What blockchain means for finance

Together with ERP, blockchain can help CFOs streamline processes, enhance transparency, and create new ways of working with partners and customers.

Can you imagine a future in which your finance organization and external business partners have a common system to transact, store, and access records for payments, orders, and reporting—a future in which processes that were once manual and laborious are carried out automatically? Not only would you be able to cut out dozens of costly and time-consuming steps, you’d also be able to create a more trusted environment for everyone involved: vendors, business users, and customers.

Blockchain can pave the way for this future. The technology promises other benefits, as well: Internet-connected devices seamlessly uploading data, and artificial intelligence (AI) systems tapping into historical records and proactively suggesting actions that finance professionals can use to bring their company to the next level in their digital transformation.

While blockchain—a secure digital ledger of all transactions in a decentralized network—might not yet be a top priority for you or many other finance leaders, that’s changing. Though blockchain has gained prominence for powering cryptocurrencies like Bitcoin, it’s now beginning to demonstrate its incredible potential to evolve how business is done.

In fact, in our 2018 global blockchain survey, 84% of organizations reported that they were working with blockchain. When combined with AI, the internet of things (IoT), and intelligent automation, blockchain can play a central role in moving finance organizations toward the future they envision—one in which routine tasks are completed without a second thought, giving finance professionals time to focus on strategy and operations.

Today, most finance organizations are held back by inefficiencies. They spend inordinate amounts of time sifting through and manipulating data that is often either inconsistent or located in several disconnected systems—just to retrieve answers to basic questions. Legacy systems can be far more powerful when combined with blockchain, which can bring business users closer to a single, trusted source of truth.

Finance’s relationship with data—based on purchases, sales, and the supply chain, among other key sources—puts the organization’s leadership in an ideal position to create a real impact with blockchain. Nearly one-third of executives across the business view finance as an important area in which blockchain will gain enterprise traction. And for those working in the function, the number is slightly higher.

Blockchain’s distributed ledger — along with smart contracts that make it possible to execute transactions based on predetermined business rules (for example, automating complex royalty payments based on viewership data) — can inspire confidence in transaction validity and data integrity. This can lead to smarter decisions that can create ripples within a business and beyond.

Blockchain + ERP = a finance dream team

CFOs may fear that bringing blockchain into finance means abandoning the ERP systems they’ve heavily invested in and rely on to run their business. But that’s not the case. Instead, the two systems can complement one another. However, making that possible will require some form of integration or supplementary application.

One of the major functions of an ERP will be to continue to serve as the general ledger in regards to monthly close, taking in data fed in via blockchain. Since blockchain’s immutable ledger makes it impossible to change entries after they’re added to the chain, it’s more secure. However, ERP handles transaction processing and validation much faster, and covers a wider scope, so it is preferred for that purpose. In addition, the blockchain may not be housing all of the data that is valuable to an organization, but an ERP can still serve in this role.

At the same time, blockchain is better for verifying transactions because the transactions have to be validated through consensus mechanisms before they are added to the ledger. And with blockchain, sharing data between organizations becomes easier because everyone gains access to the same ledger. Blockchains provide a value in addition to ERP’s by serving as a trusted data ledger for multiple parties at once — but managing comprehensive in-house data is still best done on an ERP. The chart below provides a comparison of how advanced various capabilities are in ERP and blockchain systems.

Enterprise software vendors are among those working to provide blockchain-as-a-service offerings to make the blockchain-ERP combination more effective and appealing to CFOs. These vendors are offering to do the heavy lifting to help companies get up and running with blockchain. These offerings will integrate better with existing systems, helping to overcome a major integration hurdle. In addition, it’s likely that these options will be lower cost compared to bottoms-up, customized builds.

Of course, blockchain-ERP integration isn’t the only business challenge associated with this technology: There’s also the question of trust. This encompasses several areas: lack of trust in a complex and untested technology, distrust of working with others in a blockchain ecosystem, and concerns about regulatory uncertainty.

In fact, 26% of finance professionals in PwC’s survey cited lack of trust among users as the number-one barrier to blockchain adoption in the next three to five years, and another 17% ranked it in their top-three concerns. Because blockchain is a nascent technology that depends on the trust and buy-in of all participants, finance leaders will have to address this challenge and demonstrate its value before taking on more involved projects.

How blockchain eases financial cycle pain points

Blockchain can alleviate common pain points faced during financial cycles, from streamlining payment processing and receivables collection to improving reporting and analysis.

Powering payment processing

The steps associated with processing a payment for a product or service rely on input from multiple parties, including business users, accounts payable (AP), sourcing, and vendors. Today, these parties are often required to use separate, incompatible systems, and that can cause major complications. Confusion with invoices and purchase orders, inconsistencies with data, and the risk of duplicating payments are just some of the issues. In an environment where transactions occur and settle in real time, data is consistent amongst parties, and solidified programmed terms and parameters execute transactions, the challenges of today become non-existent.

Consider the oil and gas industry. For procure-to-pay (P2P) to work in this complicated environment, field operations, the purchasing organization, and third-party suppliers of goods and services have to reach agreements on a number of items. Field operations and the purchasing organization have to go back and forth on requisitions, approvals, and goods receipts. Suppliers and the purchasing organization have to set contract terms, process purchase orders, and settle payments.

The process can get messy, and it’s muddled by non-standard contracting terms, field-based demand signals, and choppy, ineffective workflows. Smart contracts, combined with IoT enablement through blockchain, can automate and simplify business rules to reduce processing times. The outcome would likely be more satisfied customers and better vendor relationships.

Fulfilling orders and collecting receivables

Order-to-cash (O2C) encompasses the processes involved in registering and carrying out a consumer’s order of goods or services. This involves generating quotes and receiving orders; fulfilling those orders; billing; and collecting cash. The pressure is on finance to offer clients stellar service, while gaining quick, reliable access to cash flow for the business.

To achieve a better working capital position, the finance organization has to collect receivables quicker and more efficiently. Too often, however, they are hampered by inconsistencies associated with the multiple parties and technologies handling invoices; settling disputes; and validation. Implementing distributed ledger technology within the O2C cycle could enable real-time visibility and remove the need for third-party verification. That would result in streamlined customer billing and credit verification processes.

Many enterprise software vendors offer their services to other businesses via subscription models. A provider with a growing customer base often needs to evaluate those customers’ credit-worthiness before allowing them to use the software. Smart contracts can speed up the process of extending a standby letter of credit, which is often required from an issuing bank before a deal can be completed.

Using blockchain, the sourcing department can set up the terms of the contract via a web page that includes fields like specified price, duration of service agreement, and any other relevant data. Then they can place the contract on a distributed ledger to be processed by customers, the issuing bank, and the company’s advising bank. This system allows customers to quickly respond to requests for additional information, a process that can take weeks to complete the former way (think phone calls, faxing, and emails) just to sync details between the treasurer and customer. Then the system can trigger a contact with issuing/advising banks. Issuing banks can verify legitimacy and issue a letter of credit for the customer without further delays.

Revamping reporting

An efficient record-to-report (R2R) cycle creates a foundation for evaluating performance, supporting business decisions, and satisfying external reporting requirements. It allows companies to reduce the risk of financial surprises and make better use of valuable resources to provide decision support and satisfy regulatory requirements.

Blockchain has the potential to enhance the R2R process through the increased transparency and traceability of each transaction. Enhanced security and consensus protocols can reduce errors caused by a manual, non-standard chart of accounts and other processes. A single agreed-upon source of truth can prevent inaccuracies and potentially eliminate disputes regarding contract terms for intercompany transactions.

The distributed nature of blockchain means that records are updated in real time and posted on a single ledger. Accounts benefit from real-time reviews that allow for iterative reconciliations, thereby ensuring the accuracy of source systems.

Blockchain bolsters departmental cooperation

Beyond routine finance tasks, blockchain can do a lot more for the CFO. Finance departments routinely work with various parties—including internal and external auditors and other regulatory agents—to assist with compliance-related activities. Blockchain can help simplify internal audits by giving interested parties access to review an entire population of transactions as they occur, rather than requiring that they selectively test samples of transactions after the fact.

Statutory reporting also would be streamlined, as blockchain’s smart contracts can be set to automatically share data with third parties once predefined criteria are met. Transfer pricing and other areas of tax, as well as treasury management and other intercompany processes, could reap great benefits from blockchain.

Getting everyone on the blockchain train

To make this vision a reality, though, CFOs will need to take the right steps to prepare for the changes blockchain will bring—not just for the finance organization, but also for their customers, investors, and other parts of the business. CFOs will be tasked with making a clear business case that blockchain transformations in finance will ultimately lead to measurable payoffs. Defining the business case is the first of four strategies we urge all executives to take when evaluating blockchain for their business. In addition, you’ll need to consider how to work with potential partners to build an ecosystem, what the appropriate design looks like, and how you’ll stay on top of the evolving regulatory environment.

There’s a good chance that adopting blockchain will alter the finance function’s operating and service delivery models. Staff will need to be trained in new technologies and analytics. In addition, since information will be more accessible, there will be less need for staff to be centralized. And the ways in which services are delivered are also likely to change. Blockchain’s ability to provide secure, accurate, and valuable data could drive a shift away from shared service centers and outsourcing, as transactional activities such as data validation, auditing, and reconciliation are performed with blockchain, and the need for third-party verifications is reduced.

However, it is important to remember that there will always be a need for assurance and trust. Especially in the United States, trust of emerging technology requires transparency into processing that, by its nature, may not provide the necessary optics to prove that it is functioning as intended. This means that trust and, by extension, assurance, will require a fundamental change in how we view audit, compliance and regulation.

As appealing as a blockchain-enabled finance function may sound, it won’t magically come together without the backing of leadership. The finance organization is in an ideal spot to see quick wins with blockchain, which can free finance professionals from routine work and allow them to perform the kind of analysis that can lead to gains for the business—and their careers. To promote such a change, leaders will have to act as champions and tout the long-term advantages promised to employees, the organization, customers, and partners.

Matt Almeida, Noam Heller, Dan Hemmert, Jake Weiss, and Akhil Ramanadham also contributed to this piece.

Published by Sammy Singh

Graduate of UCLA and Wharton School of Business and Media Personality. World renowned global entrepreneur, venture capitalist, financial technology professional, tax specialist, marketing mogul, and more! Connect with me at: www.linkedin.com/in/cfo www.instagram.com/champagnegqpapi www.facebook.com/sammysinghcxo www.twitter.com/cxosynergy

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