Blockchain and Business Process Transformation

One can look at the transformational impact of IT on companies and industries through a variety of lenses, - e.g., products and services, revenue and profit, sales and support, market strategy.  One of the most important such lenses is the impact of IT on business processes, that is, on how work is actually done across the various functions of an organization. 

Examining the impact of IT over the past several decades through a process point of view, one can identify three distinct phases: first came process automation in the early years of IT, followed around the 1990s by enterprise-wide process reengineering and management.  The third phase, is now starting, focused on the processes and transactions that determine how institutions interact with each other around the world.  Let me discuss each of these phases. 

Business process automation.  IT was first applied to back- and front-office automation.  Companies deployed IT to automate and improve their existing processes while leaving the underlying structure of the organization in place.  It started in the 1960s and 1970s with the automation of standardized, repetitive back-office processes in manufacturing, production and data processing operations like inventory management, financial transactions and airlines reservations.  The advent of PCs and personal productivity applications in the 1980s made it possible to apply IT to front-office processes involving people and services, such as word processing in office systems, spreadsheets for data analysis, sales-force automation and customer support.

The universal reach and connectivity of the Internet a decade later enabled all kinds of customer self-service applications, bringing front-office automation all the way to the customers of the firm.  With nothing more than a browser and an Internet connection, it was now possible to do for yourself many ordinary activities that previously required a phone call, a trip to a store, or access to a radio or TV.  You could track the status of your packages, access the latest sports results, check the weather of any city in the world or buy a book or CD.

Process reengineering and management.  US labor productivity grew at only 1.5% between 1973 and 1995.  This period of slow productivity coincided with the rapid growth in the use of IT in business.  “You can see the computer age everywhere but in the productivity statistics,” said MIT Nobel Prize laureate economist Robert Solow in 1987, in what’s become known as the Solow productivity paradox.

Subsequent analysis helped explain this seeming productivity paradox by looking at historical parallels.  Companies and industries also took decades to learn how to reap the productivity benefits of previous transformative technologies, like the steam engine and electricity.  For example,   productivity growth did not increase until 40 years after the introduction of electric power in the early 1880s.  It took until the 1920s for companies to figure out how to restructure their factories to take advantage of electric power with new manufacturing processes like the assembly line.

Similarly, it wasn’t until the 1990s, with the pioneering work of Michael Hammer and others on business process reengineering, that companies realized that using IT to automate existing processes wasn’t enough.  Rather, it was time for organizations to fundamentally rethink their operations, redesign the flow of work in their companies and eliminate processes that did not add value to the fundamental objectives of the business

Beyond reengineering, a new category of sophisticated business management software emerged in the 1990s and 2000s.  Rather that managing one process at a time, these new applications leveraged IT to integrate the management of the various process in the enterprise.  Enterprise resource planning (ERP) applications, for example, facilitated the information flow across business functions, - including production, distribution, sales, customer service, human resources, procurement and accounting, - thus transforming the overall organization.

In their 2009 book Wired for Innovation: How Information Technology is Rewiring the Economy, Erik Brynjolfsson and Adam Saunders introduced the concept of organizational capital as the necessary critical ingredient that enabled a company to take full advantage of major technology advances.

“The companies with the highest returns on their technology investments did more than just buy technology; they invested in organizational capital to become digital organizations.  Productivity studies at both the firm level and the establishment (or plant) level during the period 1995-2008 reveal that the firms that saw high returns on their technology investments were the same firms that adopted certain productivity-enhancing business practices.”

Processes and transactions among institutions.  The automation, reengineering and integrated management of business processes have had a major impact on lowering the costs and improving the efficiency of transactions within a firm.  But, as we well know, the advent of the Internet and the forces of globalization have significantly increased the volume of transactions and other interactions taking place among institutions around the world.  The processes to manage the conduct of business among companies have not kept up with the economy’s digital transformation, adding significant frictions and costs to their operations.

According to a 2016 IBM report, three major types of frictions predominate when conducting business among different institutions:

  • Information frictions: Participants in a transaction don’t have access to the same information; the required information is not easily accessible; and security and privacy risks keep rising, - e.g., hacking, cybercrime, identity theft.
  • Interaction frictions: Intermediaries are needed to help deal with growing scale and complexity; transactions take longer due to arcane global processes; and a lack of trusted marketplaces in many economies around the world.
  • Innovation frictions: These include legacy systems, bureaucratic processes and institutional inertia; restrictive regulations that stifle innovation and change; and growing uncertainties and threats that make it harder to move forward.

Blockchains have the potential to significantly reduce these various frictions by bringing one of the most important and oldest concepts, the ledger, to the Internet age.  Ledgers constitute a permanent record of all the economic transactions an institution handles, whether it’s a bank managing deposits, loans and payments; a brokerage house keeping track of stocks and bonds; a global company conducting business with its supply chain partners; or a government office recording births and deaths, the ownership and sale of land and houses, or legal identity documents like passports and driver licenses.

“Today, transactions are recorded in multiple ledgers,” noted the IBM report.  “Each one captures at best a moment in time and reflects the information held by a single party: Bank X purchased or sold a mortgage, for example.  They don’t record what happens next, what came before, or the role of others - partners, suppliers, consumers - in the transaction.  Moreover, they’re prone to human error and vulnerable to tampering.  By contrast, distributed ledgers can be shared and updated in near real-time across a group of participants.”

Blockchain technologies hold great promise for global supply chains ecosystems, for example, -  increasing the speed, security and accuracy of financial and commercial settlements; tracking the supply chain lifecycle of any component or product; and securely protecting all the transactions and data moving through the supply chain.  Blockchains provide an immutable, non-revocable record of all the transactions through the entire supply chain cycle, which will be of great help in the timely resolution of errors or disputes among supply chain partners.

In August, 2016 the World Economic Forum (WEF) published an excellent report on The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services.  The report noted that blockchain technologies have the potential to transform the infrastructure and processes of the financial industry, bringing a diverse range of benefits including operational simplification, near-real time settlements among institutions, more accurate regulatory compliance and liquidity and capital improvements.

However, the report also warned that the evolution towards such a blockchain-based financial infrastructure and processes will take considerable time because it must overcome significant challenges.  In particular, it will require the close collaborations of its various stakeholders around the world, - including financial institutions, merchants and governments, - to develop the appropriate legal and regulatory frameworks.

This emerging third phase in the evolution of business process transformation is both promising and challenging, as we once more apply IT to make economies more efficient, this time involving the interactions of institutions and industries all around the world.

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