Changing the Way You Do Business

Electronic data interchange (EDI), which has been around for decades, is the transmission and reception of documents between computers in machine-readable form. EDI transactions have high integrity and are highly secure, with the potential to scale to very large batch operations. These transactions often transfer mission-critical data between enterprises. Most companies use value-added networks (VANs) to transmit EDI transactions, but the advent of the Internet is rapidly changing the EDI landscape.

In this article, I'll describe how EDI has traditionally fit into many business models and explain the costs associated with EDI. In addition, I'll show you how the Internet is making EDI more accessible to small and midsized companies and what tools are available to implement EDI in a Windows NT environment.

EDI and Traditional Business Models
EDI is a simple technology that maps the database data set on one computer to the database data set of a different computer. Companies traditionally use VANs, such as GE Information Services, the IBM Advantis Network, Harbinger EDI Services, and AT&T, for EDI. Some of these VANs can be quite large (e.g., GE Information Services has almost 40,000 subscribers). Most VANs use the X.25 mail protocol to transmit compressed, encrypted data over secure pathways. Companies typically pay for transmissions in kilocharacters (1000 characters) according to the number of characters the VAN transmits or receives, which is expensive.

About 100,000 companies worldwide participate in EDI transactions, and about 1000 companies, many of which are Fortune 1000 companies, engage in large-volume EDI transactions. International communications use EDI extensively, which is important to know if your organization conducts business around the world. As a result of the widespread use of EDI worldwide, the United Nations established the Electronic Data Interchange for Administration, Commerce, and Transport (UN/EDIFACT), which focuses on EDI.

About 100 vendors, including Sterling Commerce, Harbinger, St. Paul Software, Data Management Strategies, and Perwill EDI, sell EDI translation software. EDI translation software available for NT includes Premenos' TrustedLink Enterprise and TSI International's Mercator.

The software on the sending and receiving computers determines the number of fields in a document (such as a purchase order or invoice), the order of the transmission, and the appearance of the data. Software on the sending computer prepares the data for transmission and often modifies fixed-length data, and software on the receiving computer parses the data into a form that the computer can use. The translation software formats the data using a standard such as ANSI X12 or UN/EDIFACT so that the software can map outgoing data and unmap incoming data and transform it into proprietary file formats that business applications use.

Although the concept of EDI is simple, the practice of EDI is arcane. Standards exist, but they represent only a starting point that requires human intervention and agreement on both sides of the messaging system.

EDI plays a fundamental role in the working business model of several industries. When the government, large retail outlets, or automotive manufacturers need to communicate document-based paperless transactions to their business partners, they are in a position to impose an industry wide EDI standard. EDI cuts down on error, transmission times, and the number of staff required to process the transactions. For example, retailers can rely on EDI to communicate the output from a database that measures the inventory fluctuations that occur every time a cashier scans an item's bar code at a checkout counter. Using this information, a retailer can place the burden of stocking its shelves on the product distributors and can pay these distributors according to how quickly their products sell from the retailer's shelves. Under this arrangement, the distributors get instant (generally overnight) feedback about the success of their products and a closer working relationship with their large retail customers.

Retailers often couple EDI with an Electronic Funds Transfer (EFT) system so they can credit money to a distributor as soon as that distributor's new product arrives on the shelf. In a tightly coupled system, these transactions can occur frequently. EFT is a form of EDI using proprietary file formats that pass payment transactions between banks. However, EFT doesn't always mean that the money is immediately available to the distributor. The financial organizations involved in the transactions determine the rules of deposit and transfer.

The automotive industry uses EDI as a fundamental part of its business model to implement just-in-time (JIT) manufacturing. Several hundred suppliers provide thousands of parts to the manufacturer to build each car, and a typical assembly line might stock only 2 or 3 days' worth of inventory. The suppliers receive EDI transmission-based purchase orders from the manufacturer and provide parts as needed. The manufacturer pays suppliers for the inventory the manufacturer uses on its assembly line, thereby shifting the inventory problem to the suppliers.

The Reality of EDI
Before you run off and add EDI to your business solution, you need to know that EDI might not save your company money in the short term. EDI requires support staff to manage transactions, negotiate standards with other organizations, and build and maintain necessary infrastructure. Industry analysts have estimated that an EDI hub costs about $1 million to create, and spokes cost about $45,000 each. For information about the costs of implementing EDI, see Phyllis K. Sokol, "From EDI to Electronic Commerce," (McGraw Hill, January 1995) and Nahid Jilovec, "The A to Z of EDI and its Role in E-Commerce, 2nd Edition," (Duke Press, April 1998).

Aside from the cost, you must also consider the time commitment. You can spend several days to several months getting EDI partner communications operational. So if you're considering EDI simply to eliminate paper transactions, you might not see any benefit.

You also need to know that many proprietary and general forms of EDI transactions exist. Mappings between business partners can be unique. Governments might use a recognized standard (e.g., ANSI X12) to build EDI transactions, but other industries use proprietary transaction sets. All new industry-specific standards are ANSI X12 compliant, but many proprietary standards still exist.

Industries tend to adopt a general standard such as ANSI X12 and add appropriate descriptors, unless a standard already exists. Table 1 lists industries with trade organizations that support variants of the ANSI X12 standard. Some industries even implement several different EDI transaction sets to meet various customer demands. For example, as of 1997, Hewlett-Packard was transmitting 1 million EDI transactions per month with 1000 suppliers. Companies transmitting this many transactions can contract this administrative work to another company specializing in EDI, but many companies perform this work internally.

Finally, you need to know that transmitting EDI transactions between organizations is typically a business function. For EDI to succeed, business managers must be involved and dedicated to the project's success. EDI as a technology isn't difficult or complex, but many EDI projects fail when technical staff members drive them.

How the Internet Is Changing EDI
The Internet provides a low-cost, ubiquitous transport network for EDI and is changing the long-standing model used for this type of business communication. As such, the Internet offers businesses new opportunities to communicate with their partners. EDI over the Internet will probably make EDI more readily accessible to small and midsized businesses, but EDI is unlikely to displace existing VANs. Even so, GE Information Services now offers a Web-based technology for document data transfer--­a service most VAN vendors will soon provide.

Trading partners use VANs to exchange high-volume transactions with a store-and-forward messaging mechanism. The Internet doesn't always provide sufficient bandwidth for organizations to move high-volume EDI traffic, but it offers immediate transmissions. You can't always predict when Internet data will arrive, so auditing and verification systems are mandatory as part of Internet commerce implementations. With Internet EDI, you give up high-cost, reliable (albeit one-way) transmissions over VANs for low-cost, immediate interactivity and better two-way communications.

The Electronic Data Interchange-Internet Integration (EDIINT) working group, which is part of the Internet Engineering Task Force (IETF), is developing technology for implementing Internet EDI. Specifically, this group is addressing concerns about Internet message integrity, confidentiality, digital signature, and nonrepudiation of data transfer.

Keep in mind that EDI represents only a small part of the business that companies will conduct on the Internet in years to come. Gartner Group's Dataquest research organization (http://www.dataquest.com) estimates that the worldwide EDI market (software and services) will reach $1.9 billion by the year 2000. The Yankee Group believes that business-to-business commerce over the Internet will reach $134 billion in that same year. Both groups estimate that these activities reached the same size in 1996 (about $1 billion), which demonstrates that Internet commerce is growing at a much greater rate than EDI alone. As you can see, the greatest potential for growth in EDI is over the Internet.

Many companies are implementing EDI over the Internet or on large intranets. Making EDI work can be as easy as creating Web-based forms that business partners access to enter data. When a user submits the form, you simply translate the data into EDI output. The translation is built into the system, so all you need is a Web browser to connect to the Internet. For many small companies, this approach to EDI solves the problem of learning and maintaining complicated data-transformation software and subscribing to an expensive private network that the companies might use only occasionally.

One way to painlessly establish an EDI solution is to hire an EDI service company to manage EDI transactions over the Internet. These companies consult to build and manage EDI solutions. EDI service companies are perfect for companies that don't have the resources to create and manage EDI practices. These solutions work well for companies with a low volume of EDI transactions (i.e., up to 50 documents a month). However, for greater volumes, these solutions aren't cost-effective.

For example, Pandesic (http://www.pandesic.com) uses Microsoft Site Server to provide turnkey e-commerce solutions combining SAP's enterprise resource planning (ERP) software with Intel computers. Pandesic is a joint venture of SAP and Intel. Also, IBM Global Services (http://www.ibm.com/globalnetwork/edibr.htm) provides EDI services, using IBM's Net.Commerce product and its global network. A plug-in interface lets Net.Commerce work with third-party EDI translation software.

Many large companies are creating Web-based EDI transactions and typically leaving their traditional legacy VAN-based EDI traffic intact for the moment. In many instances, large companies starting from scratch are implementing linked intranets that support both Internet and VAN traffic.

Securing EDI Internet Traffic
The cost associated with using a VAN to send EDI transactions is steep, but the VAN offers secure transmission of the EDI traffic and the trading partners can choose to encrypt and authenticate the traffic. Sending EDI information over the Internet is cheap, but your packets are available for anyone to intercept and examine. Many organizations are applying encryption and digital signing techniques to EDI traffic over the Internet, and this type of security is a developing area of NT technology. For information about digital certificates, see Tao Zhou, "Digital Signature Technology," page 75.

One approach to securing EDI traffic is to route it over Virtual Private Networks (VPNs). A VPN uses point-to-point tunneling to reduce the risk of data interception and improve data transfer characteristics. By using a VPN, you can compress and encrypt the traffic that you transmit and receive. You create a tunnel between the sender and the receiver and open a named IP port on the receiving side only for the duration of the transmission reception. The amount of EDI traffic that flows over VPNs is limited at the moment, but the technology is gaining acceptance and will grow over the next few years.

Microsoft offers a proprietary VPN based on the Point-to-Point Tunneling Protocol (PPTP), an alternative to Cisco Systems' proprietary and widely used Layer 2 Forwarding (L2F) standard. PPTP might merge with L2F to create a new default VPN industry standard, but at the moment PPTP supports only Windows clients and NT servers. The initial implementation of PPTP has had both security and performance problems. Microsoft recently announced a replacement for PPTP based on the IP Security (IPSec) standard that Request for Comments (RFC) 1825 through 1929 outline. Currently, the most robust VPNs are running on proprietary hardware solutions that aren't industry standards.

The Future
Many third-party vendors are incorporating EDI into e-commerce packages, and many organizations are increasingly generating new EDI traffic on the Internet. For information about how Microsoft is incorporating EDI features into Site Server Commerce Edition (SSCE), see the sidebar, "SSCE and EDI," page 65. High-volume EDI traffic over VANs will likely be with us for a long time, but Internet commerce applications consisting of EDI represent the area of greatest future growth for document interchange, especially for low-volume traffic that small and midsized businesses require.

Internet-based EDI offers new methods for document exchange and provides an economical means for small companies to participate in and manage EDI traffic. By providing companies a standard they can work with, EDI might aid in making Web-based business-to-business exchange work. E-commerce software might even subsume EDI and ultimately make it transparent to end users and developers.