THE IMPACT OF TRANSPARENCY ON FINANCIAL PERFORMANCE: A BRIEF COMMENT ON A RECENTLY UPDATED HARVARD BUSINESS SCHOOL PAPER

Fenestra CFO Kevin Deeley explores the commercial argument for transparent supply chain practices.
Those of us who play a part in the blockchain community often cite “transparency” as a source of value creation that helps to justify adoption of the technology. Is there independent evidence that transparency can improve economic performance? A series of trials as part of a recent Harvard Business School study [1] says a clear YES.
It is often assumed that if enterprises move their existing business processes to a blockchain it will, as a result of the resulting enhanced transparency, increase the overall economic value of that particular process to its participants. Driving out “bad-actors” because everyone in the chain can see their behaviour and challenge it is a common theme. However, this central tenant of blockchain, that transparency equals value enhancement, is usually stated without demonstrable proof. It is just assumed to be true because intuitively it seems “about right”, so leading to lots of people repeating the mantra.
However, it is worth noting that transparency does not implicitly require blockchain. The same disclosure opportunities and incentive structures have always been there in the mainstream economy. They are not new. Any market participants can already be more open and honest if they wish to be. However, let’s face it companies typically treat their financial and commercial data as a tightly-guarded secret and so the problem is, how do we demonstrate what we think is true? How do we PROVE what we feel, that the economic and societal benefits of transparency are there waiting to be captured?
A recently updated research publication by Harvard Business School should therefore be of interest to both enterprises and the blockchain community. The three academics that wrote it took a rigorous scientific approach to shed some light on how increased transparency in the relationships between (non-blockchain) supply-chain participants can generate greater value for those participants as a whole. Experiments were carried out in digital and non-digital environments, and across a variety of different brands and product categories.
In six separate laboratory and complimentary real-world studies, the academics tested the effect of companies voluntary disclosure of the costs to produce a given product (i.e. cost transparency) to other supply chain participants. So, Company A not only knows the price it is being charged, but also gets to know the price its supplier — Company B — is in turn paying for its inputs, and so on. Variants of the experiments took place and resulted in three key findings, in the academics own words:
1. “under both conservative and liberal assumptions…the cost transparency treatment had a significant positive effect on sales.” In fact, the trials identified between 22% and 44% increased sales.
2. “cost transparency in particular, as opposed to other forms of transparency such as the mere provision of information on production processes (operational transparency), is particularly potent in boosting purchase interest”
3. “cost transparency boosts purchase interest only when voluntarily instated by the firm, as opposed to involuntarily (e.g. as required by law)”
In simple terms: voluntary transparency leads to trust, which leads to higher sales.
Of course, there are always limitations to experiments. For a start, it is clear that no company will ever want to be a first mover in its own supply-chain, for fear of unilaterally giving away its secrets and hence an element of competitive advantage. Advance agreement of reciprocity is therefore key to removing this first-mover disadvantage.
The conclusion must therefore be that if blockchain based eco-systems are to thrive in the real economy, there is more to be done than just deploying technology. We need adoption as well, and that implies that real world companies will first have to want to change, or at least be under sufficient market pressure that they can be persuaded that it’s in their best interests to do so. A potential double digit increase in sales would be a good starting-point.
Kevin Deeley is CFO at blockchain technology solution FENESTRA.
Reference:
[1] Mohan, Bhavya and Buell, Ryan W. and John, Leslie K., Lifting the Veil: The Benefits of Cost Transparency (September 11, 2016 Last revised: 6 Nov 2017). Harvard Business School https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2498174
