How Procurement could use Smart Contracts to replace 3-way matching
Introduction
Procurement has always been a complex process and so has 3 Way Matching, a Process that sits across Procurement and Finance Teams. Procurement is difficult because for one:
It’s hard to find the right supplier
It can be challenging to get paid as the supplier
It can take a while for the procurement and finance teams to release payment
This is all made worse if your organisation uses 3-way matching for supplier payments. We could complicate this more by talking about 2-way and 4-way matching. But let’s not do that today.
The dreaded process that all Accounts-Payable Pros either love or hate. If I was them, I’d hate it.
In this post, we will explain what 3-way matching is and how Smart Contract technology could replace this process. Thereby making things easier for everyone involved.
Excited?
I am.
And yes, we will be talking about BLOCKCHAIN here. No, I won’t be talking about NFTs.
What is 3-way matching?
The 3-way matching process is used by companies to confirm that the goods and services they have received are the same as those they have paid for.
You’re all probably familiar with this.
It’s one of the basics you learn when you start out in Procurement.
The intention is that it can:
Help to prevent fraud
Be an indicator that the goods/services have been delivered
Indicate a milestone in the contract has been met
Netsuite state that “small businesses experience billing fraud twice as often as their larger counterparts, according to an Association of Certified Fraud Examiners (ACFE) report”. Netsuite says that “[3-way matching] can help companies root out fake or unauthorised transactions, which can cost a company an estimated 5% of its annual revenue, according to the ACFE report”.
Further to this, to highlight the importance of this process, Facebook paid out $23Million and Google $100Million on the basis they received fraudulent invoices. The 3-way matching process is critical to protecting the bottom line, but we should look for ways to improve this task.
Why should we change three-way matching?
Three-way matching is a manual process that is slow, expensive and error-prone. It isn’t scalable, and the technology that supports 3-way matching still requires manual interactions throughout the process. It relies on a disconnect between the sourcing exercise, the contract, the PO and the invoice.
Because of this, it’s not a suitable method for large organisations such as Pfizer or Novartis, with thousands of procurement contracts to manage every year.
Automated contract matching is a much more scalable solution.
It can be used to manage thousands of contracts and does so far more quickly and accurately than manual methods.
Can Smart Contracts replace 3-way matching?
Smart Contracts are a type of contract where a computer verifies, enforces, and executes the terms.
How do Smart Contracts Work?
These contracts are designed to be self-executing and self-enforcing.
To be clear, a smart contract is not a traditional legal contract that’s a document. It’s software. We’re going to see a fundamental shift in legal over the next decade where the best-in-class contract folk will be using smart contracts. And that means the best-in-class procurement pros and the software they use will also do this.
Once all of the terms are set in a smart contract, they can’t be modified or changed by any party. This creates initial practicality issues such as what happens if a contract change is required?
A backup version of the code for the original smart contract should be kept, which can be used to create a new contract. The existing contract will need to be destroyed. It could be the case that all future Contract Repositories have a section where smart contract code is kept on the cloud, so you never lose it.
The Ethereum blockchain is the most popular platform for creating smart contracts because it allows developers to build applications on top of their infrastructure.
The Ethereum blockchain is an open-source, public ledger that records transactions. Each time someone makes a transaction using the cryptocurrency Ether, it’s recorded on the blockchain.
Smart contracts are stored in a distributed database, meaning that every device has a copy of the contract and can verify its authenticity. This allows for complete transparency, security and immutability.
Are Smart Contracts Legally Enforceable?
Yes - if they follow the requirements for a contract. A contract does not need to be a “formal written” document. Hence why, oral contracts are a thing.
Furthermore, the Law Commission in the UK recently stated:
What could the future of Procurement look like if you used Smart Contracts to replace 3-way matching?
Smart Contracts would allow 3-way matching to run more efficiently because it would also remove a lot of the manual work involved in the process, improving accuracy and speeding up payment to suppliers.
This would reduce costs while increasing trust between parties, making Procurement a much simpler process overall (and less stressful).
This shift will make all contracts results focused. I know - you’re probably thinking that this is the case now.
However, go look at ten random contracts of yours - I guarantee that the minority focus on results (mostly your Software SLAs).
Conclusion
With the rise of Blockchain technology, many exciting developments are happening in the World of Procurement. While this example only scratches the surface of what could happen with smart contracts and blockchain technology. These innovations have tremendous potential to change how we manage Suppliers today.
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