Created in 1974, the Federal Acquisition Regulation provides “uniform policies and procedures for acquisition” to ensure integrity, fairness, and openness in federal procurement. And for over 40 years now, federal agencies have implemented numerous contract writing and support systems. But no one technology has made it dramatically easier for contracting officers or industry.
While markets and supply chains increase in complexity, thousands of contracting officers rely on legacy technologies to solicit offers, receive offers, evaluate offers, and make awards every day. The irrational dependency on legacy technologies has caused delays in awarding contracts, threatening the promise of fairness and openness in federal procurement. Undercapitalized small businesses are the most adversely affected by delays and inefficiencies in the procurement process.
Who would have thought that it would take more than 40 years before an emerging technology like blockchain would revolutionize federal procurement? In 2008, in response to the collapse of the financial system, Satoshi Nakamoto invented blockchain as a worldwide transactional ecosystem with inherent procedural trust. He imagined a decentralized, self-regulated financial ecosystem free from abuse, fraud, and unwanted political influences.
Almost 10 years after its conception, the blockchain industry has evolved and expanded considerably. Although originally conceived for cryptocurrency, blockchain is now being considered for procurement, supply chain, real estate title, mortgages, and medical records. Even the federal government can’t stay on the sidelines. About six months ago, the U.S. General Services Administration, the world’s largest buyer, built the first federal procurement blockchain proof of concept to demonstrate how blockchain could modernize federal procurement. They learned that blockchain, when combined with artificial intelligence and robotics, provides the foundational architecture for widespread automation.
Built in seven weeks, the proof of concept automated the procurement process and reduced the time to award contracts from 100 days to less than 10 days. By automating processes like financial review, the blockchain eliminated human error, bias and subjectivity from the process. Additionally, a smart contract (programmable chaincode) was deployed to automatically calculate the financial health score from the offerors’ balance sheets and income statements, in a standard fashion using commercial and government best practices.
Since every transaction is stored on the blockchain’s digital ledger, vendors are no longer in the dark. As the offers progress through the workflow, vendors receive alerts of their offers’ status instantly. The blockchain makes the process transparent for everyone in the value chain while preserving the privacy of each transaction.
So, what is blockchain? Generally, blockchain is an incorruptible, networked digital ledger for recording assets and transactions in the value chain. The blockchain’s embedded procedural trust and encrypted, fault-tolerant distributed ledger provides a scalable foundation for automation while preserving integrity, fairness and openness in federal procurement. The blockchain’s digital ledger tracks products and services (assets) as well as solicitations, offers, awards, and delivery (transactions). Furthermore, smart contracts or programmable logic can be applied to the blockchain to execute transactions autonomously such as calculating the financial health score, replenishing inventory, determining the optimal market price of products and services, verifying the integrity of vendors, and many more.
When transactions occur on the blockchain, they are verified, encrypted, and recorded in blocks and chained to other blocks using a hash of the transactions. The encryption and hash-based chain provide a trustable, incorruptible ledger of transactions that is properly ordered and resistant to fraud and abuse. Trust is further strengthened by distributing copies of the ledger to authorized participants within the value chain. The networked digital ledgers and encryption makes it virtually impossible for bad actors to corrupt the ledger with fake transactions.
By design, the blockchain preserves the integrity of the assets and transactions between multiple parties within the value chain. While there are many types of blockchain (public, permissioned, and private), federal agencies are more likely to opt for the private blockchain to facilitate procurement transactions among pre-vetted parties with identity enforced using digital certificates and identity management.
The FAR espouses the policies of integrity, fairness, and openness in federal procurement. The blockchain enforces those policies through a system of procedural trust embedded into the platform. With use of blockchain, the procurement process can be more transparent, substantially faster, and less vulnerable to abuse, fraud, gaming, etc. The blockchain will promote better competition, reduce protests, and provide leaders with unique business insights into the procurement value chain unavailable previously.
Chief procurement officers and other leaders throughout the government are now faced with the question, “Who will be the first to employ blockchain, artificial intelligence and robotic process automation to make federal procurement easier for contracting officers and industry?”
Nick Nayak is a former chief procurement officer at the United States Department of Homeland Security. With over 30 years of federal procurement experience, Nick has witnessed the evolution and advancement of federal procurement.
David Nguyen is the founder and CEO of United Solutions, a digital transformation company that built GSA’s federal procurement blockchain proof of concept and artificial intelligence platform.