Two years ago, blockchain was barely mentioned in supply chain trade journals or industry conferences. Today, it’s a leading topic that still seems as befuddling to as many supply chain executives as when they first heard of the technology—which was probably when Bitcoin started to enter our lexicon.
A recent article from McKinsey & Company suggested that blockchain has an Occam problem. In other words, it’s not following the principle of “keep the solution simple and avoid unnecessary complexity.”
Authors Matt Higginson, Marie-Claude Nadeau and Kausik Rajgopal state that, “The bottom line is that despite billions of dollars of investment, and nearly as many headlines, evidence for practical scalable use for blockchain is thin on the ground.”
Using the classic four-stage life cycle theory for an industry or product—pioneering, growth, maturity and decline—as a measurement, the authors contend that blockchain “remains stuck at stage 1 in the life cycle (with a few exceptions). The vast majority of proofs of concepts (POCs) are in pioneering mode (or being wound up), and many projects have failed to get to Series C funding rounds.”
The financial sector, which was an early adopter of blockchain, is an example. From 2012 to 2015, the financial sector invested heavily in blockchain and paved the way for other sectors such as insurance, automotive and supply chain to explore the technology in earnest.
At the end of 2016, blockchain’s future looked bright. Yet, the financial sector’s reality looked markedly different.
“McKinsey’s work with financial services leaders over the past two years suggests those at the blockchain ‘coalface’ have begun to have doubts,” according to the authors. “In fact, as other industries have geared up, the mood music at some levels in financial services has been increasingly of caution (even as senior executives have made confident pronouncements to the contrary).”
By the end of 2017, many in the financial sector weren’t convinced by the outcome of POCs, which some said led to more questions than answers. “Another concern was the requirement for a dedicated network,” the report says. “The logic of blockchain is that information is shared, which requires cooperation between companies and heavy lifting to standardize data and systems. The coopetition paradox applied; few companies had the appetite to lead development of a utility that would benefit the entire industry. In addition, many banks have been distracted by broader IT transformations, leaving little headspace to champion a blockchain revolution.”
According to McKinsey, in 2019, blockchain’s practical value is mainly located in three specific areas, including:
- Niche applications: There are specific use cases for which blockchain is particularly well suited. They include elements of data integration for tracking asset ownership and asset status. Examples are found in insurance, supply chains and capital markets, in which distributed ledgers can tackle pain points including inefficiency, process opacity and fraud.
- Modernization value: Blockchain appeals to industries that are strategically oriented toward modernization. These see blockchain as a tool to support their ambitions to pursue digitization, process simplification and collaboration. In particular, global shipping contracts, trade finance and payments applications have received renewed attention under the blockchain banner. However, in many cases blockchain technology is a small part of the solution and may not involve a true distributed ledger. In certain instances, renewed energy, investment and industry collaboration is resolving challenges agnostic of the technology involved.
- Reputational value: A growing number of companies are pursuing blockchain pilots for reputational value, demonstrating to shareholders and competitors their ability to innovate, but with little or no intention of creating a commercial-scale application. Arguably, blockchains focus on customer loyalty, IoT networking and voting fall into this category. In this context, claims of being “blockchain enabled” sound hollow.
Meanwhile, blockchain continues to face headwinds. It’s poorly understood, there are technical impediments, especially around data storage capacity against the backdrop of increasing “connectedness,” and there are security concerns.
Nonetheless, the technology does indeed have a future. First, there must be a valid problem or pain point otherwise blockchain “likely won’t be a practical solution,” the authors explain. Next, “There must be a clear business case and target ROI.” And lastly, “Companies must agree to a mandate and commit to a path to adoption.”
In conclusion, McKinsey’s authors state that, “Conceptually, blockchain has the potential to revolutionize business processes in industries from banking and insurance to shipping and healthcare,” only if companies “adapt their strategic playbooks” to honestly evaluate blockchain’s capabilities against “more conventional solutions, and embrace a more hard-headed commercial approach.”