EDI continues to be the dominant standard in B2B e-commerce.  If you don’t believe me, I would encourage you to take a look at the report titled B2B Integration Trends: Message Formats published last year by Ken Vollmer of Forrester Research.  Forrester estimated that out of all B2B transaction volumes in 2007, 85-90% use EDI.  XML and other file formats, while growing at nearly double the rate of EDI, remain, at best, 15% of transaction volume.  EDI’s dominance is a subject that mystifies many outside the industry.  How does a technology dinosaur such as EDI manage to remain so popular and prevalent through an era that has witnessed the birth of unprecedented levels of disruptive technology?  If Charles Darwin were alive today he might enjoy studying the characteristics that have led to EDI’s survival despite the introduction of genetically-superior species to its ecosystem.   Here is my assessment. 

Charles Darwin

Six Survival Characteristics of EDI   

There are six factors, in my opinion, that lead to the continued prevalence of EDI as the world’s dominant e-commerce standard:

1.       EDI is mature.  It has been in use for over 20 years resulting in a proven, reliable, business critical reputation amongst its widespread users.  If you are selecting a technology to run your business on – would you select a new, emerging framework or a proven, mature standard?

2.       EDI is working.  Why fix what isn’t broken?  EDI is successfully supporting the value chains for many of the world’s largest companies today.  Corporations need a compelling business benefit to migrate to XML.  The business plan must justify the expense to perform a migration, risk of possible business disruption and opportunity cost compared to alternative investments.

3.       EDI is cheap.  The costs of EDI were often cited as its top barrier to adoption throughout the 1990s.  However, the barriers to entry for EDI based technologies have declined significantly in recent years.  As the de facto standard almost all B2B integration software packages and SaaS-based services include out-of-the-box EDI functionality.  XML often requires customization, especially for low end packages.

4.       EDI is ubiquitous.  EDI had the advantage of being the only standard for e-commerce for over a decade.  During that time, EDI became pervasive in a number of industries such as health care, automotive, banking and retail.  As a result, businesses that choose to utilize EDI have a high level of confidence that their trading partners will be able to receive their documents.  By contrast, businesses that try to standardize on XML face significant headwinds as their entire trading partner community must become XML-enabled.

5.       EDI is not industry specific.  EDI’s lack of industry-specific data fields and process models is often listed as a shortcoming.   However, one of the keys to EDI’s ubiquity has been is applicability across multiple industries and geographic regions.  Very few industries in today’s world are truly vertical leading to challenges when partners transact commerce across industries.  For example, some of the fastest growing channels for high tech manufacturers are the aerospace, retail, medical and automotive sectors, none of which use the high tech XML standard - RosettaNet.

6.       EDI is network protocol independent.  It works across value added networks.  It works with legacy dial-up protocols.  It works with newer Internet standards such as AS2.

These six factors are the critical genetic and environmental factors that have led to EDI’s longevity.  In today’s world of multiple, competing e-commerce frameworks, dominance will come from survival of the fittest.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Most readers of this headline will doubt the veracity of such a claim. Surely, the translator bundled with one of the leading integration brokers from Sterling Commerce, Software AG’s webMethods or IBM must have the highest market share.  One could argue GXS’s Application Integrator could also compete for such a title.  Well…Microsoft does now boast over 7,000 customers for its BizTalk Server.  And the new version, BizTalk 2006 R2, has several significant enhancements to its feature set including native support for EDI.  By the way - it is about time!  I am pleased to see that even Microsoft has acknowledged the continued dominance of EDI as the world’s most popular B2B document format.  But I am not referring to BizTalk when I stated that Microsoft’s translator had the largest market share.  I am actually referring to Office 2007.

Microsoft Office 2007 – The Translator 

The newest version of Office is based upon XML standards, specifically the Open Office XML standard.  This new XML standard is a different file format and structure than the previous binary format used in prior versions up to Office 2003.  The older binary formats .xls for Microsoft Excel, .doc for Microsoft Word and .ppt for Microsoft PowerPoint have actually become so well known that many people I know use them as if they were words.  I often see e-mails or on-line chats referring to .xls and .ppt.  XLS is much simpler to type than “spreadsheet” and everyone knows what a “PPT” is.  Open Office XML will challenge the established shorthand with a new four letter naming convention for file extensions.  Starting with Office 2007 .xlsx is the default format used by Microsoft Excel, .docx is used by Microsoft Word and .pptx by Microsoft PowerPoint.  If you are not using Office 2007 yet, you may have received an e-mail with a .docx file that you could not open.   In fact, this is causing considerable confusion across the industry as most users on earlier versions of Microsoft Office do not know of the new file formats.

Fortunately, Microsoft has not abandoned the binary file formats.  Using the “Save As” command or what Microsoft refers to as “Compatibility Mode” a user can save a file created in Office 2007 in the .doc, .xls and .ppt formats, which brings me back to the title of this blog.  I have been using Office 2007 for almost a year now and I must spend, at least, 20 minutes a day converting files back and forth between Open Office XML and the binary format.  GXS is only about mid-way through the Office 2007 upgrade.   And many of my colleagues at other companies have not upgraded to 2007.  The rules of proper e-mail etiquette suggest that one should send the older Office 2003 binary file format by default to avoid frustrating your peers.  As a result, my office software has become a powerful spreadsheet tool, word processor, presentation designer and document translator.   And I am not alone.  Hundreds of thousands of other end-users like myself are translating Open Office XML files to Microsoft’s binary Office file format every day.  By my estimates, the conversion of Microsoft Office file formats is occurring on a broader scale than any other document transformation process making Microsoft Office 2007 the world’s most popular translator.

How Long will Microsoft’s Reign as Leading Translator Last? 

Although Microsoft Office may enjoy top standing today in translation volumes, its reign will not extend forever.  Forrester Research recently conducted a study of Office 2007 adoption amongst North American and Western European businesses.  The study found that 43% of enterprises surveyed have some level of Office 2007 in use.  Furthermore, 93% of respondents stated they will be deploying Office 2007 in the next 12 months.  Adoption is occurring much faster than I would have expected.  However, the looming economic recession may decelerate upgrade efforts for some users.  The tapeworm-like memory usage of Office 2007 necessitates a PC hardware upgrade for many users.  Such non-essential capital spending may be deferred until 2009 or 2010 by corporations suffering from recessionary pressures.  Nonetheless, at some point in the next five years, Office 2007 will enjoy a leadership position on the desktop.  And at such time, translations to the older binary formats will likely drop dramatically.

Open Office XML – The Conspiracy Theories 

There has been a significant amount of controversy surrounding the new Open Office XML standard.  Open Office XML recently became an official ISO standard along with PDF, HTML and the other office standard – Open Document Format.   Remember that standard should always be assumed to be plural even when used without the trailing “s.”   Microsoft has been accused of unfairly influencing the ISO standardization process as part of its plan to promote its own interests.  I actually don’t think it was Microsoft that is really behind the aggressive lobbying efforts.  My conspiracy theory is that the disk drive companies such as Seagate and Western Digital are really championing the effort.  The storage manufacturers have the most to gain from a new office document standard.  For the next five years while there is a parallel set of document formats in use by Microsoft Office applications, end users will need to store two versions of many files - one in the new XML-based 2007+ format and the other in the older, binary 2003 format.  The effect is a doubling of disk capacity required by end user.

Open Office XML has a number of fascinating dimensions to it, both from an industry standards perspective and from a business applications standpoint, but my PR Director has told me that my blog entries are too long so I will not carry on, but instead leave you with some links to research the standards on your own:

• Wikipedia entry on Open Office XML ( http://en.wikipedia.org/wiki/Open_Office_XML)
• Forrester Research - The State of Microsoft Office 2007 Desktop Adoption - March 31 2008
• Wall Street Journal - Microsoft’s Office Push Scrutinized by EU – February 8, 2008
• Gartner - Standards Bodies’ Approval of OOXML Doesn’t Change Status Quo – April 8, 2008

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Last week I spent three days in London conducting a series of meetings with customers, partners, analysts and local media.  These trips are always insightful for me, but last week was a particularly interesting time to be in London.  First, the French President Nicolas Sarkozy and his new wife Carla Bruni Sarkozy were visiting the UK, which generated a lot of attention in the local press.  Second, there was a significant disappointment over the problems at Heathrow’s new Terminal 5.  On the opening day of the new terminal, the baggage handling system failed leaving thousands of passengers without luggage and resulting in the cancellation of dozens of flights.  Fortunately, I was not flying British Airways so I was not impacted.

The third reason I found this trip more interesting than others was the sense of urgency amongst everyone I met with.  Everyone was rushing to finalize activities before the end of first quarter.  This year’s first quarter is an important economic event to be sure.  Not only will it be the first financial period for 2008, but the quarterly earnings will provide insights into how widespread and deep the recession has become.  Of course, every CEO wants to be able to downplay the impact of the recession on their financial results during the upcoming quarterly earnings call.  So there is added pressure on both sales and finance organizations to ensure that they reach their forecasted goals. 

End of Quarter Stress 

End of quarter stress is not unusual for leaders in sales and finance, but it is becoming increasingly challenging for IT operations personnel as well.  I was speaking to a customer in the manufacturing sector last week.  He was explaining how critical their IT infrastructure is for their quarter-end operations.  The last three weeks of the quarter are extremely hectic for these types of manufacturers who are trying to outdo the previous quarter’s revenue results.  Sales, order processing and warehousing operations are often operating 24 hours a day including Saturday and Sundays.  Frequently, it all comes down to the last day of the quarter.   Products that ship as late as one minute before midnight can still qualify for booking in the quarterly sales reports. IT systems must be able to keep pace with the performance requirements of demanding end-users during this stressful period.  And they absolutely cannot have downtime – either scheduled or unscheduled.  Order processing, warehouse management and transportation management are critical for manufacturers.   It is no surprise that ERP applications must deliver 100% uptime to support business operations.  However, I doubt many realize how mission critical B2B (EDI and XML) connectivity is for quarter-end activities.  An interruption in electronic document flow with business partners can bring a company’s supply chain to a halt – much like the failure of a baggage handling system at Heathrow’s Terminal 5.  As supply chains become increasingly digitally integrated more and more buyer-to-supplier communications are being sent electronically.  A loss of connectivity even for a matter of a few hours can jeopardize a company’s ability to meet its quarterly financial targets.  A loss of data, specifically new orders, could be catastrophic.

The Impact of IT Failures 

The root cause of the meltdown at Heathrow was that the baggage handlers IDs were not recognized by computers.  As a result not only were airport personnel not able to log in to the bagging handling system, but they also could not navigate physically around the airport in and out of secured areas.  Eventually the system became overloaded and checking of baggage was suspended.  Delays unloading and loading of baggage postponed and even cancelled some flights.  Spanish owned BAA (British Airports Authority) had invested over £4B and 20 years of planning to construct the new concourse.  And the bagging handlers and computer applications had undergone 18 months of extensive testing, which proves that even the most well designed and planned systems can fail under peak loads.

What would happen if B2B (EDI and XML) connectivity at a multi-billion dollar manufacturer were lost on the last day of the quarter?  Electronic purchase orders from large customers and distributors would not be able to be received.  Even orders placed prior to the outage could not be confirmed electronically.  Third party logistics providers could not be notified of shipments that were ready for pickup.  In effect, the company’s supply chain would be significantly handicapped.  Of course, orders could be taken over the phone and then processed manually.  However, this would likely be a nuisance to high volume buyers accustomed to utilizing highly automated ordering processes in their procurement systems.  Theoretically, electronic documents would not be lost as a result of an interruption to B2B communications.  Most B2B transactions are asynchronous.  As a result, purchase orders, confirmations and shipping instructions would be held in a queue until the connectivity was re-established.  But depending upon the length of outage and the time period it occurred, the backlog may not be recoverable.  Suppose an outage occurred from 1PM to 5PM on March 31^st.  Sales, warehouse and transportation personnel would probably not be able to process the backlog of orders even if they worked until midnight.

I wonder how many companies and vendors will experience an outage in their B2B applications during this quarter’s final day…or how many are expecting to fulfill orders based upon incoming parts shipped via BA’s Cargo service…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

The US Automotive Market in 2008 

It seems like every day more and more people are talking about a probable US recession in 2008.  As a result businesses in every industry are exploring the potential repercussions of an economic slowdown.  The automotive industry is one sector that will certainly not be immune to a downturn in consumer spending.  However, the industry may be better prepared than other sectors due to its recent history.  Over the past 5 years many of the US manufacturers have been reengineering their business models to account for the rebalancing of market share that has occurred between domestic and foreign brands.   Many believe that the worst of the transition is over, but the market dynamics are poised to shift once again.  Throughout the past few weeks a number of noteworthy equity analysts at major securities firms have lowered their 2008 forecasts for US auto sales.  Sales projections have been revised downward from bullish estimates of 17 million new vehicles down to lower forecasts closer to 15 million new units.   When times get tough in the automotive industry, much of the attention focuses on the Big 3 OEMs and their Tier 1 suppliers.  But the retail dealerships who sell the vehicles to end consumers struggle as well.

The Dealer Challenge 

There are several key challenges for auto dealers in recessionary periods.  First, dealers must compete for a smaller number of overall sales.  Furthermore, dealers are challenged to win business from Internet-savvy consumers who are much better educated on the true vehicle costs, financing options and aftermarket accessories than ever before.   Another significant challenge for dealers is sales forecasting.  To win consumer sales, dealers must be able to offer the right car at the right place at the right time for the right price.  Consequently, a dealer must be able to estimate the exact product mix they need on their lot weeks, if not months, in advance.  If dealers underestimate demand for popular makes and models they risk missing sales opportunities.  If dealers overestimate demand then they will be stuck with excess inventory which they may need to hold on their books for long periods of time.  Ultimately the dealer may be forced to offer incentives or discounts to sell excess inventory.  The challenge of how dealers can forecast consumer demand for vehicles is one of the most complex issues in the automotive supply chain.  I will defer that discussion for a later post.  Instead, I would like to explore the financial implications of overestimating consumer demand.

One of the challenges with excess capacity is the risk of obsolescence and depreciation.   Vehicles which remain in inventory for extended periods of time may decline in value.  The risk is higher for units acquired during the summer months preceding the new model introductions in the fall.  It is not uncommon for vehicles to remain in a dealer’s inventory for 90-120 before purchase.  However, during a recessionary period of low sales, some vehicles might remain in inventory for periods of up to 9 months. 

Another challenge with excess capacity is financing the inventory.  At any point in time a dealer may have a few hundred (or thousand) vehicles in stock each of which ranges in value from $15,000 to over $50,000.  If you do the math, you quickly begin to understand the financial challenges associated with holding inventory.  A dealer with 500 units each valued at an average of $20,000 is holding $10,000,000 in inventory at that point in time.  How do small businesses such as dealers afford this?   

Note that there is an increasing trend towards consolidation in the US dealer market as chains such as AutoNation, UnitedAuto Group, Sonic Automotive and Group 1 Automotive continue to purchase smaller franchises.  However, the majority of dealers by numbers are small or midsize companies.

Dealer Floorplan Financing 

Instead of leveraging their own working capital for inventory, dealers rely upon specialized short-term lending programs from their banking partners.  The financial institutions offer a line of credit upon which dealers can draw from to fund “floorplan” inventory.  Floorplan in this context refers to vehicles both in the dealer showroom and on their lots or extended storage facilities.  Lenders assess interest and various fees in exchange for the financing services. 

Floorplan Financing - How it works

1.       The dealer places an order with the automotive manufacturer OEM.

2.       The manufacturer ships the vehicles to the dealer location.

3.       The invoice for the shipment is sent to the dealer’s preferred floorplan lender.

4.       The lender transfers funds to the manufacturer under the terms of sale.

5.       The cost of the vehicle is applied to the dealer’s line of credit.  Interest is assessed for the duration of the vehicle’s presence on the showroom floor (or outside lot).

6.       Once the vehicle is sold, the dealer pays the lender for the amount financed.

The steps above are an oversimplification of the process.   A much more complex set of loan servicing, technical integration and relationship management activities occur behind the scenes.

Technology Complexity 

For example, a significant challenge in the floorplaning process is tracking the inventory of vehicles and the associated financing activities.  A complex set of information flows between the automotive OEM, dealer and financial institution must be orchestrated to track and finance each individual vehicle.  To reduce the costs of financing fees, all parties are incented to automate workflows using technology.  Ideally, the process works as follows:

1.       Electronic invoices are extracted from the manufacturer’s accounts payable system and transmitted to both the dealer and financial institution.

2.       After processing the invoice, the lender transfers funds to the manufacturer using an automated clearinghouse transaction.  Associated remittance data detailing the payment transaction is routed from the lender to the manufacturer.

3.       Once the vehicle is sold to a consumer, the dealer pays off the floorplan loan to the lender.  A payment instruction is routed to the dealer’s bank transferring funds into the lender’s account.

4.       Throughout the process, all three parties – manufacturer, lender and dealer – can view the status of financing activities and the location of inventory through a common web-based portal.

Of course, the key to success for automation of the workflows is B2B e-commerce technology.  Without integration and digital document exchange between dealers, manufacturers and lenders, the process would be significantly more complex and risky.  This is yet another powerful example of EDInomics at work.  Visibility to inventory and financing activities becomes even more critical during recessionary periods.  Financing is typically arranged for a few months for each vehicle.  Once a pre-determined threshold of days has passed, the lender will begin curtailing their risk, by asking the dealer to pay a percentage of the inventory value. The payment reduces exposure for the lender in the event of vehicle obsolescence.  Both dealers and lenders will closely monitor their risk exposure for long-term inventory vehicles.  We can expect the scrutiny applied by banks will be even stricter in the coming years in the wake of the subprime mortgage crisis.

I will offer one final thought.  This is less relevant to EDInomics, but an interesting aspect of the dealer floorplan market.  It has to do with the relationship dynamics between lenders and dealers.  Lenders collect interest income and administrative fees from the financing offered to dealers.  However, the end goal for the banks is not the interest revenues from the floorplan financing.  The margins on these types of commercial financing are relatively low.  The real reason that lenders offer floorplan financing to dealer chains is to capture lead referrals for consumer auto loans.  75% of consumers financing vehicle purchases use the dealer’s recommended lending institution.  As a result, the dealer segment, collectively, has an incredible influence on the consumer auto loan market.  Traditionally, the captive financing divisions of major OEMs (e.g. GMAC, Ford Motor Credit, Toyota Motor Credit) have dominated the consumer auto loan market.  However, in recent years traditional financial institutions have aggressively targeted the fast growing auto lending sector.  With outstanding loan balances for auto financing are forecasted to reach $1 Trillion in the coming years we can expect competition to increase.  Retail consolidation is affecting the market as well.  Larger chains which sell multi-brand product portfolios have lessened dealer dependence on specific OEMs and captive finance institutions.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Earlier this week we were fortunate to have Ken Vollmer of Forrester Research visit GXS headquarters.  The purpose of the meeting was to give Ken an update on our plans for 2008, but also to hear Forrester’s perspectives on the market.  One of the new concepts Forrester has introduced is the idea of “B2B Detachment” which Ken defines in his recently released report B2B Integration Trends: B2B Modernization as:

“The situation that exists when enterprises and their business partners rely on a sub-optimal solution for their electronic information exchanges.” 

In a nutshell, Forrester is describing the consequences that many large multi-national corporations are experiencing as a result of under-investing in their B2B programs over the past decade.  

 In the B2B Modernization report, Forrester identifies seven “Symptoms of B2B Detachment” 

1.       Inability to rapidly on-board new partners

2.       Inability to quickly roll out new/modify existing transactions

3.       Lack of support for ad hoc/unstructured B2B exchanges

4.       Difficulty in retaining qualified B2B support staff

5.       Difficulty in maintaining electronic links to large number of internal entities

6.       Inability to easily include B2B activity in process improvement efforts

7.       Inability of current system to take advantage of SOA 

I thought I would add my perspective on B2B Detachment as I found the Forrester list to be highly consistent with the challenges we see many of our customers experiencing.  And it explains the surge in the number of RFPs we have seen from large multi-national corporations seeking B2B outsourcing solutions over the past 36 months.  Value chains continue to evolve putting greater pressure on B2B organizations: 

·         Customer Demands - Consolidation through mergers and acquisitions continues to concentrate buying power into larger channel masters.  These large hubs are demanding highly customized, complex integration from suppliers to their ERP systems.   The common customer viewpoint is “Use B2B standards, but implement them my way.”

·         Supplier Visibility - Manufacturing, logistics, design and field service activities continue to be outsourced to third parties.  Brand owners are starting to build what Cap Gemini refers to as “Control Towers” to gain better visibility to their supply chain activities being executed by third parties.  Success requires tight B2B integration with these outsourcing partners.

·         Enterprise IT – CIOs continue to push aggressive enterprise resource planning projects.  Many enterprises are adding new supply chain modules to cope with the customer demands and supplier visibility issues outlined above.  Others are simply rationalizing and consolidating disparate ERP systems.  Both types of projects simply exacerbate B2B integration challenges as they require updating the maps which link ERP to external business partners.

A stagnant B2B integration platform will not withstand the mounting pressures of today’s highly globalized, largely outsourced value chains.  Challenged by skills shortages, capacity constraints and inflexible platforms, more large enterprises will be seeking relief from B2B integration by outsourcing to third party specialists.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

There is an increasing trend in B2B towards business partners sharing higher volumes of data.  Not only are they sharing new and different types of data, but the information is being packaged into much larger files.  Historically, the e most commonly exchanged transactions have been invoices and purchase orders, which are only a few kilobytes in size.  However, over the past 24 months, there has been a substantial increase in the exchange of larger files – on the order of are megabytes and gigabytes in size.   The phenomenon is occurring in nearly every industry sector. 

Examples include:

·         Check image files in banking

·         Call detail records in telecommunications

·         Satellite images in logistics

·         CAD diagrams in manufacturing

·         Point-of-sale, market basket and loyalty card data in retail

Large File Transfer in C2C 

The trend towards larger file transmission really should not be very surprising given the growth in file sizes that we have seen in the consumer segment.   For over five years now consumers have been downloading and sharing large audio and video files for home entertainment.  With the dramatic decreases in the cost of storage and networking, it is only logical that this trend would extend to business communications as well.  In fact, demand for large file transfer in the workplace has increased steadily in recent years.  Do you give a second thought to sending a 5MB e-mail attachment to a colleague at one of your business partners? 

Technology for Large File Transfer 

So which Internet protocols do B2B practitioners use for large file transfer?  The obvious choice would be AS3 or one of the secure variants of FTP.  While these protocols can facilitate the exchange of very large files they lack critical features such as checkpoint/restart.    Depending upon the size of the file, a transmission could take 15 minutes, 30 minutes or several hours.  What happens if a router hiccups or the server on either end loses connectivity half way through the transmission?  Without a feature like checkpoint/restart, the entire file transfer process may need to be restarted.  The problem is not limited to AS3 and FTP.  Other HTTP, SMTP and open standards protocols lack these large file handling features. 

Managed File Transfer Products 

So what do companies that need to transmit large files do?  Historically, they have been forced into buying a license from a vendor with proprietary “Managed File Transfer” (MFT) software.   Some of the MFT packages are based upon Internet standards, but with customizations designed to support larger file sizes.  Sounds good, but here is the catch. The technology only works if the trading partner you are sending the information to uses the same proprietary software product.  This is a great model for the vendor as it creates a viral effect that leads to high “stickiness” with a community of end-users.   However, it is bad for the customer who is now locked into a vendor’s proprietary software product. Owners of these proprietary software products have little negotiating leverage with the vendor.  If you talk to companies with MFT software they will tell you that their annual maintenance fees are about as painful as an adjustable rate mortgage.  

2008 Predictions 

What will happen with large file transfer in 2008?  I think we will see a continuing surge in large file transfer throughout 2008, which will put pressure on vendors and standards organizations to find better technology solutions.   It is too early to predict exactly what the outcome will be.  But one thing is for sure, with customer demand rising quickly, large file transfer is becoming a mainstream B2B function need rather than a niche technology. 

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Holiday EDInomics Part 2

There is a great article in the current issue of Business Week on the supply chain challenges Nintendo is experiencing with availability of its Wii console this holiday season.  This is an intriguing subject to me because it seems like every year there is one hot product that everyone wants, but no one can find.  Back in the 1980s we had “must have” gifts like the ColecoVision and Cabbage Patch Kids.  A few years ago the Sony Playstation 2 was the killer gift and then Apple’s iPod Nano. 

A few interesting insights on Nintendo’s Wii from the Business Week article:·        

• “Over Thanksgiving weekend, online retailer Amazon.com reported that its British site sold out its entire stock of Wii consoles in just 10 minutes.”·          
• “A search of eBay’s U.S. site pulls up thousands of listings for new Wii consoles, with bidding well above the suggested retail price.”  “Some…are going for triple the suggested retail price online.”

I’ve always wondered whether the hardware OEMs who manufacture these products intentionally short supply during the holiday season just to create a buzz.  Certainly, the hype around these “hard to find” products is successful in creating even greater demand.  One could argue that the hardware manufacturer enjoys higher margins from such an approach as they can sell the product at full list price.  Additionally, the OEM stabilizes sales across a broader time horizon throughout the year, rather than peaking around the holidays and experiencing lower sales in the subsequent quarter.  And with under-supply, there is no risk of excess inventory to manage.  All of these factors make an argument for intentionally limiting supply.  Or could it be that OEMs struggle to accurately forecast sales for these items, or for that matter, to manufacture in sufficient quantities to meet consumer demand.

The video game sector presents an interesting case study to examine this issue of supply and demand.  The industry economics are such that the video game consoles are typically positioned as loss leader products.  Higher margins are generated from sales of the actual games to the captive install base of owners.  Royalties from the game sales are shared by the publisher with the console manufacturer.  From a supply chain perspective, if the consoles are not in stock then game sales will suffer as the install base will be smaller.  Given this, it seems unlikely that any OEM would deliberately short supply.  Furthermore, with the fierce competition that exists between Nintendo, Microsoft and Sony, it seems unlikely that any OEM would risk losing market share during the key selling period by limiting supply.

So how does EDInomics fit into all of this?  B2B integration technologies are the key enabler that allows manufacturers to obtain demand data from their downstream channel partners, the retailers.  But that begs a larger question - What types of data can high tech OEMs use to better forecast demand for holiday season sales of hot products such as HDTVs, video game consoles and digital music players?  To build an accurate forecast will necessitate gauging consumer demand months in advance.  Demand signals such point-of-sale, loyalty or market basket data would probably less useful in this scenario.  It’s unlikely that console purchases in September or October would provide meaningful insights into demand in November and December.  In fact, an inverse correlation may exist as those in the market for a game console will probably defer their purchase until the holiday season.  More accurate sources of demand data might be the frequency of page clicks on popular on-line retail sites such as bestbuy.com;  links to the product on personalized “Wish Lists” such as amazon.com; or the number of bids on auction sites such as eBay.  Or if one could somehow eavesdrop on the holiday wishes children are telling Santa at local malls…  There are obvious privacy challenges with all of the above, but there are perhaps ways that data could be aggregated to prevent identification of individual consumers.

Once demand data is aggregated, a critical factor in supply chain success will be the ability of the OEM to propagate this demand data to multiple tiers of the value chain.  Regular updates of forecasts and inventory need to be shared with the contract manufacturers who produce the consoles; their suppliers who fabricate the semiconductors and components; and, of course, game publishers who distribute the software.  Access to electronic information whether it is via direct integration of ERP systems or using web portals will be a necessity to respond quickly to new demand signals.

With regard to Nintendo, I think the real story is not so much the supply chain challenges it has experienced in the past month, but rather the phenomenal sales success the Wii product continues to enjoy.  One year after the product introduction, Nintendo’s Wii is still experiencing amazing success in the marketplace.  Sales growth continues even with the recent introduction of Sony’s Playstation 3.  Nintendo’s quarterly earnings reflect the results.  On October 26^th the Wall Street Journal reported “Nintendo’s group net profit rose to 132.42 billion yen ($1.16 billion) for the half ended Sept. 30 from 54.35 billion yen a year earlier. Sales for the Kyoto-based company more than doubled, to 694.8 billion yen from 298.82 billion yen.”  Wii can only be envious of such strong results…Here are the links to the Business Week and Wall Street articles I referenced above: Business Week - A Long, Long Wait for a Wii, -http://www.businessweek.com/magazine/content/07_51/b4063030297026.htm?chan=magazine+channel_newsWall Street Journal – Nintendo Plays it a Wii Bit Cautious http://online.wsj.com/article/SB119697501146616201.html

Steve Keifer 

© Copyright 2007 GXS, Inc.  All Rights Reserved.

In my first blog entry, I introduced the concept of EDInomics, which is a newly invented term I created as the title for this blog.  In this entry, I would like to formally define the term: 

EDInomics - E •D •I •nom •ics [e-di-nom-iks] -       Noun

1.       A study of how Electronic Data Interchange (EDI) and related Business-to-Business (B2B) e-commerce technologies can be used to improve business performance by reducing administrative costs and accelerating revenue growth.

2.       A study of the market dynamics of vendors, technologies and regulations in the business-to-business electronic commerce market

3.       A study of the passenger and commercial aircraft traffic patterns at Scotland’s Edinburgh Airport.

While this particular term, “EDInomics,” is new, the concept of studying the economics of a particular social, cultural, political or technology phenomenon is not.  In 2005, University of Chicago economist Steven Levitt and New York Times journalist Stephen J. Dubner published a fascinating book called Freakonomics.  This was followed in 2006 by authors Don Tapscott and Anthony Williams who published a book called Wikinomics.  In Freakonomics, Levitt and Dubner unveiled a series of amazing theories about topics such as the potential relationships between legalizing abortion and the increase in crime in America and the selection of first names at birth and the associated impacts on long-term career success.  In Wikinomics, Tapscott illustrated how the Internet and web 2.0 technologies are enabling new levels of collaboration never before possible for projects ranging from sequencing the human genome to designing software programs.   In EDInomics, I hope to unveil insights on the impacts B2B technologies have on the integration of the global economy, financial performance of individual corporations and the experience of  everyday consumers.  You may be surprised to realize the unlikely impacts that technologies such as EDI have on your life.   Poor implementations of B2B e-commerce can be pinpointed as the root cause of many everyday phenomenon, including:

·         Why your plane is unnecessarily delayed on your next business trip

·         Why you were disappointed with your Christmas presents

·         Why your health care expenses are rising so much every year

I will only focus on the first two elements of EDInomics in the definition above.   We will leave number three for the British Airport Authorities.  After all, only Google and Yahoo! seems to be confused about the difference between the B2B technologies called “EDI” and the Scottish airport with the same three letter designation.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

I first learned about ISO 20022 some 18 months ago.  I remember first thinking about the name.  I said to myself this new payment standard must be intended to replace the 20021 different formats the global financial community uses today for payments.  Unfortunately, while perhaps very fitting, that is not the origin of the name.  However, that is the intention.  While there probably are not 20,000+ standards yet, it is not an understatement to say that there are hundreds if not over a thousand in use today.

Why are there so many payment standards? 

Banking, like most service sector segments, has historically been a business that focused on local markets.  It is only within the past 20 years, that regulations changed so that banks could easily operate within more than one US state or that banks could economically operate in multiple countries within the EU.  As a result, when electronic funds transfer and payment technologies were introduced in the 1980s, each country created their own technology standards in isolation.   Message formats were standardized based upon the central clearing and settlement systems operated by each country’s central banks.  For example, in the US, Federal Reserve’s ACH and FedWire; in the UK, BACS and CHAPS; in France, SIT and so on.  Today, not only do we have different payment message structures for each country, but each country also has different file formats for each payment type (e.g. check, automated clearinghouse (ACH) and wire transfer).  And it doesn’t stop there.  It is not only the message structure that differs between payment files, but the content as well.  For example, a payment in one country may require a complete street address, city name and postal code, the same type of payment in another country may only require the postal code.   To complicate matters even further, the non-bank corporations tend to utilize a different set of standards (e.g. ANSI X.12 , EDIFACT, OAGi) to exchange payment information with their banking partners. 

Numerous organizations including OAGi, RosettaNet and TWIST have each made an attempt to standardize payment message formats at varying levels.  ISO 20022 is the most promising effort yet towards a common payment information standard. 

What is ISO 20022? 

ISO 20022 is also known as UNIFI (UNIversal Financial Industry message scheme).  The official definition from www.iso20022.org is “UNIFI provides the financial industry with a common platform for the development of messages in a standardized XML syntax, using:·         A  modelling methodology (based on UML) to capture in a syntax-independent way financial business areas, business transactions and associated message flows;·         A set of XML design rules to convert the messages described in UML into XML schemas.”  Although, the discussion above describes ISO 20022 in the context of payments, the standard has ambitions which extend far beyond that domain.  The scope of ISO 20022 is all financial messages including Payments, Foreign Exchange, Trade Finance and Securities.  And the standard is beginning to gain widespread adoption as organizations such as TWIST, OAGi, RosettaNet and SWIFT have begun to embrace it.Who is using ISO 20022? ·         SWIFT – SWIFT is embracing ISO 20022 as the preferred XML format for messages exchanged on the SWIFTNet service used by over 8,000 financial institutions in over 200 countries to exchange financial transactions.·         SEPA - ISO 20022 is one of the key unifying standards that will harmonize payment technologies and standards throughout the European Union with the Single European Payments Area (SEPA).  For example, ISO 20022 will be a foundational standard for TARGET 2 (Trans-European Automated Real-time Gross Settlement Express Transfer System), the next generation, real time settlement system for Pan-European payments. 

If you were to survey CIOs at Global 2000 companies about their 10 most important IT applications, I can almost guarantee you that B2B e-commerce wouldn’t make their list.  In fact, many of the CIOs would even go so far as to tell you that they shouldn’t have to pay for these technologies any more.  But I find this to be a very naive view – especially when you step back and look at the bigger picture of how industries are restructuring in today’s economy.   Companies are becoming more and more specialized, outsourcing more and more business functions to third parties.  This transformation is occurring in every industry and every business process.  In the supply chain, retailers and OEMs are outsourcing functions such as design, development, manufacturing, logistics, sales and service to third parties.  As business process outsourcing becomes more popular we are seeing more finance, IT and HR disciplines being transitioned to third party specialists.  This is significant because it means that companies are more dependent than ever on business partners!  Consequently, enterprise systems are more dependent upon external applications to get the data they need to function.  My own qualitative analysis suggests that over 50% of corporate data now originates outside the enterprise.  That means if you cannot connect to your business partners, your IT systems won’t function properly and you cannot run your business.  Does that sound like an area to under-invest in?  Yet, unfortunately, most enterprises don’t take such a strategic view towards B2B e-commerce. 

In this blog I will explore the continually evolving role of B2B e-commerce technology plays in supporting the needs of industry.  I have responsibility for the vertical industry strategy at GXS, which means that my team monitors the trends in sectors like automotive, retail, high tech, pharmaceuticals, logistics, banking and insurance.  Being a global company, one of our challenges is trying to understand the differences and similarities across different regions of the world such as Europe, Asia, North and South America.  There is a lot of fascinating activity occurring in the B2B segment today.  Whole new communities of users in emerging markets such as China, India and Eastern Europe are just starting to use B2B.  In mature markets such as the US, Western Europe and Japan, corporations are using B2B not just as an instrument to cut costs, but as a growth enabler.  Every day I see examples of how customers are utilizing B2B technologies to accelerate time to market for new products and to differentiate their offerings by becoming easier to do business. I refer to this collective set of activities by which B2B is helping to improve business performance as “EDInomics.”  In this blog, I will share my insights on EDInomics — the primary goal being to challenge many of the current misconceptions that outsiders and, unfortunately, many insiders have about B2B, EDI and the related vendors.  I think you will find that B2B is a highly underrated technology, that isn’t on the decline, but, in fact, has yet to peak…

Steve Keifer 

© Copyright 2007 GXS, Inc.  All Rights Reserved.