In the unfolding knowledge-based economy, services do matter. But while they are increasingly seen to play a pivotal role in innovation processes, there is little by way of a systematic view of this role. This essay presents a four dimensional model of (services) innovation, that points to the significance of such non-technological factors in innovation as new service concepts, client interfaces and service delivery system. The various roles of service firms in innovation processes are mapped out by identifying 5 basic service innovation patterns. This framework is used to make an analysis of the role played by Knowledge Intensive Business Services (KIBS) in innovation. KIBS are seen to function as facilitator, carrier or source of innovation, and through their almost symbiotic relationship with client firms, some KIBS function as co-producers of innovation. It is further argued that, in addition to discrete and tangible forms of knowledge exchange, process-oriented and intangible forms of knowledge flows are crucial in such relationships. KIBS are hypothesised to be gradually developing into a ‘second knowledge infrastructure’ in addition to the formal (public) ‘first knowledge infrastructure’, though there are liable to be cross-national variations in the spill-over effects from services innovation in and through KIBS, and in the degree to which KIBS are integrated with other economic activities. Finally, some implications for innovation management and innovation policy are discussed.