Part II: Need for Change – Transformational Needs and Best Practices for Enterprises Using Distributed Ledger Technologies
Distributed ledger technology (DLT) makes it possible to guarantee the integrity of transactions without a central authority. This innovation is therefore seen as having the potential to revolutionize existing financial market infrastructures in the long term . However, the adoption and use of DLT-based platforms has multiple implications for businesses. The technology brings not only technical but also organizational challenges that require new competencies in various business functions. Therefore, for the effective delivery of new services based on this innovation, organizational change must be anticipated.
Based on a research study in cooperation with the Karlsruhe Institute of Technology (KIT), 20 challenges concerning the use of DLT have already been identified in the first part of this series “Need for Change – Challenges for Companies in Using Distributed Ledger Technologies“. In order to generate further knowledge about the implications and impact on the individual company, we will map the identified challenges to internal business services. We will then identify possible organizational changes and derive best practices.
How DLT Impacts Business Functions
To identify affected business functions, we used the Banking Industry Architecture Network (BIAN) Service Landscape V8.0 classification . BIAN is a global, open, and independent community in which banks, software vendors, and system integrators collaborate to define a common architecture framework for the banking industry. The classification includes two levels: Service domains and business services. A service domain represents a group of similar responsibilities and tasks (e.g. product management) that consists of several business services (e.g. product design. product deployment etc. ). Business services perform parts of or even complete business functions required to deliver a business activity. In this sense, the business service specifies the resources (i.e., people and their roles, procedures and processes, and applied technologies) that are affected by the use of DLT.
In order to assign the identified challenges to the affected business functions, we conducted an interview study with 15 experts who shared their experiences from past DLT projects in the areas of finance and logistics. Sometimes, business services were explicitly named by the experts. In case of discrepancies, we asked for feedback and thus substantiated the results. Finally, we visualized the relationship between the challenges caused by the use of DLT systems and the business services (Figure-1). As a result, 36 business services in 13 overarching service domains have been identified that are subject to organizational change. An overview and complete description of individual business services, domains and challenges in particular can be found on Blockwiki.org at the following link: https://dltsystems.bei-sg.ch/
In this study, we found that the use of DLT systems triggers organizational changes in several service domains and their corresponding business units. Although IT management is the most affected service domain, several non-technical domains (e.g., marketing, regulation & compliance) are also struggling to meet the necessary organizational requirements for successful use of DLT systems. The challenges identified affect organizations as a whole, including their workforce, responsibilities, procedures and processes, and other systems, from the strategic to the operational level (e.g., business strategy and system operations).
Our interviewees expressed strong concerns about the current acceptance and understanding of decentralization by employees. Some of the interviewees assume that the organizational structure of the companies plays an important role in increasing the adoption and understanding of decentralization and DLT systems. They mentioned that companies that are structurally based on loosely coupled organizational units are better at overcoming challenges in product development. In contrast to strictly hierarchical companies, some interviewees reported that companies with a more agile workforce are more able to react and adapt to changes in their work environment caused by decentralization.
The use of synergies between business units across companies requires compliance with professional, procedural and technical standards by the companies involved. The experts mentioned that the harmonization of business processes and software interfaces can favor the use of DLT systems in conjunction with existing information systems. In addition, the use of standards in the context of different DLT protocols was mentioned as essential for interoperability between systems.
However, the standardization of information technologies may reduce the unique selling propositions of companies in terms of the IT they have used to date and thus reduce competitive advantages, especially for technology providers. The more standardized companies’ IT is, the more difficult it may be for the technology provider to adapt business processes and generate new competitive advantages.
In addition to the importance of standardization for cross-company business processes, a decentralized internal structure (e.g. division by function) facilitates the identification of synergies with other companies. True to the principle “form follows function, function follows form”, the organizational structure should form the framework for the distribution of tasks and powers within the organization.
Best Practices in the Use of DLT
By linking the challenges to the internal business functions, we are able to recognize organizational changes in various business services. Not only IT management is undergoing change, but also non-technical functions (e.g., human resources management or marketing). The changes affect the company as a whole and include both strategic and operational structures (e.g., both corporate strategy and platform operations). However, the interviews with the experts revealed not only challenges, but also possible solutions for anticipating the necessary internal changes. We were able to identify eight best practices to complement this study and help practitioners overcome the challenges and mitigate organizational risks in DLT implementation. The aspects are presented in Table-1 and described below.
|Transforming the organizational culture||Building an open, purposeful, and collaborative culture that enables distributed value creation and shared innovation|
|Empowering employees||Expanding the required skills of employees by acquiring key competencies and building knowledge through e.g. further training measures|
|Autonomy in decision making||Establishing a decentralized organizational structure that provides flexible role design, purpose-driven autonomy, and minimal constraints|
|Aligning strategic and operational goals||Building realistic expectations by defining goals/expected added value and setting a realistic time horizon for achieving them (short-term vs. long-term)|
|Integrating supervisors||Proactive dialog with regulatory authorities at an early stage and consistent monitoring of the legal framework for compliant solutions|
|Establishing a sustainable ecosystem||Creating a minimal viable ecosystem (MVE) and preparing for scaling the platform by creating incentives for all stakeholders and focusing on network effects.|
|Implementating a common governance||Implementing mechanisms, rules, and processes that ensure accountability, decision-making, and participation within the ecosystem.|
|Integration and standards||Focusing on DLT integration based on industry standards in close collaboration with partners to ensure interaction with existing systems|
Transforming organizational culture: Organizational culture is defined as a collection of value patterns and beliefs and impacts almost everything within the organization, from decision making, leadership, and communication to relationships with colleagues, customers, and suppliers . Agile methods were originally conceived to improve software development and align it more closely with customer requirements through short, iterative development steps. Their use requires a willingness to adapt and learn, as well as a customer focus. Distributed ledger technology is still a relatively new technology that depends on collaboration and that many companies have yet to become familiar with. Therefore, it is not surprising that an open, results-oriented, and collaborative culture (cf. Adhocracy) along agile lines facilitates the adoption of distributed ledger technology . DLT enables companies to collaborate more in business networks, creating innovative services for previously unmet customer needs (e.g., cryptocurrencies; NFTs) . However, this requires a paradigm shift towards a business ecosystems perspective that places a stronger focus on cross-enterprise cooperation and collaboration.
Empowering employees: The use of DLT requires fundamentally new knowledge and the willingness to engage with new structures. These requirements relate not only to technical areas (e.g., software engineering, cryptography), but also to business-oriented ones (e.g., partner management, compliance) [4;6]. Missing key competencies can be acquired through new hires on the one hand, but companies are encouraged to work closely with Human Resources (HR) to build long-term knowledge among existing employees (e.g., through education, training, workshops). By empowering employees to motivate themselves and work in an agile manner, they will be able to respond and adapt more quickly to change.
Design decision-making autonomously: Especially for technical developments, the organizational structure with its roles and responsibilities is a critical factor for the quality and time-to-market of products and services . For DLT implementation, it can be shown that organization in separate and loosely coupled business units leads to fewer challenges and easier integration than strictly hierarchically organized structures with firmly defined roles (cf. Holacracy). Strategic decisions are still made centrally, but operational decisions are increasingly decentralized. Decentralized decision-making, in conjunction with flexible role concepts, enables faster, iterative product development, as there are no delays caused by lengthy decision-making processes and the workload can be divided flexibly among team members.
Align strategic goals: An organization must regularly and consistently reflect on and adjust its goals and processes. Projects that are not profitable must be terminated so that the resources deployed there can be used more profitably elsewhere. However, when assessing whether to continue or terminate a project, it is important that managers have a realistic idea of how long it will take for the project to add value to the business (short-term vs. long-term project goals). Every DLT project needs a clear business case. For this, on the one hand, the added value that the project should bring to a company must be clearly defined. For example, is it about generating operational efficiencies through the use of smart contracts, or does a company want to participate in platform business models and generate profits by selling or trading cryptocurrency? Based on this, a distinction must then be made between project goals that can be achieved in the short term and those that can be achieved in the long term . The first project will be quicker to realize than the second because, in comparison, it “only” requires new infrastructural capabilities (e.g., custody of private keys), but not yet expertise in cryptocurrency trading or, one step further, knowledge of DeFi business models.
Engage with regulators: Legal and regulatory frameworks must be considered for DLT implementations. They are not limited to products to be offered in regulated markets (e.g., cryptocurrencies), but may also relate to the infrastructure itself (e.g., protection of sensitive on-chain data). Nearly all DLT-based initiatives may be subject to regulation. As a result, companies must proactively engage with regulators early on to develop compliant solutions and identify changes in regulation . If they fail to do so, they may face costly system changes at a later stage to make a solution compliant with regulation.
Establish sustainable ecosystems: The use of DLT requires more collaboration between organizations, because to use a shared infrastructure, the processes executed using that infrastructure must be aligned and change must be jointly decided and implemented at both the technical and process levels. After strategic alignment and positioning, organizations need to find reliable partners to establish a minimal viable ecosystem (MVP), such as technical service providers, banks, and other partners . Regardless of whether it is a technology partnership or a business-oriented consortium, the added value of participating in a DLT-based ecosystem must be clear to all stakeholders. This may change depending on the phase the project is in. For example, in the production phase, processes can initially be automated internally and costs saved, while in the scaling phase it becomes possible to automate more and more processes, even across companies. A strategy to reach a critical mass of customers and dedicated stakeholder management is required, which can pursue a range of goals from creating shared operational efficiencies to offering new products (e.g., DeFi). 
Implement shared governance: Governance concepts must be implemented to ensure decision-making, participation, accountability, and interactions between organizations. In particular, when establishing a DLT-based ecosystem, a significant trade-off between centralized and decentralized control must be made. There are different shared governance models with specific characteristics (e.g., plutocratic, democratic) that need to be defined from the perspective of the business network, platform, and infrastructure. There is always a trade-off between decentralization and efficiency. In many ecosystems, therefore, there is a leading company that makes significant upfront investments and takes care of the development of the platform. By delving deeper into the development and structuring the process, the leading company, in return for its investment, can significantly influence the platform development and tailor it to its own needs. Ideally, the decisions are subsequently reviewed by all partners.
Focus on integration and standards: The parallel operation of existing infrastructures (e.g., core banking system) and the development of new solutions lead to higher costs and additional work for all involved employees, e.g., in IT. Therefore, seamless integration of new system components is required to overcome transition risks and ensure interaction with legacy systems at an early stage. Especially with new technologies such as DLT, standards are essential to enable interoperability between systems and create a cross-organizational infrastructure. Cross-company collaboration, consistent monitoring of technological developments, and active engagement in standardization initiatives are required.
In conclusion, the results of the study provide an initial understanding of what changes an organization needs to initiate in order to successfully deploy distributed ledger technology. The impact on business functions presented enables managers to specify the need for transformation and convince the organization of the need to change the business model. In addition, the best practices presented provide a set of guidelines to overcome internal resistance to implementing such projects and prepare practitioners to successfully implement and operate DLT.
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