Digital transformation is highly relevant to most organisations in the business and the government sectors. One important aspect of digital transformation is the capability to exploit data in order to develop new services. For a number of businesses, this capability has become an imperative to their survival in an ever more competitive market. Today, data exploitation is of vital importance for innovation and economic growth. However, there is a lack of consolidated knowledge about the challenges of managing processes for service innovation. The purpose of this study is to elaborate on challenges concerning data-driven service innovation. We have used the Grounded Theory approach to identify such challenges which are: lack of a systematic process, problems with data access, distrust of data, lack of appropriate digital tools and insufficient competence. Our conclusions reveal that data is rarely used as a strategic resource in data-driven service innovation and that there is a lack of data management.