2016 seems to be the year of “enterprise blockchain.” Last year, it was financial institutions that awakened to the potential of blockchain technology to cut costs and reduce counterparty risk. This year, it’s companies outside of the financial sector. Non-financial companies are interested in the same things—reducing costs and counterparty risk—but also in improving working capital and securities issuance/administration.
Dave Morton is a leader among his peers on this topic. Dave is CFO of Seagate Technology (STX: NASDAQ), a data storage company. As a global manufacturer Seagate manages a global supply chain and global customer base, which means its finance department interacts with many of the >750 payments systems in the world. Dave began digging into blockchains in the Spring of 2014, and I’ve learned a lot from Dave and his team as we started this journey together. They are strategic thinkers on how to fix these issues and are agnostic about whether the solution involves a blockchain, but have spotted myriad places where blockchains would solve problems in payments and securities. Plus, they put their money where their mouth is by investing in Ripple, a blockchain start-up. I’m grateful for Dave’s willingness to share Seagate’s experiences in this forum!
- Seagate was the first non-financial company to pursue blockchain technology. What did you see in the technology? How do you think blockchains will change the way corporate CFOs and treasurers do their jobs?
Dave: “When we first heard about blockchains, like many people we heard ‘Bitcoin’—which for various reasons—didn’t interest us. We took the opportunity to speak to a few blockchain technology start-ups and as a global high tech manufacturing company, the potential for this technology to solve many pain points for us became immediately apparent. These pain points include supplier payment latency as we pay upwards of +100,000 invoices a month, and transparency for where our cash is around the world as we manage hundreds of bank accounts. This persistent cash velocity friction keeps us from using some of our working capital for other corporate treasury purposes. It is extremely clear to us that corporate use of blockchain technology will simplify corporate treasury operations and improve efficiency.”
- How do you see banks reacting to this technology? You have an interesting vantage point as both CFO of a major global company, as well as advisor to Ripple.
Dave: “To us, it’s a classic case of technology disruption, not unlike Uber with the transportation industry. From the banks we speak to, there is great momentum and they recognize blockchains are coming and they are figuring out how to join in. Practically gone are the days when banks could earn float on their clients’ “comfort deposits” and these institutions need to change course rapidly. As an example, last year Seagate did a small pilot program with Ripple around evaluating the efficiency of our FX [foreign exchange] execution with our banks. Through this process, we actually found our FX execution to be very good, but we were able to quantify the cost of “comfort deposits” and reducing that cost is a big chunk of the value that blockchain technology can deliver to Seagate.”
[Note from Caitlin: “comfort deposits” are minimum deposits companies maintain in each of their individual bank accounts around the world to cover expected payment volumes. Large companies have hundreds (or even thousands) of bank accounts around the world, and these “comfort deposits” inefficiently trap companies’ working capital.]
- We recently chatted about how everything in the world is moving to “just in time”—not just companies’ operations, but also their finance departments. How might blockchains help Seagate achieve this?
Dave: “The financial efficiency of Seagate’s business is defined by our cash conversion cycle and the velocity of our cash is a corporate asset, just as critical as our physical manufacturing facilities. We can’t afford for our cash to be ‘lazy’ and any time we can take out of our Days Sales Outstanding is meaningful. With blockchains, we can have real-time transparency with our customers, helping them to meet their payment terms and eliminating slack in the collection systems we use today. Reducing customer payment latency even 1-2 days would improve the velocity of our cash measurably.”
- Do you think blockchains will really make companies pay invoices faster?
Dave: “In addition to executing supply chain best practices, with blockchains we will have the potential ability to execute invoice discounting programs with both our suppliers and customers. With our suppliers (many of whom have a higher cost of capital than we do) we implicitly cover some portion of their cost of capital through pricing. The same is true for Seagate’s customers. Invoice discounting has always made good theoretical sense [for both parties] if there’s a big difference between the parties’ cost of capital, but the technology never really existed to make it worthwhile for companies to implement such a big change to their treasury operations. Now with blockchains, companies like Ripple are making real-time payments capabilities possible—so invoice discounting might eventually become standard practice. Baby steps first though—we are in the exploratory phases of defining our first use case.”
- You’ve spoken publicly about integrating blockchains into Seagate’s supply chain. How might Seagate use this technology? What lessons have you learned about driving adoption of this technology from the corporate treasurer seat?
Dave: “Seagate has been an innovator of precision manufacturing and we run the most automated hard disk drive operations in the world with our robotic technology. Despite these advances, we are not able to bill our customers till the drives are aggregated and shipped. In an optimal cash velocity world, we could envision utilizing the benefits of blockchains to dynamically invoice each disk drive the moment it comes off the manufacturing line. This would also give customers more transparency to their own supply chain—and potentially to the overall industry if we wanted to leverage and share that information. With two hard drive manufacturing companies left in the world, the years of customers relying on inventory slack are gone. Our industry is getting leaner and more efficient in terms of production utilization, and we should leverage this with customers. In turn, customers would be able to improve their own supply chain metrics for more ‘just in time’ efficiencies.”
- Finally, how do you think blockchains will affect the securities issuance and investor servicing roles of corporate CFOs and treasurers?
Dave: “The benefits blockchains can provide security issuances can be measured in hard dollars in terms of administering shareholder services, saving issuance costs, and increased transparency into who owns our securities. Today, it costs at least $200,000 for Seagate to get a shareholder list from the DTC, and by nature is always out of date due to latency in reporting. In terms of capital allocation, we have cases where dividend payments don’t end up in the correct account and we are responsible for providing support for sorting these issues out. I’d even say that we’ve had challenges with +3 day settlement delays on our own executive plans that have hard dollar consequences in price/cost execution and tax assessments. Real time execution and transparency with blockchains would eliminate the majority of these issues.”
Thanks for sharing your insights Dave! And special shout-out to Kate Scolnick, Seagate’s head of investor relations, for her engagement on this topic!