Blockchain Technology: A Tool for Procurement or Not?


From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 01-24-2017 14:25

  

Blockchain technology has all the buzz in the banking and financial services industries, but does it have potential for procurement and managing the supply chain?

Blockchain technologies use software, communications, and encryption to enable moving from a separate, fragmented database structure to a shared, distributed database that spans organizations across a network of participants. Targeted for the banking and financial services sector, will blockchain technology take route in other industries? DCAT Value Chain Insights examines the potential.

What is blockchain technology?
Blockchain technology is a type of database system that enables multiple parties to share access to the same data with a high level of confidence and security. To consider how it may be applied in procurement, in the payment process, is to first consider how it is being applied today. A recent analysis by Accenture explains its relevance in a transaction-based environment for the investment banking industry.

The study points out that investment banks maintain their own independent databases of transactions, customer information, and other reference data. To complete any transaction, banks need to reconcile and confirm their data with their counterparties and clients, which can be a complex, costly, and labor-intensive process. Blockchain technologies leverage advances in software, communications,and encryption to enable investment banks to move from maintaining a separate, fragmented database structure to a shared, distributed database that spans organizations. Blockchain technology supports a shared digital ledger of transactions recorded and verified across a network of participants. With the technology, transactions reside in a tamper-evident data structure that provides the necessary levels of data security and access for each user, according to the study.

By replacing traditionally fragmented database systems that support transaction processing with a distributed ledger system, banks can reduce or eliminate reconciliation costs while improving data quality. According to the report, this would bring savings for many of banks’ core middle- and back-office processes. The report points to a potential 70% reduction in finance-reporting costs as a result of the optimized data quality, transparency, and internal controls provided with a shared, single source of verified data. It also points to a potential lowering of compliance costs, which could drop by 30% to 50% at the product level and on a centralized basis due to the improved transparency and auditability of transactions.

The report also points to other potential benefits in adopting blockchain technology from a transaction-based process. It says that centralized operations supporting functions such as “Know Your Customer” and client-onboarding could bring 50% savings by establishing more-efficient processes to manage digital identities and by “mutualizing” or sharing a single source of client data securely across multiple banks. Also, the report says that business operations, such as trade support, middle office, clearance, settlement and investigations, could also lower their operating costs by 50% by reducing or eliminating the need for reconciliation, confirmation and trade-break analysis.

The findings of the report, “Banking on Blockchain: A Value Analysis for Investment Banks,” are based on an analysis of granular cost data from the eight banks, as aggregated by McLagan, a top benchmarking firm. Accenture’s insights on blockchain technology combined with McLagan’s data were applied to Accenture’s High Performance Investment Bank model to identify exactly where the value could be achieved.

“Given the tremendous cost of data reconciliation, which is part of every aspect of the capital markets industry, it’s no surprise that we’ve seen a significant amount of investment in blockchain technology. But, as with any emerging technology, understanding what these investments might yield is a challenge. As we move into production implementations, bank executives will need a clear roadmap for how and where to rethink their strategies and redesign their operating models, which is why we undertook this unique study.”

A recent study, “Healthcare Rallies for Blockchains: Keeping Patients At the Center,” by the IBM Institute for Business Value, examined the adoption of blockchain technology in the healthcare sector. The study surveyed 200 healthcare executives , both payers and providers in 16 countries, and found that 16% of those surveyed expect to have a commercial blockchain solution at scale in 2017. From the perspective of blockchain adoption, according to the IBM study, healthcare organizations are moving faster than the financial industry with the 16% of healthcare respondents planning to commercialize blockchains at scale in 2017 compared to 15% of banks and 14% of financial market enterprises.

For the healthcare industry, Improved record-keeping, including for clinical data and regulatory compliance, was cited a potential benefit by 7 out of 10 survey respondents in the IBM study. The report points out that data captured on blockchains can be shared in real time across a scalable group of individuals and institutions. Every event or transaction is time-stamped and becomes part of a long chain, or permanent record, that can’t be tampered with after the fact. On permissionless blockchains, all parties can view all records. On permissioned blockchains, privacy can be maintained by agreement about which parties can view which transactions and where desired, by masking the identity of the party.

The blockchain and procurement
So the key question going forward will blockchain technology be applied in other industries and how might it serve procurement. A 2016 global survey of chief procurement officers (CPOs) by Deloitte, “Procurement at Digital Tipping Point,” pointed out that only 40% of the CPOs surveyed in its study had a digital strategy in place but that there was increased interest by CPOs to invest in emerging digital strategies. To show the potential of blockchain technology overall, the study pointed out that $1.8 billion has been invested overall in blockchain technology over the past three years, and that 80% of the world’s largest banks will have initiated blockchain projects by year-end 2016 with potential savings of $20 billion by 2022. In a recent article, “Blockchain’s Impact on Sourcing and Procurement Professionals,” Michael Show, chairperson of the American Council of Sourcing and Procurement Executives, a discussion group on sourcing and procurement issues, outlined the potential of blockchain technology for sourcing and procurement. He cites improved security in the blockchain and the verifiability of transactions by network participants, thereby eliminating the need for third-party intermediaries, such as banks, since payments are made directly from the buying entity to the selling entity, which also obviates manual settlement processes. He also points to improved supply-chain governance since once transactions are verified in the blockchain, they are secure and not able to be changed, which is a critical issue when chain of custody is particularly important, such as in the pharmaceutical supply chain. He added that blockchain capabilities will change, if not eliminate the role of accounts payable and accounts receivable departments.

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