Knowledge-intensive business services - policies, issues and the future
Knowledge-intensive business services (KIBS) are among the most rapidly growing sectors of the EU economy, and play an increasingly important role in the performance of client sectors. This third article reviews a range of policy issues that are raised by the three scenarios - outlined in greater detail in the previous article - in relation to the future development of KIBS. As well as outlining major policy responses to these issues, it examines their rationale and the challenges these responses are liable to confront. In particular, the article calls for more explicit consideration of KIBS in innovation policy and in other policy areas.
Services that provide knowledge-intensive inputs to the business processes of other organisations form a prominent part of today’s knowledge-based economy. Knowledge-intensive business services (KIBS) encompass a wide range of sectors, such as computer services, research and development (R&D) services, legal, accountancy and management services, architectural, engineering and technical services, advertising and market research. The growth of KIBS reflects the increasing demand for knowledge inputs, to help organisations deal with changing technologies and social conditions. This growth also reflects organisational strategies and management thinking, such as ‘outsourcing’ and the focus on core competencies, as well as the increasing emphasis on service and intangible elements of production and products.
The first in this series of three articles on KIBS, Knowledge-intensive business services - what future?, considered the drivers of growth in this sector, highlighting how KIBS have been growing, and are expected to continue growing, at a rapid rate. The second article in this series, KIBS: Trends and scenarios, went on to consider some of the qualitative changes that may affect KIBS. While most KIBS branches feature a greater share of small firms than the economy as a whole does, many of these branches are becoming more concentrated. KIBS often supply a wide range of services, which sometimes means that there is some overlap and convergence between different KIBS branches. Some KIBS are becoming more involved with the strategies of major clients, leading to the possibility that some services will become specialised and others more integrated in relation to their clients’ requirements.
Policies for KIBS
Few attempts have been made to develop policies specifically aimed at the KIBS sector, despite the significance of this sector as a dynamic area of economic growth, and as a vital input to the performance of other sectors of the economy. In fact, limited attention has been given to the performance of the services sector as a whole, although many countries do have programmes in place to enhance the efficiency and effectiveness of public services. For example, several countries, including Germany and Norway, have research and development (R&D) programmes aimed at benefiting the services sector. Finland is particularly unique as it has put KIBS in a prominent position through its innovation policies.
KIBS have also featured indirectly or partially in a number of public policies. For example, technology awareness and diffusion programmes have sometimes encouraged companies to use various types of consultancy services. Policies relating to public sector modernisation have sometimes helped to encourage public services to make greater use of KIBS inputs, rather than cater for all services in-house. Regulatory policies in many areas - corporate law, environmental issues, information security - have often prompted a growth in KIBS, helping firms comply with regulations. Nevertheless, these activities do not amount to an articulated strategy for KIBS.
At European level, there has been a great deal of attention given to removing barriers to services trade, and elements of this are particularly relevant to KIBS. In particular, certain analyses of trade barriers in professional services (for example, the Commission’s Report on competition in professional services) have identified substantial scope for further trade liberalisation. Greater recognition of professional qualifications, harmonisation of regulations affecting KIBS, and similar measures, are suggested as ways of dealing with barriers confronted by KIBS. Increased trade in KIBS is, in turn, expected to fuel greater competition, prompting many KIBS companies to pursue more innovative strategies, to improve practices in line with those of more efficient competitors, and to search for new markets. Although there may be limits to the extent to which competition will rapidly enter local and even regional KIBS markets, in the longer term, more competition is anticipated. While access to cheaper and more dynamic KIBS should benefit user industries, some problems may be encountered in relation to KIBS employment in some EU regions, although there are also opportunities for ‘export’ of KIBS from the EU. One unresolved question relates to whether or not a ‘one size fits all’ KIBS approach should be taken, or if instead models developed in a particular national or regional context should be applied, to cater for organisations and cultures that demand quite different solutions.
Another policy area of particular relevance to KIBS - given that their employment structure is heavily weighted towards graduate and professional staff - relates to education and training policies, especially those conducive to the development of high-level skills (see for example, the Commission's action plan for skills and mobility). ‘High tech skills’ have received particular attention, as has the geographical mobility of professionals. Clearly, greater skill availability and mobility will make it easier for KIBS companies to recruit staff, although if supply is abundant, they may also be recruited directly by clients of KIBS, in order to provide services on an in-house basis. One interesting point has been raised by Tomlinson (1999), who argues that the use of KIBS provides an alternative to companies sourcing knowledge through recruiting labour. The focus of much policy relating to labour mobility is on enhancing the movement of knowledgeable workers between firms and regions that are users of KIBS. However, enhancing the mobility of KIBS themselves, the accessibility of KIBS to users in different regions, and the mobility of labour into the KIBS sector, may be a particularly appropriate focus for policy in the knowledge-based economy.
Finally, there has been growing interest in the role of services in innovation processes. In particular, there has been interest in the significance of KIBS as being among the most active innovators in the services sector, as well as an important influence on the innovation activities of client sectors (see Miles, 2005). General discussions on policies for services innovation (e.g. van Ark et al, 2002) are especially relevant here. The general conclusion of these discussions is that innovation policies have typically been designed with manufacturing industries in mind, and have thus neglected to take into account the characteristic features of many services and KIBS. Such oversights include, for instance: less emphasis on R&D as a source of innovative knowledge, and less organisation of innovation through R&D departments and managers, more through project development teams; greater emphasis on organisational innovation; less propensity to use patents as a mode of intellectual property rights (IPR) protection; poor linkage into many technological innovation systems. With the general shift away from enhancing support to particular firms and industries, governments have tended to argue that their innovation and other policies are intended to be sector-neutral. The conclusion of the much of the literature on services innovation is that there are various aspects of policies - and the policy networks used by those charged with designing and implementing them - that are implicitly weighted against services and services innovation.
Policy concerns raised by different scenarios
In the previous article, three scenarios were outlined in relation to the development of KIBS:
- Scenario A: KIBS leadership- continuing rapid growth in KIBS and the assumption of leadership positions in relation to many of their clients’ strategies.
- Scenario B: KIBS plateau- relative decline in KIBS (or at least in their rate of growth) due to a variety of factors, ranging from offshoring to competition from services provided by non-KIBS companies. There are also possibilities of a decline in demand related to competition from in-house services, or from use of new technologies that ‘automate’ some KIBS functions.
- Scenario C: Two-tier KIBS- the structure of the various KIBS branches becomes even more differentiated between many highly specialised KIBS companies and others that orchestrate the specialised KIBS inputs, often playing a substantial role in defining what these inputs are and how they are to be provided and used.
These three scenarios envisage quite different paths of development in relation to the KIBS sector, although the previous article suggested that: (a) different KIBS branches might be more oriented to one or other scenario and; (b) in any case, the eventual future is liable to feature elements of all three scenarios - the big question is exactly how these elements will be combined. Nevertheless, contrasting the three scenarios does highlight a series of significant issues that are liable to be raised in one form or another, regarding the evolution of KIBS in the coming decade. Table 1 below examines some of these issues.
|Issue||Scenario A KIBS leadership||Scenario B KIBS plateau||Scenario C Two-tier KIBS|
|Skills and labour||Requirement for many high-level skills, coordination skills.International mobility of skilled workers, as KIBS deploy their workforce across regions.||Mobility of skilled workers between companies (relying more on in-house provision of services than on KIBS).Problems of declining wages and working conditions for (widely non-unionised) KIBS workers.||Availability of high-level skills is liable to be an issue, with requirement for both specialists (and associated support workers), and coordination skills from KIBS integrators.|
|Access to KIBS services||High levels of demand for services are liable to keep prices high, and reduce the ability of smaller companies and more peripheral ones to access KIBS. However, the expansion of transnational and other larger KIBS into more regional and local markets would put pressure on locally-based firms to make more effort to service a wider range of local clients.||Low demand for KIBS may reduce prices, making it easier for smaller firms to access KIBS. Likewise, KIBS experiencing reduced demand might make more effort to service smaller organisations and those in more peripheral regions.||Smaller firms may have difficulties accessing higher-level, coordinating services and in performing this role in-house. However, basic standardised services may be cheaper and more accessible. Thus, the onus would be on those users that cannot afford integrative KIBS either to undertake integration in-house, or to rely on support from, for example, trade associations and public initiatives.|
|KIBS trade and internationa-lisation||Opportunities for export of dynamic services from EU to other world regions (raising questions of whether export support mechanisms are geared to such services).Foreign transnationals will simultaneously be seeking a larger presence in the EU, and mergers and acquisitions are likely to be commonplace. A possible challenge is that, associated with the attempt to transfer inappropriate business models to an EU context, efforts would be needed to help KIBS and their clients address this issue.||Restrictions on services trade might be encountered in this scenario, limiting the export roles of KIBS and limiting clients’ access to overseas KIBS.Some scope for non-KIBS companies to sell KIBS-types solutions globally.Intense international competition in software and other technological tools for self-servicing of KIBS-type solutions.||International competition for both integrative and specialised KIBS services, but competition is likely to form quite different patterns in various specialisms (especially where local knowledge is important).Growth of partnership arrangements is likely; Were overseas firms to take a major role in highest-level services, the possibility that inappropriate business models would be imposed may need to be confronted.|
|Offshoring||Offshoring of basic standardised services is liable to grow, while more professional activities are retained in EU and/or close to clients||This is one of the challenges confronting EU KIBS: technological and organisational innovations could facilitate the movement of many KIBS functions overseas (or to lower wage regions of the EU).Might be slowed, however, by increased conflict over international trade and investment rules.||Specialised services, pursuing high divisions of labour, would be liable to use offshored services for large parts of their production process. This is unlikely to be the case for integrators.|
|Quality of KIBS outputs||High levels of demand for KIBS may result in entry of lower-quality suppliers.||Lower demand for KIBS might be partly prompted by perceptions of poor quality of external services, thus resulting in a return to in-house solutions. KIBS suppliers would need to strengthen quality control, accreditation, and other procedures that serve to reassure clients of the appropriateness of the service.||Quality control becomes the responsibility of KIBS ‘integrators’. However, self-regulation may not be enough to control the quality of the integrators themselves, and further solutions may need to be sought.|
|Innovation in KIBS||High levels of product and process innovation are likely, using advanced technology. KIBS are liable to become increasingly important sources of innovation for clients.||The focus on innovation here would be on service production and delivery processes, with an emphasis on improved efficiency.||High levels of specialisation and division of labour will be associated with process innovation among specialised services. However, integrators will face different innovation challenges. While they may put pressure on more specialised companies to create innovative service products, they may also sometimes inhibit innovation in order to make their own task of integration more easy and routine.|
|Technology||Considerable use of new technology to produce services and coordinate operations that are being conducted over wide geographical spaces.Knowledge management systems to improve internal operations and flexibility, and to interface with clients||Opportunities and challenges in supply of software and other technologies that help firms assess their need for KIBS.||Coordination of KIBS inputs requires advanced communications’ infrastructure. While much of the integrative function relies on tacit knowledge, decision aids and project management tools of various kinds are likely to support these functions.|
|Public knowledge||Much knowledge produced by private KIBS firms: some of this would be in partnership with public institutions, and there could be scope for ensuring that more of this knowledge should be publicly available.||Much knowledge produced within companies and liable to remain proprietary or otherwise fail to be available in the public domain.||Knowledge from standardised KIBS is likely to become publicly available. Integrative functions might remain a ‘black art’ founded on tacit knowledge.|
Emerging policy context for KIBS
This section explores some of the policy issues raised above, in particular, the types of responses that may be forthcoming, and the challenges that are associated with these responses.
Measures to increase high-skilled labour and to enhance mobility
Considerable attention is already being given to the development of high-level skills (especially high-tech skills), in particular, through innovation in curricula and in the delivery of training (e.g. e-learning). In at least two of the scenarios, however, there needs to be a greater focus on developing combinations of managerial, interpersonal and technological skills, where personnel can interface with clients from user (or service supplier) organisations and can oversee complex multi-service projects. Such skills are required by KIBS and by their users, to allow for the most effective selection and use of KIBS inputs.
It has been argued by some that KIBS are used partly as an alternative to labour mobility across companies, and as a means of transferring knowledge across firms and industries. However, expansion of KIBS, and increasing trade and internationalisation, are likely to create demands for geographically mobile employees (or partners). Mobility between firms is already a characteristic of many KIBS sectors, and factors that make it difficult for such mobility in other KIBS sectors need to be addressed.
There are hopes that teleworking will be able to ease the problem of the geographical mismatch between the location of workers and of clients that require these services. Although many KIBS seem to require better grounding in local knowledge, the use of communication networks may allow for more temporary relocation of workers during periods of project work where intensive face-to-face contact or onsite support is required. While the potential of teleworking should certainly continue to be explored, the issue of offshoring will also arise (see below), to the extent that large portions of KIBS work will be able to be conducted remotely.
Measures to increase access to KIBS by less advantaged organisations and regions
Many small and medium-sized enterprises (SMEs) are unable to invest the time or effort into exploring the prospects for employing KIBS, and are often discouraged by the fear of high-pressure marketing from expensive consultancies. SMEs are also liable to feel that the costs of using KIBS are prohibitive, given the scale of inputs they require. This problem could be offset by greater scope for economies of scale, whereby several organisations in a particular sector or location pool their requirements for KIBS support. An example of this might be a cluster of e-commerce websites and services set up for small firms in a particular industrial district. Intermediary bodies - trade associations, science parks, chambers of commerce, local governments - may need to take the initiative here. Such intermediaries could also provide awareness and accreditation services, acting as a broker and buffer between KIBS and their more neglected potential clients.
KIBS almost invariably tend to cluster around national and regional capitals; as a result, many peripheral regions are poorly serviced. Again, intermediaries in public policy positions, or otherwise, could play a role: this role could involve encouraging ‘KIBS trade missions’ to visit their regions, supporting awareness and other programmes that could work in both directions. Such activities spill over into more established regional development policies, of which ‘cluster policies’ have become a familiar element in recent years. These type of policies need to take into account the actual and potential roles of KIBS in their clusters. The same applies to policies aimed at improving the quality of the local business environment, its telecommunications and transport linkages, as well as its scientific and technological infrastructures. For instance, local universities could be encouraged to undertake research and training relevant to selected KIBS.
Measures to liberalise services trade and to encourage conformity in qualifications and standards
Increasing attention has been given to the trade barriers that continue to persist among the services and professional services sectors. In this instance, the argument in favour of reducing such obstacles is that internationalisation should provide a double boost for KIBS. Firstly, the opening of markets should allow for more export opportunities for KIBS, particularly as several KIBS sectors are seen as having a competitive advantage in parts of Europe. Secondly, growing trade should increase competition in previously sheltered KIBS sectors. This should, in turn, provide a stimulus for innovation of new techniques and methods, and service products, and for efforts towards quality improvement, while leading to decreased costs for clients.
Of course, some less welcome developments are possible, and strategies to prevent these developments need to be integrated into efforts to liberalise markets. For example, overseas entry into EU markets by large transnational service companies might lead to the marginalisation or acquisition of European KIBS, which would be unfortunate particularly if these were more innovative and dynamic KIBS, and if there was a transfer of innovation capability to, for example, the US. This has already happened in several IT-related KIBS branches, for instance, where acquisition is followed by a scaling down of European research centres. Another concern is that overseas KIBS could offer services that are not tailored to business models appropriate within an EU context. For example, there are instances of project failures stemming from consultants’ inability to recognise that US organisational structures are not necessarily universal and are unsuitable for their client sectors.
Lastly, some measures that might be pursued in order to ease services trade could have unwelcome consequences for other dimensions. For instance, efforts to harmonise regulations that govern KIBS and efforts to introduce common standards, e.g. for professional qualifications and services quality, might be problematic. If such systems are too rigid, and are not designed with considerable understanding of the specificities of various KIBS and of the rapid evolution of the sector, they could have detrimental effects. They might, for instance, reduce opportunities for the emergence of new professions, new types of KIBS, and new solutions to business problems.
Offshoring of business services
With KIBS being one of the most dynamic areas of employment growth - particularly high-skilled employment - and strategically important to client organisations, there is naturally a concern that offshoring might shift jobs, and even control of processes, overseas. There is no doubt that several developing companies are hoping to move up the value chain in the services they offer, and it is likely that this would be a valuable boost to the development prospects of these companies. Some alarmist accounts of the loss of jobs through offshoring, however, may tempt companies to engage in knee-jerk responses, aimed at limiting the offshoring of professional work. Strategies to ensure the quality of the services provided, and to maintain high standards and working conditions for professional workers, regardless of where they are based, are liable to be less contentious and less damaging to broader international relations. Furthermore, the patchiness of knowledge makes it likely that many higher-level KIBS functions will need to remain in proximity to their client organisations. It seems likely, therefore, that the fate of KIBS in terms of offshoring, as well as in many other respects, will be influenced by and will influence the performance of other sectors in the economy.
Support to KIBS and to clients
Like many other services, KIBS are not very transparent: such services are produced and consumed together and it is hard to demonstrate them in advance, although it is possible to deploy the testimony of other satisfied clients. Generally, it is difficult for prospective users to assess the quality of individual KIBS providers; since the service often has to be negotiated, it can be hard to judge the exact quality, benefits, and cost-effectiveness of the services, as well as the input in time and other resources required from the client. Policymakers and other intermediaries, such as trade associations and university researchers, can play a significant role here, by making case studies and accounts of good practice available, for example, in awareness programmes; by promoting quality control systems and quality management training; by accrediting and promoting standards, for example, in the course of public procurement.
A related point concerns environmental quality. As Zaring et al (2001) point out, there is considerable scope for KIBS to become more eco-efficient, and to enhance eco-efficiency among their clients. Government policies on sustainability should also encompass these roles.
Better use of technology and support to clients
Services need to be considered more explicitly in innovation programmes; while generally more innovative than other services KIBS are no exception. For example, greater account may need to be taken of organisational innovation. Attention may need to be paid to the role of vectors of innovation such as professional associations. Also, the question of why many KIBS are poorly linked into innovation systems (with less support from universities and government laboratories) may need to be addressed, as should the question over why they do not use conventional R&D management structures as a model for their innovation management.
TASC (1998) argues that there is a significant requirement for support in developing common standards and technological infrastructures for high-technology based services, and it is likely that these conclusions will apply to Europe as to the US. Issues of reliability, security, and availability of technical skills may also be problematic for KIBS seeking to use more advanced technologies. Intellectual property issues are contentious in many services. Whereas the US has moved rapidly in terms of software and business patenting, there is much greater controversy over such approaches in Europe. For example, there are vociferous arguments in relation to the over-emphasis on property rights of innovators, as fears exist that it may act as a serious deterrent to innovation: this is a matter that requires detailed, empirically-based impact analysis, and should not simply be resolved on the basis of abstract economic argument. More generally, patenting is not an appropriate means of protection for many service innovations, and the emphasis on this mechanism in innovation policy needs to be reviewed, as should the problematic use of copyright as a means of protecting innovations.
Policies relating to knowledge infrastructure
Dangers posed by a rise of a KIBS-based private knowledge infrastructure should be examined. In particular, it should be assessed whether such an infrastructure would threaten or actually benefit the role of the public knowledge infrastructure, for example, by establishing standards, accrediting activities, validating research results, and putting knowledge into the public domain. If problems are emerging, then ways of solving these problems need to be examined, e.g. by identifying ways to assess KIBS contribution to public knowledge; developing contractual arrangements to supply public functions; developing closer relationships between public and private infrastructures (e.g. shared teaching and research between KIBS and universities).
More generally, relations between the public and social science base and KIBS sectors warrant further examination, since studies suggest that many services are themselves poorly served by universities and government laboratories. There may be scope, for example, for service innovation centres and laboratories in the public sector (most service management training at present has little orientation towards innovation or KIBS), and for closer networking between universities and KIBS sectors. The public sector could sponsor foresight studies or other strategic prospective-oriented initiatives that focus on service industries (e.g. similar to KIBS foresight studies in Finland).
Although policies specifically aimed at KIBS are still rare, the rapid rise of sectors in this area is likely to place KIBS on policy agendas to a much greater extent in the future. Perhaps the major constraining factor, however, is the huge diversity among the different KIBS sectors. While it is unlikely that policies will need to be as varied as the KIBS sectors themselves, there are likely to be many generic issues that need to be confronted. The discussion in this article has used scenarios partly to identify, and partly to illustrate, such issues. In addition to the relative lack of attention that the KIBS policy agenda has been given to date, there are a wide range of policy issues where the role of KIBS needs to be addressed more explicitly. It is hoped that this series of articles will contribute to this debate and process.
References and further reading
All links accessed on 28 August 2005.
Ark van, B., Broersma, L. and Hertog den, P., Services innovation, performance and policy: A review (ico_pdf 1.15 Mb), The Hague, Ministry of Economic Affairs, Strategy, Research & International Cooperation Department, Directorate-General for Innovation, 2002.
European Commission, Job opportunities in the information society: Exploiting the potential of the information revolution ( 176 kb), Report to the European Council, COM (1998) 590 final, Brussels, 1998.
European Commission, Barriers to trade in business services ( 514 kb), Centre for strategy and evaluation services, DG Enterprise, 2001.
European Commission, Commission's action plan for skills and mobility, COM (2002) 72 final, Brussels, 2002.
European Commission, Extended impact assessment of proposal for a directive on services in the internal market ( 316 kb), Commission Staff Working Paper, COM (2004) 2 final, Brussels, 2004.
European Commission, Report on competition in professional services, COM (2004) 83 final, Brussels, 2004.
Hertog den, P., ‘Knowledge-intensive business as co-producers of innovation’, International Journal of Innovation Management, Vol. 4, No. 4, 2001, pp. 491-528.
Hertog den, P. and Segers, J., Service innovation policies: A comparative policy study ( 205 kb), Utrecht, Dialogic, 2003.
Kox, H., Growth challenges for the Dutch business services industry: International comparison and policy issues, The Hague, CPB Netherlands Bureau for Economic Policy Analysis, 2002.
Miles, I., ‘Knowledge-intensive services and innovation’, in Bryson, J. and Daniels, P. (eds.), The handbook of service industries, forthcoming in press, Aldershot, Edward Elgar, 2005.
Miozzo, M. and Miles, I. (eds.), Internationalization, technology and services, Cheltenham, Elgar, 2002.
TASC, The economics of a technology-based service sector, Washington, National Institute of Standards & Technology, Strategic Planning and Economic Analysis Group, Planning report 98-2, 1998.
Toivonen, M., Expertise as business: Long-term development and future prospects of knowledge-intensive business services (KIBS), Helsinki, Helsinki University of Technology, Doctoral dissertation series 2004/2, 2004.
Tomlinson, M., The learning economy and embodied knowledge flows, CRIC, The University of Manchester CRIC Discussion Paper No. 26, The University of Manchester, Centre for Research on Innovation and Competition, 1999.
Zaring, O. (ed.), Creating eco-efficient producer services, Gothenburg, Gothenburg Research Institute, 2001.