Four Steps To A Blockchain-Enabled Strategy
The distributed ledger technology that started with the bitcoin digital currency is rapidly evolving into a crowdsourced system for streamlining verification. If blockchain technology lives up to its potential, it could become a game-changing force in any venue where trading occurs, where trust is at a premium, and where people need protection from identity theft. Though no one yet knows how effective or disruptive it will be, now is the time to prepare for its impact.
Your blockchain and distributed ledger efforts will be most effective if you see them as ways to reinforce or strengthen your company’s most distinctive capabilities — the ones that differentiate you in the market. For example, if you’re known for rapid fulfillment and responsive customer service, the fast turnaround rates enabled by blockchain could allow you to stay ahead of competitors. At the same time, the technology is too new and unproven to base your company on. Therefore, your best investments are those that allow you to explore new approaches with strategic potential and understand the costs involved before committing to them.
We recommend creating a core technology working group to better understand the possibilities. But keep a close watch. Working groups like these can easily get caught up in the promise of new technologies, at the expense of your overarching strategy. To counter this tendency, they need to have a clear idea of your company’s strategic goals, and how blockchain could enhance its value proposition — and then they need to constrain their efforts accordingly.
Step 1: Find specific opportunities. Charge the core technology working group with designing an effective path to the future. Start by compiling a list of potential pilot projects for which a distributed ledger could make a difference. One good place to start is with pain points: back-office workarounds, delays, and areas of client dissatisfaction. The working group should include (or consult with) a wide range of stakeholders and specialists from both inside and outside the organization, in order to compile a full list of strong prospects.
For example, a financial-services firm might try to use blockchain to improve risky or time-consuming business operations, such as reconciling cross-border payments to international subsidiaries. It might explore rethinking costly but necessary functions, such as compliance with anti–money laundering and know-your-customer regulations. There are many opportunities for streamlining operations, including transaction processing and the reconciliation of messages or data. The group could reduce the redundancy in data repositories, or look at identity issues, including the vulnerability of the company to cyber-attack. Or simply begin with consumer dissatisfaction, converting complaints to opportunities for improvement.
Your working group may be tempted to favor options that are most strongly linked to extreme disruption, or to the most talked-about technologies. But the press is often misleading, and technological change often takes place at a slower pace than people expect.
It’s best to pick starting points that could most improve your own distinctive capabilities. For example, select pilot projects that might help you handle key business processes much faster than your competitors can.
Step 2: Explore feasibility and readiness. For each of the starting points you’ve chosen, develop explicit hypotheses describing how distributed ledger technologies can make a difference. For example, perhaps the finance function could engage with a distributed ledger provider such as Ripple Labs or PeerNova to manage internal money movements among geographically dispersed legal entities. The hypothesis: It would decrease the time required for adjustments, reduce the need for adjustments, and increase transparency.
Or you might propose a smart contract test in your commercial banking function, using technology from startups such as Skuchain and Gazebo to simplify supply chain finance processes. If the test succeeds, you should see a certain level of cost reduction in a specified amount of time.
To solidify your hypotheses, once again consult with key business stakeholders. In addition to your internal business and functional teams, include customers in this group. Engage with people from risk management, regulatory compliance, operations, IT, finance, and tax, among others, so that your early proofs of concept don’t require a restart after these stakeholders weigh in with their requirements.
Some of the factors to consider, as you solidify your hypotheses:
- The degree to which the technology will remain hidden to end-users. We recommend starting in the middle and back offices before moving to processes that are visible to customers.
- The legislative and regulatory environment, and the way it affects bitcoin and distributed ledger technologies in those jurisdictions. Some jurisdictions may have rules governing privacy and autonomy that could affect how you organize and disclose data.
- Your competitive landscape. Consider how other relevant market participants (such as suppliers, customers, and competitors) might adopt the technology, and over what time frame.
- Your own capacity for change. Some of these measures might require significant shifts in your operations, or a different cultural orientation within your company. Consider the ability of your institution to change business processes to take advantage of distributed ledger technologies.
At the end of this step, you should have narrowed your list down to a few possible starting points. They should be limited and tangible enough to provide a good test of the technology — while also being relevant to your core business. And you should have a clear idea of how to develop prototype experiments for each of them.
Step 3: Put your prototypes to work. As you move into implementation, you will adjust your parameters to make the prototypes work. Inevitably, people will improve your practices during the testing and evaluation process. You’ll also discover new ways to apply the prototype’s blockchain innovations, putting you in a better position to make strategic decisions.
But stay true to your original hypotheses. Make sure that no matter how the prototype is altered, it remains relevant to your firm’s strategy and the distinctive capabilities that propel you forward. Monitor results frequently enough to get a clear sense of your momentum. If you don’t reach the milestones you expect, ask why, and keep refining and testing.
Also, make it a fair test. Don’t put laggards, who are predisposed to the status quo, in charge of implementation. Pick leaders who are reasonably skeptical, but who have a clear understanding of the new technologies, and who are open to its promise. When hiring external consultants and technology providers, choose those who demonstrably understand your company’s strategic direction — not just their own technological agenda — and who are ready to help you move there. Settle on a development time frame that is long enough to help you reasonably assess the outcomes.
Step 4: Scale your efforts appropriately. With any luck, your prototype experiments will result in some immediate, tangible improvements that justify your interest in blockchain. They may also expand your awareness of its potential and what it will cost to implement real change.
Now focus on its impact on your core business. Will this change the way you do business with the parties you work with most consistently? For example, if you’re a custody bank, set up to manage financial holdings such as securities and commodities, would blockchain technologies help you manage the most important asset classes more effectively?
Develop a long-term plan based on the results of the first prototypes. Select a few long-range goals — increased revenue, better compliance, cost reductions, quality improvements — and agree upon them. Create a road map for scaling up in a measureable, achievable, and worthwhile way.
It should be clearer at this point how much this technology will affect your core business practices. If it stays on the periphery, affecting relatively few customers, you will be glad you limited your investment to a few prototypes. However, if it moves into the mainstream of your business, then it could change everything. If that happens, by having invested in these prototypes, you’ll be prepared. You can scale up your prototypes to take advantage of everything blockchain offers.
When faced with disruptive technologies, the most effective companies thrive by incorporating them into the way they do business. Distributed ledger technologies could offer financial-services institutions a once-in-a-generation opportunity to transform themselves. This technology could also create powerful opportunities in other industries. Connected-car and auto-sharing innovations emerged more than a decade after GPS became popular; years from now, there may be similar innovations that take advantage of blockchain. Companies that adjust their business models accordingly may well enjoy enormous rewards, including increased transparency, lower costs, and greater time efficiencies. Your challenge is to understand the technology well enough, and rapidly enough, to bet a bit of your future on it — without putting your entire enterprise at risk.