The advantages of ‘blockchain smart contracts’

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Advanced contract management

Today integrated Demand-to-Contract solutions have an advanced contract management feature. It contains contract standard clause libraries and online approval workflows. When e.g. a contractual termination date is met, the user is able to re-negotiate the terms and set them accordingly. Afterwards the contract can be archived in the tool. However, little has been achieved in contract automation, although we are convinced that this is the way forward for procurement operations.

Detecon’s main hypothesis

When debating about a long-term vision for the Procurement department, we at Detecon are convinced that Procurement Operations will be fully automated by 2030. Considering all the current technological development, there is one innovation that could revolutionize the Demand-to-Contract process: blockchain smart contracts.

The attributes of a blockchain smart contract

A smart contract is an application that helps to define, validate, automate, and keep record of any action and process. It is one of the main uses of blockchain technology, which became famous with bitcoins. A blockchain smart contract enables the technical enforcement of rules and follows a simple “if, then” function. Moreover, it includes a record keeping function and has the potential to serve as elementary building blocks for demand-to-Contract processes.

Blockchain smart contracts are written in code and have self-acting characteristics. The history of actions and transactions is stored in a digital ledger. This could lower paperwork and transactions costs of today´s contracting. Once installed, it automates and speeds up contracting processes and increases transparency.

‘Smart contracts don’t have to be dumb’

The idea of blockchain smart contracts is not new. But only now, we are able to put theory into action.
The cryptographer Nick Szabo came up with the concept in 1994 already. However, it has remained unused since the required technological infrastructure did not exist back then.

Trust is pre-coded in its origin and part of the blockchain database. Therefore, contracts can now be signed and executed at very low costs. Blockchain smart contracts are computer protocols based on payment conditions of a contract and its terms. The source code is the blockchain smart contract part readable by human beings. It inhibits the executable computer code that runs on a network. Thus, many of the contractual clauses can be partially or fully self-enforced or self-executed. This fact makes them smart in contrast to paper based contracts. ‘Smart contracts don’t have to be dumb’, as said by Niko Szabo.

The benefits of using blockchain smart contracts

Blockchain smart contracts are an alternative for companies facing frequent transactions between different parties, which contain manual or even duplicative tasks. Using blockchain as a shared database offers numerous benefits. The automated and real-time update of contracts speeds up business processes and saves transaction time. Concurrently, it is less susceptible to manual errors. Additionally, these processes require less human intervention and therefore reduce the payroll costs immensely. Due to the decentralized nature of the execution process, risks like nonperformance or manipulation are reduced immensely. Overall, it is a viable solution with low transaction costs and risks.

In a traditional Demand-to-Contract process, the contract preparations and finalization with the supplier usually takes time and is very expensive. Blockchain smart contracts streamline different contract management processes and also adapt such contract parameters as e.g. commodity prices.

Possible scenario for blockchain smart contracts

One possible scenario for blockchain smart contracts usage could be price adaptions as a reaction to price changes of the world market price. Entire processes such as contract renegotiations, could be depicted on the basis of self-executional codes, according to e.g. updated price indices. Old paper-based processes rely on multiple parties across different locations, and consume lots of transfer time. The blockchain technology provides a secure and reliable solution. It enables blockchain smart contracts to realize the conditions, such as price adaptions in real-time.

Prospect – ‘Procurement operations will become fully automated’

The blockchain technology has become widespread. Therefore, this statement is definitely a possible scenario. According to Gartner’s ‘Emerging Technology Hype Cycle’ it is ‘on the peak of inflated expectations’. Of course, there is the need to tailor the technological feasibilities to the specific needs of business areas and industries. Many startups have risen in this area and even managed to link IoT devices with blockchain smart contracts. However, there is still a lack of use cases. One of the main pain points will be to adapt the legislation to these technological developments. Finally, the responsible CXOs have to trigger the technology evaluation and mastermind how blockchain smart contracts can boost their efficiency and build new digital business processes.

In conclusion, blockchain smart contracts are a first viable step towards the automation of contracting, making procurement smarter, faster and more transparent. When blockchain smart contracts are running, the greatest advantage will be the cost saving potential. As first tests in this field are already being performed, we expect user-friendly solutions within the next five years.

In a nutshell

The blockchain is a secure and decentralized database which stores and records each transaction that prolapses within a network. It became popular since Satoshi Nakamoto´s technological theory about bitcoins in 2008. The source code that forms the smart contract can be added to this blockchain infrastructure without problems. Following Nakamoto, a smart contract is:

"A piece of code (the smart contract), deployed to the shared, replicated ledger, which can maintain its own state, control its own assets and which responds to the arrival of external information or the receipt of assets"

(Bitcoin: A Peer-to-Peer Electronic Cash System; https://bitcoin.org/bitcoin.pdf).

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