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  • Nick Roquefort-Villeneuve

Do Blockchain-Based Smart Contracts Mean Lower DSO?

There are three letters that have the potential of turning the nights of finance departments employees into sheer nightmares: DSO. Day Sales Outstanding is the one measure that tells a pretty interesting story, behind which it is virtually impossible to hide: how (in)efficient your order-to-cash process truly is. Your DSO is like a book. I assume you’d rather read a story that’s fluid, captivating, and around which your peers want to connect and interact. That’s the story of a low DSO. Now have you ever disconnected on page fifteen of Leo Tolstoy’s “War and Peace” knowing that you still had 1,281 pages to go, which you’d better read because you’d be grilled on it? Yes, that’s how it feels to have to defend a high DSO before your Executive team. Having said that, there are order-to-cash process automation solutions on the market today that can improve your DSO. Yet you are still at the mercy of dysfunctions and/or imponderability such as a human error here and there and/or late payments from your customers. This is where smart contracts can change the story dramatically.

About Blockchain-Based Smart Contracts

In a previous blog post, I wrote about the difference between conventional contracts and smart contracts, so I will avoid being redundant in this post. However, to refresh your memory, smart contracts (also known as “cryptocontracts) are computer programs that directly control the transfer of digital currencies or assets between parties under certain conditions. The conditions are stored in the code of the contract itself, and as soon as they’re filled, the contract is executed. For example, a smart contract can trigger an automatic payment, when a company validates that it has received a shipment of merchandises, therefore speeding the transaction time and reducing the possibility of payment processing service errors. There is indeed no more waiting for your customer to make a payment or having to engage your collections team in case the payment is late. Smart contracts run on Blockchain platforms.

The benefits of smart contracts are multiple:

Speed of execution: The smart contract is executed or enforced as soon as a condition has been triggered. And both the condition and its trigger are stored in the smart contract’s code. The need to rely on human effort for this purpose is therefore eliminated.

Real-time updates: Every step that led to the execution of the smart contract plus each step post-execution are recorded in real-time in the Blockchain and viewable by all stakeholders at all times, creating transparency and trust, and leaving no room for misinterpretations.

Error-free: Smart contracts are automated transactions therefore they eliminate the involvement of human errors.

Incorruptible: The execution of the smart contract is automated and run on the Blockchain, which is a virtually incorruptible technology since it is decentralized. As a result, the risk of manipulation and the probability for errors are null.

No third-party involved: The execution of the smart contract solely involves its stakeholders. There is no need for a third-party to intervene, for example a financial institution or an attorney.

Cost-efficient: Automation and elimination of human errors can only reduce processing costs.

Revolutionary: True peer-to-peer exchanges and transactions.

Smart Contracts and Payments

When talking about smart contracts and payments, we need to consider two elements.

The first one pertains to the paradigm shift that Blockchain in general and smart contracts in particular represent. Thanks to this new technology, the need for a third-party involvement disappears. Today, financial institutions fill the role of intermediaries in all your transactions. So, what does it mean to scratch banks from the equation, when a smart contract executes a financial transaction? Well banks are not completely set aside. What changes is the way they are notified of the financial transaction they must facilitate. The debtor and creditor’s bank or credit card information is included in the smart contract’s code. As soon as the contract is executed, the payment is processed. Consider it as an “auto-payment” type of system. The data treatment of the process leading to the transaction, the transaction itself, and all the steps that follow are recorded in real-time in the Blockchain, validated ongoing, and available to all stakeholders without any conditions and at all times. This is what makes smart contracts, among other points listed in the first section of this blog post, revolutionary.

The second element to consider is the currency used to transact via a smart contract. I’d assume that the entirety of your transactions is denominated in fiat currencies, such as the U.S. Dollar, the Euro, or the Yen. When your Finance department compiles quarterly results, your Board or your shareholders want to see Dollars if your company is headquartered in the United States. Intrinsically, the types of currencies that are transacted on Blockchain are cryptocurrencies (Bitcoins, Ethers, etc.), not fiat currencies, and the execution of smart contracts in the best of all possible worlds should instigate the flow of cryptocurrencies between the supplier and his customer. But today’s business world is not ready for this scenario, simply because corporate accounting best practices are in Dollars, for example, and not in Ethers. This limitation creates a (small) dent in the overall functionality of smart contracts.

To Recap: Implications of Smart Contracts on DSO

Do you remember about thirty years ago when there were numerous articles in the press about how the Internet would never replace the in-store consumer experience? You know, this need to touch a product, feel its texture, engage in a passionate conversation with a salesperson who’s so knowledgeable about the brands he represents. We’re human beings! We need to interact with one another, discuss, argument, be convinced. Yeah, right! Now we can’t wait to go home to shop online. And we do so, because mentalities and habits have changed. Today we need efficiency at home… and in the office. Automation makes the corporate life easier, because it diminishes the risk of being confronted to uncertainties and conjectural changes. Blockchain technology and smart contracts are revolutionary tools that are bringing a completely new layer of security and business efficiency. There are a negative articles out there about Blockchain and smart contracts. They are intended to push an agenda that’s similar to the one those papers tried to shove down your throat forty years ago. Many professions are indeed at risk...