To innovate in today’s business environment, we must break down the paradigms that allowed companies to flourish in the past. Some of the biggest challenges of digital transformation result from an outdated understanding of how we digitalize information and handle transactions.
We can run digital business processes across companies, but to do this effectively, we must revisit our views on data management.
SAP has launched its new thought leadership journal Horizons by SAP, which brings together global tech leaders from various companies to share their perspective on the future of IT. In the coming weeks, one article from the journal will appear the SAP News Center per week. Here, Torsten Zube, head of the SAP Innovation Center Network, elaborates on the evolution of blockchain technology.
Most enterprise computing today is an answer to a particular problem: the paper-based processes of yesterday. Before the IT revolution kicked in more than 50 years ago, the information of a typical company was recorded on paper and scattered everywhere.
Branch offices, for example, maintained paper invoices onsite. Perhaps they sent copies to headquarters, which incurred transport costs and required effort to compile the numbers from different branches. Or maybe the branches simply forwarded reports with relevant high-level numbers, which meant that headquarters had limited visibility into potentially relevant data at a granular level. Either way, information was scattered and the processes to bring data together were manual, costly, and not very transparent.
Copying the Physical World Is Not Enough Anymore
As enterprises began to digitalize business processes, most organizations copied the assets and work streams they knew from the physical world into the virtual sphere. In our invoice example, this means companies generated an invoice and sent it to a customer.
Both vendors and customers used their own IT systems to record these transactions, so each company created its own virtual representation of the invoice. For decades, this was not a problem. Running those processes with the help of computers was still more convenient and cost-effective than doing tedious paperwork – and also less vulnerable to fraud.
With the advent of globalization and the emergence of ever-increasing international trade relationships, the number of transactions between companies grew exponentially. And so did the complexity.
In our invoice example, paper-based processes have been digitalized on the accounts receivable and accounts payable sides. Both vendors and customers store copies of the invoices in their respective systems. Different copies of the same invoices tend to run out of sync. Vendors struggle to determine if their invoices have been received, whether they will be paid on time, or if customers have a dispute with the invoice. Vendors need to understand what was or will be paid to support their cash flow.
Every big company is flooded with these kinds of queries, and most firms employ entire departments of workers to address them. With these business transactions, the need for synchronization has become a significant cost factor.
Horizons by SAP is a future-focused IT journal. Thought leaders from the global tech ecosystem share their thinking about how new technologies and major business trends will impact our customers’ landscapes in the fast-arriving future. The first issue, available at www.sap.com/horizons, revolves around the implications and opportunities of modular IT.
The Advent of Enterprise Blockchain, and its Downsides
Blockchain generated a lot of hype when it entered the enterprise space. It is an emerging technology that offers advanced encryption techniques and promises to democratize the Internet. Promoters said it would simplify the way companies handle cross-organizational business processes while managing transactions in complex value chains based on a shared truth.
Blockchain is most often described as a distributed ledger of transactions. Transactions can represent almost anything of value – cryptocurrencies, stock certificates, or smart contracts that trigger automated actions based on certain conditions, for example.
The distributed aspect is critical. While most ledgers are stored centrally, a blockchain ledger is stored across multiple nodes in a decentralized peer-to-peer network. Each node holds a copy of the transaction, the validity of which is dictated by consensus. If everyone in the network agrees on a proposed transaction, the transaction goes through.
Blockchain allows companies to share data in a network, and it enables trusted transactions. There is no need to manually sync different visual representations of the same transaction. And – even more important – blockchain reduces the need for third parties to notarize the validity of transaction information.
Is There Something in Between?
Public blockchains also have some disadvantages: They replicate data in every node of the network. Data sharing among participants requires high computational efforts that slow process execution. What’s more, costs are still quite high. In some use cases, full transparency is undesirable because it can provide your competition with critical business insights.
One approach we use is to work with customers in permissioned blockchain networks. These networks grant access only to parties with a relevant stake in working with shared data for common business processes. Permissioned blockchain networks usually can overcome the problem of high energy consumption and low transactional throughput. Even though this is a great option for many scenarios, the vast majority of companies tend to maintain a full digital copy of the information.
If enterprises want to synchronize and authenticate data to create trust in their network-based business without involving a third party, why should we store and communicate all information on the blockchain?
That leads us to an essential question: If enterprises want to synchronize and authenticate data to create trust in their network-based business without involving a third party, why should we store and communicate all information on the blockchain?
Modularized Future: Federated Data Management
At SAP Innovation Center Network, we began exploring the use of blockchain to accentuate its benefits without the common downsides. The paradigm we envision is called “federated data management.” By breaking down cross-company data management into different components, we can modularize the processing of different functions of any intercompany business transaction.
Federated data management includes the following components. Data virtualization is the shared virtual data model of how information is arranged and visualized. Think of the invoice: Today, each party to a transaction would store a copy of the invoice in its respective business systems. In the future, both parties will see the same invoice, no matter how they store their copies locally. Data exchange is the ability to share information with others. Making enterprise systems talk to each other directly is very costly today. We need to break down this barrier. Data notarization is the mechanism used to validate the data and the transactions. Today, this is mainly done by third parties. A financial audit would ultimately validate that the accounting is correct. In the future, a technical solution will maintain the ledgers in sync at all times. And now comes the tricky part. If you want to modularize data management and ensure that only the essential parts of the data are visible to business partners, you need to process the data in an abstract yet precise way. Data aggregation is the process of hashing all information so that you can process it in a protected way. Today, we carbon copy the document and blacken sensitive parts. Digitally, this can be done much more elegantly.
By componentizing business transactions, companies can use the preferred technology, protocol, or system for each function, harnessing the value of blockchain without experiencing its disadvantages.
For example, you can store the invoice in your proprietary system just as you have always done. You can choose a communication tool to share the data with your network. You can use the blockchain technology of your choice to notarize – not store – your data to verify its authenticity without the need for third parties. You can aggregate the data and decide whom to share it with. All of these capabilities work seamlessly together.
Building Truly Digital Business Processes
At SAP, we are working to enable the vision of federated data management while reducing complexity for our customers.
We believe in a decentralized future of data management. While companies want to use systems, such as their SAP HANA database, that are perfectly tailored to their specific needs, the requirement to work seamlessly across company borders will continue to increase. The rise of enterprise blockchains has even inspired the emergence of network-based business models. Federated data management could allow all of this at the same time, helping companies build business processes that are not only a copy of the physical world but are truly digital.
Torsten Zube is head of SAP Innovation Center Network at SAP SE