Processing payments for thousands of contractors is an onerous task large enterprises grapple with as they hire outsiders for technical and business services. IBM licked this challenge using blockchain software to curb the costs and time it takes to process invoices generated by contingent labor workers.
IBM’s Contingent Labor on IBM Blockchain automatically tracks time sheets, purchase orders and other information and secures the appropriate approvals by the approved parties, says Burton Buffaloe, leader of IBM’s global logistics and blockchain efforts.
“One of the biggest pain points of all suppliers of contractors is invoice reconciliation,” says Buffaloe, who led the initiative and reports to global CIO Fletcher Previn. “Blockchain lives in the spaces where there is friction and discrepancy.”
Buffaloe, who experimented with cognitive applications and robotic process automation (RPA) in previous roles during his 13 years at IBM, in 2018 set out to explore whether blockchain could be brought to bear on IBM’s contingent workforce problem. The company previously dispatched large teams to validate vendors’ invoices, a paper-intensive enterprise that costs an average of $21 per invoice due to the need to cross-check invoices against purchase orders and timesheets.
Mismatches stemming from data-entry errors lead to a blocked invoice that the dispute resolutions teams must settle with suppliers. Correcting this transaction is a complex chore that costs between $250 and $1,000, as IBM and its vendor partners maintain their own systems for purchase orders and time sheets, which track labor hours, costs and other variables, Buffaloe says.
In 2017, roughly 10 percent of IBM’s total invoices for technical services were blocked and required manual dispute resolution teams. And delay of payment penalties for contingent labor add up to approximately 1.5 percent of the annual spend due to manual errors and overhead associated with remediation processing. Forgetting the time, cost and people resources involved, invoice reconciliation leads to delayed payment, which heaps pressure and anxiety on IBM and its vendors.
What if IBM could use its blockchain technology to automate record-keeping for contingent labor in the supply chain, Buffaloe asked?
Reconciliation by way of digital ledger
Enter Contingent Labor on IBM Blockchain, a solution comprised of IBM’s Hyperledger Fabric and Blockchain Platform, a digital recording application that enables vendors to upload invoices and purchase orders for contractor work. Each transaction among the blockchain network’s participants is stored in a record known as a block that is digitally signed to ensure authenticity and create consensus about the state of transactions.
As is typical of blockchain solutions, the ledger is immutable and cannot be unilaterally changed, which means all parties in the transaction can rely on it as the single “source of truth,” eliminating errors that trigger disputes and expensive remediation, Buffaloe says.
The software includes shared “smart contract” logic, ensuring that business rules are enforced. For example, these rules ensure that time worked by contractors is never allowed to exceed the amount available on a purchase order. Payment terms are also built into the smart contract logic and used to automatically generate invoice notifications to both the buyer accounts payable and supplier accounts receivable based on the approved time sheets stored on the blockchain. This eliminates the need for issuing the invoice by a supplier and the need to validate the invoice by the buyer.
For IBM, the solution, which earned an IDG 2020 FutureEdge 50 award honoring applications of emerging technologies, ensures compliance for payment terms and eliminates blocked invoices and disputes while yielding reduced cycle time for onboarding and cost per invoice. It also cuts in half the time it takes to onboard a contractor.
IBM is prepping the solution for a global rollout in 2020 and is working to commercialize it to potentially transform the $400 billion market for contingent staffing by addressing the 2 percent spent on resolving disputes for non-compliance, Buffaloe says.
But the technology’s promise hasn’t equaled its hype and analysts are curbing their enthusiasm.
In October, Gartner consigned blockchain to its “trough of disillusionment,” citing waning interest as experiments failed to deliver. Gartner analyst Avivah Litan expects blockchain will begin to climb out of this valley by 2021, with the caveat that it may not transform business ecosystems until 2028. Businesses must address concerns about how users will interoperate with partners that use different blockchains, Litan adds.
As Buffaloe sees it, blockchain is following a similar path of all emerging tech: initial excitement that spurs a marketing buzzword, followed by cautious adoption, with a gradual ramp-up amid incremental success.
“It takes a long time to understand the technology and fit it into business processes,” Buffaloe says, noting that internet technologies took decades to advance.