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“Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems” – Harvard Business Review, 2017.
2008 was a bad year for the world economy, as the financial crisis had struck. In October, the same year, an unknown person under the name of Satoshi Nakamoto introduced the bitcoin digital currency. As part of the process, he also created the first Blockchain database.
What is this technology?
In the era of digitalisation, we sometimes misuse and misunderstand some of the technologies around us. Blockchain is an open, peer-to-peer, decentralised software technology where transactions (blocks) are recorded, stored, confirmed anonymously in a public-wide accounting book called the ledger. Each transaction is encrypted and chained to the previous and subsequent block, making the system secure and tamper free.
Instead of using third party intermediaries such as banks or public registers, Blockchain uses a consensus protocol to agree on a ledger content and thus making participants in the network all equal. Let me give you a simple example – the internet. When you set up with direct access to the internet, your computer is provided with a copy of Transmission Control Protocol/Internet Protocol (TCP/IP) program just as every other computer in the internet. One process followed by every computer makes the sharing of information possible.
In the Sourcing & Procurement (S&P) space, we start any transaction with an assumption that a counter party cannot be trusted. For this reason, society established intermediaries are in place - that are responsible for keeping centralised copies of data for us – banks, public registers and more. These third parties store the information we provide them in a bookkeeping mechanism called a ledger and we pay for their services.
Now let’s imagine we are about to buy a house. If we need the house history, the information has to be collected from various public registers. We trust these records and most of time we pay for this data. However, the registers of today are not secure. Provided someone obtains the access to the data, it can be edited or even deleted.
This is where the Blockchain comes with a radical solution. Each house owner has a copy of their house database, highly secured by a code stored on their own computer, hard drive or cloud. You have complete access to the data. If you decided to modify your house record and not inform anyone, a simple algorithm on the back of the network will openly, immediately identify this and inform everyone.
There are no limitations to the content that can be stored in the above example. Property, art, cars, music, can be transferred among participants of the network without a need of intermediaries in a secure and efficient manner.
You might be wondering, where does procurement meet the blockchain? Imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion and changes by every user - “Smart contracts” by the means of Blockchain technology.
The house buying or selling can be done via the Smart Contracts. House data is transferred into a program, the program runs a complicated code, which automatically checks if pre-defined conditions have been met. In practice this gives us an instant transfer of money and documents over a highly secure network without involvement of any third parties. If you are selling your house, the ownership will be transferred to the buyer only when Smart Contract conditions have been met, meaning money has been sent and received.
Like any system there are some drawbacks. Transactions are irreversible and there are limitations in terms of volume. Although the system is secure, due to human involvement there is still likelihood for hacks to occur. Let’s not forget about the legal limitations and the certain resistance from the people who are working as intermediaries. In my opinion, innovation and evolution comes at a cost. The investments are high but returns might be unclear. Despite this, Gartner, a technology research firm, estimates that by 2022 smart contracts will be in use by more than 25% of global organisations. According to a report published by Allied Market Research, global Blockchain distributed ledger market accounted for $228 million in 2016, and between 2017 and 2023 is expected to reach $5.43 billion.
More examples? Let’s look into peer-to-peer process. Imagine we performed purchasing transactions using a Blockchain technology:
• We eliminate the steps of checking if the invoice matches the Purchase Order (P.O.) as we know that the order, delivery confirmation, etc. are authentic and accurate inside the Blockchain system.
• We also skip the step of invoice processing since the Blockchain system is capable of working on rule basis and payments can be automatic following the delivery.
This sounds promising but realistically I think we still have a long road ahead of us and that road will be full of bumps and holes. It took internet more than 20 years to evolve and become an essential need in everybody's life. I believe that there are a lot of unique opportunities in healthcare, manufacturing or legal but the beauty of this technology is the diversity of applications and how we can make it work right for you.
There is no 'one size fits all' Blockchain solution instead there are hundreds if not, thousands of Blockchain applications. Given that the limitations are solved, who will be the leading Blockchain networks that will be predominant in S&P?
I believe that we are currently experiencing something truly disruptive in S&P world. As processes are changing, there will be a need to up-skill staff, invest in research and development (R&D) and identify the leaders capable to inspire their employees to research, develop, test smarter ways of conducting business. Once, the mission, vision and strategy are set, it is up to each one of us to add one extra Block of data.
- By Mykhaylo Savchenko, Operations Manager – Procurement, Infosys BPO