3 advantages boards need to know about blockchain

Middle market companies and their boards need to understand blockchain technology.

Dec 04, 2019

Blockchain will change the rules for middle-market companies. The technology creates immutable records, thereby reducing fraud risk, enabling smart contracts and digital currency, and streamlining processes for records, recall information and myriad transactions — across distances.

In a fundamental way, this disruptive technology will change how companies operate and that means the oversight responsibilities of board members dictate that they understand just how blockchain could affect enterprise operations. As boards and management work together to examine what the technology offers, and develop their digital strategy, here are three perspectives to keep in mind:

1. Blockchain strengthens the relationship a company has with vendors and suppliers

Historically, data that companies use was proprietary and stored on internal information technology systems. With blockchain technology, there is a dynamic shift: the data comes from multiple, verifiable sources in the broader industry ecosystem in which the company operates. Management need no longer rely solely on internal records to base decisions. At the same time, blockchain integrates a range of systems and data technologies, across multiple company networks, allowing for increased coordination and compatibility.

Blockchain offers a unified, decentralized system to record, track and report empirical data. As a result, inventory can be traced from manufacturer to shipper to retailer; supplies can be purchased—and priced — based on their location; and smart contracts can be created that execute provisions automatically using workflow and tracking technology.

Additionally, blockchain is highly fault-tolerant and eliminates system malfunctions and day-to-day technology shortcomings. A computer server may crash, but the blockchain multinode system will stay intact.

2. Blockchain is more about business processes than technology

When it comes to using blockchain technology, it is just as appropriate to engage a vice president of supply chain management as the chief information officer – to form a team, if possible. Blockchain is a business enabler, a technology-based tool designed to improve business processes. It is a collaborative technology, which means companies must adopt the standards of the blockchain network. There will be a tradeoff — companies will lose some process control, but they likely will gain cost reductions and efficiency.

The effects of blockchain on processes vary by industry. For example, manufacturers, distributors, and retailers can see faster and improved traceability of product and raw material information. For nonprofits, it can provide better visibility and reduce processing time for grants. The blockchain advantage for retailers, especially with the current challenging consumer market dynamics, is that product recalls and specialized certifications – such as organic, is readily effected. Across industries, companies will see a reduction in paperwork and input errors, an increase in transparency and transaction speed, and a decrease in the costs associated with recalls and supply chain platforms.

3. Blockchain offers a competitive advantage

Should a company invest in blockchain technology? Not usually the first movers, middle market companies are understandably risk averse. They often show reluctance to invest in innovative technology until it has been fully vetted — which usually means it has been adopted by competitors first.

Walmart, for example, was a leader in its use of blockchain technology, and was therefore able to set the standards used in its ecosystem. The company now requires the 2,000 entities, mostly middle market companies, that provide leafy green products such as spinach and arugula, to conform to the Walmart food traceability initiative for direct suppliers. Through this blockchain effort, data is tracked to understand where the food comes from, including country of origin, region and potentially the grower’s field plot. This can validate that the food is safe to consume; should there be any issues along that blockchain, Walmart can quickly trace it back.

While Walmart has spent millions building out this ecosystem, members of the blockchain would typically pay a subscription fee to write their data to the blockchain. While the subscription fees could be low, they can also be the difference between a profitable and unprofitable relationship. So while Walmart demands its use, smaller companies may find the subscription fees to be the reason they discontinue working with their customer.

Unless a company is a leader or a “fast follower,” there can be a huge risk to being the last to market.

See the big picture

With these perspectives in mind, considering blockchain in a vacuum, would increase enterprise risk. Management needs to know how it fits into the company’s overall digital transformation — products, automation, security — as well as how their competitors are using it.

Blockchain is changing the rules of the game. Middle market companies and their boards need to learn those rules and make them work to their advantage.

This was originally published on Directors and Boards, November 2019

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