Why blockchain, despite some early success, remains a corporate enigma

While blockchain is moving beyond pilot projects and proofs of concept testing in some industries, companies still struggle to justify development spending and continue to have concerns around security, interoperability, bandwidth and regulatory uncertainly.

Earlier this month, research firm IDC published its semi-annual blockchain spending guide; it showed blockchain spending this year is forecast to be $2.7 billion, up 80% over 2018.

By 2023, spending on blockchain hardware, software and services is expected to reach $15.9 billion, according to IDC. Adoption of blockchain for financial services, identity, trade, and other markets “is encouraging,” IDC stated.

Global blockchain spending will be led by the banking industry, which will account for roughly 30% of the worldwide total in IDC’s five-year forecast, which runs from 2018 through 2023. Discrete manufacturing and process manufacturing will be the next largest industries, with a combined share of more than 20% of overall spending.

Process manufacturing will also see the fastest rate of spending growth (68.8% combined annual growth rate), making it the second-largest industry for blockchain spending by the end of the 2023. (Overall, IDC expects blockchain spending to grow at a combined annual growth rate of 60.2% through 2023.)

In a recent survey of enterprise executives by IDC, the results of which have yet to be published, 62% of respondents indicated they’re considering blockchain in the long run, are currently deploying it in production or evaluating it, according to IDC Research Director James Wester. That number is up slightly from last year, when 55% indicated they were involved with blockchain projects, or 2017, when 51% said they were deploying or considering it.

IDC

Blockchain, Wester said, has reached a “tipping point” across multiple use cases, such as cross-border payments and settlement and supply chain management and tracking, and many companies in those areas are quickly moving from pilots into production.

However, during a webinar last week, Wester and research manager Stacey Soohoo said uncertainty about the benefits of the technology is warranted, specifically when it comes to regulation and governance.

“I think [blockchain is] developing,” Wester said. “There’s still much we don’t know about just how it’s going to develop. Honestly, that’s OK. The disruptive potential of blockchain is that it will completely change the way in which enterprise software is developed and distributed. A little uncertainty is to be expected.”

For example, when an enterprise deploys a blockchain-based network to exchange information between, say, supply chain partners, who gets a seat at the governing table for how it’s run or how business partners should divvy up the costs and benefits of the distributed ledger remains a point of contention.

IDC

“They’re [also] facing regulatory concerns, interoperability [issues] with other organizations and even within their own technologies. And they’re also faced with this issue of ‘What’s my timeline? When am I going to see the benefits?'” Soohoo said.

Even as many companies are “knee deep into these deployments and projects,” they’re realizing that a lot of what they originally set out to do wasn’t thought out 100%, Soohoo said. Or, even if they did think their projects through thoroughly, they’re only now realizing they need more time to find the right business partners and to make sure the blockchain networks integrate smoothly with legacy systems.

Blockchain is not middleware meant to tie into existing legacy systems, but there are ways of automating the flow of data from ERP systems to a distributed ledger technology. Typically, APIs and data-sharing standards, such as GS1 (best known for the machine-readable barcode protocol), have been used to enable interoperability with legacy data systems.

The IBM Food Trust, which is used by Walmart and other big box retailers to track food from farm to shelf, avoids manual data input by leveraging legacy tech investments through the GS1 standard; it automates the transfer and understanding of data between different parties on the electronic ledger.

IBM

Regardless of how blockchain is implemented, most of the cost and legwork for rolling it out requires business partner participation in the network and involves hammering out business agreements and governance rules, said Kevin McMahon, director of emerging technologies at Chicago-based consultancy SPR.

“Putting together the governance model and putting in the effort, time and energy building out a consortium as well as solving business challenges — that’s always been the surprise for our clients,” McMahon said.

“I think folks are realizing right now at this point…it’s not going to be an easy, smooth road ahead,” Soohoo said.

Finding the ROI in blockchain is also not easy.

Unlike pilots and test projects of tried-and-true technology, the amorphous nature of blockchain — because it’s an underlying enabling platform and not a business application delivering value — can make it a tough sell to executives.

Currently, Wester said, a company typically looks at a technology investment and calculates efficiency gains or revenue potential — “a relatively simple calculation.”

IDC

“When you start spreading that investment across participants in a network, that cost may not be spread evenly. Or the benefits accrued to participants may not be spread evenly either,” Wester said. “Also, those costs and benefits may change as participants enter into the network, and that may not be apparent at the outset.”

Another reason ROI is difficult to pin down is because companies are essentially building the networks in a bid to gain members and scale, but can’t properly size the opportunity before that happens, Wester added.

Blockchain, however, has the potential to change the way consumers buy, businesses track and exchange data and even how software is distributed among business partners.

Currently, enterprise software is delivered as a licensed or as-a-service model, which means individual companies consume software that sits on top of, and performs functions empowered by, databases. In other words, an ERP solution loads, manipulates, changes and analyzes data in a database.

One company may have an ERP system that looks at its data on its products. It then sends that product to a partner company that also has an ERP system that records the input of that product in its own database.

“It’s the same data, but a different database,” Wester said. “And across many industries, the ERP solution is likely provided by the same vendor. So Company A and Company B are looking at the same data but using their own licenses or access to similar ERP solutions. That’s not very efficient and means that companies are often inputting data and verifying information that has already been loaded and verified countless times before.”

With blockchain, if two partner companies and all the other members of the value chain are updating their blockchain-based server nodes to track data, “suddenly you have a very different way of looking at the enterprise software sitting on top of that database,” Wester said.

“Each transaction or change of state is replicated to each node automatically, so much of what an ERP solution does in loading and changing data becomes redundant,” he added. “Instead, all that is required is a browser-like application that can see what is happening in the blockchain. That’s the same issue with a lot of other enterprise software that tracks inventory or accounts payable/receivable. Thus, it changes the delivery model for enterprise software.”

Soohoo pointed to examples where blockchain is changing the retail industry by allowing consumers to scan a QR code with their smartphone and read about where and how their clothing, food or other products are made.

Walmart is already piloting an application that would allow a consumer to scan a QR code on a produce label and find out the history of the product, from farm to shelf.

In June, the U.S. Food and Drug Administration (USFDA) announced that IBM, KPMG, Merck and Walmart are partners in a pilot project in support of the U.S. Drug Supply Chain Security Act (DSCSA); it would allow them to identify, track and trace prescription medicines and vaccines distributed within the U.S.

Blockchain’s ability to create an immutable record of a drug’s journey from manufacturer to shipper to shelf helps guarantee they are not counterfeit or contaminated.

“Customers are reporting they can benefit from being able to scan a QR code to see where a product came from,” Soohoo said.