Bank of the Future

What Drives the Next Wave of Blockchain Growth?

 
April 18, 2019

Nothing can drive the technology growth like a strong business case. Technology evolves faster with increased adaptation, which further increases with business value. Many blockchain initiatives in the banking, financial services, and insurance (BFSI) space are initially funded by innovation or fear-of-missing-out (FOMO) budgets. While this seemed to be a ‘cart-before-the-horse’ issue in identifying areas where blockchain can actually help, it has also helped in increasing the technology understanding and in generating the needed visibility and attention from various quarters.

However, for the technology to surge ahead and mature, its benefits should drive the next phase of adoption. There needs to be a clear articulation of value to the business to not only fund the investments, but also to put their energies in working with the ecosystem to making these programs successful. Without quantifiable business value articulation, technology adoption will remain superficial and will ultimately fade out. A structured cost benefit analysis framework is the stepping stone for benefits articulation. Such a framework can also be used as a tollgate to filter out non-strategic blockchain initiatives.

A business value framework for blockchain

A business value framework quantifies the key elements on the cost as well as the benefits side. Let us first look at the key ‘cost’ considerations:

  • Cost of replacement: Are we replacing an existing, fully functional system by retiring it early? In such cases, a big hurdle is in the form of initial investment required, thus stretching the breakeven period. This is less of a problem, in case of new services or where there are legacy systems, are due for replacement anyway.
  • Cost of opting for alternative technologies: It is important to get an alternative estimate to build the system using traditional technologies. The business case for blockchain can be very strong if building and maintaining the blockchain system is estimated to be close to that of doing the same in traditional technologies. However, benefits have to be significant enough to compensate for the cost differential if implementing blockchain is a lot more expensive.
  • Ecosystem cost: Blockchain works better when there is a large ecosystem of market players in the transaction value chain. For intra-organization use cases, there are other better and established technology options. It must be noted that there is significant amount of investment in terms of time, effort, and money to set up and nurture a large ecosystem. Building ecosystem solutions involving peer organizations is cumbersome due to competitive collaboration, compared to the solutions involving suppliers or customers. Trusted intermediaries or governments have the experience of running large ecosystem-based projects, but take the sheen of disintermediation out of the solution.


Now, let us look at the ‘benefits’ side:

Business benefits need to be quantified and well-articulated. Technology features like immutability and provenance cannot be the foundation for a business case. These are of little value unless they result in tangible business outcomes like lower cost, lesser fraud, or more revenue. What we need is a mechanism to quantify these benefits and verify the same post implementation. Some of the key buckets under which benefits can be quantified:

  • Reduction of fraud-related costs: Baseline costs due to fraud and the estimated reduction in such cost needs to be compared. This will help validate the business case post implementation. 
  • Reduction of manpower: Reduction of manpower either due to the reduction of reconciliation effort or the elimination of manual confirmation of information with counter parties.
  • Reduction of capital costs: Reduction of cycle time may result in less capital requirements and hence reduced capital costs. Baselining the capital costs and estimation of the same post blockchain implementation will help in building the business case.
  • Digitization benefits: Some of the manual processes may need to be digitized before they can be moved to blockchain. Even though digitization benefits are a by-product, these can be quantified to strengthen the case for the blockchain program. For example, some trade finance processes need to be digitized before they can be moved to blockchain.
     

Blockchain is often seen being used for its novelty, with an aim to attract new customers. However, this strategy may not work in the long run if the solution is not well thought out and expected benefits are not realized.

Developing a blockchain business case considering the aspects discussed above may appear simple, but blockchain programs come with an additional complexity of the ecosystem. Costs and benefits are distributed across the ecosystem, and in most cases, not uniformly. Certain costs like product license, infrastructure, and integration are to be borne by individual players in the ecosystem, whereas costs of software development, operations, and ecosystem management are shared across players.

Sharing of costs and benefits also depends on the nature of ecosystem: in a peer-to-peer ecosystem, there is more likelihood of equal distribution of costs, compared to a supplier-service provider relationship, in which one party is expected to invest and is the prime beneficiary as well. It is therefore important to consider the business case at the participant level as well. To enable this, definite assumptions have to be made regarding the minimum participation and the method to distribute costs and benefits among members.

A structured approach and methodology for business case evaluation not only helps organizations focus on important core projects, but also helps technology to mature faster by wider adoption. Efforts spent early in the project lifecycle on the aspects discussed here can save huge costs later and also provide a proper framework for prioritizing blockchain programs.

Raghavasuresh Samudrala is an Industry Solution Advisor with the Banking and Financial Services unit at Tata Consultancy Services (TCS). He has around 20 years of experience in IT solutions and consulting, and his areas of interest include enterprise architecture and innovation. Samudrala holds a Masters degree in Computer Science from the Indian Institute of Technology (IIT), Chennai, India.