Befuddled by blockchain? What to consider before diving in

Everest Group looked at what companies should consider before rushing to embrace the much-hyped distributed ledger technology. While some companies could see serious cost-savings, for others, it might be a bust.

blockchain ecosystem

Blockchain, perhaps best known for underpinning its better-known progeny, Bitcoin, is a rapidly evolving technology that remains something of a mystery for IT shops and in boardrooms.

The distributed ledger technology seemed to take off in 2017, with everyone from IBM to J.P. Morgan and countless smaller companies rushing to embrace it. Other firms hammered IT vendors with questions about the technology and how it could be used.

Deciding when and why your company might want to roll out a blockchain transactional ledger remains something of a risky move; many early adopters could wind up spending a lot of time and money on something that ultimately provides them with little to no benefit, according to a new report from Everest Group, Unblocking Blockchain Adoption- a Prioritization Framework for Business Processes.

Banking and financial services were the first to embrace blockchain ledgers – no surprise given that their core business functions are ideally suited to its distributed nature, transparency and immutability as a system of record.

In addition, those same industries have to rely on establishing trust between transaction participants, an often time-consuming and high-friction process due to central administration, a large number of intermediaries, and regulatory oversight that can sometimes span continents.

Even so, significant business benefits can be achieved with relatively simple, non-disruptive blockchain implementations, Everest Group said in its report. 

Here's a look at some of the factors the research group says companies should consider if they're eyeing blockchain.

blockchain Everest Group Research

Start with a pilot program

Blockchain pilot programs can be inexpensive and easy to set up, especially given the growing number of Blockchain-as-a-Service (BaaS) offerings that include cloud-based infrastructure and easy-to-integrate blockchain fabric via APIs, said Ronak Doshi, practice director at Everest Group.

Initial costs, however, can also be high due to the scarcity of talented blockchain developers, a lack of best practices, IT infrastructure costs (i.e. server nodes), a lack of reusable components, and the costs to build a business case. That's especially true when multiple parties are involved.

While market hype is now drawing in companies, enterprises should not rush into blockchain implementations, as "a partially-informed decision could result in costly mistakes, potentially destroying any organizational appetite for this powerful technology," according to the Everest Group.

That said, companies cannot sit on the sidelines for so long that they miss out on the competitive advantage a blockchain deployment could offer.

"There are several enterprise-grade blockchain [platforms] launched by consortiums or open source projects such as Enterprise Ethereum, Hyperledger and Corda. "But the limited set of live deployment cases are yet to prove these being battle-tested for practical applications," Doshi said. "This concern should start to ease as we enter 2018 and see several live deployments in this year."

Before piloting a blockchain project, Doshi suggests CIOs or CTOs recommend that their boards become educated on blockchain to better understand what it can do and where it falls short. That means understanding current challenges and how to create a roadmap of existing projects to solve them.

Enterprises should also develop a market intelligence team to track innovations in the blockchain ecosystem and follow what industry peers are doing. With those building blocks in place, companies can then conduct proof-of-concepts and real-world pilots to explore blockchain's potential and build up internal expertise in the technology.

Who's best-suited for blockchain?

Everest Group created a blockchain prioritization framework to highlight four broad areas of business-specific and corporate function use cases best suited for blockchain projects – or that could avoid it. The categories envisioned projects in the accounting, banking and financial services, healthcare and insurance industries. Everest sorted each business process into "ideal" use cases, "opportunistic" ones, those that could be "selective" and ones that could "avoid" the technology altogether. (The last category referred to corporate functions where a distributed ledger would offer few  advantages while meeting high resistance to change.)

Blockchain Everest Group Research

Blockchain growth to continue in 2018

This year is expected to see an explosion of real-world blockchain rollouts, with  exponential growth, Doshi said, if issues around scalability and governance can be solved; that, in turn, is expected to lead to a "war for talent." 

Vipul Goyal, an associate professor in the Computer Science Department at Carnegie Mellon University, said many companies are interested in enterprise blockchains, with one of the "big killer apps" involving supply chain management. For example, as goods move from one place to another or from one part of company to another..., "companies are interested in using blockchains to keep track of how goods are moving."

Insurance companies are interested in using blockchain distributed ledgers to keep track of merchant goods in cargo containers shipped from one country to another.

And for cross-border financial transactions, blockchain offers the distinct advantage of both transaction transparency, efficiency and freedom from regulatory oversight.

"There's no central authority," Goyal said. "Right now bitcoin is a legal gray area. Governments don't have technical ability to block these transactions or enforce any regulations."

Blockchain Everest Group

Everest Group's report lays out a methodology for determining whether a business should move forward with a blockchain proof of concept, wait until the technology matures more, or avoid it because it would not benefit core business applications.

Key factors to consider

Key factors to keep in mind for adoption include "process criticality," or how critical a business process is and the associated risk if something goes wrong.

Process criticality, Doshi said, is defined by the potential risks involved in moving a process from a current system, such as a centrally-managed, relational database, to a blockchain-based system. "Processes that include heavy customer interaction and/or using sensitive data or those processes that have significant risk and financial costs due to minor failures will be treated as critical processes," Doshi said.

Companies should consider:

  1. Data confidentiality. Public blockchains are transparent, and even private or "permissioned" blockchains that are centrally administered are transparent to the participants in them. "Several enterprise-grade blockchains come with a promise of managing confidentiality of data on a permissioned ledger," Doshi said, noting that "at this stage ... none of the solutions are truly battle tested for confidentiality and data security. This concern should ease over the course of the year as several projects will go live in 2018."
  2. Process reengineering. Companies should account for the costs of aligning business processes to a blockchain-based environment.
  3. Lost tech investments. Moving to blockchain systems could cost money and make previous investments in existing software and hardware wasted. 
  4. New technology partners may be needed to adopt blockchain, meaning enterprises need to understand the technology providers and service providers that would be best suited for their context.

In most cases, current enterprise processes are designed around a workflow that includes a trust-guaranteeing central party, Doshi said.

"Such workflows will need to be re-designed for the blockchain implementation. Certain steps may become redundant or need to be reconfigured to adapt to the new technology," he said. "There are use cases where the current workflow is designed for a decentralized flow of information (e.g. trade finance). Here blockchain technology can be applied with very limited changes to the process."

Finally, companies need to figure out the extent to which common data standards can be used to share information on the blockchain.

blockchain Everest Group

For example, Staten Island Multiple Listing Service, developed a a blockchain proof of concept for listing real estate three months ago to address process transparency and other inefficiencies inherent in traditional property deals.

Rolling out the platform was simple in that it only required adopting a set of APIs for the online listing website, according to Richard Mohr, the company's technology director.

The blockchain ledger, based on an online platform from ShelterZoom, also complies with the Real Estate Standards Organization (RESO) data dictionary, which helped streamline its integration with Staten Island Multiple Listing Service's current system.

Blockchain works best for establishing trust where governance and contract-enforcing mechanisms can be ensured on the new system between all the parties in the process, Doshi said.

For processes within an organization, enterprises can use the power of blockchain to create decentralized applications; that aligns well with highly federated enterprises, he added.

A federated enterprise architecture enables information sharing between decentralized business units, but it can be difficult to manage, depending on what systems need to be integrated and standardized.

Just as with a federated architecture, blockchain can be used to unite a decentralized enterprise for the purposes of information exchange and generate trust in networks. "Hence... blockchain eliminates or automates certain process steps," Doshi said.

Nay-sayer or blind believer?

Companies should avoid rolling out blockchain when there are already processes or business use cases where existing technology solutions can solve the current challenges with almost the same efficiency.

A significant number of enterprises fall into two groups today: the naysayers, which are growing fewer in number as the technology matures, and blind believers. While naysayers run the risk of being left behind, blind believers run the risk of implementing impressive-sounding blockchain proof-of-concepts for anything and everything requiring a database.

Those enterprises run the risk of draining significant resources with little to no benefit.

"Enterprises would be well-advised to use a structured prioritization a starting point in their journey of blockchain adoption," Everest Group wrote in its report.

Copyright © 2018 IDG Communications, Inc.

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