IT for Management: On-Demand Strategies for Performance, Growth, and Sustainability

Eleventh Edition

Turban, Pollard, Wood

Chapter 12

IT Strategy, Sourcing, and Strategic Technology Trends

Learning Objectives (1 of 5)

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IT Strategy

IT Strategy

A plan of action to create an organization’s IT capabilities for maximum and sustainable value in the organization.

Business strategy

sets the overall direction of a company

defines how a business will achieve its mission, goals, and objectives

specifies the necessary financial requirements, budgets, and resources

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IT Strategic Planning

Strategic Planning

A series of processes in which an organization selects and arranges its businesses or services to keep the organization healthy or able to function even when unexpected events disrupt one or more of its businesses, markets, products, or services.

Strategy

The plan for how a business will achieve its mission, goals, and objectives including questions such as:

What is the long-term business direction?

What is the overall plan for deploying resources?

What trade-offs are necessary?

How do we achieve competitive advantage over rivals in order to achieve or maximize profitability?

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IT Strategic Planning: Value Drivers

Enhance the value of a product or service to consumers, creating value for the company (such as advanced IT, reliability, and brand reputation).

Three general types of Business Value Drivers:

Operational Shorter-term factors

Financial Medium-term factors

Sustainability Long-term factors

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IT Strategic Plan Objectives

IT Strategies Support the Business Strategy

Four IT Strategic Plan Objectives:

Improve management’s understanding of IT opportunities and limitations

Assess current performance

Identify capacity and human resource requirements

Clarify the level of investment required

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Strategic Planning Issues

IT and Business Disconnects

Not all business leaders will work with IT to achieve success.

Corporate and IT Governance

A company can outsource the work, but not the responsibility for it.

Reactive Approaches Fail

Failure to align to real business needs

Fail to deliver value to the business

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Strategic Planning Tools: SWOT

Figure 12.2: SWOT Analysis consists of a realistic evaluation of internal strengths & weaknesses and external opportunities and threats.

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Figure 12.3: IT strategic planning process

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Levels of the Strategic Plan

Long-range IT Plan (3-5 years)

What IT should do to achieve the goals, objectives, and strategic position of the firm and how this will be achieved

The overall direction, requirements, and sourcing of resources

Medium-term IT plan

Identifies general project plans in terms of the specific requirements and sourcing of resources as well as the project portfolio

Tactical Plan (Short-range)

Details budgets and schedules for current-year projects and activities

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Strategic Plan Portfolios

Project Portfolio

Lists major resource projects that are consistent with the long-range plan.

Applications Portfolio

A list of major, approved information system projects that are also consistent with the long-range plan.

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IT Steering Committee Tasks (1 of 2)

IT Steering Committee should:

Set the direction

Links corporate strategy with the IT strategy,

Allocate scarce resources

Approves the allocation of resources for and within the information systems organization including outsourcing policy.

Make staffing decisions

Key IT personnel decisions involve a consultation and approval process made by the committee, including outsourcing decisions.

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IT Steering Committee Tasks (2 of 2)

IT Steering Committee should:

Communicate and provide feedback

Information regarding IT activities should flow freely.

Set and evaluate performance metrics

Establish performance measures for the IT department and see they are met.

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Learning Objectives (2 of 5)

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Aligning IT with Business Objectives

Figure 12.4 The Role of aligning IT strategy with business strategy to achieve organizational strategic objectives is still one of the most important key issues that challenges IT executives.

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Business-IT Alignment

Business-IT alignment

Refers to applying IT in an appropriate and timely way that is consistent with business strategies, goals and needs.

Business-IT alignment improved by focus on:

Commitment to IT planning by senior management

CIO is a member of senior management

Understanding IT and corporate planning

Shared culture and good communication

Multilevel links

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The CIO’s Role

CIO Skillset

Political savvy

Influence, leadership, and power

Relationship management

Resourcefulness

Strategic planning

Doing what it takes

Leading employees

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Porter’s Competitive Forces Model: The Five Forces

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Achieving a Competitive Advantage: Strategies for Competitive Analysis

Cost leadership Produce product/service at the lowest cost in the industry
Differentiation Offer different products, services, or product features
Niche Select a narrow scope segment (Market niche) and be the best in quality, speed, or cost in that segment

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Porter’s Value Chain Model

Figure 12.6 Porter’s Value Chain. The arrows represent the flow of goods, services, and data in an organization.

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Value Chain Support Activities

Support Activities

Applied to any or all of the primary activities which may also support each other.

Infrastructure, accounting, finance, and management

Human resource (HR) management

Technology development, and research and development (R&D)

Procurement or purchasing

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Aligning IT with Business Objectives

What are the three categories of value drivers?

Why do reactive approaches to IT investments fail?

What is the goal of IT–business alignment?

Why is IT strategic planning revisited on a regular basis?

What are the functions of a steering committee?

Describe the IT strategic planning process.

Explain how a good IT strategy can help companies gain a competitive advantage in the marketplace.

What are the five competitive forces in Porter’s Five Forces Model?

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Suggested Answers:

1. Operational (shorter-term factors that impact cash flow and the cash generation ability through increased efficiency or growth),

Financial (medium-term factors that minimize the cost of capital incurred by the company to finance operations), and

Sustainability (long-term survival factors; factors that enable a business to continue functioning consistently and optimally for a long time.)

 

2. Two of the biggest risks and concerns of top management are (1) failing to align IT to real business needs and, as a result, (2) failing to deliver value to the business. Reactive IT investments tend to be patches that rarely align with the business strategy.

 

3. Answers may vary. IT–business alignment means how closely an organization’s IT strategy is interwoven with and driving its overall business strategy. The goal of IT strategic alignment is to ensure that IS priorities, decisions, and projects are consistent with the needs of the entire business. Failure to properly align IT with the organizational strategy can result in large investments in systems that have a low payoff, or not investing in systems that potentially have a high payoff.

 

4. The business and IT strategic plans are evaluated and adjusted annually to keep pace with rapid changes in the industry. Because organizational goals change over time, it is not sufficient to develop a long-term IT strategy and not re-examine the strategy on a regular basis. For this reason, IT planning is an ongoing process. The IT planning process results in a formal IT strategy or a reassessment each year or each quarter of the existing portfolio of IT resources.

 

5. The steering committee is a team of managers and staff representing various business units that establish IT priorities and ensure the IT department is meeting the needs of the enterprise. The steering committee’s major tasks are:

Set the direction. In linking the corporate strategy with the IT strategy, planning is the key activity.

Allocate scarce resources. The committee approves the allocation of resources for and within the information systems organization. This includes outsourcing policy.

Make staffing decisions. Key IT personnel decisions involve a consultation-and-approval process made by the committee, including outsourcing decisions.

Communicate and provide feedback. Information regarding IT activities should flow freely.

Set and evaluate performance metrics. The committee should establish performance measures for the IT department and see that they are met. This includes the initiation of SLAs.

 

The success of steering committees largely depends on the establishment of IT governance, formally established statements that direct the policies regarding IT alignment with organizational goals and allocation of resources.

 

6. The entire planning process begins with the creation of a strategic business plan. The long-range IT plan, sometimes referred to as the strategic IT plan, is then based on the strategic business plan. The IT strategic plan starts with the IT vision and strategy, which defines the future concept of what IT should do to achieve the goals, objectives, and strategic position of the firm and how this will be achieved. The overall direction, requirements, and sourcing—either outsourcing or insourcing—of resources, such as infrastructure, application services, data services, security services, IT governance, and management architecture; budget; activities; and timeframes are set for three to five years into the future. The planning process continues by addressing lower-level activities with a shorter time frame.

 

The next level down is a medium-term IT plan, which identifies general project plans in terms of the specific requirements and sourcing of resources as well as the project portfolio. The project portfolio lists major resource projects, including infrastructure, application services, data services, and security services that are consistent with the long-range plan. Some companies may define their portfolio in terms of applications. The applications portfolio is a list of major, approved information system projects that are also consistent with the long-range plan. Expectations for sourcing of resources in the project or applications portfolio should be driven by the business strategy. Since some of these projects will take more than a year to complete, and others will not start in the current year, this plan extends over several years.

 

The third level is a tactical plan, which details budgets and schedules for current-year projects and activities. In reality, because of the rapid pace of change in technology and the environment, short-term plans may include major items not anticipated in the other plans.

The planning process just described is currently practiced by many organizations. Specifics of the IT planning process, of course, vary among organizations. For example, not all organizations have a high-level IT steering committee. Project priorities may be determined by the IT director, by his or her superior, by company politics, or even on a first-come, first-served basis.

 

The deliverables from the IT planning process should include the following: an evaluation of the strategic goals and directions of the organization and how IT is aligned; a new or revised IT vision and assessment of the state of the IT division; a statement of the strategies, objectives, and policies for the IT division; and the overall direction, requirements, and sourcing of resources.

7. A good IT strategy can help achieve business-IT alignment by allowing a firm to make the most of its IT investments, and increase profitability by attaining accord between its business strategies and plans. Even though firms instinctively expect benefits from IT alignment, many of them are resistant to achieving alignment. However, it can result in a competitive advantage if executed properly.

8. Porter’s five competitive forces are:

Threat of entry of new competitors

Bargaining power of suppliers

Bargaining power of customers or buyers.

Threat of substitute products or services

Competitive rivalry among existing firms in the industry

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Learning Objectives (3 of 5)

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IT Sourcing Strategies

IT Deployment Strategies

In-house development

Systems are developed or other IT work is done in-house, possibly with the help of consulting companies or vendors.

Sourcing

Onshore: sourced to consulting companies or vendors that are within the same country.

Offshoring: work sourced to other countries.

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Cloud Strategy Challenges

Cloud Complexity

Extensibility

The ability to get data into and out of the cloud service

Migration Issues

Cybersecurity, privacy, data availability, and service accessibility

Newer Challenges

Cloud integration with on-premises resources, extensibility, and reliability

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Outsourcing Challenges: Lessons Learned

Manage change by securing the commitment of senior leaders

Assess organizational readiness

Anticipate risks and formulate a plan for mitigating them

Build project management infrastructure

Create a governance mechanism

Properly define how success will be measured

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Factors Driving Outsourcing

Reasons Why Organizations Outsource IT

Generate revenue

Increase efficiency

Agile enough to respond to market changes

Enterprise can focus on core competency

Cut operational costs

More accepted IT strategy

Cloud and SaaS have been proven

Differentiation from competitors

Reduce burden on internal IT department

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Outsourcing Risks, Hidden Costs (1 of 2)

Outsourcing Risks

Shirking

The vendor deliberately underperforms while claiming full payment.

Poaching

The vendor develops a strategic application for a client and then uses it for other clients.

Opportunistic repricing

Client enters into a long-term contract with a vendor, the vendor changes financial terms at some point or overcharges for unanticipated enhancements and contract extensions.

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Outsourcing Risks, Hidden Costs (2 of 2)

Breach of contract by vendor.

Vendor fails to carry out the terms of .the agreement.

Inability of vendor to deliver as promised.

Outsourcers unable to deliver the products or services.

Vendor lock-in.

In the event that the outsourcing relationship does not go well, it can be difficult to get out of the outsourcing agreement.

Loss of Control over data.

Organization has little control over how and when their data can be accessed and by whom

Lower employee morale.

IT employees may feel devalued.

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Offshoring

Work Not Readily Offshored

Work that has not been routinized.

Work that if offshored would result in the client company losing too much control over critical operations.

Situations in which offshoring would place the client company at too great a risk to its data security, data privacy, or intellectual property and proprietary information.

Business activities that rely on an uncommon combination of specific application domain knowledge and IT knowledge in order to do the work properly.

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Five Phase Outsourcing Life Cycle

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Managing IT Vendor Relationships

Finding and Selecting a Vendor

Experience with very similar systems of similar size, scope, and requirements; experience with the ITs that are needed, integrating those ITs into the existing infrastructure and the customer’s industry.

Financial and qualified personnel stability. A vendor’s reputation impacts its stability.

Ask for “Proof of Concept” or a Trial Run

Vendor demonstration of product to see how well it works

Get Everything in Writing

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IT Sourcing and Cloud Strategy

What contributes to the complexity of a cloud strategy?

How does tactical adoption of cloud services differ from a coordinated cloud strategy?

What is onshore sourcing?

What are the major reasons for sourcing?

What types of work are not readily outsourced offshore?

When selecting a vendor, what two criteria need to be assessed?

What is the risk of putting too great an emphasis on cost when selecting or dealing with an IT vendor?

What needs to be done before signing a contract with an IT vendor?

Why would a company want to invest in strategic technologies?

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Suggested Answers:

1. While the concept of cloud is simple, an enterprise’s cloud strategy tends to be quite complex. Cloud is being adopted across more of the enterprise, but mostly in addition to on-premises systems—not as full replacements for them. Hybrid solutions create integration challenges. Cloud services—also referred to as edge services—have to integrate back to core internal systems.

 

2. Tactical adoption is a short-sighted approach, deploying cloud services incrementally, resulting in apps and services that are patched together to create end-to-end business processes.

 

3. Work or development can be sourced to con-sulting companies or vendors that are within the same country, which is referred to as onshore sourcing.

4. Enterprises choose outsourcing for several reasons:

To generate revenue

To increase efficiency

To be agile enough to respond to changes in the marketplace

To focus on core competency

To cut operational costs

Because offshoring has become a more accepted IT strategy

Because cloud computing and SaaS have proven to be effective IT strategies

To move IT investment from a capital expenditure to a recurring operational expenditure

To differentiate from competitors—while reducing the burden on the IT organization

 

5. Based on case studies, the types of work that are not readily offshored include the following:

Work that has not been routinized

Work that if offshored would result in the client company losing too much control over critical operations

Situations in which offshoring would place the client company at too great a risk to its data security, data privacy, or intellectual property and proprietary information

Business activities that rely on an uncommon combination of specific application-domain knowledge and IT knowledge in order to do the work properly.

 

6. When selecting a vendor, two criteria to assess first are experience and stability:

Experience with very similar systems of similar size, scope, and requirements. Experience with the ITs that are needed, integrating those ITs into the existing infrastructure and the customer’s industry.

Financial and qualified personnel stability. A vendor’s reputation impacts its stability.

7. Many corporate customers lose out on the potential benefit of close relationships by an overemphasis on costs instead of value. Ideally, a customer/vendor relationship is a mutually beneficial partnership, and both sides are best served by treating it as such.

 

8. Vendors often buy hardware or software from other vendors. In order to avoid problems with the primary IT vendor, check secondary suppliers as well. Ask the primary vendor how they will deliver on their promises if the secondary vendors go out of business or otherwise end their relationship.

 

Vendors may offer the option to test their products or services in a pilot study or a small portion of the business to verify that it fits the company’s needs. If the vendor relationship adds value on a small scale, then the system can be rolled out on a larger scale. If the vendor cannot meet the requirements, then the company avoids a failure.

Before entering into any service contract with an IT vendor, get a promise of service in writing. By making both parties aware of their responsibilities and when they may be held liable for failing to live up to those responsibilities, a strong SLA can help prevent many of the disruptions and dangers that can come with sourcing or migrating to the cloud. The provisions and parameters of the contract are the only protections a company has when terms are not met or the arrangement is terminated. No contract should be signed without a thorough legal review.

 

SLAs are designed to protect the service provider, not the customer, unless the customer takes an informed and active role in the provisions and parameters. There is no template SLA and each cloud solution vendor is unique. Certainly, if a vendor’s SLA is light on details, this alone may be an indicator that the vendor is light on accountability. Additionally, if a sourcing or cloud vendor refuses to improve its SLAs or negotiate vital points, then that vendor should not be considered.

9. To gain the competitive advantage they need to flourish, companies need to strategically invest in emerging strategic technology to widen their set of core competencies and help them differentiate themselves in the market, expand their existing market or move into different markets. (Section 12.5)

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Learning Objectives (4 of 5)

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Balanced Scorecard (BSC)

Typical Approach to Business: quantify past performance

Lagging Indicators

P&L, Cash Flow, Balance Sheets

Confirm what has already happened

Represent history, not ideal for managing day-to-day operations and planning

Balanced Scorecard Approach: multidimensional

Leading indicators

Predict future events to identify opportunities.

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Figure 12.8 SMART Criteria objectives should meet

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Figure 12.9 Balanced Scorecard (BSC) uses four metrics to measure performance—one financial metric and three nonfinancial metrics

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Balanced Scorecard Metrics

Balanced Approach Perspectives

Financial

Revenue, earnings, asset utilization

Customer

Market share, Brand image, price-value relationship

Business processes

Cycle times, cost per process/transaction

Innovation, learning and growth

Employee skills, IT capabilities, R&D

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Figure 12.10 : Overview of a low-cost airline’s BSC objectives, measures, targets, and actions to achieve targets

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The BSC Methodology

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Balanced Scorecard

How did the BSC approach differ from previous measurement approaches?

How does the BSC approach “balance” performance measurements?

What are the four BSC perspectives?

Give an example of each BSC metric.

How does BSC align IT strategy with business strategy?

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Suggested Answers:

1. Prior to the BSC concept, the typical business objective could be summed up simply as to make a profit. Performance metrics were based on:

P&L (profit and loss) reports: revenue, expenses, net profit

Cash flow statements: enough cash to pay its current liabilities

Balance sheets that reflected the overall status of finances at a certain date

 

These financial metrics are lagging indicators because they quantify past performance. As such, they represent historical information and are not ideal tools for managing day-to-day operations and planning.

 

What was novel about BSC in the 1990s was that it measured a company’s performance using a multidimensional approach of leading indicators as well as lagging indicators.

 

2. The BSC method is “balanced” because it does not rely solely on traditional financial measures. Instead, it balances financial measures with three forward-looking nonfinancial measures.

 

3. Financial. To succeed financially, how should we appear to our investors and shareholders?

Customer. To achieve our vision, how should we provide value to our customers?

Business processes. To satisfy our shareholders and customers, what business processes must we focus on and excel at?

Innovation, learning, and growth. To achieve our vision, how will we sustain our ability to innovate, learn, change, and improve?

4. Answers may vary.

PerspectiveExamples of Measurement Criteria

Financial • Revenue and revenue growth rates

• Earnings and cash flow

• Asset utilization

 

Customer • Market share

• Customer acquisition, retention, loyalty

• Customer relationships, satisfaction, likes, recommendations, loyalty

• Brand image, reputation

• Price–value relationship

 

Business • Cycle times, defect rate

processes • Production throughput, productivity rates

• Cost per process

• Cost per transaction

 

Innovation, • Employee skills, morale, turnover, capacity for change

learning and • IT capabilities

growth • Employee motivation

• R&D

• Percentage of revenue from new products/services

 

5. BSC can be used to translate strategic plans and mission statements into a set of objectives and performance metrics that can be quantified and measured.

BSC is used to clarify and update the strategy, align the IT strategy with the business strategy, and link strategic objectives to long-term goals and annual budgets.

The astute student may realize that the balanced scorecard can be applied to link KPIs of IT to business goals to determine the impact on the business. The focus for the assessment could be, for example, the project portfolio or the applications portfolio. The balanced scorecard can be used to assess the IT project portfolio by listing projects along the vertical dimension, and specific measures, critical to what the organization needs to track, horizontally.

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Learning Objectives (5 of 5)

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Strategic Technology Trends (1 of 2)

Gartner’s Top 10 Strategic Technology Trends (2017):

Artificial Intelligence and Machine Learning

Robots, autonomous vehicles, consumer electronics

Intelligent Apps

Virtual Personal Assistant (VPA), Virtual Customer Assistance (VCA)

Intelligent Things

Drones, smart appliances

Virtual and Augmented Reality

Immersive content in mobile, wearables, IOT

Digital Twin

Dynamic software model of a physical thing

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Strategic Technology Trends (2 of 2)

Gartner’s Top 10 Strategic Technology Trends (2017):

Blockchain and Distributed Ledgers

Peer-to-peer networked token or bitcoin chains

Conversational System

Greater cooperative interaction between devices

Mesh App and Service Architecture (MASA)

Mesh of back end services linking apps

Digital Technology Platforms

Building blocks for a digital business

Adaptive Security Architecture

New remediation tools to protect IoT

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Strategic Technology Scanning

Every organization needs to continually scan for emerging technologies to enhance IT strategy

Improvements gained can range from incremental to revolutionary

Scanning approaches include:

General Technology Search

Technology Mapping

Systems Modeling

Customer Requirements Analysis

Analysis of Specific Technologies

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Finding Strategic Technologies

Major research centers and technology conferences

COMDEX, IBM InterConnect

Google Next, Adobe Summit, HIMSS

Look for emerging technologies

Digital mesh is an expanded sets of endpoints used to access applications, gather information or interact with people, to ensure instant connection and response to build experience.

Smart devices, wearables, consumer and home electronic devices

Companies need to strategically invest in emerging technologies

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Copyright

Copyright © 2018 John Wiley & Sons, Inc.

All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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