January Catherine Crowley, IVI Managing Costs of your IT ... · - Introduction to Cost Management...
Transcript of January Catherine Crowley, IVI Managing Costs of your IT ... · - Introduction to Cost Management...
© Innovation Value Institute 2013
Managing Costs of yourIT resources
ICS lunchtime briefing 21st JanuaryCatherine Crowley, IVI
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Format for this afternoon
- Introduction to Cost Management and the IT-CMF 15 min
- Exercise 15 min
- Overview of the IT-CMF Financial CCs 25 min
- Questions and follow up 5 min
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“… the IT budgets of some organizations are a complete mystery to the businesses thatpay for them and may not be delivering commensurate value.”
Harris, Herron & Iwanicki, “The Business Value of IT,” page 15.
“Sustained cost management creates value by freeing up incremental cash that can beused to help realize organizational priorities”
James Ellis, Finance Operations Group , Accenture.
“Cost-accounting data provides the critical foundation for important strategic decisions.These decisions are too crucial to base on educated guesses. Your information needs tobe good enough to bet the company, because you're often doing just that!!”
Bart Perkins, Computerworld
“Implementing IT cost transparency is no longer optional; it’s only a matter of when.”Forrester
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Cost Management, to be a competitive weapon, has to do morethan just calculating Total Cost of Ownership and othermeasures, important as they are. Cost Management has toconnect the other capabilities of the business to produce andrealize Business Value. What is the point of cost management ifit does not help you compete in the marketplace, otherwise it’sjust recordkeeping.
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The IT Capability Maturity Framework (IT-CMF) providescomplete and comprehensive coverage of all IT capabilities in abusiness. It allows organizations to assess major strategicbands of performance. This presentation focuses on the IT CostManagement band of performance to provide participants withan understanding of how mature organizations leverage their ITCost Management functions to create business value.
The IT-CMFClic
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IVI - A Global Open-Innovation Consortium ….Clic
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Delivers increased business value from IT throughimproved IT capability
What is IT-CMF?
How is it structured?• Tools to assess current capability maturity across five maturity levels• Practices, Outcomes and Metrics at the appropriate capability level
and within the IT specific area• Shows what good looks like with best practice guidelines
What is it used for?
Enables IT capability improvement:• At enterprise level• At organizational level• At capability level• At individual level
Framework based on a structured body of knowledge across all keyaspects of IT management and delivery
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IT-CMF offers a concise management roadmapto optimize business value from IT investment
• Value-centric IT management• State-of-the-art practices and
outcomes• Benefits from IT investments
quantified and communicated• Practices and outcomes well
above industry average• IT/business interaction formalized
for all critical capabilities• Transparent investment decisions
• Delivering basic IT services• Some IT/business interactions
formalized
• No formal processes• Ad hoc management of IT
Maturity
Low
High
Initial
Basic
Intermediate
Advanced
Optimizing
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What is a Capability?
Capabilities are organizational resources that have potentialto generate value for a firm. They comprise an intricate mixof knowledge, skills, routines, technologies, and values. Afirm’s effectiveness in developing and deploying capabilities,determines its performance outcomes. Indeed, the ability tobuild and leverage new capabilities is a capability in itself,called a ‘dynamic capability’ - Paul L. Bannerman, NICTA
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IT-CMF Critical Capability Architecture
IT Leadership and GovernanceBusiness Process ManagementBusiness PlanningStrategic PlanningDemand and SupplyManagementEnterprise InformationManagement*Capacity Forecasting andPlanningRisk ManagementAccounting and AllocationOrganization Design andPlanningSourcingInnovation ManagementService Analytics andIntelligenceSustainable ICT
Managing IT like aBusiness
Funding and FinancingBudget ManagementPortfolio Planning andPrioritizationBudget Oversight andPerformance Analysis
Managing theIT Budget
Managing IT forBusiness Value
Managing theIT Capability
Enterprise ArchitectureManagementInformation SecurityManagement*Technical InfrastructureManagementPeople Asset ManagementKnowledge Asset ManagementRelationship AssetManagementResearch, Development andEngineeringSolutions DeliveryService ProvisioningUser Training ManagementUser Experience DesignProgramme and ProjectManagementSupplier ManagementCapability Assessment andManagement
ITG
BPM
BP
SP
DSM
CFP
RM
AA
ODP
SRC
IM
FF
BGM
PPP
BOP
EAM
TIM
PAM
KAM
RAM
RDE
SD
SRP
UMT
UED
PPM
SUM
CAM
TCO
BAR
PM
SAI
SICT
EIM
ISM
* Under development
Total Cost of OwnershipBenefits Assessment andRealizationPortfolio Management
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Financial Critical Capabilities
AA = Accounting &Allocation
FF = Funding & Financing
BGM = Budget Management
BOP = Budget Oversight &Performance Analysis
TCO = Total Cost ofOwnership
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Overview of Cost Management process flow
Before budget cycle After budget cycleDuring budget cycleStrategicPlanning
BusinessPlanning
Fundinglevel
Funding &Financing
Portfolio Planning & Prioritisation
Target spendingby portfolio
BudgetManagement
TCO
Accounting &Allocation
Budget Oversight& Performance
Analysis
CapacityForecasting and
Planning
Capex/Opexbudget
Performancevs. budget
Planned spendby Portfolio
Cost accounting modelCharge back model
Variance analysisIT intensity vs. Benchmark
Cost Management CCOther CC
Variance analysis
IT Leadership &Governance
Financingguidelines
Cost Data and budgetrefinements
Updates
Cost information
Note: Simplified picture, additional dependencies exists
Benefits Assessment & Realisation
Total costs of IT investments
Benefits valuation of IT investments
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Format for this afternoon
- Introduction to Cost Management and the IT-CMF 15 min
- Exercise 15 min
- Overview of the IT-CMF Financial CCs 20 min
- Questions and follow up 10 min
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Exercise - my cost management issues
- Work in groups of three
- Identify two or three cost management issues that exist in your ownorganization
- Use current and/or previous workplaces (no need to mention names!);colleagues’ anecdotes; case studies; your imagination for inspiration…
- Select someone to ‘report back’
10 MINUTES DISCUSSION
5 MINUTES REPORT BACK
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Format for this afternoon
- Introduction to Cost Management and the IT-CMF 15 min
- Exercise 15 min
- Overview of the IT-CMF Financial CCs 20 min
- Questions and follow up 10 min
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Examples of business issues related to cost management
• No clear IT to business alignment leading to lack of confidence that IT isfinancially well-managed
• Poor understanding of costs incurred and value provided by IT• Lack of transparency and objectivity in process and governance• No evidence as to what cost management practices are working well
within the organization• Identifying favourable budget trends and areas of concern• IT is viewed a cost centre in budget oversight and analysis• Need visibility and overview of current projects with the ability to realign
with strategic change• How to move the IT budget out of the vicious cycle into the virtuous cycle
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Financial Critical Capabilities
AA = Accounting &Allocation
FF = Funding & Financing
BGM = Budget Management
BOP = Budget Oversight &Performance Analysis
TCO = Total Cost ofOwnership
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Overview of Accounting and Allocation
Definition
The policies, processes and tools used forcalculating and distributing the costs of IT.A range of methods such as chargeback,transfer pricing, and allocation are used tomanage the cost of IT services and toinfluence the demand for IT services withinan organisation.
• Accounting platform capabilities• Policy for the allocation and chargeback of IT costs• Agreements on which IT services are covered by
the Policy for allocating and chargeback of IT costs
• Business Planning of IT funding level and targetspending by IT portfolio (refer to BP).
• Oversight of IT finance and overall budgetperformance (refer to BOP)
• Variance analysis of IT intensity compared to abenchmark (refer to BGM)
• The source and allocation of funds (refer to FF)
What’s in scope What’s out of scope
Usage of Accounting Model
Accounting & AllocationGovernance
Cost Coverage
Quality of Accounting Model
Transparency of AccountingModel
Deployment
Model
Policies, Processes, Tools
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Overview of Funding & FinancingDefinition
Company-wide understanding of how, whyand from where IT is funded. Determinesthe scale, scope and sources of fundingfor IT and assign financial resources to ITactivities. Establishes a balance betweenCapex and Opex to optimise ITeffectiveness
What’s in scope What’s out of scope
• Day-to day budget management• IT Financial performance management• Total Cost of Ownership
• Funding processes, sources and alignment withstrategic goals
• Leadership understanding of IT funding andfinancing issues and options
• Allocation of funds• Portfolio planning interface• Funding and financing performance
FundingSources
FundingLevels Allocation
Governance
Communication
Decision-making process
Performance Management
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Overview of Budget Management
Definition
Active, on-going, company-wide process of reviewingand adjusting the IT spending plan to ensure thatallocated budgets
• Are being spent effectively• Remain within budget parameters• Are in-line with the governance model
The goal of BGM is improved cost predictability for ITservices.
What’s in scope What’s out of scope
PlanningScope
AlignmentProcess
GovernanceBudget Governance
Accountability
PerformanceManagement
Active MonitoringVariance Management
Predictability
• Portfolio Management [see Portfolio Management]• Multi-year trending of projects and budget categories
[see Budget Oversight and Performance Analysis]• Total Cost of Ownership Management Cost Analysis
[see Total Cost of Ownership ]• Strategic planning process to set business/IT
capability development [see Strategic Planning]• Funding & financing prioritisation [see Funding and
Financing]• Deciding on Costs and Revenue allocations [see
Accounting and Allocation]
• Budget planning• Establishing an effective budget process• Assigning budget accountability• Day to day tactical monitoring of budgets• Month to month budget predictability and variance
management
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Overview of Budget Oversight and PerformanceAnalysis(BOP)
Definition
The periodic offline comparison of ITspending versus the IT plan, whichprovides a stimulus for re-profiling orreprioritisation of budgets. BOP ensuresthat budget targets are being met and itimproves the quality of future forecasts.
• Multi-year tracking and trending of IT projects and ITbudget categories
• Strategic reviewing of budgets versus actual spend• Rebalancing and reprioritisation of budgets• Deciding on future IT funding levels and allocation• Communicating to key business stakeholders on IT
budget performance metrics
• Day to day monitoring of budgets (refer to BudgetManagement)
• Managing the portfolio (refer to Portfolio Planning andPrioritisation)
• Managing TCO costs analysis (refer to Total Cost ofOwnership)
• Establishing business/IT capability development (refer toStrategic Planning)
• Prioritising of funding and financing (refer to Fundingand Financing)
What’s in scope What’s out of scope
BudgetAlignment
andCommunication
AnalysisScope,Granularity, andSophistication
MetricsReporting
Impact onPlanning
Tools andProcesses
Impact onCost
Management
7 Dimensions
DataConsistency
Alignment
Impact and Value
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Overview of Total Cost of Ownership
Definition
Total Cost of Ownership tracks, compares,and controls all direct and indirect costs(including people, processes andmethodologies) associated with IT assets(infrastructure and systems) and servicesin order to maximise value. Accurateunderstanding of current and future TCOover the full IT asset and service lifecycleleads to more informed budgeting andportfolio management decisions.
• Cost calculation (Acquisition, Operating, Control,End of life decision making)
• A normalised approach to IT asset and servicescost comparison
• IT planning using TCO• Communicating use and benefit of TCO
• Refinement of IT spending plan (based oncalculated TCO) (BGM)
• Allocation/chargeback of direct and indirect costs(AA)
What’s in scopeWhat’s out of scope
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Assessment Focus – where to start?All assessment types can be tailored to meet an individual organization's needs
Executiveassessment
Industrybenchmark
‘Cluster’assessment
DescriptionDescription ObjectivesObjectives
• High-level view across IT• Online survey plus focused
interviews
• Rapid overview of current and target maturity across ITand what is important
• Identification of areas for further focus and investigationfrom over or under investment
• Subset of 3-6 capabilitieschosen by industry players asfocus areas for the industry
• On line surveys plus interviewsplus workshops
• Aims to identify capability gapsto target increased maturity
• Assessment of capabilities on chosen issues• Understanding of reasons for shortfall compared to target
maturity• Transparency on capabilities and best practices of selected
peers
• Package of core capabilitiesdesigned to address typicalbusiness issues
• Online survey plus interviews• Assessment process
accelerated by consolidation ofquestionnaires and interviews
• Assessment of capabilities in processes around a specifictopic
• Shows dependencies between capabilities• Overarching and capability-specific practices to reach
desired maturity level
• Deep dive of a single criticalcapability when interest is in aspecific area
• Online survey plus IT andbusiness interviews
• Deep understanding of capabilities and maturity in anindividual critical capability and the building blocks withinit
• Identification of different stakeholder views prior toimprovement planning
• Specific recommendations on how to reach target maturity
CriticalCapabilityassessment
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Assessing your Capability Maturity
Steps:
• Determine importance to Business strategy - CC Cluster Importance• Determine where you are – Current CC Cluster Maturity• Determine where you want to be – Target CC Cluster Maturity• Review Practices, questionnaire maturity anchor statements at the Target
maturity level and use your business knowledge to create an action plan foryour organization
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Examples of “Clusters” of CC’s
Source:
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Cost Management CC’s Cluster
Source:
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Cost Management Financial CC Value Proposition
CC Value
• Provides full understanding of total cost to inform accurate budgetdecisions, and enable tracking of actual against forecast
• Provides necessary input on total costs of IT investments to enablebusiness case evaluations
• Define allocation mechanisms of IT cost to customersCreate / increase cost transparency
• Gain cross-project budget oversight• Manage future costs by budget planning
• Provide means to steer projects within defined budget
• Determines the allocation of appropriate funds of IT portfolioinitiatives, and tracking of funds used against these initiatives
TCO
AA
BOP
Establish cost transparency and a deep understanding of unit cost andcost leversDrive asset/service productivityPlan budgets and manage to meet budget expectations
BGM
FF
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Assessment outputs include assessment results andrecommendations to enable improvement in maturity
IT-CMFOutputs
• Self-assessment of maturity level for each capability• Gaps between current and aspired maturity• Gaps to cross-industry average
• Key strengths and recentimprovements
• Areas for enhancement and potentialroad-blocks to increasing maturity
Sum
mar
y Ex
ampl
es
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Managing ITlike a business
Managing theIT capability
Managing ITfor businessvalue
Managing theIT budget
1
2
3
4
5
ITGBPMBP DSMCFP RMAA ODPIM SAI BGM PPPBOP EAM UTMPAMKAM RAM RDE SD SRP TIM UEDPPMCAM BAR TCOPM
Risk of competitivedisadvantage due tobelow-average maturity?
Risk of competitivedisadvantage due toover-investment?
Industry Average
The company’scurrentmaturity level
SICT SP FF
An objective maturity assessment of IT capability
This assessment example demonstrates areas ofunder or over investment
EIM SRC SUMISM
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Illustrative Example: TCO at Coca Cola Enterprise
Overview: Coca Cola Enterprise, TCO case study
Description:• Coca Cola has grown exponentially throughaggressive acquisitions resulting in a veryheterogeneous organisation with multiple, and oftenduplicated, tools and processes
Action taken:• Corporate decided to implement a TCO approachfor major cost buckets• Key element of driving TCO down wasimplementing information gathering systems to "beable to keep the environment at an optimal state"
Impact:• Through a multi-tiered approach costs were drivendown at several major processes, e.g. printer HWcosts decreased by 10% and printer supplier costsby 17%
Key Learning:• "Keeping TCO low is about keeping theenvironment at an optimal state based on currentbusiness requirements. You can’t do that effectivelyunless you have accurate and timely information.” –Coca Cola Program Manager
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Illustrative Example: Integrating IT TCO with FinanceDepartment
Overview: Integrating IT TCO with finance department
Description:• TCO calculation performed offline / manually in the IT organisation.• TCO data was only updated at the 'last minute' in preparation for budgetreviews – TCO data wasn’t reviewed or utilised at any other time• Often at budget reviews, the TCO information presented was challenged bythe business as it did not agree to the recorded/published budgets andfinancials
Action taken:• The IT organisation liaised with the finance organisation as much of therequired data already existed in finance systems, e.g. IT started using std.financial reports to populate TCO model and keep the model data 'live'
Impact:• TCO model was fully adopted as a strategic, on-going monitoring tool, rather thanbeing seen as an admin drain and a pre-budget meeting exercise• By using reports from a single system the data was robust and wasn’t challengedas being inaccurate at budget meetings• Focus on budget reviews moved to longer term strategic performance, rather thantrying to understand the TCO inaccuracies• Interaction while updating the TCO model between IT and finance forged a closerworking relationship, leading to a more collaborative ‘team’ approach, duplicateinformation sources, duplicate effort and unnecessary admin was eradicated
Key Learning:Integrating IT TCO with financedepartment decreases workload andincreases usability of measure
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TCO Measure used to Focus IT Development Activities
Overview:TCO measure used to focus IT development activities
Description:• IT budget was allocated inefficiently and ineffectively as there was noclear measure of the effectiveness of spending• Often, senior managers 'pet 'projects received on-going funding at theexpense of other more strategic initiatives leading to unrest within the ITorganisation and lower morale, as delivery of results was expected inunder-funded areas
Action taken:• IT process changed, dictating that the allocation of initial funding and on-going funding required the completion of a standard business casedocument. One of the main elements was the completion of a TCO modelto measure both the effectiveness of spending, and to justify on-goingfunding
Impact:• 'Pet' projects didn't stand up to scrutiny of TCO model, therefore fundingwas withdrawn• Budget was re-allocated to fund the correct strategic initiatives, based ona recognised and standard TCO model• General improvement in IT staff morale as the funding and budgetingmodel was viewed as being much ‘fairer’ than in the past.
Key Learning:TCO is an effective lever to increaseobjectivity of investment decisions
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Illustrative Example: Transparency in IT Cost Allocation
Description:• Large bank operated a distributed IT model in which eachBU managed their own IT budget and investment portfolio.Resulted in multiple systems with duplicated functionalityand limited insight into IT value
Action taken:• Key to new IT management approach is cost transparency.Criteria included:
• IT staff included in the BU headcount• Established infrastructure service charges (based
on cost drivers and service levels)• Data centre charge-back based on BU usage
Impact:• Increase CIO awareness of individual projects ability todeliver business value
Key Learning:• CIOs must drive business sponsors to own theirtechnology portfolios
Overview: Transparency in IT Cost AllocationOverview: Transparency in IT Cost Allocation
Key Learning:CIOs must drive businesssponsors to own theirtechnology portfolios
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Raising Financing through an Innovative approach
Overview: Raising Financing through an Innovative approach
Description:• Trampoline Systems is an award-winning enterprise software vendor
based in London (UK). It needed to raise a total of £1 million to fundthe rapid commercialisation of its "Sonar" software
• The global venture capital industry was shrinking and there was alsoa shift to lower risk ventures, so that funding for expansion becamedifficult to raise through the normal venture capital source.
Action taken:• Trampoline pioneered an unconventional approach to finance its
growth. Instead of raising money from venture capital firmsTrampoline is using a technique called “crowdfunding”, raisingsmaller stakes from a community of smart private investors.Trampoline has worked closely with legal advisors to ensure itscrowdfunding process complies with Financial Services Authority(FSA) regulations.
Impact:• In 2009 Trampoline became the world’s first technology business to
raise finance through equity crowdfunding. The company announceda programme to raise a total of £1 million spread over four rounds.The first round of £260,000 was completed in October 2009 and asecond round of £350,000 opened in August 2010.
Key Learning:Do not limit your funding horizon -consider alternative funding options
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Maintaining One Version of the Budget Truth
Situation:• Sufficient low-level budget oversight is needed to ensurethat high-level changes to budget numbers can actually berealised on the ground. For example, using up all availablebudget funds to maximize the number of projects will notwork if the project estimates do not include all costs (suchas infrastructure or management costs).
Action taken:• Budget controllers in the business, the Finance Dept. andIT must meet regularly to discuss the assumptions behindthe numbers that appear in the budgets and the reports ofactuals.
Impact:• Having only one version of the true budget and actuals isnot easy but it makes for better planning, reporting anddecision-making.
Key Learning:• One of the budget teams (Business, Financeor IT) must be accountable for the masternumbers. Finance is the best place for thisrole.• Regular and frequent verification of dataconsistency is essential.
The key success factor is Communication –the teams must seek out, discuss andinvestigate discrepancies not fear and ignoreor hide them.
Overview: Maintaining One Version of Budget Truth
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Benefits of the IT-CMF• Leverages the collective intelligence of the Consortium
plus industry & academic researchDevelopment
• IT-CMF allows the integration of existing frameworks/standards into a meta-level architecture to provide anintegrated & holistic framework
Integrated
• IT-CMF allows measurement of improvement against abaseline using standard assessment toolsAssessment
• IT-CMF provides benchmarking against peersBenchmarking
• IT-CMF provides prioritization & improvementrecommendations for 35 critical process areasRecommend
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IVI Activities
Events & Training• Bi-monthly webinars on key topics of interest• Presentations of IT-CMF experience, latest IVI research, artefacts,
education• 2 Annual IVI Summits - Autumn[Ireland] and Spring[US]• Public training courses at NUIM
Opportunities for Involvement• Membership at various levels• All IVI events are free of charge• Workgroup participation• Validation Workshops• Focus Groups for research topic
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Q&A
IT-CMF Cost Management – a Value FocusClic
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Want to know more?
- Further information available from:- Catherine Crowley, Research Fellow
Innovation Value InstituteTel: +353-1-708- [email protected]
- IM Quick Scan Cards- IT-CMF materials
- IVI/ICS Breakfast and Lunchtime Briefings
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IVI Case Studies
Greencore - Innovative approach to capability improvement using IT-CMF
Intel – Addressing the challenge of reforming from a reactive controls-focusedteam to a proactive customer service focused organization
HIMSS, Intel and IVI - Leveraging IT Capabilities to accelerate business valueimpact from electronic medical record adoption
Mainstream Renewable Power – Cloud readiness assessment
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