Oil and gas companies face many obstacles when it comes to the procure-to-pay (P2P) process. P2P is composed of multiple steps that connect customers to products or service providers. Traditionally, this has been a complex, transaction-heavy process. Current challenges faced by P2P organizations include improving transactional transparency and compliance and eliminating fraudulent transactions, among others.
These challenges are exacerbated by cumbersomeinvoicing procedures, a lack of visibility into the payment progress, and late payments, all of which increase the cost of processing transactions. Furthermore, additional human capital is required to process transactions from non-integrated systems.
For example, for every one million invoices processed, a 10 percent rejection rate due to incomplete information requires an approximately five-minute handling time per exception (a reasonably conservative number). This translates into a requirement for four full-time equivalents (FTE) just to handle these exceptions.
Also, errors, a low level of trust in data and lack of digital integration throughout the procure-to-pay process results in both extra costs and missed savings opportunities.
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There is a better way
Blockchain-enabled transactions can enhance the future of procuring, tracking, and paying for products and services in the oil and gas industry. While the concept of smart contracts (event-driven transactions) is over 20 years old, its true application has only recently been enabled by the emergence of blockchain technologies.
“Smart contracts,” enabled by blockchain, are event-driven computer algorithms that facilitate, verify, or enforce the negotiation or performance of a transaction agreement. Current leading practices suggest recording transactions on the blockchain alongside traditional legal documentation. These blockchain-enabled transactions aim to supplement security and enforcement to traditional contract agreements and reduce the transaction costs associated with contracting.
The value potential
Some benefits of blockchain-enabled transactions include:
- Reduced cost: The limited “touch point” nature of the blockchain helps to reduce errors and increase process efficiency and effectiveness.
- Increased transparency: Because the blockchain retains all historical payment-related data, suspicious transactions are easier to spot. The nature of the blockchain supports the instantaneous distribution of authentication rights during the P2P process, thus minimizing and preventing fraud while improving security—yielding better market stability.
- Increased purchase order (PO) processing speed: Transactions between POs and good receipts takes place on the blockchain at an increased rate, against current alternatives.
- Improved invoicing: All relevant parties share access to the same blockchain data, including transactions, which helps in the reconciliation process. The data also feeds into the financial reporting systems.
- Eliminated settlements: Due to the complete transparency and immediate access by all parties, reconciliations are no longer required.
- Improved auditing: All involved parties register in the blockchain, and every transaction is saved, enabling an incorruptible audit trail, and creating a holistic view of the P2P process.
Things to consider
Blockchain-enabled transaction considerations include:
- Finding a strategic supplier that is willing to participate in a proof-of-concept and expand accordingly.
- Thinking holistically about how to structure the business case for blockchain-enabled transactions (including all current procurement assets, such as systems, people, workflows and processes).
- Developing an interface to streamline smart contracts algorithms that enable financial transaction reporting. The robustness of the smart contract code is paramount, as this is where the potential for things to go wrong is the highest, be cautious.
- Contemplating potential integration challenges between the blockchain and legacy systems.
Experimenting with smart contracts
It is time to think boldly about applying the power of blockchain-enabled transactions to solve the complex challenges in P2P. Mass adoption is only a matter of time, as more oil and gas companies keep experimenting with these new approaches. The enterprises that move ahead now with will be prepared to capitalize on opportunities for performance breakthroughs.
Contributor: Fred M. Vitale