BCG report examines the ‘Blockchain Paradox’

While the emergence of blockchain technology within the freight transportation and logistics marketplace has gained a significant amount of traction in recent years, a report recently issued by Boston Consulting Group (BCG) observes that rate of blockchain adoption is slower than expected, even though the technology has some clear potential benefits.

The report, entitled “Resolving the Blockchain Paradox in Transportation and Logistics,” defines blockchain as: “a shared digital ledger for recording and storing transactions between multiple participants in a network. Changes made to the blockchain record must be approved by participants through an automated process. Approved updates are time-stamped, cryptographically signed and added to the block. The new block becomes part of the blockchain. Unlike traditional ledgers, a blockchain provides an immutable record of all transactions and agreements of interest to the participants-no single party can unilaterally alter the information. Because information cannot be deleted, only appended, a blockchain provides an evidentiary trail of information back to the point of origin.

Many of the report’s key findings were based on a survey comprised of feedback from more than 100 freight transportation and logistics executives, including:

88% believe blockchain will disrupt the industry at least somewhat;
59% believe that disruptions will take place within the next two-to-five years;
74% indicate they are exploring opportunities only superficially or haven’t thought about blockchain at all; and
the most cited obstacles to wider blockchain adoption are absence of coordination among industry players, a limited understanding of the technology, and a lack of in-house capabilities
These findings represent what BCG called a “fundamental paradox,” as it relates to blockchain, in that by increasing transparency, blockchain can mitigate the mistrust that is common among the industry’s transacting parties, adding that this mistrust makes it difficult to bring together the industry’s diverse participants into a common blockchain ecosystem.

In an interview, Andy Schmahl, BCG partner and managing director, explained that the promise of blockchain is, at its core, increased transparency and trust, with the trust verifiable on its face.

“This industry is often rife with mistrust, with lots of handoffs among multiple parties, more so than in any other industry,” he said. “Most industries have straightforward, bilateral, or maybe trilateral, transactions. But, over the course of any supply chain or transportation move, a single good can change hands dozens of times and can have multiple dozens of players when you factor in brokers and regulators, customs agencies, and other things. Each of them has some vested interest, and things often don’t go as planned, which can lead to finger pointing, and that generates huge frictions, in terms of costs and time.”

That is what leads to an ideal test bed for a technology like blockchain, according to Schmahl, even though the buy-in and adoption rate still leaves much to be desired, which leads to what BCG refers to as the blockchain paradox.

“It has to do with that same lack of trust that is preventing blockchain from being implemented in the beginning,” he said. “In order to have a blockchain, everyone has to come together and agree upon a lot of different topics like governance, commercial interests, technical details, fields, and compatibility. We have seen some coming together or recognition of potential usage cases, with a handful of companies approaching partners to collaborate.”

But the blockchain pilots that have been done, to date, are what Schmahl viewed as relatively narrow in ambition, leading to modest results.

“That provides an impression that the ‘juice is not worth the squeeze,’ but that may be because it has not been squeezed hard enough,” noted Schmahl. “Nobody has really tried to get out there and be extraordinarily ambitious with not just a three or four party blockchain but a 30 or 40 party blockchain. If I am a shipper, the latter is exciting because that starts creating situations where there are more possibilities or permutations and relationships that can evolve…and serve as a non-traditional path that my goods can take.”

But that approach may not be ideal for a legacy carrier, as there can be some inherent conflicts, or intertia, that are not good for parties like an incumbent broker or a forwarder, he said.

“But it should provide more control for them, as in many ways the information provides control,” he said. “Legacy carriers that have great reputations and perform high quality service would appreciate blockchain transparency…as it improves processes for them. Any disruption to the status quo is uncomfortable for anyone, especially for players in a multi-billion dollar industry, as it relates to intended or unintended, or unforeseen, consequences. This enables smaller players to have more ability to integrate into global supply chains, as the transparency and trust built up over decades by larger players is now muted by the concept of blockchain. I can see where this could bring some concern there.”

Addressing the survey in the BCG report, Schmahl said it highlighted how using blockchain is much different than installing an off-the-shelf software package. Instead, it requires a meaningful amount of technical competence and capability, which, he said, is not necessarily where carriers or transportation and logistics interests spikes.

“That in no way is to denigrate the IT services at any transportation or logistics companies, but compared to Silicon Valley or financial services and what their IT systems are like, those are probably a little further advanced,” he said. “The reality is everyone is still doing the same blocking and tackling in trying to get their antiquated [technology] into the Cloud and don’t have a ton of resources to direct towards something like blockchain. Often a company is waiting to see another company make the first move.”

When asked what needs to happen for more meaningful adoption of blockchain to occur, Schmahl said it comes down to ambition and the desire to go beyond blockchain as a proof of concept but to something larger and more scalable.

“It needs to be viewed more as something that is commercially viable and is going to disrupt the way things are being done today and really change the way industry dynamic work,” he said. “It will be interesting to see what can accelerate that. Things are happening, but there needs to be more of a catalyst that lights the fuse to really get things started.”