How to Design a Blockchain Business Case: Benefits, Costs and Risks

Varun Singhi | MBA Class of 2020 | Student Experience

How to Design a Blockchain Business Case: Benefits, Costs and Risks

When it comes to emerging technologies such as Blockchain, business decision makers are often faced with making a crucial choice: either keep the status quo or evolve the organization’s culture to leverage these new solutions. It is a challenge that goes beyond the definition of these technologies and involves answering the question, “How does this technology change and improve my business?”

The Deloitte 2020 Global Blockchain survey suggests that old-school thinking regarding the technology’s promise is gradually fading away. Blockchain is solidly getting entrenched in the strategic thinking of enterprises across industries, sectors, and applications.

In 2020, a new trend has been observed, where organizations are now swiftly moving away from “blockchain tourism” and an increasing number of business leaders see blockchain as a top-five strategic priority, and are also increasing their investments in staffing and blockchain technologies.

Furthermore, the current blockchain market landscape in 2020 has demonstrated more mature deployment of blockchain applications. Organizations now appear to be more committed than ever to blockchain. There is a definitive need to identify the key benefits, costs and risks of the technology when developing business cases for blockchain projects.

These business cases should have a dual focus on the unique strengths and challenges of this nascent technology. As enterprises continue to exhibit high interest in blockchain, most of them struggle to move beyond proofs of concept (POCs).

A combination of issues related to blockchain technology, the amount of change required to current business processes and culture, and uncertain financial benefits sow doubts of the merits of undertaking a blockchain project.

This article serves as a guideline to help address the three simple yet crucial questions that decision makers have to encounter while developing a blockchain business case:

  1. What are the expected benefits?
  2. What are the expected costs?
  3. What are the potential risks?

Lets deep dive in our pursuit to find the answer to each of the aforementioned questions.

 

Benefits

Sometimes it is difficult to quantify the additional benefits of blockchain over incumbent technology solutions, so it’s imperative to identify the expected benefits upfront.

Certain levers of business value and cost are unique to, or play a larger role in, blockchain projects. As you develop your business case, you need to analyze and quantify the role of each lever in your project.

Distributed ledger versus central authority: Assess if a central authority can be removed and if that removal translates into specific benefits. For example, this change could enable you to complete more transactions, achieve higher savings due to better liquidity or reduce working capital.

Traceability of records: Check if there is additional value generated by improving the traceability of records after the transaction or event in question. For projects that replace existing systems, you will need to quantify the benefits of any additional traceability that blockchain offers over current systems.

Immutability of records: Assess if there is additional value generated by ensuring that the records are immutable. Similar to traceability, for projects that replace existing systems, you will need to quantify the benefits of any additional immutability that blockchain offers over current systems. Further, check if the reliability of these records can avoid additional fees and costly cumbersome reconciliation processes.

Efficiency gains: With the introduction of blockchain in your business processes, look out for immediate gains that can be achieved through faster transactions (such as improved liquidity or better customer retention), straight-through processing or reduced errors.

Digital asset creation: One of the most important benefits that blockchain offers is digital asset creation and distribution. Check if the solution enables the creation and distribution of digital assets automatically, and if that provides value.

Access to new markets: With improved access to new markets, check for new revenue streams enabled by blockchain technology that were not possible before.

 

Costs

While most of the costs incurred are similar to those of traditional IT Projects, certain costs are likely to be higher because of the use of new technology and involvement of external participants.

Because blockchain is new to most enterprises, initial projects are likely to identify certain one-time infrastructure costs from which later projects might benefit.

In such cases, ensure the first projects are not overburdened with such foundational costs by either allocating outlays from a central budget or by distributing the costs across other projects or departments that might benefit at a later date.

Technology: This includes costs for hardware, software, storage and networks. This could involve suppliers beyond traditional enterprise technology providers.

Implementation: This includes costs for planning, architecting, designing, developing and implementing the solution.

Integration: This includes the costs involved in ensuring blockchain technologies are integrated effectively with other enterprise solutions. Blockchain technologies are not naturally equipped to integrate with enterprise reporting, analytics and other tools, so this cost needs to be estimated upfront.

Partnership and ecosystem management and governance: Projects that involve agreement and adoption by external peers will require engagement and coordination with them. In addition, the project governance, decision making and timeline are not wholly in the control of your organization, which can increase the costs of the project. Furthermore, in such cases, ongoing governance and change management provide additional complexities that need to be modelled and estimated.

Security and privacy: Assess the costs of shifting records to a distributed ledger beyond enterprise boundaries, while ensuring an adequate level of protection and privacy.

Operational risk: As systems replace the need for an intermediary and store data in a distributed fashion, they can require new systems to handle any operational, legal and compliance issues that may arise.

Change management: This includes all aspects of rolling out new business processes, training personnel, and education and support for all constituents. Note, this can involve external peers and partners.

Project failure/missed expectations: The nascent nature of blockchain technology, the unique business value it provides and its high dependency on external participants (for many projects) increase the risks of project failure and missing business expectations.

 

Risks

New technologies carry potential downsides that need to be identified and managed. This is especially true when that technology is not merely an overlaying application, but rather a core part of the organization’s underlying IT infrastructure, as is often the case with blockchain.

Organizations should adopt a proactive approach in recognizing the risks stemming from blockchain. Risk management should not be an afterthought, but should be baked into the consideration set from the initial scoping and strategy phases of the blockchain project.

While this list of potential risks might seem long and daunting, many of these pitfalls are ones your organisation is likely to face in the implementation of any other new technology.

The key challenges are choosing the right scope, having the right motivation for a business and its participants, ensuring the right governance structure, and having the correct team and technology in place. These challenges can be conquered if you make deliberate and diligent efforts to manage the blockchain network effectively and focus on driving the transformation you envisioned.

Certain risks are inherent to the nature of blockchain technology. As organizations develop their business cases, it is recommended that they evaluate each risk to determine if: (a) it has already become an issue for them today, and if so, determine mitigation actions that they will need to take; or (b) it is a potential outcome, and if so, determine how they will monitor and address the risk throughout the project.

Technology immaturity: Blockchain, while evolving rapidly, is still not proven to satisfy enterprise needs in nonfunctional areas, such as analytics, performance and security. It’s still immature in its implementation and other technical aspects such as the lack of scalability, lack of interoperability, stand-alone projects, difficult integration with legacy systems, etc.

Securing multi-stakeholder agreements: Failure to execute and secure agreements over access, rules, governance and legal standing of the proposed assets (such as intellectual property) and systems may prove to be difficult or impossible within the desired time frame.

Network effects: Many concrete blockchain use cases involve external peers and entities that are outside the firm’s control. The value in a blockchain system can be reaped only when other parties adopt it and when more workload transfers to the new system.

End-to-end process control: A lack of clarity and blurred visibility into all impacts of processes and systems (internal and external) can invalidate or complicate architecture later down the line.

Acceptability of disintermediation: Building a business case to disintermediate and/or protect against disintermediation at any level — firm, line of business, employee — is challenging from a management approval standpoint. It is vital to get all stakeholders aligned early on in the blockchain engagement.

Lack of standardization: Blockchain standards are currently fragmented and immature. The absence of standards for new processes, policies, and regulatory frameworks can prove to be a showstopper in moving ahead with the project or cause refactoring later in the project.

Availability and sustainability of skills: With the increased adoption of blockchain technology by firms, the demand for required skills such as cryptography, game theory and behavioral economics, many of which are in short supply, has also spiked. Moreover, as blockchain matures, seasoned blockchain professionals will command high prices, introducing project execution risks.

 

Conclusion

While experimental efforts that enable enterprises to fail fast and learn do not require business cases, it is vital to build a business case and evaluate its merits before you commit to a project that impacts your business.

Furthermore, blockchain business cases should be compared against alternative options, such as alternate projects, alternate technologies, and the benefits and costs of doing nothing at all.

While decision makers perform the analysis and build the business case initially, they should revisit their assumptions and monitor risks regularly to ensure the blockchain initiative is successful.

For more information, reach out to Varun Singhi.

This article was originally published on LinkedIn. Read the full article here.

Sources: [1] McKinsey Report – Strategic Value of Business with Blockchain. 2. Deloitte Blockchain Global Survey 2020 3. Articles from https://www.finextra.com/ 4.Gartner Report – ID: G00323011 – Blockchain