​Smart contract: What it is and why you need one

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As organizations pursue digital transformation, one area that is frequently overlooked in IT roadmaps is contract management. This is most likely because contracts have strictly been the province of corporate lawyers and businesses. Contracts continue to be paper-based or in digital word processed PDF formats—only now we are beginning to see a move toward smart contracts.

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Just what is a smart contract?

Smart contracts: Defined

A smart contract is a software-based contract between a buyer and a seller. The software automates the business processes and the conditions of fulfillment contained within the contract. The code programmed into the contract actually makes the contract self-executing so that it takes action whenever a specific condition is triggered within the contract. Because the smart contract is software capable of automating business processes and contract fulfillment automatically, it eliminates the need for managers and middlemen supervision.

See: Digital transformation research report 2018: Strategy, returns on investment, and challenges (Tech Pro Research)

Smart contracts in action

For example, let’s say that you are a manufacturer, and you are shipping electronics to a new customer in a developing country. While you’ve never done business in this country before, you are aware that many similar products entering this country have been intercepted and subsequently sold on the black market, never getting to the end customer. You want to know that your product will reach your customer, and you don’t want to risk sending too many shipments until you know that your new customer is actually receiving and paying for the goods.

You and your new customer develop a smart contract that is in the form of executable software. The code programmed into the software says that if your first shipment is successfully received by your buyer, the successful receipt and payment by the buyer will then automatically trigger a second shipment.

In plain English, the code might be something like:

If my new customer in country X receives the goods

and the customer pays,

then authorize the next shipment to this customer.

Your contract is self-executing and automated, so there is no need for an individual in your home office or a middleman to shepherd through the second shipment. This saves your company time and money.

SEE: Research: The current state and predictions for the future of blockchain in the enterprise (Tech Pro Research)

Today, smart contracts are still in early stages of adoption, but because the coding and automation of these contracts depends so greatly on IT, it isn’t too early for CIOs and IT managers to start researching and planning for them.

4 steps toward smart contracts

Here are four ways to get started.

1. Get smart contracts on the radar

For most companies, smart contracts aren’t a reality (Early adopters tend to be in the gaming industry.) However, as more companies digitalize and look for greater efficiencies in global commerce, smart contracts will likely be part of that equation. Since much of the “smart” in smart contracts involves smart IT, it isn’t too early to start conducting some R&D.

2. Assess your business situation

Some companies will never move to smart contracts unless forced. These businesses might be confined to narrow local areas, or businesses that are comfortable conducting their contracts as they always have. What kind of company is yours? If it fits the unlikely-to-adopt profile, smart contracts might not be a priority. On the other hand, if your company works in international banking, conducts business globally or has a long and complex supply chain, smart contracts should be high on the priority list.

3. Assess your IT

Do you have smart contract talent on board, and do you have a working knowledge of the business processes behind a contract? If you don’t, will you need to hire or retool for it? If you estimate that smart contracts are still two to three years away for your company, it would be prudent to start in on a staff development and education program now so you are prepared. Due to the confidential nature of contracts, the optimal IT solution for smart contract development and support is to have resident know-how on staff—and to work closely with your legal department.

SEE: Digital transformation: A guide for CXOs (Tech Pro Research)

4. Include risk management in your smart contract strategy

Anything software-based always presents risks of being hacked. If your organization plans a move to smart contracts, it’s a great idea for IT to work hand-in-hand with legal, financial, and procurement departments to assess, address, and mitigate risks.

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