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Return on investment (ROI) is essential to calculate an asset’s growth. Adopting a technology without understanding the ROI will become more of a hit-and-trial process — and in the enterprise world, taking calculated risks becomes possible by adopting new technologies and understanding the profit it unveils. For enterprises taking the initiatives to integrate blockchain solutions into their systems, it is essential to undertake the blockchain cost analysis and understand the benefits that it can deliver.
Global value chains need a robust system for delivering products on time and for cross-border trade. Thus, to achieve the same, the blockchain economy will increase more and more in the upcoming years. Enterprises that opted for blockchain have witnessed a 41% positive ROI. Blockchain’s most significant advantage is creating trust between parties with an immutable record of transactions that are not subject to errors.
Due to blockchain data management’s distributed and auditable nature, no single party can alter data integrity. The adoption of blockchain technology isn’t an IT system change and requires more deeper blockchain cost analysis. While blockchain offers great potential benefits, ROI calculations are far more complicated and uncertain sometimes. This blog provides an overview of achieving ROI with blockchain in the enterprise and the value proposition of technology and blockchain cost analysis in-depth approach to understand more about it.
What is Blockchain ROI and why is it important?
Blockchain ROI is particularly important for technology adoption because it provides an indication of the potential financial gains from investing in a particular blockchain technology. It is also an important metric for assessing the potential for a technology to be adopted by businesses, as it can be used to compare the potential returns of different blockchain technologies. Blockchain ROI is important because it also helps investors evaluate the risk associated with investing in a blockchain-based project. By understanding the potential return on investment, investors can make more informed decisions about their investments.
How Blockchain Assists Enterprises
Blockchain creates harmony by providing interoperable standards to connect among various platforms. A blockchain-enabled marketplace gives more transparency and enhances the economy. While employing blockchain, enterprises need to understand which data to share on the network and which not. It is essential to share trusted data to improve security & transparency. A blockchain cost-benefit analysis consists of both intangible assets and tangible assets.
One of the ways to calculate the ROI of the blockchain application in business is Multi-criteria Decision Analysis (MCDA). The MCDA analyzes the intangible benefits and the uncertainties. In MCDA, a scorecard is prepared to assess the blockchain ROI for an enterprise. Hyperledger Besu is an Ethereum client that is open-source. It serves as an execution client on public PoS Ethereum networks like Sepolia, Goerli, and Ethereum Mainnet.
The brief required to calculate the ROI
To know the ROI of a blockchain enterprise, there has to be:
1. The business model and the use cases.
2. The current stage of the project.
3. Team members, including both technical and advisory members.
4. Clear expectations of what the blockchain project will do.
5. Story of users and how they benefited from the company.
Figure: IBM report which explains the expected ROI on blockchain investment
Assessing Blockchain cost analysis – Intangible benefits of Blockchain
The intangible benefits of blockchain technology also have an impact on enterprise sales. Therefore, it will be a wrong decision to exclude intangible gains in the ROI calculation. Intangible information is such — less hacking, fewer errors, and faster and more reliable information. Furthermore, it is reasonable to include the benefits of the blockchain while calculating the ROI.
Many of the intangible benefits, such as uncovering a shipping delay, go unnoticed. Through the use of smart contracts, blockchain technology is ideal for sharing information among business partners and automating many tasks. There isn’t any central party that controls the database, and all of it is present on a distributed ledger shared across networks.
Enterprises can choose private blockchains as data sharing can be limited. There are cryptocurrencies and digital payments which promote a hassle-free payment ecosystem. Further, smart contracts can automate functions and cut administrative costs. The traceability and immutability features of blockchain are good for avoiding counterfeit goods. Consumers are also able to access blockchain data and know about the quality of products.
Figure: IBM report
Blockchain ROI Cost phases
Blockchain adoption enterprises are divided into two sides — while 61% consider it as a great technology, the rest consider it as the hype. However, business leaders have to understand the ROI of a blockchain-based enterprise. Consequently, understanding the cost phases involved is important. The blockchain ROI cost phases are divided in enterprises into three phases:
Phase 1: Pilot project
The blockchain value during the pilot project is limited or sometimes provides no value. However, the technology can be used to solve a particular problem as a proof of concept by enterprises.
Phase 2: Commercial Market
To achieve ROI in longer terms, this phase stands out. However, here we require increasing complexity, and to scale further requires additional developers. The IT effort increases in phase 2. The enterprise needs to create a governance model and advisory board to determine how the blockchain will be used.
Phase 3: Network of Networks
The “network of networks” encapsulates a large potential for ROI. Enterprises will have to upgrade their platforms as the number of blockchain-based companies increases. The companies will have to outsource work from an external blockchain management platform to develop the ecosystem. The cost for the service depends on many factors such as project duration and complexity as per the use case.
Blockchain Cost Analysis Approach To Follow:
To know about the financial feasibility of enterprise blockchain, a cost-benefit approach is used. Here are the following objectives to know while doing a cost-benefit analysis:
Determine the Objectives: The enterprise will have to determine the objectives of adopting blockchain. Suppose, for a financial institution working on cross-border payments, the goal would be to decrease the price of international transactions.
Identify costs and benefits: The costs associated can be in developing the blockchain platform, onboarding the team to learn usage, the ongoing cost of operation, and the costs of maintaining the platform.
Measure cost and benefits: Implementing blockchain in global payments results in increased revenue generated from transactions made on the platform. As a result of blockchain’s value-added features, claims are more efficient, and labor costs are reduced as well.
Aggregate costs & benefits: The cost to be considered can be onboarding costs, platform development costs, ongoing operations costs, and various maintenance and monitoring costs. Furthermore, it is necessary to take into account the benefits of aggregate costs.
Sensitivity tests for uncertainty: A sensitivity test implies the consideration of a certain percentage of increase or decrease in total customers in order to assess the influence on cost and benefits.
Interpret results: When it comes to interpreting the results, there is a need to calculate NPV, ROI, BCR, and payback period.
Compare to a base case: Finally, whenever the cost-benefit analysis is done, there has to be a base case. The findings are compared with the traditional systems.
Similarly, The cost-benefit analysis of supply chain finance can be understood more from a research paper by Patara Panuparb. The report explains the ROI benefits in three stages. Firstly, the benefit allocation for a supplier and buyer decreases while it increases for the funder and the platform provider. Secondly, the supplier is the one whose benefit may be negative or positive, as they have to pay a platform fee which may be more than the benefits from working capital. Lastly, there is a total net benefit for the supply chain enterprises.
The Barrier to ROI from Blockchain
The extent of the cost depends on network usage and the number of peer nodes. The type of blockchain used (whether public or private) decides the cost. Private blockchain has more cost of development. Onboarding, membership fees, and transaction fees can help public blockchains regain development costs. Other investments required are cloud platforms, data storage, data transfer, and infrastructure administration. Thus, the hidden costs often act as barriers in the blockchain ROI calculation. Without trying to sound over-optimistic, we would say that, yes, not all projects see success still, overall there is a benefit for the enterprises that opt for blockchain technology.
Final Note
In the next 3 years, 85% of the CTO want to join the blockchain space. Subsequently, there will be an industry-wide blockchain network. The companies opting for blockchain can get help in managing invoices, reconciliation, and tracking of goods. The enterprise may be in different development phases, but the blockchain is still helpful for operations.
Blockchain has many benefits but has more complications when it comes to ROI calculation. In recent years, technology has seen tremendous adoption across many industries and will initiate innovation across sectors. There is also a need to undertake the social blockchain cost analysis to better evaluate the benefits delivered for the welfare of the society at large. Implementing blockchain solutions can improve efficiency, minimize costs associated with transactions and data storage, reduce time to market for enterprises, and these benefits can in return be used for funding the social welfare programs and tightening security and transparency.
About The Author
Dr. Ravi Chamria is co-founder CEO of Zeeve Inc, an Enterprise Blockchain company. He has an experience of 18+ years in IT consulting spanning across Fintech, InsureTech, Supply Chain and eCommerce. He is an executive MBA from IIM, Lucknow and a prolific speaker on emerging technologies like Blockchain, IoT and AI/ML.
Passionate About: Blockchain, Supply Chain Management, Digital Lending, Digital Payments, AI/ML, IoT
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