The What and Why of Blockchain and Smart Contracts
Legal departments everywhere are hearing a lot of buzz around smart contracts and blockchain technology. For many, blockchain today is what artificial intelligence (AI) was a few years ago: something they've heard lots about yet struggle to understand the real benefits of. Yet with major corporations around the globe including Amazon, Nestle, and Daimler, already embracing smart contracts built on a blockchain, it behooves every corporate legal department to take a closer look at what a smart, digital contract future will look like.
But first, you might be wondering, what are smart contracts? Smart contracts are intelligent agreements enabled by blockchain technology that creates an immutable public ledger of transactions. These advancements allow companies to ensure sustainability, enforce data privacy requirements such as GDPR, and vastly improve transparency and efficiency in the supply chain. For example, Daimler is already exploring how it can use blockchain to verify that suppliers all the way down the supply chain have included required sustainability and ethics clauses in their contracts.
Leading analyst firm Gartner reports that smart contracts are gaining traction and offer significant benefits. Gartner predicts:
- By 2021, less than 2% of global organizations will have adopted complex (bundled) smart contracts, yet 20% of organizations will be subject to them.
- By 2022, ratified smart contracts will be in use by more than 25% of global corporations.
- By 2023, 15% of consumer goods companies will be engaged in a scalable blockchain initiative.
In short, this is not technology for the sake of technology.
Legal Departments Making the Connection – Contract Lifecycle Management and Smart Contracts
If smart contracts are the next big wave for commercial relationships, the one department in the organization most at risk of finding themselves unprepared is legal. Understandably, legal departments have historically been slower to adopt technology innovation. Surveys show that they are using technology, but not in a robust or mature way. This is especially true for contract lifecycle management (CLM) technology.
Many have adopted some sort of contract management software, yet most are just beginning to leverage it, using CLM solely as an electronic repository post-execution. Given that CLM technology is an emerging technology, and that it handles something as sweeping and complex as managing contracts across global enterprises, an adoption lag in legal departments is not surprising.
But, as the Gartner data shows, things are moving fast on the digital contract front, and legal departments should not be left behind. The good news is that, while the processes CLM handles can be complex, the technology itself doesn't have to be. Just as e-billing technology has come to be widely used and effective in corporate legal departments, so will CLM.
Legal departments must set the foundation and grow the department's maturity in contract lifecycle management (CLM) technology today, so they can experience the value of advanced technologies like blockchain and smart contracts tomorrow.
Building the Foundation for Digital Transformation
To help companies take steps toward achieving full digital transformation of contracts and the processes they touch, Icertis has developed a maturity model that provides a blueprint for achieving quick wins while laying the foundation for future gains. The model has five levels ranging from creating and storing contracts to optimizing them to maximize business value—including through smart contract technology. The idea is that small steps now pay off in the future.
To demonstrate, I often share the experience of one company's organization-wide CLM deployment, led by the legal department. The customer has integrated the Icertis Contract Intelligence (ICI) platform across all its systems, including its ERP and its CRM. It is applying AI to its tens of thousands of legacy contracts to improve enterprise visibility and has intelligent workflows that route digital contracts across the enterprise for greatly accelerated turnaround time.
The company didn't start all these projects at once—one of its first projects focused on the unsexy task of cleaning up its template library. This example demonstrates how, when legal teams get more projects under their belt, they become more adept at championing tech projects, properly gauging scope, and getting company buy-in. With this groundwork complete, companies are in a stronger position to accelerate digital transformation when the value of doing so presents itself.
While blockchain and smart contracts should not be your first digital contract project, achieving success in CLM will pave the way. CLM deployment creates a contracting muscle for the entire organization, globally. As champions of CLM, lawyers will become champions for even greater and advanced technologies to come.
Want to learn more about getting your organization ready for blockchain and smart contracts? Read our white paper:The Value of Smart Contracts Managed on the Blockchain.