This paper conceives municipalities as Smart Local Service Systems (SLSS), where co-production and variety perform as key resources to merge service quality and sustainability. The attention is focused on local public transport services, where users’ involvement in value creation process is considered to be especially relevant. A narrative case study is presented, concerning the mobility service system of the municipality of Bologna (Italy). The research focused on the SMARTIP (Smart Metropolitan Areas Realised Through Innovation & People) European project, which was aimed at enhancing service quality and sustainability through citizens’ empowerment and co-production. Citizens’ involvement in co-planning and co-designing local transport services was found to be critical to improve service quality. Citizens’ empowerment process allows to establish a co-creating relationship among the different stakeholders who are involved in urban mobility, paving the way for their engagement in devising, implementing and assessing transportation services. Public managers should take into consideration the role of value co-creation to enhance the responsiveness of public sector organizations and to achieve increased smartness. On the one hand, a citizens’ empowerment process is required to foster their participation in service co-production; on the other hand, citizens’ involvement engenders a virtuous cycle, encouraging the latter in co-producing public services. This paper represents one of the first attempts to examine service co-production in light of the requisite variety perspective. Co-production allows to merge competing purposes by activating the citizens’ sleeping assets and by absorbing external variety through the creation of internal variety.