Why smart contracts are the ideal solution for complex agreements

Negotiating is a prized skill, but even the best negotiators can be let down by what comes after an agreement is made. Contracts often end up being a web of specific terms and conditions that spawn a complex process that can be difficult to manage, especially for modern enterprise resource planning (ERP).?

Enter smart contracts, one of the most transformative innovations brought by blockchain technology.?

Not only do smart contracts remove the need for intermediaries across business functions, but they also increase efficiency, transparency and most importantly savings. ?

Before deployment, it would seem natural for a procurement officer to want to understand why they should switch to a new approach, who else is doing so, and what the positive impact looks like. Consider this your “Smart Contracts 101” to help you make informed decisions for future contract execution.?

What are smart contracts??

A smart contract is a self-executing contract or script where the terms of the agreement are directly written into lines of code.?

At a basic level, smart contracts work to empower decision making saving time and effort. For example, to compare this process to making a complex dinner where you can place all the ingredients in a bowl, smart contracts can help you automatically analyse the instructions, prepare the ingredients with any needed substitutions, and cook the meal to perfection. Not only does this navigate all the intricate nuances for you but also saves you the hassle of interpreting the instructions and figuring out how to make the complicated meal yourself.?

This is essentially how a smart contract works. It takes the key elements of your contract and gives you the power to structure it to save you time and money.?

How do they work??

To create a smart contract, an organization must go to a distributed, decentralized blockchain network and write in code the specific terms of the agreement.?

From here, the contract is deployed onto a blockchain, where it resides in a decentralized, immutable manner. When the predefined conditions are met, the contract automatically executes the terms. For example, if a product is delivered, the payment is automatically released.?

All transactions are verified by the blockchain network, which provides a level of trust and security, and because you already agreed to the code and know the ingredients that went into making it, the solution is traceable, and transparent.?

Utilizing a public blockchain for smart contracts helps make sure all participants within an organization and its partners maintain visibility into operations, business agreements and transactions necessary for efficient operations.??

How do smart contracts improve contract management???

Traditional contract management typically is a lengthy process usually with procurement and legal teams involved well before the contract is created. So, when it’s time to actually execute a contract, smart contracts can help automate many of these processes through code, helping to eliminate potential bottlenecks caused by manual intervention.?

This is apparent in four key areas:?

• Management: Traditional contracts require manual intervention to manage, while smart contracts can be managed automatically when conditions are met.?

• Enforcement: In large organizations, procurement teams traditionally function through manual workflows. By implementing blockchain technology, smart contracts can enable efficiencies and greater communication that can trigger notices when a condition is met so all parties are in alignment.?

• Transparency: While paper contracts are available to both parties, they may be manually manged in silos. However, smart contracts managed through blockchain can integrate all stakeholders, which helps manage version control.??

• Cost: Leakage can occur with traditional contract management approaches and may lead to not realizing the full value of the contract. Smart contracts can give peace of mind to this aspect of contract management, as all actions are automated to execute the terms of the agreed-upon conditions.??

Additionally, smart contracts can help eliminate siloed systems, both internally and with business partners, that historically make it difficult to manage multi-party contracts. Instead, smart contracts can transform disparate systems and teams into one cohesive environment, track cross-channel agreements and data more easily.??

EY teams have found that contract automation can improve accuracy, reduce cycle times by over 90% and cut overall contract administration costs by nearly 40%.?

For example, Microsoft’s Xbox division deployed EY OpsChain Contract Manager (OCM) our transformative blockchain-enabled solution for contract management and shrunk its suppliers’ payment timeline from 45 days to four minutes — cutting operating costs by 40%.?

Practical applications of smart contracts?

That example is just the tip of the iceberg when it comes to the practical applications of smart contracts. Smart contracts are not limited to buyer-seller transactions; they have a wide range of applications across various domains, such as:?

• Supply chain management: automating the tracking of goods and payments across the supply chain.?

• Insurance: automatic claims processing based on the occurrence of insured events.?

• Real estate: automating property transactions, including transfers of ownership and payments.?

• Finance: implementing complex financial instruments and automating trades based on predefined conditions.?

• Voting systems: creating secure and transparent voting systems where votes are automatically counted, and results are published without the need for a central authority.?

• Identity management: managing digital identities, ensuring that identity information is securely stored and can only be accessed or modified under certain conditions.?

• Intellectual property and royalties: automatically enforcing royalty payments and intellectual property rights.?

• Escrow services: holding funds or assets in escrow and automatically releasing them when predefined conditions are met.?

• Data verification: verifying data inputs from oracles and triggering actions based on these inputs.?

• Gaming: managing in-game assets, automating game mechanics and verifying fair play by running game logic on the blockchain.?

As with any emerging technology, however, there are some barriers. For example, the legal status of smart contracts varies across jurisdictions. Likewise, rigorous testing and auditing are required to confidently confirm the smart contract code is secure from bugs and vulnerabilities to minimize the risk of financial losses. These concerns around the specialized knowledge and expertise required to implement a smart contract are valid. Working with an industry professional, such as the global EY organization, can help you through this process to navigate these obstacles effectively, and realize the benefits smart contracts can provide.??

Smart contracts for a more efficient tomorrow?

Smart contracts represent a significant advancement in the way agreements are managed and enforced. By leveraging blockchain technology, they can offer unprecedented levels of automation, transparency and security.?

As this technology evolves, it is set to transform numerous aspects of business and legal operations, making processes more efficient and reliable, and companies that adopt them now will have an early advantage. With a dedicated blockchain-enabled solution for contract management like EY OpsChain Contract Manager, enterprises can change the way multi-party contracts are managed across the world with public blockchain’s security and when combined with privacy technology, terms can remain confidential yet accessible.?

Learn more about smart contracts and the EY OpsChain Contract Manager here .?