CIOs need to break down a complicated technology and explain the perils of ignoring blockchain.
It’s entirely possible that, in the next few weeks or months, your CEO will pull you into a meeting and ask “What do we tell the board about blockchain?”
News of the next “game-changing” technology has made its way from casual hallway conversations all the way to the board room. The Gartner 2016 Board of Directors survey revealed that 91% of board directors have at least heard of blockchain or distributed ledger technology. However, more detailed understanding of the implications is limited, and respondents are confused, with 36% of them viewing it as an opportunity and 21% as a threat.
It will be up to the CIO to communicate to the CEO or to the board directly what blockchain is and how it could affect the organization and the industry the firm operates within, said David Furlonger, vice president and Gartner Fellow. “They will want a high-level explanation about potential issues, risks and implications, including market potential and suggested actions,” he said.
Improve understanding of blockchain and its potential
Blockchain can enable people to create, transfer and store value directly without a traditional central authority. It creates a global, peer-to-peer, self-regulating, secure, and reliable economic and transaction infrastructure. It also creates an opportunity for enterprises to directly exchange value — whether monetary or otherwise — directly with each other.
This means that old business models and intermediation by large organizations would disappear and create an opportunity for “instant” business models created to exploit temporary opportunities with new companies. The pervasiveness of technology in society is underpinning a revolution in how goods and services are priced, valued and exchanged. CIOs should establish a framework highlighting for the board the concepts, risks and opportunities of a new economic model that blockchain technologies will enable.
Ensure the board recognizes the multiple phases of blockchain development. Identify where investments in blockchain R&D can have the most impact, based on current technology maturity, the evolution of commercial ecosystems and society’s proclivity to embrace a programmable economy.
Explain the potential frictionless markets
Set the business scene for blockchain evolution, with an explanation of the potential for a frictionless, decentralized and programmable society. Explain what would happen to the business if people, businesses and smart things could communicate directly between themselves without the requirement for a third party to establish trust and arrange for the creation and exchange of value. For example, companies could use cryptographic tokens as payment instead of a government-backed currency to purchase materials. Digital identities could become portable and documents and processes verified via immutability in the blockchain, rather than by an institutional arbiter. Highlight these possibilities and show the impact on the current operating and business models as multisided platform businesses are built.
Clarify the risks of underestimating blockchain
Companies that do nothing about blockchain run the risk of being left behind, but there are also risks to undertaking a blockchain project. Focus on three areas related to risk: The specifics of the business context (such as customer adoption paradigms), risk management (for example, information management), and legal issues (e.g., smart contracts). Industry boundaries will become more fluid as business ecosystems develop and artificial intelligence increasingly influences decision making. As the programmable economy takes shape, it’s difficult to see what business enterprises will look like in five years, as blockchain business models disrupt even today’s more advanced platform businesses such as Uber.
For risk management, governance, auditability and control of the networks and blockchain components supporting them is challenging. Assuming that permissioned operating models will solve a lot of the risk is not necessarily a given due to centralization and reliance on single supplier stacks. Legally, blockchain enables jurisdictions to be crossed and intermingled, complicating operating frameworks and enforcement. Much of the legal basis for identity, trust, smart contracts and other components are undefined in a blockchain context. Established laws still need to be revised and amended to accommodate blockchain use cases, and financial reporting is still unclear. Many challenges come along with blockchain, but the board must look ahead to how the technology could affect the enterprise.
CIOs can start small, by developing proofs of concept and engaging with the various consortia. The board should also conduct scenario-planning exercises to assess the evolution of blockchain business and the impact on their market and enterprise.
Clients can learn more about how to explain blockchain to their boards in the full research report, What CIOs Should Tell the Board of Directors About Blockchain by David Furlonger, et al. This research is part of the Gartner Trend Insight Report “Practical Blockchain,” a collection of research the practical realities facing CIOs, business leaders, developers and other potential adopters of blockchain technology.