Digital Transformation: Disrupting With Diversified Business Models

Paul Lewis

As a previous CFO I work with used to say frequently, “It’s all about cash flow.” Good ideas and good businesses are about making money and spending just enough to grow that money incrementally and predictably over time. “The faster we achieve positive cash flow on any particular project, the more investment money will be available to innovate again,” was a mantra I heard time and time again.

Getting to financial steady-state for new organizations and/or maintaining incremental positive growth for mainstay companies is becoming more difficult, however, because:

  • Competition from Internet/mobile-born startups are quick to innovate and can change priorities on a dime
  • Changing consumption demands from a changing consumer market will make or break product success far faster than ever
  • Explosion of massive automation techniques, like robotics and artificial intelligence, is reducing the human effect of customer service
  • Globalization and ubiquitous information sharing are creating real-time service comparison and global rating systems
  • Startup adjacent markets like bitcoin are competing with centuries-old financial markets

These “disrupters” could be summarized into one simple word: choice. Your clients want choice in products, service, payment method, company, length of engagement, etc. They are perfectly happy to replace you if they are not satisfied.

Consumers are also choosing to break up long-term and broad business relationships to create several short-term, diverse relationships. Instead of being loyal to a single bank consuming all the retail, investment, and insurance offerings available, they would rather spread their wealth across many institutions, and they will purposely and quickly move to another institution if you’re not keeping up with your side of the bargain on customer service.

Collectively, these digital disrupters are chipping away potential growth, especially if executives are relying on the traditional tools in their tool belt: Introducing new products at the same rate and incrementally improving customer service, prices, sales, and promotions.

The best way to compete with disruption? DISRUPTION!

Competing against these disrupters requires a new disruptive business strategy – digital transformation – which is largely divided into these three categories:

  • Operations and processes: Take a ground-up re-evaluation of the services you deliver to dramatically change the time to market delivery of your products (from months to hours)
  • Customer experience: Purposely identify and understand new customer behaviors and buying expectations with a consumer mindset of replaceability
  • New business models: Shift from “sell product” to “sell service” to “sell usage” to “sell outcome” to “sell network”

I’ve already written about operations and processes and customer experiences in the last couple of months, so let’s dig a little deeper into new business models.

A quick reminder in the last few minutes: The customer expectation is choice, as evidenced by competitive pressures from digital disrupters.

Many of the digital disrupters, including your digital competition, likely have a significantly different business model. We could go in depth in terms of the various characteristics of your business model, including value proposition, customer segments, partner relationships, key assets and activities, etc., which would certainly show major differences:

  • Major hotel chains have trillions of dollars worth of property, while online room rental capabilities have none
  • Big-box retailers cater to a diverse set of customer demographics, while drone-based delivery retailers focus on urbanites
  • Large manufacturers require hundreds of partners to deliver an array of complex machines, while a niche manufacturer only needs a 3D printer and time on its hands
  • Major technology companies rely on a solid brand for continued patronage, but new entrants need some samples that fit into the trunks of their car

We could go in depth on each of these characteristics, and they do need to be addressed by the executives, but let’s focus even more on the financial models of your offerings relative to customer choice and cash flow.

For the most part, your financial model (how you earn revenue and how you spend it) largely fits into this generic description:

  • Sell product or service; make money – spend money to make product or deliver service – invest profit to make new product or service
    • It’s tried and true, and you can create and deliver a variety of products and services that fit this model. The more profit made, the faster debt is paid, the happier investors become.

But what happens when your customers are looking for choice and find the exact same product or service available from your competition in dramatically different financial models, including ones that suit their particular financial needs much better? Let’s explore those other models:

  • Sell product – make money THEN sell service – make money
    • Not a huge difference from the generic model, but it does create potential for new and recurring revenue. Adding the ability to sell add-on post-sale services not only creates new revenue, but also a level of “stickiness” with the customer due to the ongoing interaction. Instead of buying once and hoping they come back for a newer model later, the continued interaction keeps the brand front and center. The negative of course, is that a poor or declining customer experience will have a dramatically negative effect. It’s almost impossible to bring back a customer with a poor experience.
  • Sell product AS a service – make money over time
    • This model is the big shift from CAPEX to OPEX for all participants. For a customer, it’s replacing the financial burden of an upfront cash outlay with ongoing expenses over a period of time (a contractual term or when they stop the service). For the company, it means changing the spending model by taking on the upfront risk of product or service creation and availability, with the potential return of more profit per product over time. This model is preferable for customers looking to manage a predictable cash flow.
  • Sell product AS a service – make money based on USAGE
    • While still an OPEX model, the difference in that the burden of profitability is entirely on the shoulders of the company to create enough customers with enough usage over time to compensate for the upfront initial investment in the product creation and expenses over its lifespan. The potential return, however, is a far higher potential of profit if usage becomes popular. This model has created many cash cows. For customers, the expense is directly controllable and they can spend as little or as much as they need at their discretion.
  • Sell product AS a service – make money based on OUTCOME
    • As an extension to the usage model, the outcome model helps balance the risk between the seller and the consumer for the cost of the product. The burden of the product investment is still with the company, and the usage over time will still dictate the amount of potential profit, but that risk is now reduced with each customer interaction by jointly taking on the risk for the ongoing or end price. This is the model of “everybody roll up your sleeves” to create an average transaction price that’s lower for the consumer.
  • Sell platform services – make money from all participants:
    • This is a dramatic shift from creating and selling products to creating a network of buyers and sellers for a particular set of products or services. From the consumer perspective, and even your brand recognition as a whole, you may be seen as a provider, but this model is only about making offerings available from a variety of different sellers and earning revenue transactionally as part of the buying experience. The burden of product investment remains with the sellers. The burden of creating a marketplace (both the platform and relationships with all parties) becomes exclusively yours. The time and investment required to create these platforms will be a significant burden, and the potential of failure is significantly high. However, once the network is thriving, net new revenue can be earned by creating new and innovative value for each of the participants in the network and creating logarithmic profits by the simple organic growth of the network alone. The value for the customer, of course, is creating the ultimate venue for choice.

Just to be clear: I am not advocating a shift or a move to a new business or financial model for your existing offerings. And even if you strategically decide a new model would be valuable, I am not suggesting the various models described represent maturity or evolution. My recommendation is to evaluate your current growth against your competitors’ and your customers’ desires in order to create diversity in your business financial models to offer choice to your various customer segments. Ultimately, it’s choice that will be the winning digital transformation business strategy.

Everyone has a perspective and a point of view. Spend time reading, forming an opinion, and talking about it. Being right isn’t important. If you are never wrong, you aren’t trying hard enough.

See how IT can help organizations shift to real-time operations. Read the EIU report.

This blog originally appeared on Hitachi Data Systems Community.


Paul Lewis

About Paul Lewis

Paul Lewis is the chief technology officer in Hitachi Vantara for the Americas, responsible for the leading technology trend mastery and evangelism, client executive advocacy, and external delivery of the Hitachi vision and strategy especially related to digital transformation and social innovation. Additionally, Paul contributes to field enablement of data intelligence and analytics; interprets and translates complex technology trends including cloud, mobility, governance, and information management; and represents the Americas region in the Global Technology Office, the Hitachi LTD R&D division. In his role of trusted advisor to the CIO community, Paul’s explicit goal is to ensure that clients’ problems are solved and opportunities realized. Paul can be found at his blog, on Twitter, and on LinkedIn.

Take Back Your Customers With IoT Initiatives

Joerg Koesters

It’s clear: The retail industry is changing at a rapid pace. It has never been so important for retailers to grab hold of their customers and create new sales points, drive better engagement, and build brand loyalty. The implementation of IoT can provide that important connection point for retailers and customers, providing a new way for retailers to engage with and meet the needs of their customers.

Retail trends are worrisome: A jumpstart with IoT can change it all

By April of 2017, the U.S. had lost 30,000 positions in the retail industry, and CoStar Group reported that 10 percent, or 1 billion square feet of retail space, would shutter by the end of the year. In the UK, continued Brexit concerns plague the retail industry. In Australia, there’s a growing concern about Amazon moving into a retail market already struggling to stay alive. These key trends are worrisome for retailers.

The key here is that consumers are still buying. In some cases, consumer spending is up. The problem is, it’s much easier to buy what’s needed online and wait for it to arrive rather than head to a store. That’s what retailers need to change. They need to give consumers a better experience when they walk in the door to convince them to come more often, buy more, and increase their brand loyalty. IoT can help with that.

At the same time, most retailers today see the value of turning their attention to improving e-commerce operations. Implementing the right technology can ensure that shopping carts are not left empty and that consumers always have an idea of what is in stock and ready to buy.

Retailers secure profitability again through the connected customer

Retailers have an interest in IoT. It provides improvements in inventory management, asset management, and consumer experience-driven sales. The simplest explanation of the future of retail is that IoT will become a critical enabler of the shopping experience. What does the connected customer expect? What can they provide to the industry?

IoT improves customer satisfaction

A key component of IoT in the retail experience is its ability to enhance customer satisfaction. Happy customers translate into stronger loyalty, larger transactions, and more frequent visits to retail locations. IoT can connect people, including customers, associates, and service providers, directly to products and to product information.

That means it can help to improve the visibility of product. Consumers know what’s available, and that drives their ability and willingness to purchase now. It also reduces inaccuracies in inventory availability. This is one of the most common reasons e-commerce retailers see abandoned order carts, customer dissatisfaction, and even brand switching.

Profitability increases

With more customer satisfaction and loyalty, retailers see long-term profitability rise. Initially, this means bigger checks, but it also means increased sell-through. It improves profitability overall but also reduces the need to mark down products now, a critical concern for many retailers today. Consumers have become accustomed to buying only when there’s a sale or discount. Retailers no longer have to mark down their product to see sales as frequently.

Personalized marketing drives better sales performance

Finally, IoT creates personalized marketing opportunities for retailers. This type of marketing is perhaps the most important component of physical store marketing going forward. Personalized marketing is the ability to send specific messages of sales, opportunities, or product awareness to a consumer that’s most likely to buy. This leads to higher conversion rates and better sales performance in every scenario.

The changing retail sector is more consumer-focused than ever

It’s estimated that 70 percent of retail decision makers across the globe are adopting IoT to improve customer experiences. Another key fact from the Zebra 2017 Retail Vision Study says that 90 percent of retailers plan to implement some type of buy-online/pickup-in-store plan within the next four years. As these details demonstrate, there’s a growing need to change the way you do business to meet the needs of today’s consumer.

Imagine, for a moment, how personalized marketing could work for the average retail location. A consumer stops at a shopping mall. The mall’s implemented IoT system notices the consumer based on his or her opt-in app. It can provide insight into the latest discounts or perhaps offer in-store purchases in a flash sale. Retailer A sees that this consumer, who purchased a specific product from them, is nearby. The retailer can ping the consumer’s phone, offer a flash sale on that item or provide information about bulk inventory, and the customer benefits. This creates instant satisfaction to the consumer and provides a clear opportunity for the retailer, and the shopping center, to connect and engage their consumer.

The key here is the technology behind IoT. With the most effective system in place, including the hardware, software, and connectivity, it becomes possible to embrace a better customer-retail connection. Of course, having the framework in place and the tools to pull in and analyze that data is the critical first step. From there, the more companies implement IoT strategies, the more they will comprehensively change the retail atmosphere.

Learn how to innovate at scale by incorporating individual innovations back to the core business to drive tangible business value: Accelerating Digital Transformation in Retail. Explore how to bring Industry 4.0 insights into your business today: Industry 4.0: What’s Next?


Joerg Koesters

About Joerg Koesters

Joerg Koesters is the Head of Retail Marketing and Communication at SAP. He is a Technology Marketing executive with 20 years of experience in Marketing, Sales and Consulting, Joerg has deep knowledge in retail and consumer products having worked both in the industry and in the technology sector.

How To Build Better Customer Loyalty With Authenticity

Derek Klobucher

Successful customer loyalty programs can seem like an impossible dream for a retailer, but their potential for repeat business makes them well worth pursuing — if done properly.

Store credit cards, for example, might appear to be a good place to start, as 40 percent of shoppers who have one indicate that they’re more likely to return.

“That has more retailers working to get customers to sign up for their own branded store credit cards … to encourage purchases, grow ticket sizes, and breed loyalty,” Retail Dive stated last week. “The good news for retailers is that they seem to be making progress.”

But that progress could turn out to be unacceptably slow because defining — and earning — customer loyalty isn’t so simple, according to a panel of retail experts at NRF 2018. A loyal customer isn’t necessarily someone who regularly buys from you, and what drives loyalty for other retailers probably won’t work for you.

Rethinking who’s loyal

“You need to look inwardly about what is the definition of a loyal customer — not to your peers in the industry,” John Allen, chief technology officer of UK-based fast-fashion retailer Missguided told the panel. “What happens in grocery is completely different for fashion, merchandise, sportswear, etc.”

Frequent buying doesn’t necessarily make a customer loyal; nor do frequent returns make another customer disloyal, according to Allen. And many loyalty programs have focused on only one segment of the retailer’s catalog, to the detriment of their wider range of products — and ignoring loyal customers who didn’t shop that segment.

“All of these things need to be taken into account when you look at loyalty … [and] that sort of analysis — and continued analysis — needs to be in place,” Allen said. “It’s not about the product anymore — it’s about the brand; I think that brand advocates in the world of social media can have a very much greater contribution — and be more loyal — than those who are buying lots of products.”

Making it easy, experiential, and beneficial

“There’s definitely a correlation between brands that have loyalty programs and brands that do a better job understanding their customer and deploying that information,” Evan Neufeld, Intelligence VP at New York-based business intelligence firm L2 Inc., told the panel. “Digital has opened up our expectations … it’s about experiential rewards: It’s being given exclusive offers; it’s being told something’s happening in-store; it’s getting some sort of loyalty points for actually sharing your information socially with your friends.”

Brands have historically created loyalty programs to help themselves, often at the expense of the customer; going forward, they must align their benefits with benefits to the customer, according to Neufeld. They must also make clear the distinct value of membership — so that new customers will join as easily and efficiently as possible.

“It’s the small things that people are missing that make life easier,” Neufeld said, citing brands that bury their loyalty program registration in the nether regions of their websites. “If you have one, make sure that you’re making it available so consumers can actually reach it.”

Where customer loyalty begins

“Loyalty starts by having a definition of who your customer is — and really focusing on your customer,” Neufeld said. “That’s why mass brands have a huge challenge.”

Those retail giants are often trying to sell everything to everybody, where smaller retailers tend to focus on narrow demographics, according to Neufeld. It’s tempting for big brands to try attracting customers with sales — but that paints consumers with too broad a brush, which won’t hold their attention.

“We see completely different buying behavior, even from the same pool of people,” Missguided’s Allen said. “If you’re selling a range of products, as most of us do … then your loyalty program is not going to work across all of those — even if you’ve worked out who your customer is.”

The human element

“The number-one way that people navigate things to do is by friends and family,” L2’s Neufeld said. “[It’s] by recommendation and social media.”

Your brand’s message must resonate socially, according to Neufeld said. It’s about trusting your customers to share your message, tag your products and more.

“That’s when you’re going to have authenticity behind your brand,” Neufeld said. “And that’s when you’re going to be successful at loyalty and personalization.”

Follow Derek on Twitter: @DKlobucher

This story originally appeared on Business Trends on the SAP Community.


Derek Klobucher

About Derek Klobucher

Derek Klobucher is a Financial Services Writer and Editor for Sybase, an SAP Company. He has covered the exchanges in Chicago, European regulation in Dublin and banking legislation in Washington, D.C. He is a graduate of the University of Michigan in Ann Arbor and Northwestern University in Evanston.

The Blockchain Solution

By Gil Perez, Tom Raftery, Hans Thalbauer, Dan Wellers, and Fawn Fitter

In 2013, several UK supermarket chains discovered that products they were selling as beef were actually made at least partly—and in some cases, entirely—from horsemeat. The resulting uproar led to a series of product recalls, prompted stricter food testing, and spurred the European food industry to take a closer look at how unlabeled or mislabeled ingredients were finding their way into the food chain.

By 2020, a scandal like this will be eminently preventable.

The separation between bovine and equine will become immutable with Internet of Things (IoT) sensors, which will track the provenance and identity of every animal from stall to store, adding the data to a blockchain that anyone can check but no one can alter.

Food processing companies will be able to use that blockchain to confirm and label the contents of their products accordingly—down to the specific farms and animals represented in every individual package. That level of detail may be too much information for shoppers, but they will at least be able to trust that their meatballs come from the appropriate species.

The Spine of Digitalization

Keeping food safer and more traceable is just the beginning, however. Improvements in the supply chain, which have been incremental for decades despite billions of dollars of technology investments, are about to go exponential. Emerging technologies are converging to transform the supply chain from tactical to strategic, from an easily replicable commodity to a new source of competitive differentiation.

You may already be thinking about how to take advantage of blockchain technology, which makes data and transactions immutable, transparent, and verifiable (see “What Is Blockchain and How Does It Work?”). That will be a powerful tool to boost supply chain speed and efficiency—always a worthy goal, but hardly a disruptive one.

However, if you think of blockchain as the spine of digitalization and technologies such as AI, the IoT, 3D printing, autonomous vehicles, and drones as the limbs, you have a powerful supply chain body that can leapfrog ahead of its competition.

What Is Blockchain and How Does It Work?

Here’s why blockchain technology is critical to transforming the supply chain.

Blockchain is essentially a sequential, distributed ledger of transactions that is constantly updated on a global network of computers. The ownership and history of a transaction is embedded in the blockchain at the transaction’s earliest stages and verified at every subsequent stage.

A blockchain network uses vast amounts of computing power to encrypt the ledger as it’s being written. This makes it possible for every computer in the network to verify the transactions safely and transparently. The more organizations that participate in the ledger, the more complex and secure the encryption becomes, making it increasingly tamperproof.

Why does blockchain matter for the supply chain?

  • It enables the safe exchange of value without a central verifying partner, which makes transactions faster and less expensive.
  • It dramatically simplifies recordkeeping by establishing a single, authoritative view of the truth across all parties.
  • It builds a secure, immutable history and chain of custody as different parties handle the items being shipped, and it updates the relevant documentation.
  • By doing these things, blockchain allows companies to create smart contracts based on programmable business logic, which can execute themselves autonomously and thereby save time and money by reducing friction and intermediaries.

Hints of the Future

In the mid-1990s, when the World Wide Web was in its infancy, we had no idea that the internet would become so large and pervasive, nor that we’d find a way to carry it all in our pockets on small slabs of glass.

But we could tell that it had vast potential.

Today, with the combination of emerging technologies that promise to turbocharge digital transformation, we’re just beginning to see how we might turn the supply chain into a source of competitive advantage (see “What’s the Magic Combination?”).

What’s the Magic Combination?

Those who focus on blockchain in isolation will miss out on a much bigger supply chain opportunity.

Many experts believe emerging technologies will work with blockchain to digitalize the supply chain and create new business models:

  • Blockchain will provide the foundation of automated trust for all parties in the supply chain.
  • The IoT will link objects—from tiny devices to large machines—and generate data about status, locations, and transactions that will be recorded on the blockchain.
  • 3D printing will extend the supply chain to the customer’s doorstep with hyperlocal manufacturing of parts and products with IoT sensors built into the items and/or their packaging. Every manufactured object will be smart, connected, and able to communicate so that it can be tracked and traced as needed.
  • Big Data management tools will process all the information streaming in around the clock from IoT sensors.
  • AI and machine learning will analyze this enormous amount of data to reveal patterns and enable true predictability in every area of the supply chain.

Combining these technologies with powerful analytics tools to predict trends will make lack of visibility into the supply chain a thing of the past. Organizations will be able to examine a single machine across its entire lifecycle and identify areas where they can improve performance and increase return on investment. They’ll be able to follow and monitor every component of a product, from design through delivery and service. They’ll be able to trigger and track automated actions between and among partners and customers to provide customized transactions in real time based on real data.

After decades of talk about markets of one, companies will finally have the power to create them—at scale and profitably.

Amazon, for example, is becoming as much a logistics company as a retailer. Its ordering and delivery systems are so streamlined that its customers can launch and complete a same-day transaction with a push of a single IP-enabled button or a word to its ever-attentive AI device, Alexa. And this level of experimentation and innovation is bubbling up across industries.

Consider manufacturing, where the IoT is transforming automation inside already highly automated factories. Machine-to-machine communication is enabling robots to set up, provision, and unload equipment quickly and accurately with minimal human intervention. Meanwhile, sensors across the factory floor are already capable of gathering such information as how often each machine needs maintenance or how much raw material to order given current production trends.

Once they harvest enough data, businesses will be able to feed it through machine learning algorithms to identify trends that forecast future outcomes. At that point, the supply chain will start to become both automated and predictive. We’ll begin to see business models that include proactively scheduling maintenance, replacing parts just before they’re likely to break, and automatically ordering materials and initiating customer shipments.

Italian train operator Trenitalia, for example, has put IoT sensors on its locomotives and passenger cars and is using analytics and in-memory computing to gauge the health of its trains in real time, according to an article in Computer Weekly. “It is now possible to affordably collect huge amounts of data from hundreds of sensors in a single train, analyse that data in real time and detect problems before they actually happen,” Trenitalia’s CIO Danilo Gismondi told Computer Weekly.

Blockchain allows all the critical steps of the supply chain to go electronic and become irrefutably verifiable by all the critical parties within minutes: the seller and buyer, banks, logistics carriers, and import and export officials.

The project, which is scheduled to be completed in 2018, will change Trenitalia’s business model, allowing it to schedule more trips and make each one more profitable. The railway company will be able to better plan parts inventories and determine which lines are consistently performing poorly and need upgrades. The new system will save €100 million a year, according to ARC Advisory Group.

New business models continue to evolve as 3D printers become more sophisticated and affordable, making it possible to move the end of the supply chain closer to the customer. Companies can design parts and products in materials ranging from carbon fiber to chocolate and then print those items in their warehouse, at a conveniently located third-party vendor, or even on the client’s premises.

In addition to minimizing their shipping expenses and reducing fulfillment time, companies will be able to offer more personalized or customized items affordably in small quantities. For example, clothing retailer Ministry of Supply recently installed a 3D printer at its Boston store that enables it to make an article of clothing to a customer’s specifications in under 90 minutes, according to an article in Forbes.

This kind of highly distributed manufacturing has potential across many industries. It could even create a market for secure manufacturing for highly regulated sectors, allowing a manufacturer to transmit encrypted templates to printers in tightly protected locations, for example.

Meanwhile, organizations are investigating ways of using blockchain technology to authenticate, track and trace, automate, and otherwise manage transactions and interactions, both internally and within their vendor and customer networks. The ability to collect data, record it on the blockchain for immediate verification, and make that trustworthy data available for any application delivers indisputable value in any business context. The supply chain will be no exception.

Blockchain Is the Change Driver

The supply chain is configured as we know it today because it’s impossible to create a contract that accounts for every possible contingency. Consider cross-border financial transfers, which are so complex and must meet so many regulations that they require a tremendous number of intermediaries to plug the gaps: lawyers, accountants, customer service reps, warehouse operators, bankers, and more. By reducing that complexity, blockchain technology makes intermediaries less necessary—a transformation that is revolutionary even when measured only in cost savings.

“If you’re selling 100 items a minute, 24 hours a day, reducing the cost of the supply chain by just $1 per item saves you more than $52.5 million a year,” notes Dirk Lonser, SAP go-to-market leader at DXC Technology, an IT services company. “By replacing manual processes and multiple peer-to-peer connections through fax or e-mail with a single medium where everyone can exchange verified information instantaneously, blockchain will boost profit margins exponentially without raising prices or even increasing individual productivity.”

But the potential for blockchain extends far beyond cost cutting and streamlining, says Irfan Khan, CEO of supply chain management consulting and systems integration firm Bristlecone, a Mahindra Group company. It will give companies ways to differentiate.

“Blockchain will let enterprises more accurately trace faulty parts or products from end users back to factories for recalls,” Khan says. “It will streamline supplier onboarding, contracting, and management by creating an integrated platform that the company’s entire network can access in real time. It will give vendors secure, transparent visibility into inventory 24×7. And at a time when counterfeiting is a real concern in multiple industries, it will make it easy for both retailers and customers to check product authenticity.”

Blockchain allows all the critical steps of the supply chain to go electronic and become irrefutably verifiable by all the critical parties within minutes: the seller and buyer, banks, logistics carriers, and import and export officials. Although the key parts of the process remain the same as in today’s analog supply chain, performing them electronically with blockchain technology shortens each stage from hours or days to seconds while eliminating reams of wasteful paperwork. With goods moving that quickly, companies have ample room for designing new business models around manufacturing, service, and delivery.

Challenges on the Path to Adoption

For all this to work, however, the data on the blockchain must be correct from the beginning. The pills, produce, or parts on the delivery truck need to be the same as the items listed on the manifest at the loading dock. Every use case assumes that the data is accurate—and that will only happen when everything that’s manufactured is smart, connected, and able to self-verify automatically with the help of machine learning tuned to detect errors and potential fraud.

Companies are already seeing the possibilities of applying this bundle of emerging technologies to the supply chain. IDC projects that by 2021, at least 25% of Forbes Global 2000 (G2000) companies will use blockchain services as a foundation for digital trust at scale; 30% of top global manufacturers and retailers will do so by 2020. IDC also predicts that by 2020, up to 10% of pilot and production blockchain-distributed ledgers will incorporate data from IoT sensors.

Despite IDC’s optimism, though, the biggest barrier to adoption is the early stage level of enterprise use cases, particularly around blockchain. Currently, the sole significant enterprise blockchain production system is the virtual currency Bitcoin, which has unfortunately been tainted by its associations with speculation, dubious financial transactions, and the so-called dark web.

The technology is still in a sufficiently early stage that there’s significant uncertainty about its ability to handle the massive amounts of data a global enterprise supply chain generates daily. Never mind that it’s completely unregulated, with no global standard. There’s also a critical global shortage of experts who can explain emerging technologies like blockchain, the IoT, and machine learning to nontechnology industries and educate organizations in how the technologies can improve their supply chain processes. Finally, there is concern about how blockchain’s complex algorithms gobble computing power—and electricity (see “Blockchain Blackouts”).

Blockchain Blackouts

Blockchain is a power glutton. Can technology mediate the issue?

A major concern today is the enormous carbon footprint of the networks creating and solving the algorithmic problems that keep blockchains secure. Although virtual currency enthusiasts claim the problem is overstated, Michael Reed, head of blockchain technology for Intel, has been widely quoted as saying that the energy demands of blockchains are a significant drain on the world’s electricity resources.

Indeed, Wired magazine has estimated that by July 2019, the Bitcoin network alone will require more energy than the entire United States currently uses and that by February 2020 it will use as much electricity as the entire world does today.

Still, computing power is becoming more energy efficient by the day and sticking with paperwork will become too slow, so experts—Intel’s Reed among them—consider this a solvable problem.

“We don’t know yet what the market will adopt. In a decade, it might be status quo or best practice, or it could be the next Betamax, a great technology for which there was no demand,” Lonser says. “Even highly regulated industries that need greater transparency in the entire supply chain are moving fairly slowly.”

Blockchain will require acceptance by a critical mass of companies, governments, and other organizations before it displaces paper documentation. It’s a chicken-and-egg issue: multiple companies need to adopt these technologies at the same time so they can build a blockchain to exchange information, yet getting multiple companies to do anything simultaneously is a challenge. Some early initiatives are already underway, though:

  • A London-based startup called Everledger is using blockchain and IoT technology to track the provenance, ownership, and lifecycles of valuable assets. The company began by tracking diamonds from mine to jewelry using roughly 200 different characteristics, with a goal of stopping both the demand for and the supply of “conflict diamonds”—diamonds mined in war zones and sold to finance insurgencies. It has since expanded to cover wine, artwork, and other high-value items to prevent fraud and verify authenticity.
  • In September 2017, SAP announced the creation of its SAP Leonardo Blockchain Co-Innovation program, a group of 27 enterprise customers interested in co-innovating around blockchain and creating business buy-in. The diverse group of participants includes management and technology services companies Capgemini and Deloitte, cosmetics company Natura Cosméticos S.A., and Moog Inc., a manufacturer of precision motion control systems.
  • Two of Europe’s largest shipping ports—Rotterdam and Antwerp—are working on blockchain projects to streamline interaction with port customers. The Antwerp terminal authority says eliminating paperwork could cut the costs of container transport by as much as 50%.
  • The Chinese online shopping behemoth Alibaba is experimenting with blockchain to verify the authenticity of food products and catch counterfeits before they endanger people’s health and lives.
  • Technology and transportation executives have teamed up to create the Blockchain in Transport Alliance (BiTA), a forum for developing blockchain standards and education for the freight industry.

It’s likely that the first blockchain-based enterprise supply chain use case will emerge in the next year among companies that see it as an opportunity to bolster their legal compliance and improve business processes. Once that happens, expect others to follow.

Customers Will Expect Change

It’s only a matter of time before the supply chain becomes a competitive driver. The question for today’s enterprises is how to prepare for the shift. Customers are going to expect constant, granular visibility into their transactions and faster, more customized service every step of the way. Organizations will need to be ready to meet those expectations.

If organizations have manual business processes that could never be automated before, now is the time to see if it’s possible. Organizations that have made initial investments in emerging technologies are looking at how their pilot projects are paying off and where they might extend to the supply chain. They are starting to think creatively about how to combine technologies to offer a product, service, or business model not possible before.

A manufacturer will load a self-driving truck with a 3D printer capable of creating a customer’s ordered item en route to delivering it. A vendor will capture the market for a socially responsible product by allowing its customers to track the product’s production and verify that none of its subcontractors use slave labor. And a supermarket chain will win over customers by persuading them that their choice of supermarket is also a choice between being certain of what’s in their food and simply hoping that what’s on the label matches what’s inside.

At that point, a smart supply chain won’t just be a competitive edge. It will become a competitive necessity. D!

About the Authors

Gil Perez is Senior Vice President, Internet of Things and Digital Supply Chain, at SAP.

Tom Raftery is Global Vice President, Futurist, and Internet of Things Evangelist, at SAP.

Hans Thalbauer is Senior Vice President, Internet of Things and Digital Supply Chain, at SAP.

Dan Wellers is Global Lead, Digital Futures, at SAP.

Fawn Fitter is a freelance writer specializing in business and technology.

Read more thought provoking articles in the latest issue of the Digitalist Magazine, Executive Quarterly.



Why Blockchain Is Crucial For FP&A: Part 1

Brian Kalish

Part 17 in the Dynamic Planning Series

In these times of almost continuous technological change, there is a natural tendency to be suspect of whatever is being heralded as the “flavor of the month” or the “next best bet.” In early 2017, I was graciously given the opportunity to speak on what I believed to be the technologies that were transforming finance and specifically, the FP&A function. The talk I ended up giving covered five areas:

  • Advanced analytics and forecasting
  • Robotic process automation
  • Cloud and Software-as-a-Service
  • Artificial intelligence
  • Blockchain

While all these topics deserve further investigation, for this article, I want to focus on blockchain. Part of the reason for diving deeper into blockchain is the lack of understanding of what it actually is and the great amount of time people in the finance function are currently spending talking about it. This has greatly changed in the past nine months.

Last March, while hosting an FP&A Roundtable in Boston, I ask a group of 25 senior FP&A professionals how familiar they were with the concept of blockchain. Out of this august group, there was only one participant who felt truly comfortable with the concept. I still get asked on a regular basis, all over the world, “Blockchain. What is it?”

Blockchain: What is it?

By allowing digital information to be distributed but not copied, blockchain technology has created the spine of a new type of Internet. Picture a spreadsheet that is duplicated thousands of times across a network of computers. Now imagine that this network is designed to regularly update this spreadsheet, and you have a basic understanding of blockchain.

Information held on a blockchain exists as a shared and continually reconciled database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly transparent and easily verifiable. No centralized version of this information exists for someone to corrupt. Hosted by many computers simultaneously, its data is accessible to any authorized user.

Blockchain technology is like the Internet in that it has a built-in robustness. By storing blocks of information that are identical across its network, the blockchain 1) cannot be controlled by any single entity and 2) has no single point of failure. The Internet itself has proven to be durable for almost 30 years. It’s a track record that bodes well for blockchain technology as it continues to be developed.

A self-auditing ecosystem

The blockchain network lives in a state of consensus, one that automatically checks in with itself on a regular basis. A kind of self-auditing ecosystem of a digital value, the network reconciles every transaction that happens at regular intervals. Each group of these transactions is referred to as a “block.” Two important properties result from this:

Transparency. Data is embedded within the network as a whole, and by definition, is available to all authorized users.

Incorruptibility. Altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network. In theory, it is possible; however, in practice, it’s unlikely to happen.

A decentralized technology

By design, the blockchain is a decentralized technology, so anything that happens on it is a function of the network as a whole. Some important implications stem from this. By creating a new way to verify transactions, aspects of traditional commerce may become unnecessary.

Today’s Internet has security problems that are familiar to everyone. However, by storing data across its network, the blockchain eliminates the risks that come with data held centrally. There are no centralized points of vulnerability that can be exploited. In addition, while we all currently rely on the “username/password” system to protect our identity and assets online, blockchain security methods use encryption technology.

I hope this little tutorial helps describe what blockchain is. In my next article, I’ll discuss the value of blockchain to the FP&A profession.

For more on this topic, read the two-part “Blockchain and the CFO” series and “When Blockchain Fulfills CFOs’ Paperless Vision.”

2018 will be a busy year with FP&A Roundtables in St. Louis, Charlotte, Atlanta, San Diego, Las Vegas, London, Boston, Minneapolis, DFW, San Francisco, Hong Kong, Jeddah, and many other locations around the world to support the global FP&A community.

Follow SAP Finance online: @SAPFinance (Twitter)  | LinkedIn | FacebookYouTube


Brian Kalish

About Brian Kalish

Brian Kalish is founder and principal at Kalish Consulting. As a public speaker and writer addressing many of the most topical issues facing treasury and FP&A professionals today, he is passionately committed to building and connecting the global FP&A community. He hosts FP&A Roundtable meetings in North America, Europe, Asia, and South America. Brian is former executive director of the global FP&A Practice at AFP. He has over 20 years experience in finance, FP&A, treasury, and investor relations. Before joining AFP, he held a number of treasury and finance positions with the FHLB, Washington Mutual/JP Morgan, NRUCFC, Fifth Third Bank, and Fannie Mae. Brian attended Georgia Tech in Atlanta, GA for his undergraduate studies and the Pamplin College of Business at Virginia Tech for his graduate work. In 2014, Brian was awarded the Global Certified Corporate FP&A Professional designation.