Extract's Table of Contents:
Electronic commerce is the use of computers and telecommunications in the routine
business relationships that most affect the basics of an organization’s operations:
everyday relationships with suppliers, customers, banks, insurers, distributors and
other trading partners. It’s close to becoming the business mainstream, where it’s
as much part of the organizational landscape as phones and not something to do with
“computers.” The most established components of electronic commerce –electronic data
interchange and electronic corporate payments – have been growing for over a decade
at rates of around 20% a year and are rapidly reaching critical mass. As that happens,
electronic commerce becomes a competitive necessity not an option. In the 1990s, those
proven and steady applications of electronic commerce have been accelerated and extended
by the combination of low cost, high performance telecommunications and personal computers
plus the astonishing emergence of the Internet as both a marketing channel, a
telecommunications infrastructure that opens electronic commerce up to small firms, a
vehicle for companies to rapidly develop internal and external information and communication
systems, and an enigma. The enigma is whether or not the recent growth in use of the World Wide
Web signals that the Net will be a massive mass market for just about every type of business or
if its already overloaded communications, with all the delays and frustrations every Internet
user has to deal with, and its demographics will limit it to a narrow electronic commerce
community of, mainly professional males, with well above average incomes, who use it largely
for electronic mail.
Electronic commerce is the best way to do business in an era where telecommunications allows more
and more options for customer contact, elimination of documents and all the overhead and
administration associated with them, and computer-to-computer processing of transactions between
customers and suppliers and, though to a far lesser extent as yet, between companies and customers.
If it’s the best way to do business, then it’s obviously something every manager needs to make part
of his or her thinking. That’s what this book is about: providing business managers with a non-hype,
non-technical, reliable and interesting guide to this new business territory.
That guide is needed and largely missing today. The value of electronic commerce (EC) can be difficult
to measure and even more challenging to explain. Some of the reasons for the mystery about EC results
from the fact that:
- EC is not just a single technology or tool: it is a combination of technologies, applications,
processes and business strategies. Managers who are fully knowledgeable about business processes
and strategy make not know much about and even be intimidated and put off by the jargon of EC technology.
The best EC technical professionals have enough to do to keep up with the technology and may not
appreciate the realities of process and organization business managers have to deal with.
- EC cannot be accomplished by any single enterprise working alone, regardless of the quality of its
technologies or its business strategies. It’s fundamentally about business relationships. Managing the
relationship is the starting point for managing electronic commerce. Then, managing processes and
technology becomes the priority.
- EC systems and procedures must be consistent with the practices, relationships and, in many instances,
power and influence structures of industries. EC is about the relationships between enterprises. As a result,
its progress depends heavily on industry associations and working groups to define the standards –formats and
procedures – for electronic relationships. In the automotive industry, for example, electronic commerce got
off the ground when competitors came together through what is now the Automotive Industry Advisory Group.
Progress in using electronic data interchange in healthcare was for long blocked by the fragmentation of the
industry: hospitals, insurers, government agencies such as Medicaid, pharmacists and others. By contrast,
much of the impetus in EDI came from power players in an industry encouraging and even forcing their suppliers
to move. When Walmart or Toyota invests in electronic commerce, it inevitably changes its suppliers’ role in
the supply chain and their then necessary EC investments.
Our goal in this management guide is to remove the mystery from electronic commerce, establish its value, orient
managers to the key technical issues, and help them make EC part of their own planning.
The value is HUGE! Electronic commerce has provided three major benefits to an enterprise. We stress “has provided” not
“will provide”– we’re not making any of the wild predictions that litter books and articles about the promised wonders
of information technology. Electronic commerce is proven, not potential. The potential is even bigger, but as you read
this guide, you won’t need to think “Yeah, sounds great, but where’s the evidence?” We offer plenty of evidence and
examples that: electronic commerce:
- Reduces the cost of creating, moving, managing and processing individual documents, transactions and other
forms of information exchange that make up the relationships among enterprises. The savings per transaction are
often well over 100%, an opportunity no organization can afford to neglect. We could fill an entire book with
figures from companies about how they cut the cost of purchase orders.
- Transforms relationships between trading organizations to their mutual benefit, because the information flows
are more timely, coordinated and accurate when sent and processed electronically - and this improves the quality
of decisions made by management.
- Opens up additional channels through which to market and sell for many organizations. The Internet is the
obvious allure here, but in business-to-business commerce electronic links have opened up many opportunities to
reach out to customers through new levels of convenience, location-independent service and the lean structures
often termed the virtual organization. The lower cost of electronic channels can also reduce costs, while at the
same time increase profitability, compared to other, less efficient channels. Many of the best examples of the
value of EC are in the manufacturing, transportation and retail industries, because these were the first industries
to begin electronic data interchange (EDI) implementation more than 10 years ago.
- Simplifies and streamlines business processes, removing administration, delays, errors and overhead.
- Directly and fairly immediately contributes to shareholder value, through reductions in working capital that
has a direct carrying cost: inventories, accounts receivable and in-transit goods.
Electronic commerce is a means to a business end. Improving costs, relationships, channels, processes and shareholder
value is the goal. Technology is the enabler. The main technology-based tools of EC are electronic data interchange, the
elimination of all the paper, steps, delays and errors that burden the cost base of companies and impede their service,
flexibility and responsiveness, electronic money management, and electronic logistics that integrate the firm’s supply chain.
It also includes the use of electronic tools in the relationship between consumers and business. The effect of the automated
teller machine, which changed the basics of banking, and its less mature cousins such as the debit card at point of sale and
the smart card, which are gaining momentum through such applications as prepaid phone cards, looks to be eclipsed within the
next few years by the Internet and the World Wide Web, which offers many extensions of the electronic commerce matrix. The
rapidly emerging tools here include secure payment mechanisms for on-line purchasing; electronic catalogs, store fronts and
malls; new and as yet unproven forms of electronic cash; extensions of credit cards; on-line banking services; and on-line
business-to-business information sharing.
Most of the applications of electronic commerce are undramatic and the functions they address have largely been delegated to
administrative units. It’s easy for executives to consider purchase orders and collection of accounts receivable, for instance,
as just part of the background activities of the firm, administrative operations that are obviously important but in no way
“strategic.” Electronic commerce makes them truly strategic for the simple reason that it entirely changes the nature of
business relationships and the profitability of a firm in relation to its competitors. The three types of relationship here are:
person to person, person to computer, and computer to computer.
These three relationship categories define the general interactions that are driving the practical applications of EC technology
and processes today:
Person to Person: Most often this uses electronic mail, fax and 1-800 phone numbers. The driver here is obviously
communication between people, who handle the interpretation of the request and the information involved. The “electronic”
part of this electronic commerce is the network that conveys messages. Person-to-person commerce has been growing rapidly
because of the availability of the Internet and such services as America Online and CompuServe plus low-cost fax machines
and fax features built into personal computers plus rapidly falling telecommunications prices, driven by the combination
of competition and technology innovation. The primary advantage of this type of relationship is its flexibility. The other
types of electronic commerce, person-to-computer and computer-to-computer require structuring procedures and ensuring there
are no ambiguities of terms. The disadvantage is the administration, facilities and time required for simple transactions
that can be more conveniently handled through a person-to-computer relationship (the computer stays awake all day and night)
and cost cents and seconds to process (getting your credit card balance over the phone, for instance).
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Person to Computer: This is the area where there has been the most widespread and visible activity over the past several
decades, ranging from the Automated Teller Machine to electronic cash management services and most recently to electronic purchases
via the Internet. Person-to-computer commerce involves the use of a template – a script the computer follows in its questions and
responses – or pre formatted menu of options, controlled by a computer program, to allow service delivery. This can lead to inflexible
and irritating dialog structures; there’s no human commonsense to correct obvious errors, like recognizing that the person on the
phone gave her name as Jean Grogan, while the computer software must have it as Grogan, Jean; accept shorthand inputs such as “Philly”
for “Philadelphia, Pennsylvania”, and so on. Designing the dialog for phone access to computers or for Web site transactions is an art
form. A lot of people bail out after the fifth “Press 1 to...... Press 2 to......”.
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Computer to Computer: This is where corporate applications of electronic commerce have focused. The outputs of one computer
program become the inputs to another: the system that use to generate a printed purchase order and mail it to the supplier now sends it
as an electronic data interchange message to the company that used to key in the order for input to its own order processing software.
Payments similarly move from checks to electronic funds transfers. It makes no sense to spend $50 on paper and people when two computers
can structure the transaction for a few cents. As a result, more and more large firms that already had comprehensive computer systems
and data communication networks that handled all their outgoing commercial documents started to adopt EDI and EFT in the early 1980s At
that time, this meant implementing “proprietary” systems, ones that used company-, software- or hardware-specific formats and “protocols”.
This required trading partners to adopt the same systems, which is rather like person-to-person electronic commerce relationships depending
entirely on which make of fax machine each party used. The entire evolution in computer-to- computer EC has been to remove as many restriction
about which computer.
Figure 1 below shows a simple representation of the matrix of electronic commerce interactions, each of which has its role and value for every business:
The EDI/Email/Interactive matrix
ELECTRONIC COMMERCE AS COMPETITIVE NECESSITY
Imagine trying to run a company today without phones and fax, telling your customers and suppliers that you only do business by mail. How about trying to
run it in 2000 without the basic tools of electronic commerce: electronic data interchange for handling purchase orders and invoicing, electronic payments,
and electronic links between your own logistical processes and those of your key trading partners that streamline the entire supply chain? We take phones
and fax for granted today. On the rare occasions the phone system is down for even a few hours - or even a few minutes -, business comes to a halt. The
phoneless company is the businessless company. How soon will it be before we take electronic commerce just as much for granted and the EC- deficient company
becomes the business-weakened company? How soon will firms be as dependent on their EC base as they are on phones in the everyday operations that determine
their quality of service, financial strength, efficiency and speed?
The answer is “not long” – if not now, then certainly within the next three to five years, based on the compounded twenty percent annual growth over this
decade in just about every established area of electronic commerce. You don’t need any wild hype about Information Supersomethings – highways, society,
virtual organization and the like -- to be sure that EC usage will at least double in the next four years; that merely continues the historical trend.
While it’s harder to predict the growth rate for newer components, especially ones that use the Internet to replace traditional buying and payment mechanisms,
they are likely to move at at least the same pace as the earlier ones. So, the minimal growth in EC is a doubling in four years and the most likely is a tripling.
It’s not the raw numbers that matter, though. It’s the movement of EC from being a relatively minor element of largely administrative functions to its becoming an
integral component of business basics. More importantly, it’s the acceptance of the electronic commerce approach as being the basic way to conduct business. The more
competitive the industry and the more the pressures to improve service, cut costs and speed up operations, the more quickly electronic commerce becomes a business priority.
That’s apparent in the car industry and in retailing. About twenty years ago, North American automobile manufacturers were challenged by foreign imports and being beaten at
their own game. Many commentators saw them as an endangered species, as Chrylser, Ford and General Motors went through crisis after crisis. Today, they are in good shape. They
moved aggressively, if often belatedly, to improve quality, following the path of Toyota, to speed up time to market, again following Toyota, and to exploit electronic commerce,
way in advance of Toyota. Many of the key innovations in EDI came out of the North American auto industry, including evaluated receipts settlement (payment on receipt of goods,
with no invoice) and advanced shipment notice and paid on production. The Automotive Industry Advisory Group, originally named the Transportation Data Coordinating Committee, was
the pioneer in bringing together competitors to cooperate so that they all benefited from common procedures and formats for transactions that make practical electronic relationships.
Today, if you asked any of the “Big Three” what business without EC would be like, they would have trouble comprehending the question. Why? Because without EC and EDI, they would simply
not exist! They can no longer even contemplate using paper and people the way they did, even a decade ago. And the evolution continues.
That evolution is built on electronic data interchange, the core of electronic commerce. EDI streamlines business processes. Electronic money management, the next ring of the electronic
commerce wheel, leverages the financial capital that is the fuel of profits. Electronic logistics, the full wheel that encompasses just about all the business relationships of a company,
provide the support for the streamlined, process-smart organization that maximizes every practical opportunity to simplify the basics of its business and to add speed, responsiveness and
reliability. Individually, these improvements typically improve the productivity of the specific processes they are targeted to by 20-40% -- 20-40% faster, cheaper, and with that much
reduction in errors than beforehand. Together, they make electronic commerce the base for being a well-run firm in the era of just-in-time everything – just-in-time production, distribution,
service and communication.
The electronic commerce-less company of 2002 – five years from the publication of this guide – faces the following problems:
- Most large companies simply won’t use it as a supplier; already, many elite customers demand suppliers use EDI in
their relationships with it.
- It will not be able to pay its taxes in a timely.
manner to federal and local governments; almost every state and the IRS are moving to requiring electronic filing and payment of
taxes by medium to large firms.
- It will be unable to bid on many commercial contracts since those will be posted on the Internet and processed electronically; government agencies and such large companies as General
Electric are moving most of their requests for bids onto the Web.
- It will carry an administrative and overhead burden that is like a tax on its operations; its competitors won’t. Just about every study of EDI shows that it slashes transaction costs
by a factor of five to ten. It’s crazy for any firm not to exploit this proven opportunity.
- It will waste money on every financial transaction it makes, equivalent today to sticking a check in a drawer for a few months instead of cashing it. Electronic payment systems, funds
transfers, automated clearing houses, and what is termed FEDI (Financial EDI) are the money equivalent of just-in-time inventory and lean production – just-in-time and on-time cash
management.
- It will be unable to match the streamlining of core processes that the leader in its industry have already made.
- It will be just a little slower than its competition every year, just a little more expensive, just a little less reliable and in the end just a lot less successful. The process-smart
leaders in retailing, manufacturing, financial services, distribution and transportation are 50% more productive in terms of revenues per employee and profits per employee than the median
for their industry. (Those figures may be easily verified by reading Business Week’s and Fortune’s quarterly reports on corporate performance.)
None of these are radical predictions. In 1997, managers can afford the equivalent of St. Augustine’s famous prayer “Oh Lord, make me chaste – but not yet.” Oh Lord, let’s implement electronic
commerce – but next year perhaps.” As the many examples scattered throughout the Glossary of this management guide clearly indicate, it’s time to move. Electronic commerce is the opportunity of 1997
and the necessity of 2002.
THE COMPONENTS OF ELECTRONIC COMMERCE
Electronic data interchange: a foundation block of the well-run business
Electronic data interchange (EDI) is one of the two foundation blocks of EC, the other being electronic payments. It is computer-to-computer communication of business messages that use agreed on codes
and formats that allow them to be directly and immediately input to transaction processing systems, most obviously for order entry, payments and distribution. It’s a simple concept that requires
relatively simple technology; the complexity and cost lie in the organizational changes needed to exploit the technical opportunity and in the vital need to build cooperation, collaboration and trust
among all the parties involved. Trust is the currency of EDI.
The proven benefits of EDI are so substantial that it’s hard to see why so many firms in industry after industry have not followed the lead of the pioneers, many of whom implemented it in the early 1980s.
Here are some instances, which were newsworthy just a few years ago but are now almost ho- hum:
- Automotive industry: processing and administrative costs per truck shipment: cut from an average of $61 to $6, by eliminating paper documents and also invoices, using the EDI documents to
match order to delivery.
- Digital Equipment Corporation: procurement lead times dropped by 30% and inventory levels by 90% between 1987 and 1993, by using EDI for over $4 billion worth of procurement of materials, supplies
and services a year.
- Thermo King: Order costs cut from $50 to $10 for 20,000 spare parts items. “Hard” savings of $3.4 million in stocking costs and release of $4.9 million of cash from reduced inventory for a firm with $65
million sales.
- General Electric: Materials inventory cut from 7 weeks supply to 2.5 and suppliers’ inventory reduced by half. Material lead times dropped from 60 to 10 days and the cost of a purchase order from $52 to
$12.
- Pacific Bell: purchase cycle time cut by 13 days through the use of basic EDI, another 17 days by adding advanced shipment electronic notices and bar coding and yet another 13 days by adding electronic funds
transfers.
- Grocery industry surveys: Before EDI, almost 30% of supplier invoices are “in dispute” because of some processing error. With EDI, the figure is close to zero.
- Texas Instruments: EDI linked to bar coding for tracking office supplies: 40,000 square feet of warehouse space freed up, worth close to a million dollars a year; inventory cut by $2 million and cycle time from
three days to one; error rates now one in ten thousand orders versus one for every twenty five.
- IBM, Fishkill, New York: 7700 orders a year reduced to 970 for the same volume of goods; reduction from 718 to 8 suppliers, with an average of 9% price cut in return for volumes, 6% error rate for incoming shipments cut
to close to zero, 65% savings in inventory carrying costs.
- EDI Group survey of 1560 EDI users in the United States (1994): error rates cut from 10% to 4% post-EDI, cycle time reduced by 40% on average.
- Car dealers (100 in survey): Reduction in the time to process paper-based car loan applications cut from 1-2 weeks to as short as one minute, with 25% of the applications requiring no human intervention.
The examples above could be multiplied by, quite literally, a thousand. They range from straightforward and substantial savings in time and cost to more basic changes in the nature of customer- supplier relationships and transformation of
logistical and supply chain processes. The benefits are there for any firm, large or small, to gain. The technical risks are minimal and provided issues of training, incentives, communication and project management are carefully and
explicitly handled, implementation is increasingly straightforward. So, it makes little sense for a firm not to adopt this way of doing business that is well-proven, increasingly inexpensive in terms of capital investment and operational
cost, and more and more convenient and simple in terms of technology, especially with the Internet and value-added network providers offering the telecommunications facilities that previously demanded strong in-house technical expertise.
So far, though, relatively few firms have taken this opportunity. Most estimates are that less than 20% of large firms have embedded EDI in the core of their business operations; an executive of one of the largest providers of EDI software
commented in mid-1996 that he knew of around 40,000 companies using EDI, but that there are two million firms in the United States. There are plenty of reasons for the slow take up of EDI, despite its proven payoff. They are the same ones
that apply to all innovations in the application of information technology that change both organization, process and skill needs: (1) initial overselling,
over expectations, and over promising followed by disillusion and dismissal of the
concept, (2) underestimation of the challenges of meshing technical change with organizational change, (3) lack of senior business management interest, commitment and policy guidance, (4) a bewildering proliferation of hardware, software,
telecommunications and information components that too often were “incompatible”, and (5) the lack of precise, agreed-on, consistent and widely-available EDI “standards” for message formats and contents.
Most of these were the very tough problems of the 1980s, when the pioneers in EDI, mostly in the automotive and retailing industries, had no experience base to guide them, lacked cheap and efficient technology, and had to start from scratch
in creating standards-setting mechanisms and associations and then wrestle with defining the standards themselves. As a result, what may be termed First Wave EDI was dominated by “proprietary” systems defined by companies with sufficient clout
in the marketplace both to fund their deployment, often giving free software to suppliers, and to force suppliers to adopt them. Ford, General Motors, Sears and RJ Reynolds are just a few examples of power customers forcing the pace of EDI.
They all formally told suppliers in the 1980s that within a given period they would no longer accept paper invoices and that purchase orders would be processed via electronic links. The supplier had to adopt the power customers’ systems and
formats, meaning that in many cases it would have to handle multiple software systems. An extreme of this situation has been in health care, where a hospital had to comply with literally several hundred different document formats for processing
insurance claims and payments. This obviously blocked the development of EDI and made transactions administratively costly, complex and prone to errors and delays.
Historically, the relationship between large customers and their suppliers prior to the emergence of EDI had largely been conflicting rather than cooperative (and remains so in some instances). Companies carefully guarded information, in order
to gain an advantage in negotiations. They often played suppliers off against each other, looking for an ever better deal in price and terms of payment. They would exploit the opportunity of slow payments to smaller suppliers who needed their
business, while insisting that smaller customers pay more quickly. EDI began and continues a shift towards far more trust-based and cooperative arrangements, which over time is likely to be by far the most far- reaching consequence of electronic
commerce. In the First Wave, though, some companies continued to exploit their power advantage, not sharing the benefits they themselves gained from the introduction of EDI. But over time, more and more of them recognized that they would gain by
encouraging, first, cooperative long-term relationships with a smaller number of suppliers and, second. sharing information in order to optimize the entire supply chain and improve every partner’s costs and processes.
Old habits died slowly, though. One of the authors of this book remembers working in 1991 with a major food company which was being forced by one of the leading supermarket chains to adopt its EDI system. The head of production literally thumped
the table at a meeting and expressed his opposition by saying “XYZ [the firm’s largest competitor] isn’t the enemy. [The supermarket] is.” Imagine. The customer as the enemy! He argued cogently, though, that the supermarket chain would squeeze the
company, demanding ever speedier delivery at increasingly short notice, which it did. He saw immense costs in introducing new computer systems, disliked the idea that the customer would demand access to the firm’s inventory data bases, and all in
all preferred the old days when both parties jostled with each other in a mixture of competition and cooperation.
Second Wave EDI, today’s standard practice and the fairly imminent competitive necessity for the well-run firm, is far different. Collaboration drives innovation now. First, the standard-setting process, the key to extending EDI across types of
transaction and across industries, has become quite literally routine. Instead of proprietary standards, there are now two related families of standards, ANSI X12 and EDIFACT. ANSI, the American National Standards Institute, is a huge cooperative
organization that provides a forum for interested parties to work together to define, vote on and publish standards. It has become the home for EDI, with the X12 committees producing EDI transaction sets. Here are some examples of these:
- Air transportation: air freight details (X12 110), shipment status message (114), rate update (129)
- General: invoice (810), credit/debit adjustment (812), tax information reporting (826), contract award (836),
request for quotation (840), purchase order (850), shipping schedule (862), report of test results (863), notice of
employment status (540)
- Warehousing: shipping order (940), stock transfer shipment notice (943)
- Healthcare: claims/payment advice (835), patient information request (274), eligibility inquiry (270)
- Phone service: bills (811)
- Retailing and wholesaling: price sales catalog transaction (832) Government: an electronic equivalent of a levy
or garnishment order that can be sent to such agencies as Health and Human Services, Treasury, and Social Security
by a agency charged with collecting delinquent child support payments (521), electronic tax filing (813)
- Mortgage applications: appraisal request (261)
This list gives just a flavor of the wide range of X12 standards. To these may be added more technical standards developed by computer and telecommunications
providers. There’s also a whole alphabet soup of industry association standards, such as AIAG (automotive), WINS (warehousing), TFX (tax payments), ACH (bank
payments), EDIFACT (international trade), ASN (Advanced Shipment Notice), and VICS (retailing). Cooperation is thus the core of EDI, far more than technology,
and there are now plenty of ANSI subcommittees working in an ongoing basis on EDI transaction sets for mortgage applications, payment of utility bills, health
insurance claims processing, electronic catalogs of prices and products for drug wholesalers, among hundreds of applications. The automotive industry became
the leader in EDI when the major manufacturers abandoned their efforts to impose their own firms’ systems and standards and set up the Automotive Industry Action
Group, whose rationale – and indeed that of EDI in general – was summarized by its executive director in late 1996: “In today’s industry, communication and interaction
throughout the supply chain is critical. More than 60 percent of the cost of a new vehicle comes from the supply chain.... and the way to minimize that cost while
protecting profits is to work together as an industry on pre-competitive issues, eliminating waste and streamlining processes.... and that is why AIAG was created.”
(EDI Insider, November 10, 1996) Retailing and banking also have their own cooperative associations. Internationally, EDIFACT, a cooperative forum analogous to ANSI’s
X12 activities set up under the aegis of the United Nations, focuses on international EDI, on transaction sets for trade documentation, insurance, customs, and the like.
ANSI and EDIFACT work harmoniously together.
The result of the shift from proprietary to what are termed “open” standards is that there is a growing family of EDI transaction sets, that more and more are being added
by the year, and that the costs of implementing the software get lower and lower; the wide ANSI/EDIFACT base means that general purpose software facilitates straightforward
addition to existing EDI capabilities, just as Microsoft Windows lets you add another application to your PC without someone having to write a program to do this. There is a
growing industry that supports the translation of a firm’s transaction data to and from relevant transaction sets, handles issues of technical conversion between different types
of computer, provides technical expertise and in many instances takes over all the functions needed for EDI operations. These “value-added networks” (VANs) and EDI “hubs” are,
again, part of the cooperative drive of electronic commerce. IVANS, for instance (Insurance Value Added Network Services), is a VAN set up in 1983 for handling just about everything
from telecommunications transmission to consulting for insurance electronic commerce. It offers what it calls an electronic pathway for more than 500 firms with a million total users.
Many of these are competitors but they use the pathway to gain economies everywhere: telecommunications discounts of 25-50% through IVANS’ massive buying power, expertise, centralized
network management and software support.
This style of coordination and resource-sharing is spreading across industries that previously have been highly fragmented. As mentioned earlier, the healthcare industry has hundreds
of different formats, codes, forms and procedures for handling the same relatively simple process of authorizing and paying insurance claims. This is being transformed through ANSI X12
835, a transaction set that is the result of the Working Group on EDI, that included representatives from all parties in healthcare. Its first challenge was a First Wave effort by the
Federal Health Care Administration to impose its own preferred standard on the industry, using its clout in funding half of Medicare. It took executive action by the White House to warn
HCMA off and let the Second Wave ethos move the industry ahead. Once the WEDI group had agreed on its new X12 standards, its members voted to choose a single provider to operate a shared
healthcare VAN. They chose Baxter Travenol, one of the longest-established players in customer-supplier electronic links, for hospital and pharmacy supplies.
Second Wave EDI has benefited from the accelerating improvement in just about every area of telecommunications, the technology key to collaboration, coordination and communication.
Deregulation, which took place only in 1984 and only in long distance, rapidly lowered telecom costs, improved service and brought new providers into national and international markets,
many of which focused on providing services for business-to-business- data (non-voice) communication in general and for EDI in particular.
In the First Wave, trading partners – the electronic commerce term for companies routinely involved in buying, selling, moving and paying for goods and services between each other – had to
link to slow and expensive “private” networks, which were leased on a monthly basis by large firms. There were a number of value-added networks, which were in effect privately run facilities
operated by industry associations or third parties to be used for EDI transactions. All in all, the telecommunications part of EDI was complex and expensive.
Now, it’s neither. The established value-added networks of the 1980s have evolved into EDI utilities that offer “hubs” that large and small companies can quickly use, either in starting up their
EDI operations, adding new trading partners, or adding new transaction sets. The rapidly dropping costs of computers have also shifted EDI from being a software application running on mid-sized
and large mainframe computers to one that can be “distributed” across many low-cost, high speed devices. Personal computers in doctors’ offices, car dealers, stores – anywhere – can handle the
front end of the EDI transactions. Servers – high end PCs with sophisticated telecommunications and large data storage capabilities -- coordinate the flow of message traffic and information into
and out of the hub and translate data from one standard format and transaction set to others. Within the hub, larger scale computers coordinate the overall processing. The use of front-end PCs
opened EDI up to small as well as large firms. It also enabled the rapid diffusion of EDI software.
Together, cooperation and technology extended EDI across more and more companies within a trading partner community. The EDI Group provides reliable and comprehensive surveys of EDI growth, use and
cost. Its figures for 1995 show both that EDI is highly affordable and that it is no longer the luxury of the large firm. It estimates that it costs around $2,000 to add a trading partner that is
new to EDI to a hub, and under $3,000 to add a new transaction set. The number of days needed to either a new trading partner that is inexperienced in EDI is about three weeks and half that for an
experienced partner. A transaction set can be implemented in two weeks. Whereas in 1993, companies using EDI had an average of 1,200 staff, in 1995 the number had dropped to just under 200. EDI is
now in the mainstream of small as well as large business. Much of the reason for this, of course, is that small businesses are suppliers to large ones. Surveys continue to show that most companies
give as the primary factor in their decision to adopt EDI is that a key supplier demanded they do so.
The Third Wave of EDI is gathering speed and height. The new driving force is most obviously the Internet, but that’s really just the cresting of the Second Wave; the Net augments not changes the mainstream of EDI, simply by providing access from and to anyone in the world who has a PC and an Internet address. It extends the reach of telecommunications and dramatically cuts costs for small volume users. That opens up EDI for more and more trading relationships, including business to consumer electronic commerce; one of the developments well under way in early 1997 is the use of the Internet for electronic billing by utilities, using new ANSI transaction sets, for instance.
All this is valuable and innovative, but it’s mainly a continuation of today’s mainstream, which was in itself an evolution from the First Wave and a bigger one. The next evolution will surely be bigger, too. Some commentators expect a tsunami, a massive tidal wave that crashes on the shore and wrecks the physical structures of existing businesses – the Internet Electronic Commerce Powerwave. Instead of just surfing the Web, we’ll all then be trying to stay on the surfboard. That could indeed happen, but our own view is that it won’t. The wilder visions of The Future Is Wired may well come to pass in time, but over the next ten years, we can expect the same type of evolution as over the past ten: continued progress in standards, ever-improving technology, frequent over-selling, rapidly dropping costs, and EDI taking over from the alternatives it replaces at an accelerating pace.
What will make the Third Wave the biggest one to date will be that EDI and electronic payments are converging and that EDI is becoming the base for integrated logistics, not just electronic administration. The driving forces here are simply the demands of business in an environment of time- based competition, pressures on margins and prices, quality as a basic requirement, not a premium item to be charged extra for (except on airlines!), service as the differentiator, and the vital need to take out waste everywhere. The human costs here are often high and it has to be admitted up front that one of the consequences of electronic commerce is the elimination of many jobs, mostly administrative links in the process chain. The trade-off the best firms offer is that they are using streamlining, reengineering, downsizing and the like to ensure they survive, that they are ready to make the commitments to and investments in people that make the claims of “empowerment” more than another euphemism for “you’re fired.” The evidence that firms can at the same time use electronic commerce to remove jobs and build jobs is that the most noted leaders in electronic logistics are still pretty good places to work -- Federal Express and Wal-Mart, for instance – while the laggards may still have the paper bureaucracies but they’re downsizing, too, but out of weakness.
Electronic money management:
From seashells to gold to coins to bills to bits
Electronic payments are the second fundamental building block of electronic commerce, with their extension now being towards the management of all aspects of money rather than just what is often termed FEDI (Financial EDI). It’s electronic payments which have transformed the nature and scale of international foreign exchange trading, the movement of funds by banks and businesses worldwide, and how companies optimize their management of cash for short-term investment. The figures are mind- numbing here. For instance, while the physical exports of the two largest trading nations, the US and Germany – Japan is only number three – amount to around $800 billion a year, international foreign exchange trading amounts to close to that per day. New York City processes $1.5 trillion a day in electronic payments and trading transactions. London handles 40% of the world’s foreign exchange trades; its weekly volumes are larger than its Gross Domestic Production. Over 2 trillion dollars of funds transfers a day travel through a single network, SWIFT.
Electronic payment systems have been around for close to twenty years. They have been almost entirely the province of banking, which provides them as a service mainly to large firms. The SWIFT network (Society for World Wide International Funds Transfers) is owned by over two thousand banks and handles transactions between almost 4,000 financial institutions in 88 countries. In the United States, the 30 regional automated clearing houses owned by associations of banks, is a workhouse for corporate payments. The UK has its CHIPS system (Clearing House for International Payments Systems) and the US has CHAPS (for Automated payments).
The banks’ systems have been the electronic support to the physical operations of companies. They are a somewhat old-fashioned and even unglamorous base for, first, FEDI which is the integration of payments into the business processes they are part of and, more recently, for the much more radical extension from corporate financial transactions to consumer-business interaction and the invention of new modes of service and new products. For many people in the information technology field, “electronic commerce” means electronic buying and selling, with the Internet seen by them as the key to the future. That’s the largely unproven element and one where it may be many years before proven applications and tools emerge. It includes entirely new forms of electronic money, of ways of making credit card payments over the Internet, and even new currencies. A few examples of these are:
- First Virtual Bank: Customers sign up for the service by providing credit card information, which First Virtual stores off-line, so that it cannot be tapped into over the Internet. The receive an ID number which they use for transactions over the Net. The merchant does not know who the purchaser is. Transactions are handled by a private telecommunications network, which updates the credit card account information. They are confirmed by the system sending an electronic mail a second or so after the purchase is made; the buyer must reply to it before it is consummated. The merchant pays 29 cents a transaction plus 2% of the price of the goods sold. Since there is no transfer of funds over the Net, this is a simple and safe system, built on well-established infrastructures and processes. First Virtual has signed up close to 150,000 customers and 2,000 merchants (late 1996).
- Bayshore Trust of Canada became one of the first banks to handle loans completely over the Internet. It processes them in around two minutes, offering a rate 1/8th percent lower than loans originated through its sixteen branches, at one-tenth the overhead cost.
- Cybercash: Customers set up bank accounts with funds specifically for spending on the Net. When purchases are made, money is directly transferred from the buyer’s to the seller’s Cybercash account. Both parties pay a fee of 30 cents a transaction.
- Digicash: Customers purchase digital cash -- “think of digital cash as the serial number on a dollar bill that has shed its paper body and entered the ether.” (Ether’s an obsolete word for air, but it sounds neater.) (Wired, August 1996) via their credit cards or bank accounts. The serial numbers are maintained by the merchant and bank. The merchant has no idea whatever of who the buyer is. The transaction cost is targeted to be a 1/10th of a cent. Credit cards provide convenience but not privacy. Anonymity and privacy mean cash. Digicash represents the most radical approach to combining privacy, convenience, low cost transactions and security over the Net.
- Millicent is designed to handle very small purchases at very low cost. Today, the cost of processing, say, a one cent fee for downloading a short piece of information from the Net is many times more than the fee. Web advocates anticipate that the ability to handle micro-centes or even nanocents – billions of a cent – will be key in the longer term if it is to become a major base for electronic commerce. Wired comments that “Would-be barons of digital microeconomics say there is a potential annual market of several hundred billion dollars” (August 1996). Not if they cost several hundreds of billion to process. Wired adds “......the only thing missing is the technology to really make it fly.” Millicent, while still under development, represents an early approach to getting it off the ground. It involves “scrip” – fake money, like two-for-one coupons, food stamps or gift certificates. Merchants create their own scrips – McDonalds dollars – that they sell to a small brokers, who will be well-established and well- trusted banks. Buyers buy currency from these brokers who have the scale of operations to spread their own costs over a wide customer base. Anyone could tap into the requests for and transfer of the scrip, but it is so small in value that the cost will be more than it’s worth. The targeted transactions are as low as a cent, and the fee 1/10th of a cent.
Some of these proposals are pretty wild. In the meantime, firms require reliable and practical methods of handling the basics of money via electronic commerce as they now handle the basics of logistics via electronic data interchange. From a business rather than technology viewpoint, electronic payment systems are, firstly, an essential operational tool, and secondly, part of the move towards an entirely new but increasingly practical integration of paper, process and payment, and, most far-reaching for the future, signaling over time exactly the same long-term vision as that of the Internet visionaries: electronic money as the norm and cash and checks the occasional exception. It’s the reverse today.
EDI began in the purchasing departments of manufacturing companies. Electronic payments began in banks, with electronic funds transfers in the early 1970s and electronic cash management taking off in the early 1980s. Western Union’s telegramming of cash to stranded motorists or errant offspring was one of the earliest consumer applications of technology here but the main uses have been to speed up the movement of money by large firms, first domestically and now globally.
Until recently, EDI and electronic payments were very separate organizational functions and also moved at a very different pace. Electronic payment systems focused on efficient and reliable movement of funds, with the banks in control. With EDI , the control was in the hands of the most aggressive and innovative manufacturers and retailers, who forced the pace, extending its reach out from, first, purchasing, and then along the entire supply chain. For them electronic payments mean more than funds transfers and cash management, the forte of the banks; they are an integral part of just-in-time business logistics, an area where most banks have little expertise or even interest.
Now, the action – and the risk and uncertainty – is in the financial side of electronic commerce. Fundamentally, the issue is that the Internet cannot become a mass market shopping mall until (1) credit card payments are both secure – which they already largely are – and perceived by consumers to be secure – which they largely are not, (2) very small payments can be processed at an acceptably low transaction cost, and (3) all the many electronic transactions have to link easily and automatically into the established electronic banking payments systems.
It’s hard to forecast how and how quickly electronic payments will move from FEDI to electronic money. With FEDI, the money remains the same as before; bank balances, debits and credits. It’s basically a form of electronic check plus an electronic letter providing instructions on where to deposit the money. The new mechanisms and media are very different. Consider, for instance, one current candidate for substituting bits for cash. Mondex, a company headquartered in Brussels, has piloted on a large scale in several countries an electronic purse into which cash can be stored in different currencies and authorized for use for different purposes. It’s a credit card sized device with a computer chip in it. It can be used for low cost transactions such as buying a newspaper. Because the cash is preloaded in the card, there is no need for the seller to link to a central computer for authorization, unlike with a credit card. Mondex purses, sometimes called smart wallets, can be linked together, so that, for instance, a parent could transfer money to a son or daughter, loading it into separate parts of the wallet; one part of the cash might be stored so that it can only be used for medical transactions. The wallet can store cash in multiple currencies, simplifying international travel.
Will Mondex work? Banks love the idea of the electronic purse, which is why Mondex was set up and funded by a banking consortium (in Europe). It’s cheaper to operate than a debit card, which requires a link from the store to the bank’s systems. Credit card firms see it as a natural and inevitable evolution of their own product. That’s why MasterCard bid to own 51% of Mondex, in November, 1996. Most retailers like the idea of not having to handle cash, which has to be sorted and attracts robbers and dishonest store staff.
But.......... Many commentators believe MasterCard made its bid for Mondex because its trials of its own electronic purse had produced disappointing results. Visa has its own version, Visa Cash, which it piloted fairly successfully at the 1996 Summer Olympic Games. Europay has its own rival to Mondex, called Clip. The most widely used system, the only one to date which is a clear commercial success, is Portugal’s DMB card. This has 170,000 active users and close to 50,000 terminals installed in stores, gas stations and taxis. There are also disposable purse systems in use in Denmark, ATM cards with reloadable chips in Austria, and pilot projects everywhere. The results have been very mixed, with acceptance highest among consumers in Australia and Hong Kong. No one system has emerged as the standard and until it does retailers will not commit to installing expensive equipment in stores. Governments and tax authorities are concerned that the anonymity of the electronic purse and the ability to transfer money bet purses will inevitably lead to nefarious uses, most obviously for avoiding taxes.
Mondex is aiming to become the world standard. It may. But in the meantime, the risks and uncertainties are high. Even the president of MasterCard International admits that “The reason for all of these pilots is that no one has proven the business case. I’ll be really interested to see if anyone makes money out of this.” (Financial Times, November 13, 1996).
Electronic money management is in the long-term surely inevitable. In the meantime, the most likely developments are in the extended use of credit cards for on-line transactions on the Internet, with new bank mechanisms emerging to handle processing, merchant information and payments.
Integrated business logistics
Electronic commerce in the end is about putting all the pieces together – electronic data interchange, electronic money management and supporting telecommunications, information management and other technical tools. The goal in putting them together is what electronic commerce really means for business: the gradual integration of processes that span companies, geography, and business functions. This is the target of the virtual organization, Quick Response in retailing, agile production, time-based competition, and the many efforts to create organizational responsiveness and flexibility. Here are a few examples of firms that are well on the way to creating the information- and communication-driven business, with electronic commerce a key enabler:
- First Line, UK: a start up provider of insurance services entirely by phone, with no branches. First Line captured ten percent of Britain’s car insurance market in its first two years. Fidelity Investments similarly preempted traditional security brokerage and mutual funds firms via phones and technology.
- Benneton: backward integration for the entire clothes manufacturing to store replenishment chain to the extent that point of sale information triggers the decision what color to dye white sweaters made in Taiwan at the last practical moment before they are sent to the store.
- Nike: famous for being a shoe “manufacturer” that makes no shoes and retains only R&D and marketing as its core activities, outsourcing everything else.
- Verifone, the maker of most of the credit card authorization and processing devices in stores, a company that has no offices. It lives by electronic mail, with even requests for hiring of secretaries handled electronically.
From a business perspective, these examples point to the growing strategic importance of electronic commerce. These companies began with the older tools of First Wave EDI, electronic mail, electronic payments and point of sale. Look at how much they all achieved well before the mid-1990s. They are what the now much debased term reengineering originally aimed at: the creation of the process- driven organization that streamlines and coordinates processes end-to-end, instead of breaking them up into departmental and functional steps with fiefdoms, paper everywhere and unnecessary administration along the chain of “hand-offs” from one department to another. The examples above show just how much is practical now. Add in new and ever-improving technology, more and more proven EDI tools, stable electronic money management mechanisms, and growing experience in process transformation and it seems clear that they are the blueprint for the company of tomorrow.
There are five ways of viewing electronic commerce in terms of business logistics, each of which offers substantial payoff. It can be focused on:
- Workflow coordination: This is the most tactical level. Here, EC is part of the general move in organizations to streamline processes, remove waste and cost, and add speed and communication across all the organizational units and people involved in it. The focus here is mainly on the firm’s internal processes and on handling simple routine transactions with trading partners, including customers, suppliers and such third parties as banks and distributors. EDI and FEDI are the obvious starting point here.
- Trading partner relationships: Here, the focus extends from transactions with trading partners to relationships. One primary driver of consequence of EC has been to shift from a we-they relationship to one of mutual cooperation, based on sharing of information, collaborative trust, and a narrowing down of suppliers from a large pool who compete on just price and delivery terms to a smaller group.
The key issue here is contracting. The old style customer-supplier relationship relied heavily on what is termed ex post contracts. These are the ones that spell out in detail all the terms and conditions and address legal responsibilities and liabilities. They are designed to deal with someone going wrong after the contract is signed. The lawyers then comb the contract to determine who’s at fault.
With EDI, the goal of collaboration shifts towards mutual trust rather than law as the base for contracting. Ex ante contracts and what is termed trading partner agreements lay out how the parties are going to work together; if things go wrong which they inevitably will at times, the TPA lays out the steps to repair the problem. It’s the blueprint for establishing mutual understanding and responsibilities; without trust, there can’t be
collaboration.
- Zero working capital: One way of evaluating your company’s electronic commerce capabilities is to look at its balance sheet. On the asset side will be shown its working capital: cash, receivables, materials, work in process and finished goods inventory. For centuries, these have been treated as assets. Bankers viewed them as collateral for loans. Analysts tracked working capital ratios of assets to liabilities: payables and short-term debt.
In the world of electronic commerce, most working capital is a business liability, not a financial asset. If your firm has excess cash, it’s not using the tools of electronic trading and investment. Large accounts receivable are evidence of inadequate use of electronic payments, electronic data interchange, netting and related systems. High materials inventories mean poor customer- supplier electronic links and trading partner agreements. Large finished goods inventory means a neglect of the many tools of just-in-time production and distribution.
Many firms have recognized this shift from working capital as accounting statement asset to its becoming a business liability. They have as their goal zero working capital. Several even aim at negative working capital. They plan to be as adept as possible in collecting money owed to them but stretching payments to the firms they owe money to. They will thus show just a few days in receivables and months in payables.
- Logistics integration: Electronic commerce is an integral part of the logistics revolution that marks more and more industries. This involves organizing the firm’s planning, operations, organization and information around processes not functions and departments. It includes supply chain management, concurrent engineering, quick
response (retailing) and such blueprints for the organization of tomorrow as the virtual company and networked enterprise. Day-to-day transactions are the core of logistics and of electronic commerce.
- Organizational agility: Electronic commerce is part of organizational agility: the combination of flexibility in processes and structures, the leveraging of skills through technology, training and career opportunity and reward, and just-in-time everything – production, distribution, replenishment, payments, scheduling, customer service and the like. Electronic commerce contributes to agility in everyday transactions. It doesn’t help to have first-rate products and tenth rate management of product inventory. Customer service that is superb in terms of staff responsiveness is undermined if payments are misprocessed or insurance documents delayed. Low prices for out of stock goods substitute good intentions for good logistics. It’s not news to any manager that just about every force in business pushes towards demand for more flexibility, responsiveness, use of teams, customer service, speed and removal of the constraints of organizational structure on strategy. Let’s call this organizational agility. Electronic commerce doesn't in itself create it, but is an enabler, support and even catalyst. Indeed, it’s hard to see how any firm committed to this as its strategic priority can progress without electronic commerce.
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