Enterprise resource planning (ERP) systems have become immensely important because they allow companies to scale up with consistent execution and planning. These systems connect demand plans to procurement, supply chain operations, invoicing, payments, and human resources, and they are the machinery that makes sure that when the last teddy bear is pulled from the shelf in a store, more cuddly animals are already on their way.
The foundational value proposition of ERP systems is to keep all the different participants in a business operation in sync. If your forecast shows increased demand, are you placing orders with suppliers? Do you have enough staff and inventory to manufacture the product?
ERP systems don’t just allow for scale; they allow for scale with consistency. They enable companies to make promises such as “I’ll give you a discount in exchange for the bulk of my volume” and then actually keep them. Want to execute a purchase order for a non-preferred supplier? ERP systems will force review and justification.
This isn’t just theory. It’s reality. The world’s biggest companies are bigger today — and more consistently global — than they ever have been before. ERP has played an enormous role, in particular, in turning big companies from multinationals — large firms that have somewhat independent outposts in many countries — into truly global firms.
If we look back a few decades, big companies were multinationals. The name may have been the same, but local variations were often very large.
ERP is insufficient for today’s ecosystem
Today — from mobile phones to operating systems to financial services — global firms look much more integrated and consistent than ever before. Many products, especially technology products, are often identical all over the world.
Despite the triumph of ERP, these technological wonders are showing their age and facing challenges.
Fifty years ago, companies were much more vertically integrated than they are today. Keeping promises as a firm was about getting the firm internally synchronized.
Today, firms depend on networks of subcontractors and partners to execute business plans, and getting them to do so with consistency is hard because they all have different ERP systems. This means that, deep into the age of ERP, a lot of key operations are still being done manually.
Introducing a solution: smart contracts
Blockchains promise to transform ERP systems and cross-business integration by extending standardized business rules and data across enterprise boundaries.
In particular, blockchain-based smart contracts enable complex business rules to be written for contracts and for the enforcement and automation of those rules across companies’ boundaries, all using standardized, open-source technologies.
For example, Microsoft uses a blockchain-based system to handle Xbox video game procurement across thousands of unique contracts. In moving from traditional systems to smart contracts, its team was able to cut the cycle time on sales reporting by 99% and the cost of administration by 40%.
Smart contract technology can do clever things like keep track of volume discounts and rebates, and even aggregate buying volume across firms. Enterprise procurement is expected to be one of the first big areas where firms start using them.
These smart contracts can make sure that business terms are followed, and discounts and rebates are applied, even when a supplier is buying on behalf of another firm.
Nonetheless, smart contracts have been slow to take off in part because many firms found integration with blockchain technology difficult. This was on top of immature blockchain privacy technology.
Now, however, both issues are much less of a problem.
Modern blockchain systems can deliver privacy on public blockchains, cutting costs dramatically compared to private blockchains, and they can integrate with firms in ways very similar to traditional electronic data interchange (EDI), which is already widely used.
Analyzing smart contracts’ ROI
So, how do you know if a smart contract is a good option for your firm?
A rule of thumb is that blockchains and smart contracts create the most value when you have multiple parties who need to share both common data (like how much we have purchased or spent) and common business rules (such as delivery times, standards, or pricing models).
When both of those are true, there’s usually great value found in adopting this promising technology.
Paul Brody is EY Global Blockchain Leader. He is responsible for driving initiatives and investments in blockchain technology across consulting, audit, and tax business lines, including the build-out of the first EY global SaaS platform, Blockchain.EY.com. With Brody at the helm, EY was the first and only professional services firm to commit to public blockchains and Ethereum. Since then, EY has launched public blockchain solutions, including participating in the creation of the Baseline protocol alongside ConsenSys and Microsoft, which aims to help enterprises adopt public blockchain. Brody also helped build the industry’s first smart contract testing platform and first on-chain audit platform. Brody also serves as the Chairman of the Enterprise Ethereum Alliance (EEA), the leading global community for enterprise blockchain. Prior to joining EY, Brody served as Vice President and Global Industry Leader in Mobile and IoT at a multinational technology company. Brody earned a bachelor’s degree in economics and a certificate in African Studies, both from Princeton University.