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Industries:  General 

Organization-wide Deployment of Smart Contracts is not a reality yet

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By: Beroe Inc

calender01 Nov 2018

organization-wide-deployment-smart-contracts-not-reality-yet

By Sridevi Akkarajuvenkata - Customer Success Lead; additional inputs by Sakthi Prasad

Sourcing and contracting activities are inextricably linked to each other. Procurement executives are constantly grappling with issues such as process efficiency, transparency, quality and security, and hence, seek ways to innovate through automation and digitalization. Contracting, which is a major activity for Procurement Organizations across the world, comes with its own challenges, such as:

  • Lack of standardized processes
  • Compliance issues
  • Slow contract renewal rates
  • Supply chain disruptions
  • Increasing FTE costs
  • Availability of trained professionals
  • Optimal use of existing tools and solutions
  • Erroneous and repetitive instances of contracts

In recent years, the Procurement community has seen increased interest in digitalization and the applicability of blockchain technology to improve contract management and compliance. While the blockchain ecosystem is still evolving, let us focus on the aspect most applicable aspect to Procurement: smart contracts.

Smart Contracts Explained

A smart contract, also known as a self-executable contract, is a piece of software code that executes agreed terms between Procurement Organizations and suppliers; it offers more security and eliminates middlemen.

All transactions are stored in chronological order on a blockchain that is not erasable at any time. The counterparties in a contract have access to all transaction records. No individual counterparty can make unilateral changes to the contract, and any modification will have to be agreed upon by all parties involved. Changes will also be notified to everyone in the system.

Reduction in Costs Related to Processing Records

Let us consider the total number of records to be processed is 20,000 and the cost of processing each record is $20. Even if we project a conservative reduction of 25 percent in cost with the use of blockchain, the annual savings realized due to a reduction in the cost of records processing is 20,000*20*25% = $100,000 (based on IBM Blockchain Framework & Forrester Total Economic Impact study)2.

With the use of blockchain, a company typically employs fewer FTEs from finance, legal and order management, as these processes are fully automated through codes written in the smart contract.

Smart Contract Development Cost

The cost of developing a smart contract is directly proportional to the complexity of the work involved. As per industry reports, if a company hires a smart contract development team, a simple contract would cost up to $10,000. For larger enterprises, it is estimated to go up to $45,000–$100,0003. In addition, deployment costs are involved too. The costs are driven not only by coding, but by testing and auditing. The skills required to tests bugs in a blockchain environment are considered niche, and differ from regular software testing. Hence, it is important for enterprises to take a project-based approach, instead of looking to replace legacy Procurement systems entirely with blockchain-based solutions. As a first step, Procurement Organizations can start small and take up smart contracts as part of their digital project journey.

With the evolution of a smart contract ecosystem, it would be ideal for Procurement Organizations to start considering and testing the concept of smart contracts, and develop use cases internally. Within the next five years, the industry is expected to witness greater adoption with transition to safety and robust auditing. Smart contracts can bring significant efficiencies for global Procurement teams in terms of compliance (with sustainability, environmental and ethical standards) through the use of clear rules and automated codes.

Smart Contract Development Companies

There are hundreds of smart contract development companies across the world. The table below is an indicative list of service providers.

Company

Solution/ Services

Overview

IBM

IBM Blockchain platform

With this platform, enterprises gain access to development tools, tutorials and a development environment to quickly create their own smart contracts using The Linux Foundation’s Hyperledger Composer

Accenture

Blockchain solutions

Accenture provides strategy assessment, blockchain bootcamps, blockchain sandboxes, blockchain solution design, solution build and implementation, and blockchain assets and solutions

Cognizant

Enterprise blockchain solutions

Cognizant supports companies in their blockchain journey whether they are just getting started or actively moving into production

Applied Blockchain

Customized blockchain solutions

A team of blockchain engineers, designers and advisors will build platform-agnostic blockchain applications to solve client problems

New Alchemy

Smart contracts

Market-tested smart contracts and technology to securely launch token issuances

Blockchain App Factory

Customized blockchain solutions

Involved in ideation, design, development and implementation

draglet GmbH

Customized blockchain applications for enterprises

Helping companies develop smart contract solutions based on the Ethereum platform

Contract Vault

Next generation agreements for everyone on the Ethereum Blockchain

Contract Vault is a platform that bridges the gulf between legal contracts and smart contracts; it thus simplifies the creation, management and integration of contractual processes on the blockchain

Sphinx Solutions Pvt Ltd

ICO development and launch services

An ICO development company serving global clientele with skills and proficiency in smart contract development, Hyperledger development and Ethereum development

Applicature

Smart contract development services

Creates smart contracts in the Solidity programming language

Intelegain

Blockchain development services

Offers custom blockchain solutions and consultation; Intelegain builds products and solutions with intuitive UI, high uptime and fewer complexities

SoluLab Inc.

Smart contract development

Design, development, audit and optimization of self-executing smart contracts systems based on Ethereum and other platforms to automate transactions without involving middlemen

LeewayHertz

Smart contract development

Implements smart contracts to automate enforcement in RootStock and Ethereum

SmartContract

Smart contract design and implementation services

Helps enterprises build fully functional and secure smart contracts

Intellectsoft

Blockchain consulting and development

Intellectsoft Blockchain Lab developers deliver enterprise-grade blockchain solutions, consultancy, and custom blockchain development services

Techracers

Blockchain services

Smart contracts services

  • Smart contracts architecture
  • Smart contracts design and development
  • Smart contracts audit
  • Smart contracts optimization

Source: Supplier websites

Full Scale Embracement of Smart Contracts is not Feasible yet

To begin, let us assume that companies with complex supply chains across industries have some level of automation as part of their contract management strategy: contract management solution, contract repository or contract lifecycle management, among others. However, the degree of use and the technology vary widely. Internal departments, such as Procurement, legal and finance, are involved with varying degrees of control and governance. The digital roadmap for enterprises depends on the organizational structure, complexity of business operations and supply chain, and the maturity of the industry. For some, it could mean having a central repository; for many, it could be moving to a cloud-based solution; and for a few others, it could be implementing an artificial intelligence-enabled solution.

The question is—are CxOs considering blockchain as part of their digital roadmap or vision? As per Gartner’s 2018 Chief Information Officer (CIO) Survey (among 293 CIOs)1, only 1 percent of CIOs indicated any kind of blockchain adoption, while only 8 percent were involved in short-term planning or experimenting with the use of blockchain. Seventy-seven percent of CIOs surveyed showed no interest in the technology. Thus, there is a clear indication that, despite the hype, deployments are hard to come by and rushing into adoption of blockchain will prove to be futile. Overall, organizations are merely looking to develop knowledge and use cases, but are skeptical about making investments and structural changes.

“Right now, there are no clear guidelines or interest among all parties involved within a supply chain when it comes to implementing and executing smart contracts. It is far from being institutionalized. A smart contract requires considerable investment in terms of computing power—there is no strong business case to justify and demonstrate its value. There are implausible claims; I feel decentralization will not necessarily resolve systemic problems,” a senior executive of a U.S. bank, who is not authorized to speak on behalf of the company, told Beroe.

Chasing the dream of fully automated contracts is not a new phenomenon. In fact, academicians and supply chain participants alike have been on a decades-long quest to eliminate the supposed inefficiencies in traditional written agreements.

Electronic data interchange (EDI), a contracting technology from the 1970s, was designed with the same goal and garnered similar fanfare. Commentators at the time imagined a revolution in the way firms transacted and a full shift away from anything resembling a paper contract, according to a research paper authored by University of Pennsylvania’s Jeremy M. Sklaroff.

Sklaroff states that EDI failed to achieve the goals of entirely replacing paper contracts and any form of human intervention. On the other hand, it empowered, rather than circumvented, human decision-makers, along with their ‘inefficient’ way of forming agreements. In doing so, EDI successfully reduced some transaction costs while preserving efficient forms of contractual flexibility.13

It is wrong to assume that shifting away from paper contracts creates full-scale efficiencies. On the contrary, it may create new inefficiencies.

These stem from three features of smart contracts: automation, which requires that every agreement be formed from fully-defined terms; decentralization, which conditions performance on verification by third parties; and anonymity, which eliminates the use of commercial context to give meaning to agreement terms. As a result, it is extremely costly to form smart contracts in a volatile environment or whenever there is a level of uncertainty surrounding the agreement,” according to Sklaroff. To read the prize-winning paper, please click here: https://scholarship.law.upenn.edu/prize_papers/9

Challenges to the Large-scale Adoption of Smart Contracts

A few industry reports estimate that the global smart contract market is expected to grow at a compound annual growth rate of 30–34 percent by 20235. While this number represents a bullish trend, there are inherent challenges in large-scale adoption:6

  • Moving from a transactional mindset to an environment driven by decentralized systems
  • Contract management is usually a multifunctional team effort—are legal and finance departments ready to move away from clauses to codes?
  • Each company will have its own way of writing codes and automating contracts within its supply chain as it is in a nascent stage; hence, there are no best practices, standard protocols or agreed frameworks at an industry level7
  • Regulations (e.g., General Data Protection Regulation) are highly dynamic, and companies often struggle to transition and adopt new standards, which would make bringing regulatory and legal standards within the ambit of smart contracts challenging
  • With existing technology assets and investments, it will become increasingly difficult for companies to revisit and build smart contracts into business processes
  • Compared with traditional contracts, smart contracts are irrevocable, and hence, it is difficult to code unforeseeable events
  • In terms of adhering to confidentiality, smart contracts existing on public ledger are a major limitation
  • Smart contracts require skills for programming, as opposed to manual drafting, and hence, hiring developers will prove to be a major challenge in large-scale adoption

Benefits of Selective Deployment

Given the hype and skepticism, smart contracts still have the potential to improve the overall Procure-to-pay cycle if deployed wisely to weed out process inefficiencies on a selective basis. Some of the major benefits of using smart contracts are:

  • Efficient and seamless RFX processes
  • Reduction in transaction and FTE costs in the Procure-to-pay process
  • Provenance and transparency (track and trace) over product specifications across the supply base
  • Ability to determine availability of supplies across the supply chain
  • Visibility over prices across supply base and additional costs being incurred per contract

In reality, a possible scenario for deployment could be price negotiation based on market conditions. A commodity buyer usually tracks the prices and sets up multiple discussions with series of suppliers across locations to negotiate the price. If this task is deployed on a blockchain as self-execution codes—that is, the system receives inputs from updated price indices—the price adaptions are executed in real-time and the transaction is carried out based on the agreed terms. This leads to savings in time and costs.

Now visualize a contract as a code on the blockchain. The code leverages conditional statements, and executes transactions based on specific terms agreed by the buyer and the seller. A smart contract directly reduces the costs involved in manual processing of orders and payments, as well as the efforts taken by accounts payable in mapping the purchase order to payments. After provisioning the initial code, it eliminates the need for a middle-man or third-party to be involved in the process, thus leading to greater transparency and trust.

Conclusion

Smart contracts are currently used in a localized manner and for specific processes. Large-scale adoption is still far from reality. At best, it is in an experimentation phase, with most companies invested in other transformational projects with no immediacy to allocate time or resources for smart contracts.

The jury is still out on the large-scale adoption of smart contracts. If and when that happens, it will be a different story altogether.

References:

  1. https://www.finextra.com/pressarticle/73751/gartner-survey-reveals-scarcity-of-blockchain-deployments
  2. https://public.dhe.ibm.com/common/ssi/ecm/79/en/79017679usen/ibm-blockchain-tei-case-study_final_07-20-2018_79017679USEN.pdf
  3. https://softmedialab.com/blog/smart-contracts-development-process-and-costs/
  4. https://procureability.com/smart-contracts-for-procurement/
  5. https://www.marketsandmarkets.com/PressReleases/blockchain-technology.asp
  6. https://blog.pwc.lu/smart-contracts-adoption-challenges/
  7. https://www.springcm.com/blog/contract-management-challenges-it
  8. https://www.zdnet.com/article/ibm-maersk-launch-tradelens-blockchain-shipping-platform/
  9. https://dex.openledger.io/smart-contract-success-stories-from-blockchains-pioneers/
  10. https://www.ibm.com/blogs/blockchain/2018/04/digital-transformation-next-gen-procurement-and-supply-chain/
  11. https://www.whitecase.com/publications/insight/digitalising-mining-metals-global-supply-chain-rise-blockchain-and-smart
  12. https://www.contractvault.io/files/Whitepaper.pdf
  13.  https://scholarship.law.upenn.edu/prize_papers/9

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