Why Blockchain Is Crucial For Financial Planning and Analysis - Part 2

In my last article, I described blockchain in some detail. Now I want to dive a little deeper and expand on the potential value that blockchain could hold for the FP&A profession.

Blockchain has the potential to streamline financial processes, such as contract enforcement, by integrating delivery and payment into the contract itself. Blockchain can potentially increase IT security, because of the unprecedented protection it offers against fraud and hacking. Blockchain will also potentially improve transparency by accessing accurate transaction data from across your company’s value chain.

It would be fair to describe the current state of blockchain uptake as exploratory. Organizations are researching, assessing the potential use and value, and having discussions with the executive team.

A Distributed Database with Cryptographic Security

Blockchain has the power to challenge many of the accepted norms of global trade, finance, and supply chain management, because it reinvents the basic building block of commerce, the ledger, for a digital, connected age.

A blockchain is a digital ledger – a distributed database that can be shared across a network of computers based in different sites and geographies. An identical copy of the ledger is held by all people participating in a blockchain network. Any changes to the ledger are reflected in just minutes or seconds, thus providing all involved with real-time information and the capacity to track trends.

The security of the information in the ledger is protected cryptographically, with the participants in the network agreeing on who can perform the appropriate functions within the ledger. For blockchain, its attraction is more than the algorithmic technologies that underpin it.

This technology makes it possible to transform the ability of the ledger to record, enable, and secure a huge amount of transactions. It could be used in multiple sectors, from financial services to tax collection in the public sector. In the future, Financial Planning and Analysis (FP&A) may be able to leverage blockchain to increase IT security, manage extended value chains, and streamline contract enforcement.

Blockchains are considered highly tamper-proof, providing unprecedented protection from fraud, hacking, and unauthorized use. Instead of having to reconcile the internal system of record with information from suppliers and partners, FP&A will be able to pull data from multiple blockchains to create their system of record.

A Programmable Ledger that Contains Logic

A smart-contract feature means that the delivery and payment relating to the transaction can be integrated into the contract itself. With blockchains, the ledger itself is programmable and contains logic, freeing up human resources and capital to work on higher-value objectives. For example, there can be a rule that automates a payment upon the completion of a service.

Smart contracts would automate this process, which today involves a lot of manual steps and paperwork. This will work most of the time, where there aren’t disputes. What has yet to be designed is a mechanism for handling disputes in smart contracts. This topic will emerge as an important area of blockchain research in the future.

Ultimately, there will be hybrid contracts that blend the automation of smart contracts with the provisions for dispute resolution that exist in traditional agreements.

While blockchain technology is quite new, it is likely to play an important role in FP&A in the coming years. FP&A professionals should be anticipating how they are going to build the relevant competencies and skill sets.

FP&A professionals also need to start discussing the future of their system of record, given that organizations could move from working with a single, monolithic system of record inside the enterprise to working with many different systems.

We will be addressing these issues and more at the upcoming 2018 FP&A roundtables and conferences we are hosting in St. Louis, Charlotte, Atlanta, San Diego, Las Vegas, London, Boston, Minneapolis, Dallas-Forth Worth, San Francisco, Hong Kong, Jeddah, and many other locations around the world.