Enabling “Smart Federal Contracts” through Blockchain Technology

April 30, 2020

Enabling “Smart Federal Contracts” through Blockchain Technology

The global financial crisis of 2007-2008 saw significant social, political, and financial impacts in the United States, such as the increase in political polarization and the reduction of wealth. Within the last ten years, Americans have seen the rise of controversial politics worldwide and a present-value income loss of $70,000 for every American according a Federal Reserve Bank study.[1] However, the damaging effects of the global financial crisis saw the rise of a technology that has the potential completely revolutionize the manner in which the global economy operates. Despite being around for almost 30 years, blockchain has become an increasingly popular technological innovation to improve the way in which the global economy operates.

What is blockchain technology?

Most Americans associate blockchain technology with the many cryptocurrencies (most notoriously Bitcoin) that arose in the aftermath of the global financial crisis. This technology was used to create alternative digital currencies to execute financial transactions in lieu of traditional brick-and-mortar banking institutions and fiat currencies. The reality, however, is that the concept blockchain technology has existed since the early 1990s when computer scientists sought to create a technique to ensure and secure the integrity of digital records. [2]

Blockchain technology relies on a system of document timestamps arranged in “blocks” that cannot be manipulated. Digital information that contains transactions arrive into a computer network in blocks, which are then “chained” together through complex math. The complexity of this chain makes it extremely difficult for malicious actors to overwrite, counterfeit, and change these blocks of digital transactions. Adding on to the blockchain’s security is its decentralized nature. Unlike traditional banking systems, which centralize and record transactions within a single organization, blockchain decentralizes and distributes the record of transactions among all computers within the network—if a computer is lost or compromised on the network, the blockchain can continue and survive.[3]

What is contract management and how can blockchain technology be used to increase its effectiveness?

According to the National Contract Management Association (NCMA), contract management is the process of managing contracts, deliverables, deadlines, contract terms and conditions while ensuring customer satisfaction.[4] The anatomy of contract management consists of a wide range of activities from negotiations, pricing, regulations, metrics, enforcement, evaluation, options, and renewals. Despite the skills necessary to execute each of these activities, contract management organizations and professionals often struggle to coordinate these activities effectively.

While much of the discussion around it has revolved around its use to create digital currencies, blockchain technology can also be to implement the innovative “smart contract” that can resolve the contract management coordination issue. A smart contract is defined as computer code that automatically executes all or parts of an agreement and is stored on a blockchain-based platform, and a smart contract can be used as the sole manifestation of the agreement between parties or complement a traditional text-based contract capable of executing provisions (e.g., payment, option execution/renewal, etc.).[5]

Smart contracts have the potential to greatly improve the manner in which current text-based contracts are managed. As a Service-Disabled Veteran-Owned Small Business (SDVOSB) delivering contract management strategy and consulting services to Federal and commercial clients since 2012, Washington Business Dynamics, LLC (WBD) has observed some of the following ways smart contracts can be implemented to provide a substantial benefit to our clients:

Reduced Burden on Contract Managers – Studies have shown that companies in utilities, aerospace and defense, and food manufacturing can have 90 percent or more of their annual revenues represented in contracts with suppliers and vendors.[6] In the Federal Government alone, contract spending in fiscal year 2019 reached $594 billion, which is the highest amount on record.[7] These figures represent a substantial burden on Contracting Officers, Contracting Officer’s Representatives, and procurement executives, who are responsible for oversight, payment, renewal, and close-out of contracts. The overwhelming workload of contract portfolios can be reduced through the implementation of smart contracts, which can be coded to execute functions, such as automatic payment/disbursement and exercising of options/renewals,.
Improving Human Capital – Implementing smart contracts can also result in the increase of human capital among contract management personnel. Traditional contract management processes and responsibilities require contract managers to devote their skills and abilities on performing operational functions on a daily basis; however, a smart contract presents the opportunity to free up contract managers to pursue skills relevant to the technological-driven work environment. Continuous learning is an imperative in the modern workspace, and studies have shown that up to 375 million workers around the world may need to switch jobs by 2030 to learn new skills.[8
Reduced Transaction Times – Smart contracts not only play a beneficial role for contract management personnel. Suppliers can benefit from the execution of smart contract provisions (e.g., payments for delivery, renewals for successful performance). Smart contracts can be coded to track delivery schedules and performance metrics that can reward successful performance and reduce normal business friction.

Preparation and Adoption for the Future

Smart contracts are still in the early stages of maturity and adoption, and contracting professionals may feel reluctant to adopt a technology that can upend the traditional methods of contract management. As with any revolutionary technology, WBD recommends that contracting organizations consider all perspectives in order to make a better decision when it comes to adopting smart contract technology. A novel idea can be beneficial and exciting; however, it can also cause substantial problems when organizations do not clearly and explicitly evaluate their need for a new technology or innovation.

Learn more about WBD’s service lines and how we assist organizations consider and implement innovation here.

[1] https://www.frbsf.org/economic-research/publications/economic-letter/2018/august/financial-crisis-at-10-years-will-we-ever-recover/

[2] https://tedxbeaconstreet.com/speakers/stuart-haber/

[3] https://www.nytimes.com/2018/06/27/business/dealbook/blockchains-guide-information.html

[4] https://www.ncmahq.org/community/career-center/what-is-contract-management

[5] https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/

[6] https://www.mckinsey.com/business-functions/operations/our-insights/contracting-for-performance-unlocking-additional-value

[7] https://about.bgov.com/news/federal-contract-spending-five-trends-in-five-charts/

[8] https://www.mckinsey.com/featured-insights/future-of-work/jobs-lost-jobs-gained-what-the-future-of-work-will-mean-for-jobs-skills-and-wages