EDI is Dead! Long Live EDI!

Around the time that the group that approves such things signed off on XML 1.0 in February of 1998, the trade press began to write the obituary for electronic data interchange (EDI), which it predicted would soon fade into extinction along with the value-added networks (VANs) that profited from it. Cost was the primary factor. The critics attacked EDI's transaction-based telecommunications charges, special software, licensing costs, annual upgrade charges and, most expensive of all, the technical wherewithal required to keep the data flowing. How could such a business model survive in a world of cost-free data transfer over the Internet, a world where extensible markup language (XML) promised to relieve companies from the "burdensome complexity and rigidity" of EDI protocol? The answer: It works. The corollary: Nothing's free. When it comes to information technology, it's rare to hear reports of 20 or even 25 years of experience. But that's how it is with EDI. Historically, EDI users have been large enterprises and their immediate suppliers, businesses with high volumes and the most to gain from eliminating paper and automating business transactions. Today, the total annual value of EDI transactions ranges from $1.8 trillion to $3.2 trillion worldwide, depending upon how the data being exchanged between companies is tallied. The lower figure counts only pure transactions, purchase orders and invoices, and does not attempt to quantify the value of other documents being exchanged, such as manufacturing schedules, delivery schedules, change orders, inventory status, shipping notices and shipping manifests. According to technology research firm IDC, Framingham, Mass., traditional EDI commerce will continue to have a compound annual growth rate (CAGR) of 8.4% through 2006, while Internet EDI commerce will have a CAGR of 52.1% through the same period. Those predicting EDI's demise failed to account for how well the technology met -- and continues to meet -- the needs of thousands of users. "Some of the people coming into the market have a very strong preference, a disdain if you will, for older technology even though it's working fine," says Ken Vollmer, a one-time EDI administrator who's now with Giga Information Group, a Cambridge, Mass.-based IT advisory firm. "Guess what? This old technology works. It has critical mass, and nobody is going to change that." Still, there is the cost. Internal management costs can add up, but provoking the most ire among users -- and the greatest misgivings among potential users -- have been the monthly mailbox and per transaction charges associated with the traditional value-added networks. These connectivity costs could once be justified due to the expense of setting up and connecting to a private network, which included modems and dialups, as well as custom support for different communication protocols. The arrival of the Internet opened the door to much cheaper alternatives. One of several examples is the Industry Data Exchange Association (IDEA), a data warehouse and document exchange service spawned by the National Electrical Manufacturers Association and the National Association of Electrical Distributors. IDEA is an Internet-based, low-frills private exchange used by Square D Company, Osram Sylvania, GE Lighting, Rockwell Automation, Leviton and Cooper Bussmann, to name a few. These manufacturers use it to exchange documents with distributors and big-box retailers such as Lowe's. Compared with VANs, which may tack on document transmission fees from 10 cents to 50 cents per kilocharacter, IDEA charges 5 cents to 7 cents, depending upon volume. "By getting someone else to perform the function with a different technology, we were able to cut our costs substantially, more than 50% on average," confirms Kevin Kurth, e-commerce manager for Cooper Bussmann Inc., a St. Louis-based manufacturer of fuses and other electrical products. Traditionally EDI has involved the 25% of suppliers that account for 75% of a large manufacturers' raw material and part volume. Much of today's EDI activity has been aimed at increasing connections between large enterprises and their small and medium-sized suppliers that account for much lower volumes, but where manual paper processing leads to disproportionately high administrative expenses. These efforts include Web-based forms and extranets that allow smaller businesses -- either by choice or mandate -- to electronically receive purchase orders and send acknowledgments. The EDI protocol remains the same, but the Internet has removed some of the cost and complexity barriers. "Metaphorically, think of EDI as the highway," says Bill Fallon, vice president of product marketing for EasyLink Services Corp. "It's Interstate 90 going across the country. The lanes of the highway are essentially unchanged. There was a lot of traffic that was going through it 10 years ago, there's a lot of traffic -- and it's increased -- going on it now. What's changing is the number of exit and entry ramps onto that highway." For EasyLink, a former EDI service unit of AT&T, those entrance ramps have taken the form of Internet-based EDI services and facsimile conversion that translates faxes into and from EDI documents. "In the last four years we've gone from nothing to probably 60% of our traffic touching the Internet, and we see that trend continuing," says Fallon. Internet-based intermediary Advanced Data Exchange (ADX) is another company tackling the challenge of hooking up smaller companies. Based in Newark, Calif., ADX receives documents, such as purchase orders, from a large enterprise. It translates those documents into a format that trading partners can easily review and respond to online, and routes that response, in the form of a advanced shipping notice or invoice, back to the customer in the appropriate EDI or XML format. "People have dabbled in all kinds of different ideas, including marketplaces, which were supposed to bring people together, and extranet Web solutions. They really haven't gotten over the barrier of the business process change required by small and medium-sized suppliers," says David Michaud, vice president of marketing for ADX. "There's a fair amount of inertia with those folks as you can imagine. They've always been doing things by paper and fax, and they're used to that." For large companies, ADX handles all of the supplier recruitment and training. Instead of a complex pricing schedule based on usage, the company charges suppliers a predictable monthly fee as low as $59 per month for 25 transactions. Steve Gaylor, vice president of marketing for Inovis (formed in June 2002 with the merger of Harbinger and Extricity), acknowledges that the value-added networks did not move quickly enough to an Internet-based architecture to save network costs and pass those savings along to their customers, which they could have done and still maintained margins. "Certainly the value in the value-added network has changed over the last couple of years as people have moved to the Internet and different types of data," says Gaylor. "The value that a VAN brings is no longer protocol conversion but it's things like guaranteed delivery and trading community management." That sentiment is echoed by Jim Hendrickson, vice president of product management for Sterling Commerce, who says that business people forget how challenging it can be to manage a trading community, whether it involves 50 or 1,000 partners. The value-added networks have always offered relatively easy scalability. "Technology isn't the issue, although certainly being able to adapt to new technology is important. It's the message delivery, the security, the exception processing, the monitoring and management of the business," Hendrickson says. He estimates that such oversight represents 40% to 45% of a manufacturer's cost of managing its supply chain. Hendrickson applauds such services as offered by ADX, a partner with Sterling Commerce in many instances, and their efforts to extend e-commerce connections to a greater number of a larger enterprise's trading partners. "The fundamental proposition for an EDI network is really helping businesses to manage their supply-chain costs by offering a single plug that reaches all of these worldwide communities. We can do it cheaper than anybody," he asserts, referring to Sterling Commerce in particular, and the long-time EDI service providers in general. The most recent challenge to traditional EDI revolves around two communications specifications known as applicability statements (AS1 and AS2). These specifications make it possible for users to send documents -- EDI, XML or flat files (tabular or text files) -- over the Internet securely and reliably. In October 2002 retail 1,000-pound gorilla Wal-Mart threw its weight behind this document transmission method when it gave its small and midsize suppliers one year to begin using AS2. Observers say that the move will likely reduce technology costs, and increase supplier intimacy, but it adds costs in other areas. "If you're going to try to manage yourself, a hundred or a thousand point-to-point connections with your trading partners, then you're basically in-sourcing that communication that you were able to outsource with the VAN agreement," says Ken Vollmer. "If I was an EDI manager, nobody would ever talk me into bringing that responsibility in house. It just doesn't make sense." On the issue of e-commerce complexity, the new standards are a contributing factor. Far from simplifying the process, demands by customers to conform to various vertical industry standards, plus new standards such as XML (which isn't a single standard at all but a rough specification that comes in a wide variety of flavors, each requiring its own map or "codebook") add in Web-based interfaces and translation requirements, and the challenge of managing electronic businesses communication has increased significantly. "My favorite definition of a standard is 'a common place where all deviation begins,' " Gaylor comments. "As more and more of these standards come into play, it makes our work [at Inovis] more difficult, but our value greater because none of these old standards ever goes away." This increasing complexity has been a factor in some companies' decision to outsource their entire B-to-B efforts. This includes not only EDI, but all of the external connections between a company and its trading partners. It's a matter of looking at core competencies, and a business deciding that it can't or doesn't want to keep pace with the infrastructure investment or the necessary expertise. Traditional EDI service providers are also emphasizing a new capability: business-process integration (BPI). To a certain degree EDI has allowed many companies to integrate at the transaction level. Integrating at the process level means defining standard business rules for handling standard orders and exceptions. According to Global eXchange Services (GXS), a long-time EDI service provider spun off from General Electric Co. in 2002, 80% of transactions contain mistakes that prevent "straight-through" processing. These exceptions -- missing shipment data, incorrect SKU/UPCs, quantity errors, syntax problems, and price miscalculations -- usually have to be worked out manually by customer service people. BPI establishes rules for handling those exceptions automatically, instituting a self-service model where the buyer is informed of a problem and offered a choice of several pre-determined methods of reconciliation. Most company managers know how they want to handle these exceptions, only the rules haven't been institutionalized very well. "BPI is to EDI what call waiting, call forwarding, caller ID, voicemail, and three-way services are to traditional local phone service," says Chor-Ching Fan, global product manager for business process integration at GXS. "BPI is a strategic vehicle providing more value-added services on top of that transmission service." Fan extends the analogy, likening the enhanced knowledge of incoming orders to caller ID. When a supplier fails to respond to a purchase order, that triggers an escalation, similar to a flashing voicemail message on someone's phone or beeper. What's the near-term future for EDI? EDI use will continue to grow 8.4% annually through 2006 predicts IDC. Most of this growth will come from Internet-enabled solutions that allow companies to expand connections deeper into their supplier base. By 2006, if not before, IDC predicts that more than 50% of EDI traffic will be Internet based. When there's a revolution, sometimes the old guard survives, even if the uniform changes.