Business Does Business on the Internet

By Don Dugdale

[Sidebar]: Pilot Jump-Starts Commercial Internet EDI

Lower costs, greater speed and more convenience give Internet-based EDI an edge over proprietary networks, but entrenched vendors remain strong.

Other reports to the contrary, Internet commerce is not all about selling flowers and pizza. Although the retail consumer has been the focus of much of the speculation surrounding the prospects of sales on the Internet, business-to-business transactions are expected to account for most Internet trading in the near future. A 1996 study by Input, a market research company in Menlo Park, CA, predicts that business-to-business sales will account for $120 billion in the year 2000 on the World Wide Web alone, compared to $45 billion in business-to-consumer sales on the Web.

That estimate takes into account not only the popularity of the Internet as a medium but business's ever-increasing interest in that broader category of wired communications, electronic data interchange (EDI). A 10-year-old phenomenon that is still in its youth, EDI is now being practiced by 80,000 to 100,000 U.S. companies, which Input estimates will do $130 billion in business this year using EDI--virtually all of it through traditional value-added networks (VANs).

The value of EDI itself has been recognized for some time. The computer-to-computer exchange of standard purchase orders, invoices and other documents is propelling business into a new era of faster and more fully automated transactions. Use of the international standard EDI for Administration, Commerce and Transport (EDIFACT) has smoothed the way into that era. The question now staring business in the face is how the coming explosion of Internet-based commerce will impact traditional EDI. Will companies continue to flock to VANs for their EDI needs, or will they opt for the Internet instead?

The Internet Edge

The Internet's most obvious inherent advantages over VANs are cost and speed. While VANs charge a set rate per kilocharacter of data transmitted, plus a complicated array of other fees, businesses pay an Internet service provider (ISP) a setup charge and a monthly connection charge, regardless of data volume. Some companies may already have the connection they need. The cost difference can be large for a high-volume user. "Today's [Internet] access providers are selling these services at one-third to one-tenth the price that traditional VAN providers sell their services," according to BIS Strategic Decisions of Norwell, MA, in a 1995 EDI report. A medium-volume EDI program (200 to 2,000 documents per month) will cost from $2,788 to $6,530 for the first year over a VAN versus $412 to $758 over the Internet, according to BIS.

However, the cost differential can be deceiving. VANs and other traditional EDI service providers give their subscribers more than just data transmission. For example, VANs typically act as a trusted third party, providing an audit trail of transmissions, so if a company doesn't get a response to a document, it can check through the VAN to find out what happened. In the typical hub-and-spoke scheme of EDI, a trading hub (usually a large company with many trading partners) can also have the VAN solicit suppliers to be the hub's trading partners, which may save the hub business development costs. "A lot of things are included in the per-character cost," says Michael Morgan, Internet services product manager for the network services group of Sterling Commerce in Dublin, OH, a traditional EDI service provider that is expanding to the Internet. "If a company decides to use an ISP, they have to add in all the things that they would have to pay somebody else to do internally."

Speed is another matter. While VANs typically use a store-and-forward method of transmission, keeping documents for batch transmission, Internet transmission is nearly immediate. "People think of a VAN giving a one-day or overnight turnaround of a message," says Steve Young, director of electronic commerce for Input. "The Internet has the potential to be quicker." The data rate on the Internet is also faster. VANs typically transmit at 4.8 kilobits per second (kbps) while Internet transmissions usually range from 9.6 kbps to 1.5mbps (with a T-1 transmission line), up to 300 times as fast as a VAN. In a pilot project completed early this year to test the Internet's ability to handle business-to-business requests for quotation (RFQ), the CommerceNet consortium of electronic commerce proponents, based in Menlo Park, CA, found that improved speed was one of the Internet's primary benefits.

The availability of the World Wide Web and its multimedia options also could further the use of EDI. If a business could simply call up another company's Web page, fill out a form in the browser and return it securely, that would reduce costs substantially and make EDI an option for a multitude of small businesses that can't afford it now. "The multimedia aspects are extremely appealing to the professional and nonprofessional user," says Steve Mann, director of product strategy for Computer Associates in Islandia, NY.

Another advantage to the user of Internet-based EDI is the Internet's momentum in electronic commerce. "The Internet has really taken off as a focal point," says Rebecca Young, vice president of marketing for Premenos, a vendor of EDI software in Concord, CA. The Internet offers the potential to open up a panoply of electronic trading partners that includes virtually all companies with an Internet address, not just those who have agreed to do business using specific applications over a proprietary network. However, because universal Internet EDI interoperability standards have not been agreed upon, much less implemented, open connectivity is pie in the sky at the moment. But expectations are high. "What's yet to happen is the building of a trust model that allows organizations to trade with other organizations with confidence," says Young.

Some observers believe that the arrival of the Internet for EDI use will increase the leverage of smaller business partners at the end of the EDI spokes because of the Internet's ubiquity. "Traditional hub-and-spoke architecture limits organizations in some respects," Mann says. "The smaller business partners out there on the edge of the rim are at the whim of the large business partner at the hub. With the Internet, there will be greater flexibility and less cost to the partners. I see organizations weaving an electronic quilt, where they tie their business partners to their internal business processes. Traditional EDI is going to plateau over the next couple of years, and Internet-based electronic commerce will supplant it."

However, a damper on the potential universality of Internet EDI connectivity is that the Internet is not ubiquitous in U.S. business, despite its popularity among high-tech companies. For example, Walter Houser, webmaster for the U.S. Department of Veterans Affairs in Washington, DC, says that only a small portion of the department's 179,000 potential business partners have Internet access. "Internet EDI is not going to supplant the U.S. mail," Houser says.

The Established Order

Despite the apparent advantages, no mass migration away from VANs and onto the Internet is expected soon. Standing in the way are large investments in existing EDI infrastructure, satisfaction with VAN service, institutional inertia and the perceived unreliability of the Internet. In addition, as noted previously, standards are yet to be adopted for the interoperability of EDI applications over the Internet.

In its study of electronic commerce, Input found that EDI users generally are not anxious to be rid of VANs. Eighty-one percent said they were at least somewhat satisfied with their VAN. However, users also expressed intense interest in the potential of the Internet for EDI. Most said security would be their chief concern in considering a switch.

The reliability question--which most often centers on security--will be put to rest over time. Although the Internet's openness makes it vulnerable to attack, cryptographic and digital certificate technology have been developed that can make an Internet message even more secure than on a private transmission line. "Security is a potential barrier in that the Internet is inherently insecure, but there is technology available to overcome that," says Input's Young. "People may not always believe that, so there still is an education job to do, particularly among low-tech companies."

The security question focuses on four aspects: confidentiality--keeping prying eyes away; integrity--making sure your message arrives intact; authentication--verifying the identity of sender and recipient; and non-repudiation of origin and receipt--taking away the ability to deny having sent or received the message. Using existing standards, each of these elements can be employed today on the Internet, although there is not yet agreement on exactly how to do it.

Chief among those responsible for resolving the security and interoperability issues is Rik Drummond, chairperson of the EDI Internet Integration (EDIINT) Workgroup within the Internet Engineering Task Force (IETF) and principal consultant of the Drummond Group in Fort Worth, TX. Drummond's committee is looking at standards-based solutions to EDI via e-mail, file transfer and the Web. "Interoperability among multiple product sets is what we're after," he says. "Right now businesses can't safely and reliably send even [Microsoft] Word documents across sometimes."

EDIINT is supposed to make a recommendation from among four possible interoperability/security solutions:

Secure Multipurpose Internet Mail Extensions (S/MIME), a standard that originated with RSA Data Security of Redwood City, CA, was designed to add security to e-mail messages in MIME format.

Pretty Good Privacy/MIME (PGP/MIME), a widespread solution with shareware, freeware and commercial versions, relies on users to exchange keys and establish trust in each other. This informal "web of trust" works well for small workgroups but can become unmanageable for large numbers of users.

MIME Object Security Services (MOSS), a protocol that applies digital signature and encryption services to MIME objects, is considered difficult to deal with because of its large number of options.

The Defense Message System (DMS), a U.S. Department of Defense system based on the X.400 message-handling standard, is in use in the United States and England without existing commercial applications.

S/MIME and PGP/MIME are considered the front runners, and each is scheduled for EDI interoperability testing this fall by EDIINT, assisted by CommerceNet. "Our recommendation will specify how you use existing standards, with a couple of minor additions, to do EDI," Drummond says. "This is all the underlying infrastructure necessary to do general electronic commerce between businesses."

Who's Doing What

Even its staunchest proponents concede that not much EDI traffic is going over the Internet yet. "A minuscule amount has been done," says Input's Young. "We estimated that in 1995 only $5 million worth of goods and services were sold or traded using EDI over the Internet."

The few noteworthy Internet EDI programs have tended to be pilot projects. BankAmerica Corp. and one of its customers, Lawrence Livermore National Laboratories, conducted a joint program ending early this year to exchange financial EDI over the Internet. For details, see "Pilot Jump-Starts Commercial Internet EDI."

In pilot testing an RFQ process over the Internet, five electronics industry trading partners and CommerceNet exchanged RFQ messages and acknowledgments involving various-length encrypted files between their various servers. Although the program did not involve either real RFQs or a trusted third party to handle key exchanges, CommerceNet concluded that all the technology was in place and that such an RFQ system would work.

These studies are only precursors. Input predicts that, while in 1996 $130 billion in goods and services will be traded using EDI through VANs, in the year 2000 the total goods and services traded will increase to $383 billion, with $106 billion of that conducted over the Internet. However, $70 billion of the $106 billion will come in Internet-related VAN EDI, due to the VANs' adoption of Internet strategies.

Premenos is the company most often mentioned as laying the groundwork for Internet-based EDI software. The company's Templar application, released in 1995, enables secure EDI over the Internet with authentication and non-repudiation, and 60 product licensees are either using or testing it, Premenos reports. Use of Templar is now required on both ends of an EDI transaction for the system to work, but the vendor claims that the standards used as a basis for Templar mean that eventually it will be able to interoperate with other products when they come on the market. "Part of being first in the market is that you don't have another product to interoperate with," says Rebecca Young. Companies including Harbinger Corp. of Atlanta, General Electric Information Services (GEIS) of Rockville, MD, and Sterling Commerce also are developing or have recently released Internet EDI applications.

Harbinger's TrustedLink, now under development, is supposed to allow both Internet and non-Internet trading partners to conduct business either over the Internet or through VANs. Premenos and Harbinger are said to be working to make their products interoperable.

Sterling's Commerce:Connection for Windows 3.0.1 is a PC-based suite of electronic commerce-related software products that allow connection to Sterling's proprietary network services via an Internet connection. Users will be able to connect to trading partners doing business with Sterling's Commerce:Network.

Premenos has aligned itself with established vendors such as Computer Associates and translator companies such as DNS Worldwide of Burlington, MA, as well as newcomers like Verisign, a provider of digital certificates for secure transactions over the Internet, based in Mountain View, CA. Computer Associates' Unicenter/ICE (for Internet Commerce Enabled) network and systems management product has been tailored to handle such applications as Templar and Netscape's Web server software, according to CA's Mann. DNS has integrated its EDI translator with Templar for Windows to enable the DNS software to translate normal business documents into the ANSI X12 EDI standard just as it does for non-Internet EDI, and then as part of its program call Templar to send the document to a trading partner over the Internet.

The inclusion of Verisign means that potential trading partners who don't have an EDI partnership agreement could use their EDI systems to digitally verify each other's public key identity through Verisign's digital certificate service, then start trading using the encryption keys. "This is all part of building the infrastructure that will lead to open trading," says Rebecca Young.

VANs Fight Back

To answer the Internet clamor and perhaps as a defensive move, the leading VANs have come up with their own Internet strategies. These efforts are designed primarily, like Sterling's, to use the Internet to bring more trading partners to the EDI service provider or VAN itself, thus increasing the potential number of partners for its established customer base and allowing smaller companies to participate with low-end EDI translators. "They are using the Internet as a transport mechanism to get to their VAN data center," says Steve Young. "A lot more traffic will go over the Internet that way, but it doesn't replace the VAN." Currently, VANs haven't changed their cost structure, but Young sees changes ahead as VANs begin to compete with direct Internet connections, possibly leading to the elimination of the VANs' dial-up network connections in favor of cheaper Internet connections to the VANs.

"The VANs probably feel a bit threatened, because people are asking if they need VANs," says Steve Young. "So they have decided to incorporate the Internet into their strategy rather than seem to be fighting it." Input estimates that Internet-related VAN EDI will account for 18 percent of all EDI trading in the year 2000.

"Sterling, GEIS and the other major players are going to invest lots of money to build pipelines to connect their VANs securely with the Internet," says Steve Vanechanos, president of Internet software vendor DynamicWeb in Clifton, NJ, who has decided to ally with the VANs rather than fight them. "The strategy is essentially to extend the EDI model to be interactive with the smaller companies that are outside the loop today. Once the basic infrastructure is in place, application developers can feel free to utilize those secure pipelines, and the security issue is handled by a major institutional player, like Sterling or AT&T, that invents the infrastructure."

Despite the high expectations for direct Internet EDI, few observers are predicting the demise of the VANs. Rather, the mechanisms and technology used by the VANs are expected to change, along with their pricing, to accommodate the possibilities opened up by Internet-based commerce. "I think we'll have to adjust our definitions," says Drummond of EDIINT. "The Internet protocols are going to become standard. You will see VANs offering value-added services like reliability and security, but based on the Internet rather than on the proprietary stuff."

The momentum of traditional EDI and the comfort of subscribing to the VANs will take time to overcome, admits Rebecca Young: "It takes awhile for companies to make a big change in their way of doing business. But even if a vast majority of companies doing electronic commerce today do not move their transactions to the Internet right away, a bunch of companies out there are still using paper and fax. They will start to do EDI if we make it very easy."

Making it easy, as well as inexpensive, is probably the key to EDI's future on the Internet. Companies will take the option that sends their documents reliably, securely, with the least cost and most convenience. Increasingly, with the coming introduction of interoperability standards, Internet-based products will be offering those advantages.

Don Dugdale is a technology writer based in San Jose, CA. He can be reached at