizens are directly able to interrogate
databases on the availability of jobs or their eligibility to benefits.‘l
information services are major users of IT (and appear as major contributors
to the large part played by services in IT investment, cited above). Sectors like
telecommunications and financial services have used new technology to limit
labour costs as well as to provide improved or new services, so that their levels of
output growth are much higher than their employment growth (if any). As in the
previous cases, the traditional IT applications involved large-scale electronic
systems for massive number-crunching operations, together with specialized appli-
cations in broadcasting and other media. New IT is enormously important-and
often very visible-in these industries, with innovations like ATMs and smart cards,
new telephone and telematics services, and shifts from broadcasting to ‘narrow-
casting’ all the focus of considerable activity. Some service firms involved play a
prominent role in guiding the innovations, as in the case of banks which are heavily
involved in defining the characteristics of new teller machines. The pace of
innovation in these industries is quickened by the shift in regulatory policy in many

FUTURES July/August 1993

 Services in the new industrial economy 663

countries, which has led to new entrants and increased international competition
confronting many firms.
In contrast, public services, though being early leaders in the use of main-
frame computers, now face financial and other constraints on their use of
advanced IT as efforts are being made in most countries to limit public expenditure
(although this may sometimes lead to efforts to cut costs through displacing
personnel with new technology). Public services have often found it difficult to
recruit technically skilled personnel (or to retain those they have trained) at wages
below those offered by financial services in particular: staff shortages have delayed
many computerization programs. Public and professional concerns have grown as
to the privacy of individual data and the threat of increased surveillance of the
citizen, together with worries about computer security (in terms of the risk of
accidents, poor software, and intrusions by viruses, hackers and computer sabo-
teurs).

Service innovation: industrialization and beyond

Despite the received picture of services as uniformly lagging behind other sectors,
some services are actually at the forefront of innovation, especially that concerning
new IT. Indeed, new IT-based services, such as software and telematics, are triggers
to innovation across the economy, rather than passive recipients of innovation
from manufacturing industry. If services are becoming more R&D- and technology-
intensive, the traditional demarcations between services and manufacturing may
be eroding-especially as manufacturing industry itself is becoming more service-
like, with the shift to shorter and more customized production runs, and other
features of ‘flexible specialization’. With the growth of producer services, and the
externalization of some service functions by firms in other sectors, manufacturing
and services are becoming more intertwined, so that notions of ‘post-industrialism’
or ‘de-industrialization’ become suspect. The real issue is the mutual reinforcement
of diverse economic activities, and the scope for innovation in all economic
sectors.L 1
Table 6 suggests some ways in which the characteristic features of services
lead to particular types of innovation-often aimed at overcoming the problems
associated with, for example, the difficulty in demonstrating the service to the
client, or the problems in storing and building up stocks of the service.24 Over and
above these discrete innovations, a number of more general tendencies in the
innovation process in services are important. One such is the industrialization of
services, which is a tendency apparent in several specific innovations. This
tendency involves efforts to standardize services, so as to yield service products of
predictable characteristics and quality, with, where possible, economies of scale
and improved delivery times. 25 It will typically involve the introduction of high
levels of division of labour, with the use of pre-packaged and automated elements
(such as pre-prepared meals, word-processed templates for form letters, and the
like). Such standardization of the service products has become a competitive
strategy, for example, not only in the case of fast food restaurants but also of some
international hotels2hand it applies to developments in the internal services
within firms (for example, efforts to transform conventional secretarial relations to
those of ‘office factories’).
Many important innovations in services involve combinations of specific new
technologies together with organizational change. The role of organizational inno-

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664 Services in the new industrial economy

TABLE 6. INNOVATIONS AND THE FEATURES OF SERVICES

Service production
Technology and plant Reduce costs of buildings by use of teleservlces, to//-
Heavy investment in buildings free phone numbers etc

Labour Reduce reliance on expensive and scarce skills by

Some services highly professional use of expert systems and related innovations;
(especially requiring interpersonal skills); relocation of key operations to areas of low labour
others relatively unskilled, often involving costs (using telecommunications to maintain
casual or part-time labour coordination).

Organization of labour process Use IT to monitor workforce (eg tachometers and

Workforce often engaged in craftlike mobile communications for transport staff); aim for
productron with limited management control ‘flatter’ organizational structures, with data from field
of details of work and front-offrce workers directly entering databases
and thence management information systems

Features of production Standardize production (eg ‘fast-food’ chains),

Production is often non-continuous and reorganize in more assembly-line-like feature with
economies of scale are limited more standard components and higher divrsion of
labour

Organization of industry Externalrzation and privatrzation of public services;

Some services state-run publfc services; combinahon of small firms using network
others often small-scale with high technologies; IT-based service management systems
preponderance of family firms and self-
employed

Service product
Nature of product Add material components (eg client cards,
Non-material, often information-intensive membership cards). Use telematics for ordering,
Hard to store or transport reservation, and, if possrble, delivery. Maintain
Process and product hard to distinguish elements of familiar ‘user-interfaces’

Features ofproduct Use of electronic data interchange (EDI) for remote

Often customized to consumer requirements input of client details. In general use of software by
client or service provrder to record clrent
requirements and match to service product

Service consumption
Delivery of product Telematics; automated teller machines (ATMs) and
Production and consumption co-terminous rn equivalent information services
time and space; often client or supplier has
to move to meet the other party

Role of consumer Consumer use of standardized menus and new

Services are ‘consumer-intensive’, requiring modes of delivering orders (EDI, fax etc)
inputs from consumer into design/production
process

Organization of consumption Increased use of self-service, utilizing existing

Often hard to separate production from consumer (or intermediate producer) technology -
consumption. Self-service in formal and eg telephones, PCs - and user-friendly software
informal economies commonplace interfaces

Service markets
Organization of markets New modes of charging (‘pay per’ society), new
Some services delivered via public sector reservation systems; more volatility in pricing using
bureaucratic provision. Some costs are features of EPOS and related systems.
invisibly bundled with goods (eg retail
sector)

Regulation Use of databases by regulatory institutions and

Professional regulation common in some service providers to supply and examine
services performance indicators and diagnostic evidence

Marketing Guarantees; demonstration packages (eg ‘demo’

Difficult to demonstrate products in advance software, shareware, trial periods of use)

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 Services in the new industrial economy 665

vations in services is very apparent-developments such as supermarkets and

other self-service facilities are extremely significant in the development of modern
service industries. Such organizational innovations will often have a technological
dimension, whether this be very basic (eg shopping trolleys), or relatively high-tech
(EPOS-electronic point of sale-equipment or ATMs linked into networks). As
suggested above, one important trajectory of organizational change has been
towards se/f-servicing, without necessarily following this development all the way
towards the vision of the client sitting at home interacting with the service provider
via a remote terminal. Instead, reorganization of the facilities of the service
provider permits customer self-service in the service establishment, saving on
labour costs and often increasing user satisfaction as it is possible to make
decisions anonymously and at one’s own pace.
Other types of organizational change are being forced on many service firms
as new government philosophies have led to the revision of regulatory structures
governing sectors like banking and telecommunications, and the privatization or
externalization of many public services. Often these policies have the intended or
unintended consequence of ending monopolistic organization of a market, which
may well not only prompt innovation as part of a competitive strategy, but also
create a need for innovations in order to cope with the new complexities. (For
example, the need to reconcile and interwork between different telecommunica-
tions services leads to new requirements as to how directories are established,
accessed and maintained.)
An important direction of organizational innovation, mirrored in manufactur-
ing, is the search for quality assurance and improvement2’ In manufacturing
‘quality’ can be defined in terms of material dimensions of goods (eg robustness,
precision), and much of the literature on quality has featured manufacturing.
However, services quality can often be defined in terms parallel to those used for
goods, and recent developments in quality standards (eg British Standard 5750 and
International Standards Organization’s 9000) have been taken up by service firms
as well as manufacturing firms. 28 Measurement is an important feature of most
quality programmes, and in services the role of performance indicators has been
growing. In the UK this has often been a direct result of government policies such
as the ‘Citizen’s Charter’ (which sets performance standards for public sector
institutions), and the setting up of new regulatory bodies in sectors with new
regulatory regimes (such as Oftel in telecommunications, which has prompted the
publication of performance data by telecommunication operators). But service
firms in many sectors have introduced performance indicators of various sorts-
measures of client satisfaction and complaints, assessments of process bottlenecks
and the like. Indicator systems and the associated databases are used in part as
ways of identifying parts of the service process which are in particular need of
innovation to overcome inefficiencies and other problems. Such information will
frequently lead to innovations being made (and a theme in the mainstream
innovation literature, of course, is the direction of innovative attention to ‘technical
imbalances’ and bottlenecks in production): but it should not be forgotten that the
very act of monitoring will often also involve technological change.
With the development of performance indicators often comes much greater
attention to a detailed charting, costing and monitoring of the service production
process. This may be associated with strategies aimed at charging clients for the full
costs incurred in the course of producing services-for example, in health services,
for every bandage used and stitch inserted-or for a notional estimate of the costs

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666 Services in the new industrial economy

typically incurred in a particular subset of surgical or other procedures. New IT

makes it possible to monitor the use of certain services in far more detail than was
previously feasible, and the emergence of pay-per regimes is under way in various
types of service which were financially supported in indirect ways in the past. For
example, cable TV systems may charge viewers by the volume of programmes
consumed (or, at least, displayed on their TV sets or downloaded to their video-
recorders); the use of roads or of passenger information services (and other new
services riding on the back of ‘transport informatics’) may likewise be charged to
users via techniques ranging from the classical tollbooth to new methods employ-
ing ‘smart cards’ and mobile communications.29
Finally, in discussing organizational innovation in services, van der Aa and
Elfring 1o identify a further three directions of development (which may have
implications for technological innovation):

l New combinations of services, whereby service companies expand their portfo-

lio (eg combining auditing and management consultancy). As well as represent-
ing a familiar diversification strategy, there may be economies of scope asso-
ciated with the new combinations (eg some data about clients can be reused).
0 The involvement of clients as co-producers, an extension of the self-service
model to knowledge-intensive business services, with the emphasis being laid
on clients’ roles in advancing the expertise of service suppliers, and identifying
new avenues for its application.
0 Multi-unit service firms, a development prominent as service suppliers have
increased their geographic scopeespecially as they have established bases in
different countries in the wake of their transnational clients.

New organizational forms

One common tendency, hailed by many commentators as that which best equips
users to the new competitive environment of the 199Os, involves firms (and public
sector organizations) seeking increased flexibility by a combination of (a) decentral-
izing decision making to lower levels of the organization (using IT for decision
support), with (b) coordinating the organization through integrated information
reporting systems. The aim of such approaches is to increase the ‘span of control’,
without losing significant detail on organizational performance.
Such organizational developments are being widely discussed in many sectors
of the economy. But there is a case that they are particularly significant in services,
as has been suggested by Quinn and his co-authors.” Drawing on a range of
examples spanning physical, human and information services, these researchers
conclude that IT, together with other technologies applied to service functions, is
being applied by forward-looking firms to achieve both efficient and customized
services. This typically involves ‘empowering’ employees by enabling them to carry
out sophisticated tasks without long learning curves. Software and planning staff
assume a key responsibility for guiding the innovation process so that the techno-
logies that are in use support the decisions required of the front-office staff. More
decisions about product configurations are made at the local level, within these
new frames of reference. And this decentralization is accompanied by a ‘flattening’
of firm structures, so that information on operations is rapidly processed and fed to
senior levels of management, rather than proceeding through a long management
chain of many layers.‘?

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 Services in the new industrial economy 667

These new organizational forms have implications for the occupational struc-
ture of the user firms-and potentially for the wider economic environment.
Decentralized decision making may substantially reduce the future demand for
middle managers and routine white-collar workers. Such systems, however, raise
the need for lower-grade service workers (shopfloor workers, sales and distribution
workers etc) to undertake judgmental tasks. The balance between the two trends
may be important for those urban areas where many service jobs are currently
concentrated-which will create new challenges for researchers in the recently
popular field of analysis of spatial location of services (especially producer
services).33
Another implication of these trends is that demand for producer services may
well (continue to) increase as a result of organizations contracting out activities to
service firms-which can be seen as a rather extreme form of decentralization.
Sometimes these service ‘firms’ are actually self-employed individuals, indeed they
may even be ex-employees who are made redundant and then taken on as
subcontractors to carry out the same work-but with less overhead for the core
company.34 The ‘hollow corporation’ is surrounded by service firms performing vital
parts of its activity: the challenge is one of finding ways of ensuring that the same
quality of input is maintained. Many commentators hail these developments as
ones that will be multiplied as new technology allows more of us to become
‘telecommuters’, working from remote homes or community offices at our own
pace for distant organizations. There are certainly moves in this direction, but
whether they will develop on a large scale will depend in part on whether ways can
be found of empowering remote workers-especially if they are no longer actual
employees who can be treated and made to feel like part of the ‘family’-with the
sorts of social support that are common in traditional organizations.
A further point needs to be made here. While services are becoming more like
manufacturing in terms of being technology-intensive, ‘industrialized’, traded and
so on, so manufacturing is becoming more like services in some respects-for
example, shorter and more flexible production runs. The service content of manu-
facturing is increasing, both in terms of inputs of producer services and in the
increased ‘information-intensity’ of production that means higher proportions of
white-collar to production staff. Both grand sectors, perhaps, are moving to new
organizational forms that represent a new stage of industrialization. Manufacturing
and services are both increasingly interdependent and increasingly unlike their
stereotypes. The new industrial economy presents us with a complex intertwining
of activities and institutions, applying new configurations of technology across
changing geographical areas.

Internationalization of services

We began by noting the importance of international trade in services, and organ-

izational innovation and the use of new technology are also critical here. Interna-
tional trade in services is facilitated by changes in regulatory regimes (eg the GATT
Uruguay Round, and the European single market), but organizational and technolo-
gical innovation are also important. The coterminality in production and consump-
tion of many services, requiring both the supplier and consumer to be present for
the service transaction to take place, has made them difficult to trade by conven-
tional means. International trade in services has often meant that one or other
party must cross national borders-as in shipping, tourism and many personal

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668 Services in the new industrial economy

services. IT can make it easier to separate the location and timing of service
production from its delivery, and is being used to alter the ‘mode ofpresence’ of
service organizations in foreign markets, and thus to transform patterns of service
trade. ri
Modes of presence range on a continuum of greater or lesser intimacy. Most
intimately, foreign direct investment (FDI) may be used to establish a branch or a
subsidiary company in a host country, or to purchase, or merge with a service firm
in the latter. FDI may be used to take a share in a local firm, or to enter into equity
agreements or minority joint ventures. FDI appears to be of growing importance in
services, whose share of FDI among industrial countries grew in the 1980s. Less
intimately, and blurring the boundary between FDI and conventional exports,
mode of presence may involve management control procedures exerted through
third parties in the national economy, eg franchising, licensing, and management
agreements.
Where services can be traded using electronic (or photographic, printed or
optical) media, physical presence can in principle be limited to the final delivery
and distribution of the services by the retail or delivery of the service via physical or
telecommunications media. This is particularly evident in IT and information
services. Software can be exported through the sale of information stored on
floppy discs, databases via new telematics services, which can be accessed so
readily across national borders that users may be unaware of the country in which
the database is physically located. More generally, telecommunications systems
loosen locational ties in the production and consumption of services by making
some information components of services transmittableas in the case of the use
of ATMs in international cash card networks. Elements of financial transactions,
reservation and booking services, and indeed of many knowledge-based services
too, experience growing scope for delivery through IT-based systems. In addition to
the media and services already mentioned, there is scope for the use of new
storage media (such as CD-ROM), remote delivery of educational software and
services (on these new media, via telecommunications, and via data broadcasting
etc), and new types of product such as expert systems.
As well as making some services more exportable, new technology can be
used to alter management control systems, allowing for rapid appraisal and
monitoring of local operations and circumstances through telematics networks.
Such systems may also be used for maintenance activities, and telematics are
already used in remote computer diagnostics and for environmental monitoring in
several industrial countries. Additionally, ‘offshore office services’ are being estab-
lished, carrying out (usually routine) office tasks (such as data entry) in countries
with low labour costs. For instance, ticket stubs and insurance claim forms may be
physically transported or faxed to remote countries, where the data will be
manually converted into machine-readable information. “’
Technological innovation is promoting and itself being stimulated by the
internationalization of services. We should not assume that all services will move
towards new modes of presence, however. There may also be strategic interests or
opportunities to capture value which lead service suppliers to acquire local outlets
or at least seek substantial management control (eg through third-party arrange-
ments sufficient to ensure adequate product quality). Some services require
detailed knowledge of local markets and regulatory environments, and may be
dependent on local agents and third parties. Needs for substantial levels of

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 Services in the new industrial economy 669

interaction, or long-term relationships, between suppliers and clients, are more

likely to lead to FDI-type arrangements. Telematics renders it possible to deliver
data services remotely, but FDI will remain highly important where, for example,
service companies follow their clients overseas to meet complex, or highly custom-
ized requirements. Data-processing services (software, facilities management,
computer bureaux and systems integration) tend to rely on the establishment of
affiliates as a mode of presence, while database firms are more likely to use export
via telecommunications systems. Regulations in the host country may encourage
or discourage investment and foreign presence. Suppliers’ size, access to capital,
and levels of management expertise, are important, as are such aspects of service
production as its transitoriness or permanence, its riskiness etc. Nevertheless,
technological innovation is reflecting and reinforcing changes in the pattern of
trade in services-which, as noted, is being promoted by deregulation, organiza-
tional innovation, and other important forces.

Conclusions

Services-more precisely, some services, since others are still relatively insulated
from the economic turmoil that surrounds us-are integral to the new pattern of
industrialization that is being forged. There should be nothing surprising about this,
since services have always been vital to manufacturing-for example, the indus-
trial revolution required insurance, transport and communication facilities.37 But
all-too-often unexamined assumptions about post-industrialism or de-industrializa-
tion still stand in the way of systematic analysis.
Services are major users of, and often pioneers in the use of, new IT. New
services are developing which are integral to the application of IT (software,
telematics), and some established services are instrumental in driving the develop-
ment of both hardware and software along. Services are partaking of, and helping
to forge, the new industrial revolution. And it may well be that the time-honoured
distinctions between manufacturing and services are blurring, so that to talk of the
future of industrialization as applying to both sectors will no longer be surprising.
Perhaps the very language of ‘manufacturing’ v ‘services’ is becoming obsol-
ete. Economies are simply a tangle of diverse activities, each of which involves
different combinations of ‘production-type’ and ‘service-type’ work, and yields
products which vary in the particular combinations of material and informational
components which they comprise. We need to find ways of classifying activities
which are more sensitive to their (changing) composition.
Two challenges must be noted, in conclusion. First, it is easy to make
sweeping statements like this, but the reorganization of government policy and
management strategy that is implied may be considerably harder. Second, services
have remained under-researched in part because of the difficulties that have
plagued statistical measurement of output, productivity, trade and other issues:
our discussion implies that these difficulties are liable to be experienced increas-
ingly widely across the economy, decreasing the usefulness of many of our
established analytic tools. The new forms of industrialization are thus liable to be
intellectually demanding to describe in the future, let alone to predict now.
Arbitrary oppositions between manufacturing and services are clearly not the
place to begin.

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670 Services in the new industrial economy

Notes and references

1. This is the title of an influential book by Cohen and Zysman (1987).

2. Elsewhere we have called this the information age (eg Miles, 19911, but since the focus of this
essay is on a rather more narrow set of features of this emerging phase of social development,
we here use a more limited term.
3. See Elfring (1988) for a detailed discussion of services employment growth In industrial countries,
and of the different patterns of growth characterizing different types of country.
4. World Bank (1991).
5. Eg Riddle (1986); UNCTAD (1989).
6. The classic exposition of post-industnal theory is Bell (1973); see also Kuznets (1972).
7. Fuchs (19681, though note that in reaching conclusions concerning the quality of labour and
rates of productivity growth in services, he excluded capital-intensive services from his analysrs;
more recently Kravis et a/ (1982) find little evidence for a preference for services emerging as
countries get wealthier.
8. Clark (1945); Fisher (1935).
9. This definition (and those of the primary and secondary sectors) is inspired by the discussions of
Hill (19771, llleris (1989) and Riddle (1986); it is used extensively in Miles et a/(1988) in a discussion
of the applications of new IT.
10. Cershuny (1977); Skolka (1976).
11. This hints at another source of confusion, in that the term ‘services’ can be used to describe
industries, commodities, forms of lahour, and even the final functions which are obtained from
purchases from the formal economy. See Cershuny and Miles (1983) for an analytic framework
which seeks to clarify and demonstrate the relations between these aspects.
12. Kubicek and Seeger (1992).
13. Barras (1984) drscusses investment trends in services; other papers drawn on here include Barras
(I 986a, b).
14. Miles and Matthews (1992); Roach (19871.
15. Paolo Saviotti has pointed out in conversation with the author that the model being used here IS
really an ‘industry-cycle’ rather than ‘product-cycle’ one.
16. Howells (1988) presents a stage model, based on his analysis of the emergence of information
services like software from firms in other sectors, in which internal services are later marketed
and finally spun off. See Baven and Elfring (1992) for a critical examination of this thesis in case-
studies of services used rn the automobile industry.
17. Useful discussions of statrstical issues rn US services are carried in the newsletter The Service
Economy, published by the Coalition of Service Industries.
18. See, for example, the various statistical overviews and case-studies presented in Guile and
Quinn (1988a, b) and Faulaber et a/(1986).
19. See Miles et a/ (1988). The analysis presented here draws on Miles il987a. b).
20. Note that bar-code scanners require the cooperation of manufacturers in bar-codrng their
products. Similarly, financial service innovatrons like credit and debit cards require the coope-
ratron of retarlers in accepting these cards and using validation systems.
21. See Hepworth and Ducatel 11992).
22. For analyses of the strategies being pursued rn the publrc sector, see for example Snellen and
Frissen (1990), and the journal lnformatization In The Public- Sector.
23. On ‘convergence’ between manufacturing and services see Mrles (1987bi, Postner (1991): on
interpenetration and interdependence of the sectors, Miles (1989).
24. This approach has been inspired by the work of van der Aa and Elfring (1991) and Heuer (1990).
25. Levitt (1976) presents a classic study of servrces industnalization.
26. Though note that other firms may seek competitiveness by emphasizing such elements as
personal service, quality, or local ‘authenticity’.
27. Cf Scheuling and Little (19911, and several chapters of Teare (1990).
28. About half the companies applying for support for quality consultancy in the Department of
Trade and Industry’s Enterpnse Scheme are service companies, especially distribution, hotel and
catering firms and professional services. Likewise a survey of firms involved in such schemes
revealed a substantial number of service firms participating (Barker, 1992).
29. Pioneering formulations of ‘pay-per’ innovations are in Mosco (1988); for the transport case see
Hepworth and Ducatel (1992).
30. Van der Aa and Elfring (1991).
31. Eg Quinn and Pacquette (1990); Quinn, Doorley and Paquette (1990).
32. Quinn (1986) goes on to discuss several types of firm organization and strategic issue that arise
from these developments.
33. Eg Daniels and Moulaert (1991); Marshall et a/(1988).

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 Services in the new industriai economy 671

34, For example, a publishing firm may lay off its editorial staff, and then recommission them as seif-
employed editors to carry out the same task.
35. Vandermerwe and Chadwick 11989); another interesting discussion is Dunning 11989).
36. See Posthuma (1987).
37. Cf Riddle (1986).

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FUTURES July/August 1993

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