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Roger Clarke's 'eCommerce Foundation Paper'

EDI Is But One Element of Electronic Commerce

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

This paper was presented at the 6th International EDI Conference, Bled, Slovenia, June 1993

This paper has been accessed thousands of times by students of electronic commerce, from all over the world. Because people find it useful in its present form, I've left it unchanged. But my thinking on these issues has proceeded a great deal further since. You may therefore find it valuable to check out my electronic commerce definitions, and/or my other EC publications.

© Xamax Consultancy Pty Ltd, 1993

Available under an AEShareNet Free for Education licence

This document is at http://www.rogerclarke.com/EC/Bled93.html


Abstract

The notion of 'electronic commerce' is proposed as a means of drawing together a wide range of business support services, including inter-organisational e-mail; directories; trading support systems for commodities, products, customised products and custom-built goods and services; ordering and logistic support systems; settlement support systems; and management information and statistical reporting systems.

It is contended that an integrative framework is needed to ensure that organisations view these electronic support mechanisms as parts of a whole rather than as independent elements. A five-phase process model is suggested, and a classification proposed of the various degrees of change induced in organisations and industry sectors.

The future directions of the Bled series of international conferences are argued to be in electronic commerce rather than in EDI alone, or in inter-organisational systems in general.


INTRODUCTION

The focus of the first six Bled International Conferences has been on EDI. There have been several other technologies which have attracted attention, however. At this conference alone are papers using the terms 'value-added information services', 'intelligent electronic markets', 'business partnerships', 'business process redesign' and 'electronic integration'.

The 6th Conference has used 'Inter-Organisational Systems' (IOS) as part of its title, but this seems too diffuse a term to satisfy the need for precise terminology for these kinds of systems. This paper argues that the focus of future Bled conferences, and of researchers, consultants, executives, managers and professionals alike, needs to be on a broader concept which this paper refers to as 'electronic commerce'.

The latter part of this paper surveys models which enable us to recognise EDI for what it is - just one of a closely-related family of electronic support facilities. The paper commences, however, by reviewing a range of these other electronic support facilities, which, like EDI, are being used to automate, rationalise, transform and re-engineer both individual organisations and industry value-chains.


THE SEGMENTS OF ELECTRONIC COMMERCE

This section briefly reviews the services which support various aspects of business activity.

Inter-Organisational Email

Email, a tool to support the transmission of unstructured messages between individuals, is complementary to EDI. In the area of international trade, for example, studies have established that about 100 structured messages (which can, at least in principle, be supported by EDI) are supported by about 40 kinds of communications between individuals, which are at best poorly structured and at worst entirely informal (PMA 1989).

These messages need the support of something better than conventional email products. Attached-document and compound-document services are increasingly important in some contexts, but, above all, the islands of intra-organisational email systems must be linked. In recognition of this need, organisations are either replacing their existing intra-organisational email systems or, more commonly, retro-fitting X.400 interfaces to enable internal mail systems to be interfaced to those of their business partners.

Directories

Many organisations applying IT to purchasing have concluded that the greatest difficulties arise not from the preparation or despatch of purchase orders, but from the discovery and/or selection of the appropriate party to send them to. Access is needed to databases of goods and productised services which can be purchased, and of suppliers of classes of goods and productised services. Reflecting the popularity of the 'white-page' and 'yellow-page' services provided by telephone suppliers, it has become conventional to refer to such databases as 'directories'.

Different users require different entry-points for their searches in these directories. Some are aware of the supplier name and others of the product-name, but many are aware only of a generic product description, or of a national or international standard which the product they seek must conform with.

A special application of directories is the recording of standing or period contracts which a large organisation, or a tier of government, has struck with its suppliers. Purchasing officers throughout the organisation, or in all of the various agencies within the particular government, may procure under such contracts using pre-arranged terms and conditions.

Many organisations are discovering that directory services with the requisite combination of functional sophistication and useability can deliver far more strategic or competitive benefit than can EDI alone. Once the details of the supplier and product are available, however, the automated generation of a standard electronic purchase order is straightforward, and the potential gains of EDI are more readily achievable. Experiences of the NSW Government's SupplyLine project are reported on in Curran (1992) and Jonas (1992).

Trading Support Systems

There are various ways in which sellers and buyers discover one another, and several ways in which the negotiation of price, quantity, delivery and related terms and conditions is performed.

A major determinant of the form of the trading mechanism is the class of goods or services being traded. The previous sections have implicitly dealt with only those goods and services which are 'productised', i.e. are normal offerings of the supplier which can be ordered simply by nominating a product-identifier (perhaps supplemented by the specification of a few options, such as size or colour). The following sub-sections remove that over-simplification, and identify and discuss the important classes of trading.

(i) Products

Much of the economic prosperity which arose from the industrial revolution was due to the efficiencies achievable from automating repetitive processes. Associated with this was the standardisation of goods and services into a limited number of forms, each with limited and pre-determined features and optional extras. Notwithstanding the onrush of the 'third wave' or information economy, it remains common for goods and services which were initially offered in custom-built form to be 'productised' and offered more cheaply to a wider range of clients.

The directory services discussed in the previous section, if suitably designed, enable buyers to discover products they want, and sellers of those products. In addition, marketing by sellers to buyers can be supported in a manner far more efficient than mass promotional mechanisms.

Where goods or services can be classified, or described with adequate precision, they can be sold through computer-supported exchange mechanisms, including screen-based trading. One simple means whereby seller and buyer may identify one another is through the broadcast of 'wanted to sell' and 'wanted to buy' messages, e.g. using noticeboards or advertisements, or electronic analogues thereof.

An example of the former is sales of fish, or of stamps, which have been classified by the auctioneer according to their characteristics, including their quality (e.g. top, good, fair and poor). To provide buyers with the necessary degree of confidence, the terms of sale need to allow for negation in the event of mis-classification. Even in markets in which considerable variations in the product exist, 'sale by description' is gaining acceptance as a means of achieving efficiencies in trading activities; for example, in the Australian livestock industry, the Computer Aided Livestock Marketing (CALM) system is a nationwide screen-based auction based on previously disseminated, detailed and structured descriptions of the lots of cattle, sheep or pigs (Clarke & Jenkins 1993).

Computer support can also be provided for single-site auctions based on buyers' own assessments of stock. Examples of such a system are the Hog Auction Market (HAM) in Singapore (Neo & Clarke 1992) and the FAST Fish Marketing System in Sydney (Clarke 1992).

A rich variety of alternative auction procedures exists. One simple form is the sealed-bid auction, which involves a statement of the goods or services to be bought or sold, the submission of sealed bids, a closing date, and (usually) the acceptance of the lowest or highest of those bids; for example 'collectables' (such as stamps and the contents of wine cellars) are often sold in this manner. The term 'tender process' is commonly used for sealed-bid procedures where the best bid does not necessarily win, but the decision instead depends on evaluation of a number of features of the bid, in addition to price. IT support for such auctions and tender processes (such as EDI-based dissemination of requests for tender (RFTs) and tender submission), can provide a greater depth of market (i.e. more bidders) and/or a faster auction cycle.

Another common form of auction involves bidding-up from a starting-point selected by the auctioneer, with the highest bid winning the goods, subject to any 'reserve price' which may have been set. Alternatively, the price can be run down from an unrealistically high starting-point selected by the auctioneer, with the first bidder winning the lot (the so-called 'dutch' auction procedure). The FAST system of the N.S.W. Fish Marketing Authority involved the replacement of a long-standing voice-based bidding-up procedure with a computer-based dutch auction. Many variants exist, such as the establishment of fixed bidding steps (used in CALM), and running down of the starting-point in the event that no starting bidder can be found (used in HAM).

(ii) Commodities

There is a sub-class of products, generally referred to as 'commodities', which are products that exist in identifiable form, in considerable quantity, and in essentially identical form, and are available from a variety of sources. Common examples are stocks, shares and derivative financial instruments such as futures and options, foreign currency, and primary produce such as coffee and crude oil.

Trading in commodities requires special forms of electronic support. On-line or screen-based trading is appropriate for high-value commodities such as large parcels of stocks and shares, and of currencies. Automated matching of buy and sell instructions, on the other hand, is appropriate to smaller parcels of the same kinds of commodities and to lower-value commodities such as stamps and wine (Lee 1991, Lee & Lee 1993).

(iii) Custom-Built Goods and Services

At the other extreme from commodities are goods and services which are not standardised, but are custom-built to customer specifications. Custom-built goods and services are generally the subject of requests for information (RFIs) or requests for proposals (RFPs). An evaluation process may result in a list of qualified tenderers who are then sent a more fully developed request for tender (RFT). An alternative approach more appropriate in the case of genuinely novel requirements is for a 'preferred supplier' to be selected, and invited to develop, under a succession of contracts, successively more refined proposals until a point is reached at which contracts for the supply of the desired goods or services can be finalised.

Various forms of electronic support can be devised for trading in custom-built goods and services. Clearly much of the work involves relatively poorly structured communications, and hence compound-media email is important.

Even the development of specifications for very substantial custom-built goods (such as submarines and chemical plants) can be electronically supported. Text-only email needs to be supplemented by the transmission of images (for rough sketches) and diagrams (for technical drawings). Communications between the client and contract designers can be greatly facilitated by the ability to annotate elements of diagrams and locations in text and sketches with text or voice segments. Computer Aided Logistics Systems (CALS) is a cousin of EDI which is addressing the needs of design engineers.

(iv) Customised Products and Services

The apparently clear distinction between custom-built goods and services, products and commodities is not sufficient to cope with all forms of trading. Many circumstances exists in which base products are modified under contract to suit a particular customer's requirements, or a standard specification is modified according to customer need and a semi-custom-built good or service constructed. This is particularly common where there is a significant service element in the good or service.

Because the acquisition of customised products and services has characteristics of both product and custom-built trading, it requires a rich combination of the electronic support mechanisms discussed in the previous sections.

A small number of research centres and individual researchers are actively working on a wide variety of aspects of trading support systems.

Ordering and Logistics Support Systems

EDI is well-established as an electronic support mechanism for the ordering of products under previously negotiated contractual arrangements, and the delivery of the goods and services through the transportation networks. International trade presents special problems, which are being subjected to especial attention by a small number of research groups (Wagenaar 1990, Sheombar & Wagenaar 1991, Clarke et al 1991, Wagenaar 1992, Wrigley 1992, Clarke et al 1992).

Settlement Support Systems

Subsequent to the delivery of the goods, settlement procedures are required, including the preparation, despatch and processing of invoices and statements (to the extent that these are not rendered redundant), and of remittance advices. Payment instructions from the payer to the payer's bank are also within the EDI arena, and are commonly referred to as EDI/EFT. The scope for theft and fraud is greater than in the case of ordering and logistics EDI, and it is therefore likely that a premium needs to be paid in order to enhance the security and integrity of such messages.

The actual remittance of value between financial institutions, in final settlement of a transaction is, however, not generally regarded as an EDI matter, but rather as being in the realm of electronic funds transfer systems (EFTS). There are, of course, many variations in the payment process, particularly in international trade, where the provision of evidence of payment having already been secured (a letter of credit) is generally a pre-condition of despatch of the goods. Where the purchaser is a consumer, or a representative of a corporation buying goods in a retail outlet, consumer EFTS, and in particular EFT at point of sale (EFT/POS) becomes an element in the process.

Management Information and Statistical Reporting Systems

The completion of each transaction seldom represents the completion of the cycle as a whole. Accumulation and summarisation of transactions, routine search for exceptions, and reporting to holding companies or superordinate agencies are part of the conventional management information system (MIS) activities of almost any company or government agency. Beyond this is the accumulation and reporting of data to statistical agencies, including not only the national statistics bureau, but in many cases also one or more regulatory agencies, and one or more industry associations.

These 'spin-off' activities have become, in some countries, and in some industries, seriously onerous and expensive activities, whose automation relieves the organisation not only of expense, but also of considerable deflection of its attention from its primary activities.


TOWARDS AN INTEGRATIVE VIEW OF ELECTRONIC COMMERCE

The argument in this paper is not that EDI is unimportant, an old issue which is already fully solved, or a business service which is already fully-exploited; far from it. What is argued is that organisations are failing to address their full needs if they restrict their focus to EDI alone. The work undertaken on EDI needs to be inter-related with that on other related technologies and business support mechanisms.

The first consideration is what unifying or umbrella concept can be used as a means of integrating the various electronic support technologies. The terms 'electronic trading' and 'electronic markets' have gained some degree of currency, but have the disadvantage that they can refer to only the agreement-making portion of the process. The term 'electronic business' is all-encompassing, covering many forms of service in which trading does not occur. The term 'electronic commerce' has the advantage that commerce is a sufficiently broad notion, which can reasonably be used to encompass all of the trading, pre-trading and post-trading elements which need to be dealt with.

The next need is for a framework which will enable the various segments of electronic commerce to be inter-related. A number of models have been proposed in the literature, including several at previous Bled Conferences. Many of these models focus on the trading portion of commerce. In particular, Bytheway (1991) offers an entity-relationship model; Clarke (1992a) and Swatman, Swatman & Duke (1991) provide respectively informal and formal models of the dynamics of trading; PMA (1990), Wrigley (1992), Sheombar & Wagenaar (1991), Wagenaar (1992) and Clarke, Wagenaar & Wrigley (1992) provide data flow models, specifically targetted at international trade; and Lee (1988) and Lee & Lee (1993) address the act of contract formation in the trading of commodities. Other valuable models are to be found in reference disciplines, e.g. Winograd & Flores (1986) address the dynamics of negotiations leading to contractual terms being agreed.

Further contributions are needed, and integration of the many useful features of existing models needs to be achieved. On the basis of work undertaken in the area during the last few years, a five-phase process model of electronic commerce is suggested in Exhibit 1.

Exhibit 1: A Five-Phase Process Model of Electronic Commerce

Exhibit 2, after Clarke (1992a), provides a schematic representation of these phases.

Electronic commerce can have varying degrees of impact, and Exhibit 3 proposes a classifications scheme. Elements of electronic commerce can be used to simply automate existing processes. The opportunity can be taken, however, to rationalise procedures, perhaps with minor impacts on organisational structures, and thereby to reduce costs, and improve the speed and quality of services. Beyond this, the implementation of electronic support services can result in significant change in organisational structures and processes within the organisation. Where this happens accidentally, it can be described as 'business transformation'; where it is the result of active planning and management, it is 'business re-engineering'. Because these services almost inevitably involve an organisation's business partners, automation, rationalisation, transformation and re-engineering may not be confined to internal structures and processes, but may occur across organisational boundaries and along the industry value-chain.

Exhibit 2: Phases of Electronic Commerce

Exhibit 3: A Framework for Analysing the Dynamics of Changes Induced by Electronic Commerce


IMPLICATIONS

It is contended that the use of an integrative model as a basis for discussions of electronic commerce will have important advantages. It will be beneficial for companies and government agencies because it brings into a common forum the various people who are applying computers and communications to support different phases of business processes. Discussions about prioritisation of, for example, directory versus purchase order transmission, are provided with a context.

Industry associations, regulators and policy-makers are also served by the model, because it becomes much easier for them to gain and retain perspective on the industry sectors and segments involved, and evaluate the contribution that each alternative initiative can make to economic, social and political objectives.

Researchers are, in one sense, disadvantaged, because the model recognises the inter-relatedness of the many facets of industry and government activities, and hence makes it much more difficult to segregate areas and activities which can be readily submitted to the conventional tools of analytical research. On the other hand, applied research must serve the needs of business and government, and must therefore reflect the real complexities of business organisation and processes.


CONCLUSIONS

I submit that the sixth of the highly valuable International EDI Conferences held in Bled, Slovenia, should be the last. 1994 should see a broader title, a broader clientele and a broader range of papers. I stress that I do not propose this in any sense as an enemy of Bled, of EDI, or of the Conference Organisers, but out of a conviction that the time has come for all future discussions of EDI to be within the broader context of electronic commerce.


BIBLIOGRAPHY

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Butler Cox (1990) 'Electronic Marketplaces' Research Report 77, Butler Cox Foundation, London, 1990

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Clarke R.A. (1992a) 'A Contingency Model of EDI's Impact on Industry Sectors' J. Strat. Inf. Sys. 1,3 (June 1992)

Clarke R.A. (1992b) 'Strategic Information Systems: Retrospect and Prospect' Proc. Int'l Conf. Inf. Sys. and Organisations, Bled, Slovenia (August 1992)

Clarke R.A. (1992c) 'Data Interchange and International Competitiveness' Business Council of Australia Bulletin (September 1992)

Clarke R.A., J. Griçar, P. de Luca, T. Imai, D. McCubbrey & P.M.C. Swatman (1991) 'The International Significance of Electronic Data Interchange' in Palvia S. Palvia P. & Zigli R.M. (Eds.) 'Global Issues in Information Technology' Ideas Group Publ., 1991

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Lee H.G. & Lee R.M. (1993) 'An Intelligent Electronic Market Approach for Commodity Auctions' Proc. 6th Int'l EDI Conf., Bled Slovenia, 7-9 June 1993

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Wagenaar R.W. (1990) 'Management Training on EDI: The Port of Rotterdam Simulation Game' Rotterdam School of Management, Erasmus University

Wagenaar R. (1992) 'Business Network Redesign - Lessons From the Port of Rotterdam Simulation Game' Proc. 5th Int'l EDI Conf., Bled Slovenia 3-5 September 1991 390-404

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Wrigley C.D. (1992) 'EDI Transaction Protocols in International Trade' Proc. 5th Int'l EDI Conf., Bled Slovenia 3-5 September 1992



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