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This document is authorized for use only by badarinath Peddireddy in BLCN 634 Human Resource Management and Blockchain-1-1 taught by Lenore Pollard, University of the Cumberlands from Apr 2020 to Oct 2020.

10 MIT SLOAN MANAGEMENT REVIEW WINTER 2017 PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED. THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED.

F or the last century, academics and business leaders have been shaping the practice of modern management. The main theories,

tenets, and behaviors have enabled managers to build corporations, which have largely been hierar- chical, insular, and vertically integrated. However, we believe that the technology underlying digital currencies such as bitcoin — technology com- monly known as blockchain — will have profound effects on the nature of companies: how they are funded and managed, how they create value, and how they perform basic functions such as market- ing, accounting, and incentivizing people. In some cases, software will eliminate the need for many management functions.

Sound far-fetched? Let us explain. The internet vastly improved the flow of data within and be- tween organizations, but the effect on how we do business has been more limited. That’s because the internet was designed to move information — not value — from person to person. When you email a document, photograph, or audio file, for example, you aren’t sending the original — you’re sending a copy. Anyone can copy and change it. In many cases, it’s legal and advantageous to share copies.

By contrast, if you want to expedite a business transaction,

emailing money directly to someone is not an option — not only

because copying money is illegal but also because you can’t be

100% certain the recipient is the person he says he is. As a result,

we use intermediaries to establish trust and maintain integrity.

Banks, governments, and in some cases big technology compa-

nies have the ability to confirm identities so that we can transfer

assets; the intermediaries settle transactions and keep records.

For the most part, intermediaries do an adequate job, with

some notable exceptions. One concern is that they use servers

that are vulnerable to crashes, fraud, and hacks. Another is that

they often charge fees — for example, to wire money overseas.

They also monitor customer behavior and collect data, and they

exclude the hundreds of millions of people who can’t qualify for

a bank account. And sometimes, they make terrible mistakes, as

the 2008 financial crisis made evident.

What would happen if there was an internet of value where

parties to a transaction could store and exchange value without

[OPINION]

How Blockchain Will Change Organizations What if there were an internet of value — a secure platform, ledger, or database where buyers and sellers could store and exchange value without the need for traditional intermediaries? This is what blockchain technology will offer businesses. BY DON TAPSCOTT AND ALEX TAPSCOTT

F R O N T I E R S

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SLOANREVIEW.MIT.EDU WINTER 2017 MIT SLOAN MANAGEMENT REVIEW 11

the need for traditional intermediaries? In a nutshell, that’s

what blockchain technology offers. Value isn’t saved in a file

somewhere; it’s represented by transactions recorded in a global

spreadsheet or ledger, which leverages the resources of a large

peer-to-peer network to verify and approve transactions. A

blockchain has several advantages. First, it is distributed: It

runs on computers provided by volunteers around the world,

so there is no central database to hack. Second, it is public:

Anyone can view it at any time because it resides on the network.

And third, it is encrypted: It uses heavy-duty encryption to

maintain security.

Blockchain transactions are continuously verified, cleared,

and stored by the network in digital blocks that are connected to

preceding blocks, thereby creating a chain. Each block must refer

to the preceding block to be valid. This structure permanently

time-stamps and stores exchanges of value, preventing anyone

from altering the ledger. To steal anything of value, a thief would

have to rewrite its entire history on the blockchain. Collective

self-interest ensures the blockchain’s safety and reliability. There-

fore, we think blockchain provides a powerful mechanism for

blowing traditional and centralized models, such as that of the

corporation, to bits.

The Role of Transaction Costs In a classic article published in 1937 titled “The Nature of the

Firm,” economist Ronald H. Coase noted that there are costs

associated with organizing production through the open mar-

ket rather than through a firm — such as the cost of searching

for relevant prices and the cost of negotiating numerous con-

tracts. Coase expected businesses to expand internally until

the cost of performing an additional transaction inside the

organization become equal to the cost of using the open mar-

ket. In a 1976 article, scholars Michael C. Jensen and William

H. Meckling added another dimension by introducing the

concept of “agency costs,” which are the costs associated with

managers’ tendencies to make decisions that are not optimal

from an owner’s point of view.

Like many other analysts, we envisioned that the internet

would reduce transaction costs so that corporate boundaries

would become more porous and organizations would seek

talent outside their boundaries. As it turned out, the costs fell

much further than we expected and in turn lowered barriers

to entry for startups and established businesses looking to ex-

pand into adjacent areas. To be sure, the internet reduced the

costs of search, while email, social media, cloud computing,

and applications such as enterprise resource planning reduced

the costs of coordination. More broadly, these new capabilities

enabled corporations to outsource overhead, crowdsource inno-

vation, and eliminate middle managers and other intermediaries,

thus freeing industries such as accounting, commercial banking,

and even music to consolidate assets and operations.

Managing With Blockchain We believe that blockchain will transform how businesses are

organized and managed. It allows companies to eliminate

transaction costs and use resources on the outside as easily as

resources on the inside. Vertical integration may continue to

make sense in some situations (for manufacturing controlled

pharmaceuticals, for example, or where companies have industry-

leading strengths throughout the supply chain). But in most

cases, we believe that networks based on blockchain will be bet-

ter suited for creating products and services and for delivering

value to stakeholders.

Human Resources and Procurement Blockchain will enable

organizations requiring specialized talent and capabilities to ob-

tain better information about potential contractors and partners

than many traditional recruitment and procurement methods

offer. With a prospective employee’s consent, an employer will

have access to a cache of information that’s known to be correct

because it has been uploaded, stored, and managed on a highly

secure, distributable database. For example, job prospects

wouldn’t be able to lie about their training or degrees because an

authority, such as the university they graduated from, has entered

the data on the blockchain. Tampering with data after the fact

wouldn’t be possible: It would involve taking over the entire

blockchain, a nearly impossible task. Individuals would control

their own personal data (including birth date, citizenship,

We believe that blockchain will transform how businesses are organized and managed. It allows companies to eliminate transaction costs and use resources on the outside as easily as resources on the inside.

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12 MIT SLOAN MANAGEMENT REVIEW WINTER 2017 SLOANREVIEW.MIT.EDU

F R O N T I E R S

financials, and educational records) in a virtual black box. They

alone would be able to decide what to do with the information.

Human resources and procurement staff will need to learn how

to query the blockchain with specific yes or no questions — for

example, Do you have this kind of license? Can you code in this

specific language? The responses from all the black boxes will

provide a list of people who meet these qualifications. Employers

can ask whatever they want, and job seekers can program their

black boxes with answers or refuse to answer.

Finance and Accounting Information about a business’s finan-

cial well-being changes all the time. When you search the web

for a company’s financial data, you search in two dimensions:

horizontal (across the web) and vertical (within particular

websites). What you find can be out-of-date or inaccurate in

other ways. On a blockchain, though, there’s a third dimension:

sequence. In addition to being able to obtain a historical picture

of the company since it was incorporated, you can see what has

occurred in the last few minutes. The opportunity to search a

company’s complete record of value will have profound implica-

tions for transparency as it brings to light off-book transactions

and hidden accounts. People responsible for records and reports

will be able to create filters that allow stakeholders to find what

they are searching for at the press of a button. Companies will be

able to create transaction ticker tapes and dashboards, some for

internal use and some for the public. As extreme as this may

sound, it’s really not.

Sales and Marketing Just as a blockchain provides a way to ob-

tain information about potential contractors and partners, it will

be able to tell you about people or businesses who are potential

customers. As we have noted, individuals will control access to

their own data in virtual black boxes, which will limit a compa-

ny’s ability to profile customers by tracking and capturing their

behavior online. However, the blockchain will allow companies

to engage with individual customers on a peer-to-peer basis.

This may seem like a lot of effort, but it could actually be a huge

opportunity. Some consumers may offer businesses access to

their data in exchange for freebies; others will charge fees to

license their data. Either way, companies will be able to reach

their target audience with greater precision.

What’s more, sellers won’t have to worry about who the

customers are and whether they are able to pay. With the new

platform, sellers won’t have to incur the cost of establishing

trust — thus they can facilitate transactions that would have been

risky or might not have been possible otherwise. Furthermore,

blockchains will eliminate the cost of warehousing data and pro-

tecting other people’s data from security breaches. It should also

be easier to target customers who make their interests known.

Despite the advantages of being able to reduce risk, there is

also a downside. The ability to make precise queries leads to pre-

cise results. This means that there will be much less serendipity.

With blockchains, you are less likely to discover people or part-

ners who don’t fit your profile but are open to change, willing to

adapt, and eager to learn.

Legal Affairs Coase and subsequent economic theorists have

argued that corporations are vehicles for creating long-term

contracts when short-term contracts require too much effort to

negotiate and enforce. Blockchains facilitate contracting in both

the short and long term. Through smart contracts — software

that, in effect, mimics the logic of contracts with guaranteed exe-

cution, enforcement, and payments — companies will be able to

automate the terms of agreement. A contract can refer to data

fields elsewhere on the blockchain (for example, a party’s account

balance, a change in a commodity price, or an additional sale of a

copyrighted work). It can trigger alerts and ensure payments.

Because the contracts will be self-enforcing, corporations will

not want to enter into them lightly. Changing the terms of deals

(or attempting to manipulate them) will be more challenging.

Lawyers and other managers will need to learn how to audit

legal templates and make sure the contract software supports

what both parties agreed to do. They will also need to become

knowledgeable on issues involving the blockchain and smart

contracts. The fastest-growing specialty in the law firm of the

future is likely to be “smart contract mediator.”

With the new platform, sellers won’t have to incur the cost of establishing trust — thus they can facilitate transactions that would have been risky or might not have been possible otherwise.

How Blockchain Will Change Organizations (Continued from page 11)

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SLOANREVIEW.MIT.EDU WINTER 2017 MIT SLOAN MANAGEMENT REVIEW 13

Raising Capital We believe blockchains will also transform

the process of raising money. In our view, the blockchain has

the potential to disrupt the way the global financial system works

and change the nature of investment. Mindful of this prospect,

the New York Stock Exchange has invested in Coinbase Inc., a

digital currency wallet and platform company headquartered

in San Francisco, California. For its part, the Nasdaq Stock

Market is also experimenting with blockchain technology.

Integrating the Pieces So how will blockchain help companies become stronger com-

petitors? How can a company use it to integrate the various

pieces? Blockchain technology provides a platform for people

to work together with the persistence and stability of an organi-

zation but without the hierarchy. Consider ConsenSys, a venture

production studio based in Brooklyn, New York, that builds de-

centralized software applications and end-user tools that operate

on blockchain. Founder Joseph Lubin describes the company’s

structure as a hub-and-spoke arrangement rather than hierarchi-

cal; each project operates on its own, with the major contributors

holding equity. For the most part, people get to choose what they

work on. The central hub provides supporting services to the

spokes in exchange for a share of the ownership. The various

rights and relationships are codified in smart contracts that

hold the entity together.

In recent years, we have been reminded all too often that

managers don’t always act with the highest degree of integrity.

(Think of the scandals at Enron, AIG, and Volkswagen, for

instance.) What if we could codify ethics and integrity into

the circuitry of the enterprise, or reduce the moral hazard that

too often sees management gambling with shareholder capital?

Through smart contracts under blockchain, shareholders

will be able to enforce the commitments executives make.

Companies can specify relationships and state specific outcomes

and goals so that everyone understands what the respective

parties have signed up to do and whether those things are

actually getting done.

On blockchain, executives will someday no longer need to

attest that their books are in order once a year or every quarter;

the blockchain will keep a company’s books in order in what is,

in effect, real time as a matter of course. Financial statements

will go from snapshots of the enterprise at one point in time

to a transparent, three-dimensional view of the whole enterprise.

Shareholders and regulatory agencies alike will be able to exam-

ine the books whenever they choose. Institutional investors will

have the ability to create their own credit dashboards based

on the facts, as opposed to relying on interpretations by ratings

agencies. And ratings agencies themselves may overhaul their

rating systems based on information from blockchains.

In contrast to the internet, which took two decades to develop

and yet another decade to become commercial, the blockchain

ecosystem is developing more rapidly as an economic platform.

For executives, this means there is little time to waste. They will

want to examine their industries and their competitors with an

eye toward identifying opportunities for profitable growth.

Executives should begin by identifying people within the

company who are interested in the technology or using digital

currency. They should talk to people in the company’s IT depart-

ment about the technology’s implications, buy some bitcoin,

and experiment with purchasing inexpensive items on the block-

chain to see how it works. At the same time, they should identify

nearby companies using blockchain — take the opportunity to

visit their operations and talk with people involved, and invite

experts to meet with the team. Now is the time to reimagine

how your company organizes the way it creates value. If you

don’t, someone else will.

Don Tapscott is the chancellor of Trent University in Peterbor- ough, Ontario, and CEO of the Tapscott Group Inc. in Toronto. Alex Tapscott is founder and CEO of Northwest Passage Ventures, an advisory firm incubating early-stage blockchain companies, in Toronto. They are the authors of Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World (Portfolio, 2016). Comment on this article at http://sloanreview.mit.edu/x/58222, or contact the authors at smrfeedback@mit.edu.

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Shareholders will be able to enforce the commitments executives make. Companies can specify relationships and state specific outcomes and goals so that everyone understands what the respective parties have signed up to do.

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