IT strategies soon with blockchain technology?

Blockchain technology is increasingly becoming of more interest for a future-oriented IT strategy. But, in order to create a real benefit, companies have to ask themselves what they want to achieve.

// Digital Transformation, IT-Outsourcing, IT-Strategy

According to the World Economic Forum up to 10 percent of the global gross domestic product will be generated via blockchains by 2027. Reason enough to take a good look at this technology already today. The upcoming opportunities of blockchain technology have, in fact, found their way into discussions on the executive level. Especially in terms of the alignment of the long-term IT strategy, the topic of blockchain should be taken into consideration in order to be able to identify early on opportunities for your own company. However, decision-makers should have a clear understanding of the potential impacts of the technologies on processes and industries.

Whether or not blockchain technology has disruptive qualities is still open for discussion 

The publicity hype surrounding Bitcoin, Blockchain & Co. often covers up the fact that the technology, at present, still is in its infancy, for the most part. Even though specific use cases are under development, it still has to be proven which real benefit the technology is going to be able to provide.

In a lot of respects, blockchain is being anticipated to be “disruptive”, even viewed as having an impact similar to that of the invention of the World Wide Web. From a strategic point of view, blockchain technology is being attributed with extraordinary significance not only in the financial industry already today.

Innumerable companies from the most diverse areas of industry are already searching for opportunities to use blockchain technology and area researching the potential of the distributed ledger that became famous through Bitcoin. Global real-time transactions, storage of health data, and even whole government organisations that operate based on blockchain – as such, a trend has long been identifiable. Even central banks are investigating the options of a central bank-supported digital asset.

The added value of the blockchain must be both strategic and economical

Before companies brave the step into initial investments in the area of blockchain, it should be clearly outlined – just as with any other investment – what they expect from it. Completely unstructured experiments without a concrete application case can quickly lead to a situation where such projects consume incredible amounts of money. It must be determined whether it is possible to ultimately achieve a potential strategic added value though an investment in blockchain technologies.

To do so, it must first be understood how a blockchain works and what is to be changed or improved with it. What is the strategy? Which tasks should the blockchain fulfil? Should the technology be able to interact with existing systems? Which legal requirements must be fulfilled? It is only once these questions have been clarified that blockchain can become a true game changer.

Group-internal offsetting as the real thing and use case?

In 2018, two thirds of international trade were conducted group-internally. As such, the delimitation of income by means of internal transfer prices is of immense significance. Often, central (IT) services are obtained as services between affiliated companies that require a transparent demand-oriented invoicing. From an administrative point of view, this includes a great organisational expenditure since transfer prices must be specified in advance based on intercompany agreements. In this, the development of the transfer price is extremely complex and information flows between the tax department, the regional/global controlling department, the shared (IT) services department, and – in part – external service providers must be coordinated.

Such a coordination and additional monitoring of an effective execution of transfer prices harbours an inherent risk. Additional special regulatory aspects apply to transfer prices with respect to the design and verification since they – among other things – allow for a transfer of earnings within a group of companies. Therefore, the OECD stipulates a group-internal offsetting of services fixed in writing. In addition, it must be proven that a service was actually provided to the recipient of the service. Furthermore, agreements need to be adjusted on a regular basis.

Additional risks occur in the passing-on of information if transactions have to pass through multiple jurisdictions. Just like in many other areas, maintaining a correct flow of information constitutes one of the central challenges.

Transfer price models through blockchain and smart contracts – a scenario

Here, blockchain-based solution concepts come into play. As is widely known, blockchains are de-centrally stored and, moreover, invariably sequential databases for the storing of relevant information. As such, they can guarantee a revision-proof archiving of transfer prices. Additionally, smart contracts can support the dynamic adaptation of contract clauses and trigger an automated transaction when a service is used.

The billing of the service is recorded and stored on the block chain based on pre-defined rules. Thus, the fundamentals of transfer pricing models can be mapped to the blockchain and processed fully automatically without the need for further human involvement. This saves time and money. At the same time, a “single version of truth” is created by implementing the blockchain, information asymmetries are prevented, and an increased transparency of the cost centres is created.

With the help of smart contracts, a greater legal certainty can be created through automated processes. Additionally, a multitude of risks could be minimized, ranging from risks due to human error via opaque compliance requirements all the way to obsolete information systems. In theory, smart contracts provide for enormous progress in the simplification of complex issues. In addition, blockchains can meet the demands of tax authorities for a seamless recording of relevant data or make ERP systems more efficient.

“Intelligent” SLAs in outsourcing?

When used correctly, blockchain and smart contracts would not only be a benefit for the gap-free storage of data and the settlement of transfer prices between service providers and their customers. As soon as contractual commitments are made for a service, it must be made possible to verify the performance of these, both for intercompany contracts as well as for underpinning contracts (UCs) with third parties, based on measurable service level agreements (SLAs).

Even though clearly defined SLAs are beneficial in multiparty collaboration, a lot of human support is currently needed for the monitoring and enforcement of breaches of contract. Here, too, intelligent, blockchain-based contracts could make their contribution and create efficiency advantages with automated processing.

Complex outsourcing processes in which a document verification and monitoring of SLAs between multiple parties is necessary could be simplified through the use of blockchain.

However, the replacement of a conventional implementation and processing of service level agreements in favour of blockchain-based smart contracts is still completely unlikely in the next few years. There is already a growing interest in the technologies and companies will increasingly consider implementing intelligent SLAs in their contracts. If these reach a sufficient degree of maturity, it is very likely that the blockchain can become a major driver of new contract and settlement models, here.

Blockchain – future model or already operational today?

Time and again, technological change provides companies with new challenges and offering them opportunities at the same time. Highly innovative technologies, in particular, have the potential to massively change the strategic position within an industry. Time and again, companies lose their market position within their own industry if they react too late or not at all to changed framework conditions and continue to adhere to their outdated business models.

A first mover advantage can be quite tempting, and in certain cases even useful, provided it is based on a sound strategic concept. On the other hand, a premature investment in a not yet proven technology can also quickly turn into a negative. So, from that perspective, companies without a concrete use case for a blockchain technology should still exercise caution and not invest in technologies that still have to be “understood” in a lot of respects. While executives and decision-makers should think about the use of blockchain, they should also be careful to not invest blindly - just because it's fashionable at the moment. Mature, blockchain-based applications that provide a real benefit will be established on the market once the cost/benefit ratio is right.

 

noventum consulting

Tobias Schmidt

Consultant

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