How Pay-Per-Use Is Improving the Financial Metrics of the CFO and the Finance Department
The role of the finance function of a company is generally not considered to be particularly innovative. Many associate this corporate function with balance sheets, cash flow analyses and Excel spreadsheets. With the advent of blockchain technology, however, this perception could change fundamentally and shift the finance function to a strategically acting driver of innovation. This is especially true for companies operating in the industrial environment and being influenced by the machine economy. Pay-per-use, in particular, offers the CFO of a company, active in the industrial environment, the opportunity to significantly improve his/her financial metrics.
Authors: Philipp Schulden, Thomas Faber, Benjamin Schaub, Philipp Sandner
Within the Industry 4.0, fully networked value chains result in future-oriented production logics, leading to novel business models and growth opportunities. Through machine-to-machine (M2M) communication, intelligent and interconnected industrial components, such as machinery or sensor-equipped warehousing, are fully automated and exchange data without human intervention. Here, the blockchain technology serves as a key technology to facilitate the complete integration of data flow of all functions involved in the economic process of the future industrial period. The integration of blockchain improves an organization’s cost efficiency and data availability, it integrates and automates business processes across company borders, and ensures robust and analytical business operations. Importantly, the blockchain also allows automating a firm’s accounting and payment processes, through an integration of machines into payment networks — prospectively by using digital representations of conventional currencies.
As a result of the aforementioned opportunities, it appears that the CFO and his finance department, unlike any other corporate function, can leverage blockchain technology for meaningful applications to accelerate the digital transformation of his organization. The appliance of blockchain technology in combination with pay-per-use thus potentially has a considerable influence on the role of the CFO of an industrial company and on its operations themselves.
Applicability of blockchain-based pay-per-use for driving a firm’s revenue and profitability
In a typical pay-per-use scenario, the user of industrial equipment does not purchase the product but pays a fee that is dependent on the usage which is measured by specified parameters that suit the context of usage. With today’s state of technology, sensors can easily track usage data and transfer it securely to the equipment provider. The application of blockchain technology as the underlying technology for pay-per-use models firstly guarantees a tamper-proof sensor-generated flow of information between the machine manufacturer and the machine operator and enhances data integrity and transparency across the value chain. Furthermore, the overall process is highly resistant to technical failures and malicious attacks.
In the following sections, we will highlight the impact of pay-per-use on selected dimensions and demonstrate the massive potential (see figure 1 for an overview).
Financial flexibility
Particularly in times of economic downturn, pay-per-use models facilitate the possibility of financial flexibility. By paying a usage-based premium, the machine user is required to disburse only a fracture of the otherwise considerable upfront investment for the acquisition of the machinery. This facilitates the smoothing of cash flows and their adjustment to the current production volume.
With a concurrent payment of the usage premium via the blockchain, the resulting inter-organizational standardization and alignment allow for a concurrent settlement without the need for time- and capital-intensive reconciliations. In this way, new financial strategies can be designed, such as to ensure a more efficient working capital or cash flow management. Such improvements can have a considerable influence on the accounts payable process. Currently, the hand-operated procedure of coordinating and authorizing payments is labor and cost-intensive. In contrast, blockchain allows payments to be instantaneously approved not only autonomously and immediately, but also in accordance with the underlying smart contract. Such efficiency gains will considerably improve an organization’s cash flow, as well as the Days Sales Outstanding (DSO). Moreover, the account receivable process could also be automated by utilizing a blockchain. Here, too, a smart contract could pre-authorize payments, resulting in the organization’s improved cash flow and transaction speed.
The integration of machines into payment transactions also exerts a positive influence on a CFO’s working capital ratio. The utilization of blockchain-enabled autonomous M2M payments shortens the supplier’s DSOs as payments are instantly settled. This, in turn, positively impacts the cash-to-cash cycle time and liquidity, while ultimately lowering the working capital associated with the increase in transaction speed.
Automation
The installation of sensors into, e.g. machinery, enables real-time insight into the associated utilization level. Here, for instance, the machine manufacturer, as well as the machine operator, runs a separate blockchain node to sign and verify the metered telemetry data. On the one hand, this allows for highly accurate and ongoing measurement of machine utilization. Deploying pay-per-use simplifies the otherwise regular, cost- and time-intensive measurement of utilization data, which offers blockchain-enabled full integrity and transparency. Resulting in the high degree of transparency and trust among the operator and customer, machinery can be embedded into the payment transaction processing by additionally using the blockchain as a payment layer.
Consequently, if a customer consumes “machine capacity”, the machine itself automatically and directly executes the invoicing and audits the incoming payments. Thus, instead of the machine manufacturer’s accounting department, the machine itself sends the invoice and checks incoming payments based on the underlying smart contract predefining the order lifecycle. This also eliminates the need for invoice verification and payment instruction on the part of the customer. Machines, therefore, have the potential to become independent economic actors referred to as “profit centers”. In this scenario, machines are equipped with their own digital wallets, which make it possible for the machines to send and receive funds. This happens without requiring an additional intermediary for the transaction processing, such as a human-operated accounting department. This process considerably reduces administrative expenditures per transaction by the facilitated machine-to-machine payments and prospectively enables decentral governance of organizations.
Advanced data analytics
In this context, blockchain technology is of central relevance in supporting the CFO’s responsibility of creating an effective information system management. Thus, deploying a blockchain-based pay-per-use model makes it possible that the incoming sensor data of machinery can be verified and authenticated by checking the associated hash function of the data set. Therefore, unintentional modifications or other forms of manipulation can be detected before the consolidation of data takes place. Through blockchain technology, the data can then be bundled into a sophisticated data pool in a standardized, immutable and complete manner. The generated data optimization offers the CFO the ability to perform advanced data analytics. Internal financial data can thus be combined with other data sources, enabling the CFO to play a leading role in the formulation of the corporate strategy. In this way, it is possible to more proficiently run the descriptive, diagnostic, predictive, or prescriptive analysis. In combination with AI, this provides, for example, a more precise presentation of company data, a clearer understanding of the root causes for poor company performance, as well as earlier recognition of market trends or competitive behavior. As a result of the blockchain, the CFO will be able to analyze larger amounts of data more economically, faster and with greater accuracy. Thereby, the CFO can support other members of the C-Suite more efficiently in formulating the strategic direction of the company. Hereby, the CFO’s task is to ensure that the appropriate systems, instruments, and training are in place to support his/her workforce in performing such analyses. If successfully implemented, a CFO can influence the corporate strategy of a company more than any other board function. With the blockchain as a basis for decision making, the CFO can make a company more steadfast, while reducing the firm’s vulnerability to risks.
Technology leadership
The use of pay-per-use systems significantly increases the influence of a CFO on the technological capabilities of a company. By enabling the acquisition of new equipment without the usual expenditure of capital, new opportunities arise. A CFO can thus always guide a company towards the latest technological equipment without taking the risks that the traditional financing of machines entails. In this way, companies are regularly given the opportunity to benefit from a first-mover advantage in emerging technologies. However, the leeway of a CFO gained through pay-per-use, may not only improve the company’s technological capabilities but also automatically reduces its own expenses for research and development. Moreover, it is a step towards participating in global, open IoT marketplace designs like the iBlockchain is modeling.
Risk Delegation & Resilience
In a typical pay-per-use scenario, the user of industrial equipment does not purchase the product but pays a fee that is dependent on the use which is measured by the parameters applicable to a certain context. This transforms the fixed costs associated with the machines (e.g. depreciation) into variable costs and constitutes a transfer of operational risk (having the machine at hand and running it at performance and at cost) and business risk (machine under-utilization when demand falls below projections) from the user to the equipment provider. Due to this inherent characteristic, pay-per-use models help companies to mitigate the impact of economic downturns or seasonal fluctuations.
Conclusion
The CFO, or the finance function in general, is not usually considered to be a source of innovation. However, blockchain technology will likely evolve that image. A good example for that is pay-per-use, a usage-based payment scheme. When combined with blockchain technology, it offers the CFO of an industrial company unprecedented opportunities to streamline their financial metrics. The dimensions of impact include financial flexibility, risk delegation and resilience, technological leadership, automation as well as advanced data analytics. The German company PayperChain offers a complete blockchain-based infrastructure that enables secure, automated and efficient pay-per-use transactions, thereby making the above mentioned advantages easily accessible for industrial companies.
Remarks
This research and development project was partially funded by the German Federal Ministry of Education and Research (BMBF) within the funding number 16KIS0906 and implemented by the VDI/VDE Innovation + Technik GmbH. The authors are responsible for the content of this publication.
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Philipp Schulden is chief operations officer of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management. In the blockchain environment, he has supervised numerous international projects and research initiatives. He also possesses expertise in the field of application possibilities of blockchain technology in the area of the Industry 4.0. He completed his studies in Management (M.Sc.) in Germany, Russia, Peru and South Korea. You can contact him via mail (philipp.schulden@fs-blockchain.de and LinkedIn (https://de.linkedin.com/in/philipp-marcello-schulden).
Thomas Faber is a research fellow at the Frankfurt School Blockchain Center and a project manager at the International Token Standardization Association (ITSA). He holds a B.Sc. degree in Management, Philosophy & Economics as well as a M.Sc. degree in Management with a focus on digital business models from the Frankfurt School of Finance & Management. You can contact him via email and LinkedIn.
Benjamin Schaub is a project manager at the Frankfurt School Blockchain Center (FSBC) and Chief Operating Officer at Plutoneo. His interests include blockchain regulation and governance as well as blockchain use case development. You can contact him via mail (benjamin.schaub@fs-blockchain.de) or on LinkedIn (www.linkedin.com/in/benjamin-schaub).
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de) via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).
