Service Innovation Through Experimentation

A Dilemma in the Service Industry

Business faces a dilemma today: Though our economy depends increasingly on services, innovation processes remain oriented toward products. This isn’t surprising: How do you apply formal R&D to services—where real customers engage in real transactions in real time? And ensure that failed experiments don’t harm your customer relationships and brand?

The Bank of America Approach

Impossible? No: One large service company—Bank of America—runs formal experiments to create new service concepts for retail banking. Seeking to grow revenue and customer satisfaction, it turned several branches into “laboratories.” At these branches, Innovation & Development (I&D) team members conduct experiments with actual customers during regular business hours—pinpointing innovations for broader rollout.

The program has generated surges of fresh thinking, improved customer satisfaction, attracted new customers, and deepened the company’s understanding of service development. The payoff? A crucial edge over less adventurous competitors.

The Idea in Practice

To launch service-innovation experiments, consider Bank of America’s process:

Conceive, Assess, and Prioritize

Drawing on customer-satisfaction studies and other market research, I&D and branch staff submitted experiment ideas, then prioritized them based on impact on customers and fit with the bank’s strategy and funding requirements. Of 200 ideas, 40 became formal experiments—e.g., testing whether TV monitors reduced teller customers’ perceived wait time.

Plan and Design

Flesh out selected ideas. Resolve experiment problems without customers before testing in a live environment.

The I&D team created a prototype branch where members could rehearse the physical steps involved in an experiment—and correct problems—before implementing the service idea with customers.

Implement

Maximize learning by conducting experiments in ways that ensure results’ reliability and accuracy.

To temper the effect of noise (variables other than those being tested), the I&D team repeated the same experiment in the same branch and in different branches, and also established a control branch for each experiment. For instance, to test new account-transfer software, it installed the technology at one center but not at another, similar center.

To ameliorate the Hawthorne effect—people behaving differently when they know they’re being watched—the bank instituted “washout periods.” It waited a week or two before measuring experimental results, so novelty effects among staff could pass.

Test

We learn best by receiving immediate feedback on our actions’ results. But assessing results’ accuracy takes time. Balance speed with reliability in providing feedback.

The I&D team ran each experiment for 90 days before adjusting or discontinuing it based on results. Members believed three months provided enough time to gain reliable measures without unduly delaying modifications. They also made exceptions, revamping one mortgage-loan experiment after 30 days because getting credit approvals was taking too long.

Recommend

Decide if experiments warrant broader rollout.

Analyzing performance data from test locations and control branches, the bank determined which experiments had enhanced customer satisfaction, revenue generation, and productivity. Then it performed cost-benefit analyses to ascertain whether the performance gain outweighed the expense required to introduce the new process nationally. Of 40 experiments, 20 were recommended for rollout.

Conclusion

The Bank of America approach demonstrates that service innovation through experimentation is possible, even in industries where customers are directly involved in transactions. By following a structured process, organizations can generate new ideas, improve customer satisfaction, and gain a competitive edge.

FAQs

Q: What is the main challenge in applying formal R&D to services?
A: Ensuring that failed experiments don’t harm customer relationships and brand.

Q: What is the key to successful service innovation through experimentation?
A: A structured process that balances speed with reliability in providing feedback.

Q: What is the payoff of service innovation through experimentation?
A: A crucial edge over less adventurous competitors.