PurposeThis study, adopting a knowledge perspective, aims to explore how small- and medium-sized enterprises (SMEs) engage in service innovation by implementing design thinking.Design/methodology/approachA qualitative research methodology and a multiple case study strategy were adopted on account of the exploratory nature of this study. Three cases based in Scotland have been selected. Data were collected from staff, managers and researchers who participated in Create Cultures of Innovation (CCoI), a project sponsored by the Scottish government.FindingsThe research shows that SMEs can be enabled, through design-led interventions, to think collaboratively and leverage knowledge to achieve service innovation.Research limitations/implicationsThis research contributes to the service innovation literature by theorising an integrated research framework of “Knowledge exchange in SMEs service innovation with design thinking”. Further, this study enriches the extant understanding of service innovation in the traditional sector (manufacturing and hospitality) and redefines the roles and relations of the dimensions of service innovation.Practical implicationsThis study addresses the call on tools and methods for servitisation, suggesting that changing the culture and mindsets of both the top management and the staff are critical for the success of servitisation and the implementation of design thinking. In addition, this research suggests the need to embed design thinking within the leadership prior to rolling it out to the wider public. Support from the top management should focus on both the engagement of staff and the changing of vision from product to service-focused.Originality/valueThis paper gets together service innovation, design thinking and knowledge exchange in the context of manufacturing SMEs offering novel insights into how to succeed in servitisation with the implementation of design thinking.