The workspace input parameter isn't supported with a GP Service (as a parameter). We do support "strings" though as you pointed out.At 10.1 we map the unsupported parameter to either string (user defined) or hardcoded it (constant).It sounds like you're consuming the Service inside Desktop? When you open the tool dialog inside ArcMap you just have a string box to put a path in. I can't envision another way around this as the Service now has STRING as input. You could write a little script tool and distribute that to your Desktop users. The tool would take a folder as input and pass the string representation of that to the Service. Or if you're using a web application that you've built - you can build in a file open dialog and just get the value of that and pass it to the service.
Desktop has the ability to send the file to the Server, and the service with a few lines of Python code could unzip the contents of the file to a local directory, perform some operations, then zip up the output.
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