Innovation Adoption in Large Corporates_AIIA_2012

Innovation Adoption in Large Corporates_AIIA_2012

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  Finding Fertile Ground 1 Nov2012 Innovation adoption in Financial Services A white-paper prepared for the AIIA Financial Services Innovation Group by Patrick Crooks and Dr Khimji Vaghjiani
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  FINDING FERTILE GROUND AIIAFinancial Services Thought Leadership Paper: FAST INNOVATION 1 Nov 2012 Authored By Patrick Crooks Commerce in Motion Editorial Contributors Khimji Vaghjiani Charles Lindop Chair AIIA FSIG Carlisle Partners We would like to express our deep appreciation to the number of banks, industry leaders, vendors and entrepreneurs who kindly contributed to this paper 1 Innovation adoption: Finding Fertile Ground
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  Planting now forthe future The current digital innovation and entrepreneurship upsurge in NSW could not have been better timed, as Australia struggles to diversify away from mining as a source of economic wealth in cooling global resources markets. The innovation community is thriving, from two people start-ups through to innovation within the largest IT vendors. Financial Services accounted for 11 per cent of GDP in Australia in 2001 1 and this sector is thirsting for innovation. As new technologies and opportunities sprout, time frames shrink, and new innovation models emerge; smart companies are looking at how to look beyond their corporate boundaries for innovation. The reality, however, is that innovation involves risk and engaging with external innovators, possibly emerging companies, is even riskier. At times, innovators find it easier to secure customers overseas before most Australian institutions will take a risk at adopting new technologies. FINDING FERTILE GROUND 2 Through interviews with financial services companies and innovators, we have explored the challenges faced by large companies in adopting external innovation. This paper details some ofthefindings,andhopestooffersomeinsightstoassistinthegrowthoftheFintechinnovation sector in Australia. “What a complex organisation -how many more people will I have to meet to make this sale?” VENDOR RISKS..? Management / shareholders Organisation IP, Contracts Investments Project track record Risk Management Skills availability Change control procedures Reference sites Technology roadmap Strategic fit Security Financial sustainability Humsan Resources IT RISKS for BUYER...? Total Cost of Ownership Cash-flow planning Cultural misfit Revolving doors Access to core banking IP – will they steal it? Time lags Scrutiny Burn Rate Documentation Guarantees “IfonlyIcouldhave met him when I was designing a solution, not just when it was finished!” “Why don’t they just tell me what they want? 1 Australian Government Benchmark Report 2011
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  The “Collaboration” Leak TheStartup Genome Project is a global project which has tracked 84, 000 start-ups to date, along a number of metrics. The project has found that success rates increase dramatically when innovators learn through direct customer engagement, and change direction as a result ofthoselearnings.Referredtoasapivot–theprocessentailstestingandretestinghypotheses directly with the customer, and innovating iteratively through validation cycles. They have reported that those “that pivot once or twice raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all”. These lessons can be applied to any innovators, whether in a start-up or as part of an innovating company. The above research has shown beyond a doubt that the most successful innovators work extremely closely with customers through an iterative product design process. Only once the problem and the customer are fully understood do great innovators embark on finding and testing solutions- together. The leak occurs when customers expect vendors to arrive with a fully completed and tested product – thereby missing one of the most critical opportunities in creating great innovations. FINDING FERTILE GROUND 3 2 NICTA has developed an extensive mindmap of the innovation community as a shared resource for the innovation community to own and self-report on. http://www.mindmeister.com/108579446/australian-tech-ecosystem <http://www.mindmeister.com/108579446/australian-tech-ecosystem> IP CREATION Corporate R&D Collaboration with corporates THE INNOVATION PROCESS Innovation communities Success stories Government and Industry bodies Press and Info hubs Global connections COMMECIALISATION Global connections Press and Info hubs Finding the first adopter Collaboration with corporates Early adopters in Australia THE INNOVATION PIPELINE A recent mapping of the Innovation Ecosystem by NICTA 2 across nine parameters shows that the innovation community in Australia is robust and growing. Through interviews with financial services’ companies and innovators we have explored the challenges faced by vendors and financial services’ customers in adopting external innovation. Cross-mapping NICTA’s ecosystem map and our findings, we have found that although the innovation pipeline seems to be growing from strength to strength there are “leaks” both at thebeginningoftheprocess(ideation),andattheendoftheprocess(adoption).Thesefindings are significant. THE INNOVATION PIPELINE IS GENERALLY HEALTHY, BUT THERE ARE LEAKS LEAKS IN THE INNOVATION PROCESS
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  Caution becomes evenmore critical when dealing with what APRA (the Australian Prudential Regulatory Authority) defines as “material business activities 3”, which need an extra level of diligence and include aspects such as: 1 The financial and operational impact and the impact on reputation of a failure of the service provider to perform over a given period of time, 2 Potential losses to the regulated institution’s customers and other affected parties in the event of a service provider failure, 3 The degree of difficulty, including the time taken, in finding an alternative service provider or bringing the business activity in-house. In order to manage the risk of procuring new technologies, companies need to perform a due diligence on vendors and their new technologies. To give some appreciation for the scale of a thorough due diligence, it is useful to look at the attempt by US-based banks and audit firms to create a “standardized information gathering” (SIG 4 ) questionnaire for vendor assessment: they ended up with 1300 questions spread across 15 categories. And this was before they actually started assessing the actual technologies. Theimplicationisthatitisextremelytimeconsumingforafinancialservicescompanytothoroughly evaluate new vendors and untested technologies, especially when using traditional approaches or when the adoption of new innovations has not been verified elsewhere. Often Australian companies, in particular, look for success of an innovation in an overseas market, typically in Europe or the US, rather than being on the “bleeding edge” themselves. Innovators themselves have a myriad of challenges and trade offs that they need to manage: - Using unstructured iterative design thinking versus more traditional “waterfall” approaches; - Being fiscally lean, yet being big enough to look strong and stable; - Staying small enough to avoid dilution, yet building a strong balance sheet; - Projectingtheimageofbeingabletoprovidewhatthefinancialinstitutioncannotdointernally; - Being able to demonstrate why they offer a better solution than global competitors; - Stabilityoftheinnovatorandlong-termstayingpower–oneofthemajorfearfactorsamongst large financial institutions. FINDING FERTILE GROUND 4 3 APRA Prudential standard CPS231: Outsourcing 4 http://sharedassessments.org/about/ The “Adoption Leak” The early adopter “leak” is one that is found whenever a vendor attempts unsuccessfully to All organisations have an inherent tension between the need to embrace innovation, and the need to drive profitability and manage risk. In dealing with customers and regulators, banks are hardlyrewardedforrisk-taking–infacttheyareexpectedtoalwaysfavourstabilityoverinnovation while meeting quarterly targets
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  What models havebeen used in adopting External Innovations? Ultimately, the responsibility for commercialisation of any new technology rests with the innovator. However, as a community looking to grow collectively, corporates must share some of the responsibility (and will be beneficiaries) in assisting innovators as far as possible in order to also grow the ICT sector. Companies have a variety of options when looking to external innovation options. There is always a tension in companies in how to manage innovation horizons with the core businesses. Leaders need to structure organisations so that they can manage the conflicting goals, KPI's, cultures, HR and processes required with innovation. To build ambidextrous organisations they need to balance type 1 individuals (who fear failure) and type 2 individuals (who fear missing opportunities). Research at Stanford University shows that organisations that cycle individuals through multiple departments, and smaller organisations, exhibit more type 2 behaviour. Internal Approach The internal approaches comprise the more traditional approaches such as tendering for and licensing of technologies. The so-called “skunk-works” creates an internal environment that is generally free from red tape and cross-functional constraints allowing for a high degree of experimentation and innovation. Though the‘skunk-works’approachwassuccessfullyusedinAustralianbanksintheearlyinternetandmobilebanking days of the early 2000’s, these were often under the radar of senior management. They would surface to the business units and senior executives only if the innovation proved successful. This modus operandi existed informally because senior management often did not understand the technological innovations link to business objectives, and hence placed less emphasis on this art. External Approach Thecaseforexternalinnovationisclear.Leadingresearchshowstheidealenvironmentforinnovationincludes the following: recombination of existing innovations from different industries, weighting teams with 80% optimists, creating space where "creative abrasion" is encouraged, mixing teams with a mixture of naive and expert people. External collaboration assists in providing some of these core ingredients. External approaches include a large move to innovation funds (such as Amex’s $100m fund), innovation programs(SuchastheANZ/InnovyzStartpartnershipandAMP’sAMPlifyinnovationfestival).Theseapproaches allow organisations to take a “real option” in early stage innovations and to provide entrepreneurs with much needed access to the larger corporate engine. In the early 2000’s, all five of the large Australian banks had venture funds and, often based on the US examples of Citibank, these units were closed shortly after the internet bubble. NAB, had o2e, CBA had ComVentures, ANZ, ANZ Ventures and WBC, the Accelerator. While these initiatives resulted in mixed success, banks found it hard to continue exciting senior management of such expenses that when the impact on the top line was difficult to measure. FINDING FERTILE GROUND 5 Tender License technology Hire contractors Skunkworks Replicate API Approach Sandboxing Collaborativeideation White labeling Co-venturing INTERNAL COLLABORATIVE EXTERNAL APPROACHES TO INNOVATION ENGAGEMENTS Sponsor“Hackathons” Ideas festivals Innovations funds 5 In 2012, The Harvard Business Review <http://en.wikipedia.org/wiki/The_Harvard_Business_Review> named Blank one of 12 Masters of Innovation. He lectures at Haas, University of California, and Stanford, and has founded eight successful startups.
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  There is aninteresting area in the middle of internal and external approaches to engagement which,allowsfordeepercollaborationbetweenexternalprovidersandtraditionalinternalinnovation. The following are examples of collaborative approaches: 1 CBA have scored an innovation trifecta by co-venturing with Wincor Nixdorf along with IDEO for ideation, resulting in the soon to be released Pi terminal which allows for third party developers to build Android applications onto a terminal using an approved API. 2 AnotherlargeAustralianbanklicensedanoverseassocialbankingplatformforuseinasandbox environment – studying the technology and business processes so that the interesting parts could be replicated elsewhere in the bank without having to take on supplier risk. 3 A large US bank has embraced white labeling in order to allow third parties to put their own brand at risk instead that of the bank. The bank provides the technology and support and the partners innovate products and processes using supplied API. 4 The author co-founded a successful company that had a co-innovat ion model whereby technologies were jointly created and implemented inside a bank, and then productised and sold to other banks. The solutions Plugging the “Collaboration” Leak The world is becoming more collaborative. The world’s most extensive encyclopedia has been written by thousands of unpaid anonymous collaborators throughout the world. Technologists commonly share source code, open up interfaces to allow for collaboration, and even IP ownership has seen a shift to a creative commons model. Corporates know that collaboration is needed more than ever to harness the ever-increasing pool of knowledge, talent, energy and ideas that move freely when boundaries are removed. We were fortunate to interview Steven Blank 5 for this paper. His simple advice: Go to the top. In his experience, companies can only adopt an open culture of innovation if the CEO wants it and drives it. We found this to hold true in mapping out the “epicentre” in companies we believe to be leaders – it starts at the top. One of the reasons for this is that employees driving innovation require buy-in from the rest of the organisation to execute an idea. FINDING FERTILE GROUND 6 5 In 2012, The Harvard Business Review <http://en.wikipedia.org/wiki/The_Harvard_Business_Review> named Blank one of 12 Masters of Innovation. He lectures at Haas, University of California, and Stanford, and has founded eight successful startups.
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  Plugging the “Adoption”Leak The adoption leak is extremely frustrating for innovators. Without a sale, new clients and investors remain skeptical, and with long sales cycles come the ultimate nightmare – potentially fatal cash burn rates. Part of the solution lies simply in hard work. As one very senior vendor representative put it: “Thereisnosilverbullethere...itisbasically,…allabouthardwork,constantclientengagement, pavement walking, getting to the right person, establishing inte rest, really playing the long game, understanding internal politics, battling enterprise IT who in the banks will always want to do it themselves, creating advocacy, getting reference ability, finding that first 'client' willing to pay somethingandthendoingitalloveragain. Onethingiscertain,allofthismakesforaconsiderable investment, regardless of outcome.” One industry leader was fairly unsympathetic to the plight of vendors, saying that sales training isstronglylackingintheinnovationcommunity,andthattheyneedtobecomemoresophisticated in order to succeed. Geoffrey Moore (Author of Crossing the Chasm) along with Paul Wiefels has triedtoofferastructuredapproachbyseparatingearlyadoptersandpragmatists,andhighlighting that the two sales approaches are fundamentally different. In our interviews with financial institutions, we were consistently told that even though they understandthebenefitsofco-innovation,itisextremelydifficultforthemto“openupthekimono” to outsiders. FINDING FERTILE GROUND 7 “THE COLLABORATION LEAK” Financial services companies are reluctant to open up about their problems,makingcustomer-centric innovation difficult. FINANCIAL INSTITUTION’S RESPONSES Because of the highly secure and regulated environment, it is unlikely that banks will ever fully open up to outsiders with whom they have no relationship. Potential Solutions based on case studies and discussions 1 Financial Institutions said that they were far more likely to open up to companies with which they have an existing relationship. “Start with a small project” said one large bank, “once you getasecuritypassandminglewithusinthecanteen,youarefarmorelikelytobuildrelationships and see real needs.” 2 Employ staff or advisors who have first hand knowledge of the problem you are trying to solve. Many successful start-ups had ex staff members, consultants, or contractors who know the client intimately. 3 Respond to request for proposals by creating a “proof of concept” system that could assist you in getting to the next phase of discussions. 4 Partner with someone who already has a supplier relationship and compliments your own offering. 5 When dealing with customer-centric innovations, go directly to the customer to understand problems and needs.
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  FINDING FERTILE GROUND Disruptive technology impactingentire value chain Needs to change core system Needs to dislodge an existing system Client does not have early adopter culture Culturalm isfit Approach lacks professionalism FERTILE GROUND FOR NEW TECHNOLOGY UNLIKELY TO SUCCEED Change approach or model FERTILE GROUND Watch for the weeds! FERTILE, BUT BIG BARRIERS TO BE OVERCOME Prepare for the long haul - Solution does not uniquely help a client achieve their strategy or remove a pain - No demonstrable business case for client - Vendor is unable to offer a way to manage continuity of service if their business fails - Solutionisaconceptonly,notbackedbyreference sites or credible leadership with a track record 8 Needs to change core system - Customer has pain that only you can fix - Solution sponsored by a senior client executives - Client shows top down innovative leadership, an early adopter - Smaller companies un-serviced by established vendors - New requirements (like mobile or NFC) where no other reference sites exist globally - Implementation contained to a single department or team INFERTILE GROUND... FERTILE GROUND - Innovation is in a support or niche function rather than in primary business Weed
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  FINDING FERTILE GROUND 9 EARLYADOPTER PATHWAY Is your innovation: - Revolutionary or strategic? - Visionary, but not yet completed - So new it has no reference sites Focus on prospects that are: Intuitive Seek revolutionary advances Contrarian Self referencing Risk taking Motivated by future opportunities Seeks what is possible Seeks the best technology Approach: Ensure strong executive sponsorship,asruleswillprobably need to be broken! Focus on selling: - A powerful vision, providing dramatic competitive advantage - Excellence in iterative innovation - Flexibility in approach PRAGMATIST PATHWAY Is your innovation: - Evolutionary? - Built, tried and tested - Has reference sites Focus on prospects that are: Analytic Seekingevolutionaryadvances Referencing others perceived as similar Motivated by current problems Pursue what is probable Seeking the safest solution or vendor Approach: Ensureyoutickalloftheboxes on the technology and company risk assessment. Focus on selling: - Product leadership - De-risking all key project elements - Delivery certainty AN APPROACH TO SELLING IN AMONG/FOR EARLY ADOPTERS Adapted from Geoffrey Moore’s “Crossing the Chasm”
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  POTENTIAL SOLUTIONS BASEDON CASE STUDIES AND DISCUSSIONS 1 Alwaysselldirectlyintothelinemanagerthatneedsyoursolutionthemost.Allrespondents said that going through technology or procurement was most difficult. 2 Consider selling into a smaller company first, potentially a subsidiary of a larger organisation (for example Bank of Melbourne as a subsidiary of Westpac). Alternatively, sell into a smaller department first. 3 Build strong relationships with line management (most companies we spoke to said that line management are the ones who really drive a purchase). If needed, appoint someone senior with deep relationships to your advisory board to facilitate access and trust, or work with intermediaries. 4 Ensure you solve a problem that nobody else can. This, above most other things, will position you for a sale. 5 Pace yourself. Ensure that you know what is required of you to become a vendor and start preparing your responses well ahead of time. At worst, you will be forced to ensure that you have the basics in place for yourself and your next client. 6 Be creative and flexible. As one bank said: “When it comes to contracting, some organisations fight over intellectual property rights and other contractual terms”. Another bank source highlighted that they had chosen a smaller vendor because of the speed of design iterations (“a code drop a week”). Flexibility may be a way to shorten cycle times and outmanoeuvre the competition 6. 7 Ensure continuity of service by allowing the corporate to have some form of “step-in” rights so that they can minimise vendor risk by taking over your staff and IP if your company fails. 8 Consider getting endorsements from players such as Gartner, other vendors, or industry leaders. 9 Never compete primarily on price. It makes you looks desperate and unsustainable. HOW CAN FINANCIAL SERVICES COMPANIES HELP? It would help immensely if Financial Services organisations could provide more transparency to vendors around two areas: (i) What their procurement and due diligence process entails, and (ii) Who the main contact points are within banks to introduce new innovations. Once a sale has been made, shorter payment cycles will assist vendors in managing cash flow. FINDING FERTILE GROUND 10 ISSUE #2: “THE ADOPTION LEAK” Thesalesprocessislong,involvestoomany touch points, and drains a lot of cash. Documentationrequirementsareonerous. FINANCIAL INSTITUTION’S RESPONSES Financial institutions are very large organisations, and often complex to navigate from the inside as well. 6 As a warning: Banks appreciate consistency. Being flexible should not be confused with seeming undisciplined or erratic.
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  This paper hasoutlined the innovation collaboration opportunities and challenges currently being observed in Australia and worldwide. It attempts to highlight the issues between innovation and risk, between the need to continue the innovation process, while maintaining a balance between the need to grow the existing business. A number of processes are provided for consideration for both innovators and end users of innovations. Further a few thoughts for future consideration are provided below. It is hoped that from these additional thoughts, innovators and end user financial organizations will collaborate more in areas of innovation bringing together ideas and users. We offer two models models which may help innovators succeed. The first, based on the work of Geoffrey Moore and Paul Wiefels, helps innovators understand which kind of clients to target, and the approach to take. It also helps highlight that very few financial services institutions can truly be called early adopters when their definition is used. The second model provided shows where fertile ground may exist - helping innovators understand where the fertile ground is. To resolve these complex and important issues will require a lot more collaboration from all industry participants: 1. The innovation community is trying to resolve the “Collaboration” leak, from the bottom up: a. A leading Sydney incubator is trying to work more closely with corporates on the up- front innovation to through the creation of mechanisms for open innovation. This approach aims to bring the user community closer to the innovator talent pool and ensures the user requirements are designed in. b. A major university innovation school is educating and collaborating with companies from a view to exploring game-changing innovations through their design thinking and iterative design approach. c. The AIIA Innovation SIG is working with external entities such as Pushstart to create 2. Internal innovation typically stays internal to an organisation. If NSW and Australia are to truly build growth through innovation, the Financial Services industry needs to assist by being more open to external innovation. Only then can innovations be productised and exported to other industries and markets. The innovation community has asked the Financial Services Industry to help by: a. Leading open innovation from the top down. As one person said - it's no co-incidence that the innovation bottleneck is at the top of the bottle. b. Being more transparent about their preferred process for interacting with innovators. We have found in our research that almost no banks have clearly defined pathways made known to external innovators, or publicly known contact points for innovation. c. Engaging the innovation community more, making them aware of challenges that need solving where this is possible (for example on non-core systems issues, or giving a part of a bigger problem that needs solving). This could be through Hackathons, open innovation forums, or financial innovator "bootcamps" d. Trying to use local external talent. Often large financial institutions are closed to innovations until they are widely used by other organizations, particularly overseas. Innovators need access to innovative and free thinking minds to help design the next banking innovation. Could the ‘Open Innovation” model be adopted for a wider and more accepted position in shared innovation to bring diverse ideas and approaches? FINDING FERTILE GROUND 11 CONCLUSION mentoring opportunities for startups. In particular, they are facilitating events where entrepreneurs can interact with corporate buyers to refine their value propositions and identify improvements in their value proposition.
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  3. The AIIAplans to follow this paper up with a second paper looking at which approaches have worked well within Financial Services companies, and will also provide case studies of successful partnerships, of which there are many. a. We invite CIO's, CTO's and this responsible for innovation in the Financial Services companies to contact us in order to better understand their challenges, with a view to proposing models that could work better with innovators and better facilitate collaboration and adoption. b. We invite innovators large and small who have successful case studies to contact us so that we can pick a couple of examples for inclusion in the second part of this report. c. Finally, we call on those who would like to work with us in resolving some of these issues to offer their ideas and energy as a contribution. FINDING FERTILE GROUND 12 CONCLUSION
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  13 AUTHORS Patrick Crooks ispassionate about innovation. He has co-founded around twenty new ventures, including an IT company employing over 1000 staff. He has acted on behalf of large corporates to plan and deliver some of the world’s most successful mobile payments projects, and has advised executives in over a dozen countries on financial services innovation. Commerce in Motion Commerce in Motion is building a portfolio of niche Near Field Communications (NFC) start-up businesses, through investment, mentoring, and provision of specialist tools and methodologies. At present, their focus is on transactional and business-to- business solutions. CommerceInMotion.com.au Patrick Crooks Khimji Vaghjiani · Khimji is the CEO of Solar-Gem and was awarded the Australian Innovator of the Year and Australian International Design award in 2010, the Powerhouse Museum Award 2010, and the Tech23 Innovative company award 2010. Solar- Gem has sales in 15 countries for its innovative solar energy solutions. · Just completed his PhD in Innovation adoption in developed and developing countries at UNSW · Currently teaching at UTS in the MBA Innovation & entrepreneurship program, and at UWS in International Market Entry program. · Innovation roles at Westpac, Telstra and Siemens in the UK Director from 2003-2008 of Smart Internet Technology centre. · Founder of TiE-Sydney chapter (The Indus Entrepreneurs)
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  14 ABOUT AIIA The AustralianInformation Industry Association (AIIA) is the nation’s peak industry body for the technology sector. AIIA sets the strategic direction of the industry, influences public policy and provides members with productivity tools, advisory services and market intelligence to accelerate their business growth. AIIA member companies employ 100,000 Australians, generate combined annual revenues of more than $40 billion and export more than $2 billion in goods and services each year. With member companies right across the country, from every sector of the industry and representing every size of company, AIIA is truly the ICT industry's association of choice. About AIIA's Financial Services Network AIIA established the Financial Services Business Network for executives interested in technology-led innovation in the financial services industry. Join us to: • Understand the innovation opportunities in financial services • Facilitate networking between the innovators in financial services and the suppliers of technology solutions • Discuss and create technology-led business opportunities in financial services and facilitate deal making. JOIN OUR LINKEDIN GROUP - AIIA Financial Services Technology Innovation Group JOIN OUR AIIA WEBSITE GROUP - www.aiia.com.au Thought Leadership Papers In partnership with specialist companies from across the ICT industry, AIIA releases regular Thought Leadership pieces in the financial services arena . Download’s available of the AIIA Financial Services White Papers on the AIIA website : www.aiia.com.au
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  15 ABOUT AIIA Thanks toour Sponsors Thought Leadership Sponsor DESIGN&LAYOUTMICKYDU0416334611