The Time to Digitize Hidden Value is Now
Forty-eight percent of CEOs don’t trust blockchain technology.Yet 84% are curious about the compelling benefits that it offers.
In today’s tumultuous markets, moving from an investigative mindset to one that overcomes apprehension and mistrust is critical to the “digitization of value.” Rooting out hidden value buried in legacy systems or money being left on the table due to inefficient processes means turning to technologies that can unite physical and virtual worlds in a way to support enterprise models and processes.
Whether by choice, neglect or habit, outmoded systems leave significant value behind, a luxury that can no longer be afforded. C-suite leaders must take prompt action as a matter of survival. Just as the internet digitized communications, blockchain and smart contracts will radically transform how business is executed and systematically capture hidden value.
Today’s pandemic and economic downturn have made things very clear: all businesses must find ways to reduce costs and operate on thinner margins. Doing so is paramount to survival, and companies cannot achieve this without adopting technologies that will uncover more money.
Extracting Value From Current Processes
Numerous organizations are beheld to costly legacy systems or decades-old technology infrastructure. For example, for the US government to maintain 10 legacy systems, the cost to taxpayers is an astounding $337 million a year. Elsewhere, enterprise organizations spend approximately 80% of IT budgets to support existing systems.
Additionally, clunky, paper-based and manual workflows require significant administrative resources and lack the capabilities to be unilaterally shared, which feeds redundant, siloed efforts. These interoperable processes hinder inter- and intra- company information sharing and further exacerbate transactional frictions across business relationships, particularly when it comes to contract executions and payments.
Smart contracts backed by blockchain technology can streamline operational inefficiencies, automate invoicing and payment processes to free up cash flow and provide real-time insight into the financial health of a company; something that’s hard to do when juggling legacy, disparate systems and outdated technology solutions.
How Blockchain Frees Up Working Capital
In business relationships, achieving traditional consensus between companies in contracts is time-consuming and expensive due to the fact that each participant has their own version of data or events — hence the massive need for the monthly reconciliation of invoices and elongated day sales outstanding (DSO).
With blockchain, real-world events are captured in an immutable, third-party digital record that can be shared across participants. In any transactional relationship between businesses, vendors, suppliers and so on, blockchain enables access to the value that is hidden in current processes through visibility, transparency, accuracy and speed. By leveraging existing systems like business processes, data sources and connected Industrial Internet of Things (IIoT) devices, a holistic picture of truth can be tethered to contract performance and execution.
Smart contracts function as software programs that capture operational terms of a legal contract between companies. Smart contracts use performance metrics, leverage operational data and other information sources from legacy systems to ensure and verify that transactional obligations are fulfilled then triggers automated payments.
Examining the Invoice, as Example
Most companies experience long payment cycles rife with disputes and manual reconciliation processes that cause significant drag. By transacting on a blockchain network, service providers can get paid at speed, and counterparties only pay for what is actually received or performed thus bringing great efficiency to existing processes.
One example of an archaic business concept is that of the paper invoice. When pumping gas at the gas station, one swipes a credit card and pays on the spot for the transaction as it occurs in real-time. With business contracts, instead of instantaneous transactions, payments are stuck in long cycles, delayed by paper records and invoicing, dispute and reconciliation procedures.
With much value to be realized in inefficient processes, the data exists to render commercial invoicing obsolete. Having human “checkers” essentially checking correctness is a facet of the past or at least one that can be chalked up to wasteful (but deeply ingrained) procedures. Blockchain is designed to provide access to neutral, third-party distributed source information. It does this by reaching across multiple companies and systems to pull specific from field data and other IIoT sources, and store required data in its distributed ledger. The technology then triggers payments and is therefore a new way of capturing efficiencies and rooting out existing hidden value.
Act Now, Not Later — Value Can’t Wait
The opportunity to reduce cost inefficiencies and free up working capital exists in improving business processes across sectors like that of construction, legal and oil & gas. Blockchain powered smart contracts can take a multistep process and reduce it to two steps. The implications are tremendous, particularly during an economic downturn as companies must figure out how to run on thinner margins with no end in sight.
Turns out that the best time to realize value locked in existing systems is to revisit processes and look to digitization and automation opportunities to capture money that is being left on the table. It’s possible to get to this new level of granularity with existing systems by forging a new way of doing business: one that’s on the blocks.
This article originally appeared on The Block.