Electronic Commerce: BOOM OR BUST?

Before consumers jump on the electronic commerce bandwagon, they want to know their money's secure

n its early days, proponents of electronic commerce were few and far between. Now the bandwagon is stretched to capacity, but businesses and consumers have yet to use it on a large scale.

According to the EDI Group of Oak Park, Ill., electronic data interchange, a subset of electronic commerce, is performed at approximately 1 percent of the 10 million U.S. business sites -- not companies, but sites that have the capability to perform EDI functions.

However, in a couple of years if you want to do business with the government -- or with large segments of private industry -- you will have to do electronic commerce, said Bill Young, program manager of the Fairfax Electronic Commerce Resource Center, which is run by Dimensions International.

Aside from the government's mandate to have full electronic commerce capability by 1997 and the phenomenally increasing popularity of the Internet, some of the reasons for the rise in electronic commerce are increased productivity and decreased cycle time and costs, Young said. "All the buzzwords apply, but in this case they're real," he said. Some of the holdups are the cost of implementing the system, technology considerations and the cultural change necessary before consumers will accept it.

Some 55- to 60 percent of companies using EDI do so because a principal supplier or customer said they must, according to data from the EDI Group. Look at Wal-Mart -- businesses that can't communicate electronically aren't one of its suppliers.

If companies fail to restructure their business processes and put electronic commerce on top of existing systems, it may not generate savings, Young cautioned.

If restructuring is done correctly, experiences such as those at GE's Power Systems could result. In 1989, there were between 180 to 200 buyers that handled $1 billion in purchases and 100,000 purchase orders a year, said Chris Lauria, a senior consultant with GE Information Systems, which helps companies implement electronic commerce. Today, the purchasing department has been reenginered and handles $2 billion in purchases and 400,000 purchase orders a year, with roughly 90 percent occurring electronically. It employs between 65 to 75 buyers, he said. In 1989, the cost of a transaction at GE Power Systems, including buying agents' salaries and benefits, ranged from $90 to $100, Lauria said. Today it is approximately $5.

While the cost savings associated with EDI can be astronomical, the costs of implementing a system may not be cheap. Companies that act as hubs and trade electronically with 100 or more trading partners invest more than $1 million in EDI, said the EDI Group. Companies that trade electronically with less than 10 partners show a cumulative investment of $45,000. In some cases, companies such GE Power Systems, which want their suppliers to use electronic commerce, may arrange special deals with certain computer and software vendors so that suppliers can go to those vendors get the larger company's discount.

The costs for electronic commerce, which is broader category, may be cheaper. For example, to set up a secure electronic commerce site on the Internet may cost $6,500 the first year and drop to $1,600 a year thereafter, said Cliff Kurtzman, president of Tenagra Corp., which helps companies develop Internet presence. "For a big business, that's peanuts, but for a small business, that's a lot," he said.

Medium and large businesses often are better equipped to implement EDI than small businesses, such as those with fewer than 100 employees, said Bob Plumb, manager of marketing services with GE Information Services. GEIS helps many businesses implement electronic commerce and offers services such as electronic bid boards, funds transfer, the ability to check account payment status and inventory. To help small businesses, GEIS has started an "EDI light" on the Microsoft Network that will allow customers to perform basic invoicing and issue purchase orders electronically, Plumb said. A more robust Internet service for the larger user is in beta test, he said.

Small businesses that opt for electronic commerce may find it gives them increased ability to compete in markets that otherwise would not be open to them. Ed Dombrowski, sales manager for the Harley-Davidson Dealership in Stanford, Conn., set up a World Wide Web site to attract international business. Harley customers tend to be loyal to their local dealer, but in countries outside the U.S. it is "a nightmare to order parts from [the corporate distribution center] in Milwaukee," Dombrowski said.

The Web site is generating an average of $1,100 a week. U.S. customers tend to make small purchases for items such as collectible T-shirts with the Stanford dealership's name. Foreign customers, who are primarily from Europe spend $1,000 to $2,000 on parts, he said. Some customers are reluctant to provide credit card information over the Web, so they are given the option of faxing, he said.

Personal customers are a little harder to persuade to use electronic commerce than businesses whose existence depends on their relationships with other businesses. For many of these people, the change is a cultural one, said Frank Taylor, president of TriNet Services, a North Carolina-based Internet consulting and marketing firm. It takes time to adjust to a new way of doing things, Taylor said. The last major new way of buying goods was mail order and it was years before consumers became comfortable enough that they didn't hesitate before sending an order through the mail.

In many areas, consumer acceptance of electronic commerce is tied to technology's ability to offer secure transactions, said Kurtzman. For a bank or business conducting financial or commercial transactions, security is a critical concern, he said.

Currently, major financial transfers and business-to-business transactions occur only on secure, private networks. However, most banks are evaluating the Internet as a future technology that will become important, said Taylor, whose clients include a number of banks.

Right now, there are too many options in terms of security on the Internet, and there is no clear winner, said Chris Howell, alternative delivery systems manager with Centura Bank, one of the 20 that has signed deals with Intuit and Microsoft to provide home banking functions over a private network for the Quicken and Money programs. The bank plans to do electronic commerce on the Internet, but does not want to spend a lot of money on one system only to find out that it is not the system of choice, Howell said.

Smaller financial transactions, such as an individual sending his unencrypted credit card number to an Internet T-shirt vendor generate less concern because it's clear the risk is less than giving the card to a waiter or waitress, Kurtzman said. However, there is enough concern to cause some delays in use of the Internet for commerce. This should decrease as protocols such as NetScape's Secure Courier, which provides increased protection for transactions on public networks, become available. What remains to be seen is whether consumers will feel secure enough to use it.

EDI and Electronic Commerce: What's the Difference?

Electronic data interchange and electronic commerce are often used interchangeably, but the two really are not the same.

EDI is a subset of electronic commerce and is based on a set of standards allowing data transfer. There are other technologies that enable electronic commerce that are not EDI. For example, many of the exchanges happening on the Internet are not necessarily EDI, but they would qualify as electronic commerce, said Bill Young, program manager of the Fairfax Electronic Commerce Resource Center, which is run by Dimensions International. Electronic commerce is much broader. For example it can include not just data, but audio and video information.

The idea for EDI has been around for quite a while -- it originated with the Berlin airlift -- but only recently has it started to gain broad acceptance. Ed Guilbert, who some consider the father of EDI, decided a better system was needed to coordinate shipments flying into Berlin. Guilbert and several others later started work on a set of EDI standards, which were developed in 1975. In 1976 and 1977, definitions of technology needed to process EDI transmissions were developed. Shortly after that the feasibility of using EDI in grocery stores was studied, and a pilot project was undertaken. Between 1985 and 1988 there was worldwide coordination of EDI standards.

Around that time, businesses starting picking up on the idea of electronic commerce because of the productivity and efficiency improvements it offered. In 1988, people asked if you had a fax, now no one says that, they ask for your fax number, Young said. The same kind of thing is happening with businesses and electronic commerce -- in several years potential trading partners won't ask if you have the capability, they'll assume you do, he said.

most important reason for initially doing edi

Customer/Supplier Request: 55

Competitive Advantage: 12

Improving Customer Service: 12

Accuracy of Data: 8

Cost Savings: 7

Quick Access to Information: 5

Source: EDI Group

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