The adoption of Internet-EDI in SMEs 1,2 Sveinn Vidar Gudmundsson Toulouse Business School 20 Blvd. Lascrosses – BP 7010 31068 Toulouse Cedex 7 France and
Linda van Schieveen Intercai Academy P.O. Box 9256, 3506 GG Utrecht, The NETHERLANDS Working Paper Presented in the NOFOMA Conference 2001, Reykjavik, Iceland
This version May 2005
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Corresponding author. Tel: +33-5-61-29-4843; E-mail:
[email protected].
The authors would like to extend thanks to EANCOM Nederland for supporting this research. The views and results expressed in this article are those of the authors alone and do not represent or imply in any way those of EANCOM Nederland.
The adoption of Internet-EDI in SMEs
ABSTRACT:
The success of EDI depends on full integration throughout the value
system, so mass adoption is necessary through the participation of SMEs. Historically, SMEs were excluded due to the exclusive features of EDI such as cost and high volume required, but should be able to make use of EDI now, after a continuing stream of enabling software and technologies made available over the Internet. This research asks if SMEs are indeed moving towards investment in Internet EDI (IEDI). Our findings show that there is indeed market potential for IEDI. The potential user firms that considered IEDI as a viable option within 5 years view the benefits of IEDI more positively on almost all accounts compared to SMEs that are not interested in using IEDI. It is evident from the study that firms feel in general that there is lack of clear information and lack of demand from industrial partners. Thus, it is argued in the paper that without strong stimulation from the business environment, firms will not invest in IEDI. Key Words:
Internet-EDI; EDI; SME; supply-chain; logistics; e-commerce.
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INTRODUCTION
EDI is one of few and also the most popular electronic document exchange platform that exists for business to business (B-B) commerce. Prior studies have shown that international trade involves at least 20 types of enterprises exchanging over 100 formal documents, supplemented by nearly 40 less formalized communications [1]. Using EDI to facilitate these transactions can lower total operation costs up to 30% according to a KPMG study [2]. However, it has been estimated that EDI Value Added Networks (VAN) exclude about 60% of businesses, mostly SMEs, due to unaffordable costs and technical complexities [3]. In the last few years new enablers have appeared, such as Internet based EDI, which can reduce the cost of B2B document exchange for SMEs. Yet, there is little known about the views and abilities of SMEs to take up these new technologies, which are important for full integration of supply-chains. Many definitions exist for EDI, one suggested by EANCOM mentions automated and electronic, structured and standardised messages: “EDI is the automated, electronic exchange of structured and standardised messages between computer systems of different organisations” [4]. In the definition, automation, refers to the replacement of human handling by integrating the information systems of organisations, a direct benefit of EDI, while, electronic refers to the intra-structural means of communication. Thus, this definition holds that without full automation no real EDI is applied, e.g. messages sent to or from a fax machine would not capture the essence of EDI. Furthermore, EANCOM distinguishes between structured and standardised messages. Structured messages are necessary for computers to communicate seamlessly but standardised communication is helpful to avoid misunderstandings between business partners. Recently there has been a renewed interest in the potential of Internet EDI [5] mostly due to possibilities enabled by the eXtensible Mark-up Language (XML). Internet EDI (IEDI) reduces the costs of hardware and software necessities, therewith making it possible to extend the EDI trading community to SMEs. As the extent of the benefits that can be obtained from using IEDI largely depends on value chain integration, it is very important to know whether SMEs are considered qualified trading partners to integrate external business 2
processes. It seems that uncertainty exists about the potential benefits of IEDI for SMEs and little profound research has been done on this topic from the perspective of SMEs. Existing studies of positive EDI impacts largely fall on the EDI champion side, the dominating parties [6]. The blurred area between the (theoretical) promises of IEDI and the benefits obtained in reality by SMEs in this field of e-commerce is an important subject of research. The goal of this research is to determine to what extent smaller firms visualize benefits by implementing IEDI and the associated barriers to such implementation. Theoretically, for most forms of IEDI the benefits obtainable are the same as those of conventional EDI. However, the relative market position of SMEs makes it questionable whether they are able to derive the same benefits from using IEDI as their bigger counterparts. In summary the following question guided our research: What benefits and barriers do SMEs see in deploying Internet EDI?
RESEARCH FRAMEWORK
In the following section we will cover the background and develop the hypothesis that guided our research. Background In the evolution of information technology, alternative and substitute products are following up each other in rapid pace. A comparison between IEDI and its rival business tools is necessary to estimate the chance of mass adoption. Several distinctive communication options are described below. A distinction is made between EDI using other communication media than the Internet, and non-EDI related technologies based on the Internet. Table I about here
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The main selection criteria for EDI are listed in Table I: a direct link, a value added network (VAN), IEDI and Workstation EDI. A direct link is a point-to-point link that is employed to trade among closely affiliated companies [7]. This system excludes outsiders because of the technical complexity of handling more than one standard. A normal public telephone line or a leased line can be used to transfer the data, of which the latter offers better performance and a higher communication speed. When implementing a point to point link a company needs advanced knowledge of computers, telecommunication, and EDI to set up communication between trading partners and to integrate the data with in-house applications [7]. A Value-Added Network (VAN) is a third-party network that provides a proprietary communications network to connect trading partners, regardless of individual hardware platforms or communications protocols [7]. It supports links to its network for all of the main computer hardware and software operating environments. The VAN actually serves as a normal post delivery service in which the customer puts its message in a mailbox and the delivery of the messages is taken care of. A VAN provides extra services to its companies where other networks stop. It transmits, translates, receives and stores messages while providing high levels of data and transfer security [8]. VANs also provide the end user with other services as a full audit trail, interconnection to other networks, and converting documents through different formats and standards. Above mentioned features are provided by nearly any VAN. VANs tend to differ mostly in their levels of expertise and involvement in the management of EDI rollouts to suppliers and their implementation and support services [8]. However, in general it can be said that VANs do not tend to get too involved with their customers. VANS mainly support high batch processing of messages up to the point where a company has an operational EDI system. The main selection criterion of VANS is based on which VAN organizes the EDI of the largest trading partner [8]. Until now, this third party service is still used by most companies that have implemented EDI [7]. In Holland more than two-thirds of EDI-using companies use a VAN. Notwithstanding many companies find the use of a VAN not cost-effective when compared to the services provided. The Internet is a serious threat to the success of VANs, explaining why many of them are starting to offer additional Internet services to connect SMEs to their networks.
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Many SMEs that are forced by their trading partners to adapt to an EDI based business environment have adopted Workstation EDI system, which allows them to receive an EDI order, which is then printed out via a printer or a fax as a hard copy and then processed by manually entering data into in-house sales order processing system. Data has to be re-keyed which invariably results in errors, and difficulties arise especially when audit trails are needed [7]. Usually, SMEs have only part of the paper-based information stream automated and no access to internal data is provided between business partners. It is obvious that in this case EDI does not offer additional value in the chain as no system integration is achieved. Two ways of using the Internet for conducting EDI can be identified: IEDI, for which Email services or file transfer protocol [FTP] technologies are used, and WEBEDI [9]. In the case of IEDI, the Internet is used as a platform for the exchange of transactions only. Similarly, when using a VAN or a direct link, the data of the EDI transactions can be integrated into the internal information systems. In E-mail EDI messages are transmitted in the same way as personal e-mail messages, i.e. messages are sent as attachments to the mailbox of trading partners. With FTP EDI entire files of transactions are transferred at the time, which is useful when the sequence of collecting and sending batches of electronic transactions to companies is repeated frequently [10]. WEBEDI does not enable companies to insert data automatically into their internal information systems. In this case of a proprietary kind of EDI, architecture is created on the back of the Internet web technology. This approach is used mostly in the B-C sector, and is gaining popularity in the B-B sector to reach smaller companies. WEBEDI initiatives do usually not make use of EDI standards [11]. In this context, an important development was the eXtensible Markup Language (XML) for the Internet and EDI, we mentioned earlier in this article. The value of XML/IEDI lies in the fact that the know-how of business processes, captured in EDI messages, is put in a Web environment, where the same file can be viewed by any user or can be processed by any application [12]. In this way, XML can replace EDIFACT1 as syntax. With XML/EDI both computers and humans can read the message. An XML/EDI message can travel throUGh an organisation before it is sent to another organisation, each 1
EDI standards are defined techniques for structuring data into the electronic message, comprising the syntax,
the message design rules, and the directories. Many more content specific standards exists, as EANCOM for the consumer industry, that are based on the EDIFACT syntax. 5
time adding new information, and switch between humans and applications along the way. Thus, EDI will become more embedded in the workflow of e-commerce applications. However, the danger exists, as with traditional EDI, that individual parties will develop XML definitions that are not compatible. The Internet can also offer non-EDI type substitutes that are transparent, easy to use, and cost effective information and communication platforms, where an almost seamless tuned logistical process is made possible [9]. Federal Express is one of the logistic services that use the Internet to offer additional services to its customers by means of FedExNet. Customers can download software to order, track, and trace their packages from the FedEx homepage free of charge. The company now also offers additional customer services as onscreen preparation of air-shipment documents, storage of address books, and management of shipping history information [13]. Another initiative is the Rosettanet2 designed to complement EDI with deeper e-commerce and IT industry-specific electronic business interfaces, which not only address basic transactional data, but also encompass all aspects of a commercial relationship. The initiative led to the development of a library composed of a technical and a business dictionary. This library can be shared by the industry sector and enables companies to share a common language to do business, thereby eliminating disparity. This enables reconfiguration of the value network at lower integration costs, helping manufacturers to improve production planning, distributors to bundle product information for their resellers, and corporate purchasers to return handling at resellers and increase procurement efficiency [13]. We have now covered the background to our study very briefly. The following part deals with the specific hypothesis developed for the study. Development of hypothesis Each industry has its own specific information needs for which it may require very specific usage of particular messages, segments or data-items, the use of specialized segments
2
This is a project supported by a wide industry consortium and managed by CommerceNet since 1998
(Timmers, 1999)
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within messages or data-items within segments, and even purpose-specific messages [14]. Therefore flexibility is an important requirement to ensure that the needs of different industries can be expressed and communicated. Higher flexibility on the other hand, requires extra capabilities of system and human process capabilities. This brings along higher complexity because the more options there exist to communicate the more confusing the system will be for its users and the software applications. A continuous trade-off is being made between flexibility and the complexity of electronic messaging by using standards. This is one of the key obstacles to the diffusion of EDI [14]. The flexible disposition of the Internet opens an opportunity for competing transaction systems that need not to be based on EDI standards. We can assume that an IEDI is competitive when it has the potential to obtain a higher market-share than its competing and substitute business tools added together. This is because, the extent of business advantages that IEDI enhances directly, depends on the adoption of IEDI throughout the value system. Therefore, IEDI adoption is closely linked with the market potential of substitute business tools for IEDI. Thus, Hypothesis 1 (H1): Anticipation of substitution technology will have a negative effect on adoption rates of IEDI. Alignment between organizational features, company strategy, and information systems is assumed to be of importance in IEDI adoption [15]. As the adoption of information systems is positively correlated with the awareness and knowledge of people [16] a priori assumption was made that the more central decision-making is, the less beneficial for the adoption of IEDI. The counter argument is that a centralised organization structure tends to facilitate quick acceptance of innovations requiring organizational standardization [17]. Furthermore, according to Thong [16] businesses in different sectors have different information processing needs, and those in more information intensive sectors are more likely to adopt information systems than those in less information intensive sectors. Finally it has been suggested that organizational size and willingness to invest in EDI is correlated [18, 16, 19]. Thus, Hypothesis (H2): Organizational characteristics have an influence on the willingness of SMEs to adopt IEDI.
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Another factor that might be of influence in the willingness to use IEDI is external pressure. As a result of the network nature of IEDI and the relatively vulnerable market position of SMEs, external parties such as suppliers, consumers, and competitors are anticipated to exert an important influence on the adoption of IEDI. Thong [16] stated that competition increases the likelihood of adopting innovation. As for the value-chain partners, findings show that coercive power of trading partners might be the only reason for small firms to engage in IEDI [20]. Conversely, when technological unpredictability is present, as now due to the e-commerce revolution, firms tend not to establish long-lasting linkages with partners because they may wish to retain the flexibility to terminate relationships and switch to partners with more appropriate technological capabilities [17]. Thus, Hypothesis (H3): The potential user group [PG] of IEDI faces higher external pressure of suppliers, consumers, and competitors than the none-user group [NG] of IEDI. In a report by Booz, Allen & Hamilton [21] it is argued that strategic advantages rather than operational advantages lead to a long-term competitive advantage. Senn [10] argues that to follow a successful strategy, a company should not just try to obtain cost savings, but to generate additional revenues. However, Iacovou et al [20] state that small firms face more difficulties in utilizing the benefits of IEDI fully and to integrate it with their systems. When operating IEDI parallel to business processes, is it hardly possible to obtain strategic benefits. Thus,
Hypothesis (H4): The potential user group is not expecting that IEDI will provide longterm strategic benefits The barrier to EDI adoption by SMEs have usually been named as high investment costs, causing it to be exclusionary for SMEs who are faced with lower financial resources and lower volume of transactions. The Internet EDI may solve this problem by making EDI easier to use, cheaper to implement, and more accessible to a broader base of potential users. However, it is not clear how well businesses are aware of EDI via the Internet or which weight they place on various barriers. Thus, Hypothesis (H5): Perceived barriers to the adoption of IEDI should be significantly higher among the none-user group [NG] than the potential user group [PG]. 8
Figure 1 about here Figure 1 shows a model of influencing factors of IEDI adoption. Depending on availability of substitutes, organizational acceptance and external pressure, SMEs will have to weight the perceived benefits against the barriers to adopting IEDI. The outcome is rate of adoption of IEDI. Since EDI standards allow communication between a wide range of businesses, and the Internet is providing for low cost communication platform, a priori assumption is that IEDI will remain superior over more flexible but non-standard platforms. Thus, Hypothesis (H6): IEDI will reach wide scale adoption as a business e-commerce solution in the short-term.
METHODOLOGY
The sample is taken from members of EAN (±5000 members) in the Netherlands. EAN is composed of several organizations of producers, suppliers, consumers and logistics service providers, who strive for the integration of logistics processes and information streams in international commerce. The criterion used to classify SMEs was annual revenues3. Firms were selected that had up to nine million Euros annual revenue. This resulted in a total sample of 3649 EAN Nederland firms drawn from various industry sectors,4 of which 3416 were usable. The total amount of questionnaires returned was 500, an effective response rate of 14.6 percent.
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Firms are classified in five groups: 0-0.5, 0.5-1, 1-2, 2-10, and 10-25 million guilders of annual revenue.
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Firms are classified in thirty groups: provisions, chemist’s, hotel restaurant and catering industries, do it
yourself stores, ironmongery, automobile parts, building materials, mixed branch, special department stores, household articles, sound carriers and related articles, toys, cameras and related articles, office articles, fashion, white and brown wear, daily papers, installation branch, healthcare, transport companies, logistical services, consultancy firms, translation software, network services, system houses, scanning equipment, packaging material, agriculture, metal industry, government 9
The respondents were subdivided into three groups according to their willingness to invest in IEDI within the next five years: the user group [UG], the potential user group [PG], and the non-user group [NG]. Only 3.6 percent of respondents claim to make use of any form of IEDI. This low percentage makes it quite difficult to make valid statistical analysis for this group. However, we found that no significant difference was between the UG and PG for all except two variables. Thus, for the purposes of this study these groups were considered near identical. Questionnaires were sent by post and by e-mail. All attitude items were measured on a five-point Likert Scale representing a range from “strongly influential” to “weakly influential”. A prior test of the questionnaire was conducted through a preliminary survey among 5 representative firms. After this, minor adaptations were made in the questionnaire. After receiving the questionnaire, the respondents were offered to call a help desk during office hours or to send questions by e-mail. To check whether the responses were representative for the entire sample, non-response bias was assessed by conducting a posterior telephone survey (4 percent of total sample) among non-respondents. The general characteristics of this group can be used to make assumptions about non-respondents. A ttest was performed between the “voluntary” respondents and the “telephone” respondents. Except for the variables stability of suppliers and stability of customers, no significant difference was found between the two groups at the five percent significance level. Sample Description In Table II classification of the sample and respondents can be seen. Most of the sample falls into the largest two revenue categories D and E, in accordance with the distribution in the database. Table II about here This distribution, differs slightly in terms of respondents where the proportional response for annual turnover categories is about 5 percentage points higher for group E and 6 percent lower for group A. For the organizational size classification the distribution is similar with the largest difference being in category two or 4.8 percent. We conclude that for annual turnover and organizational size measured in number of employees, the 10
distribution of responses reflect fairly well the distribution of the sample into the categories.
FINDINGS
In the following part the findings of the research are presented. The sections are divided according to findings for each of the hypothesis. Substitutes One of the variables that influences the likelihood of IEDI usage is the knowledge of the individual firms of other inter-organisational information systems, that is, substitutes for IEDI. Table III shows the results and can be used to estimate the market potential of IEDI and the degree of rivalry between the different business tools. None of the alternatives shows an unusual peak. Although, NG is obviously less aware of the EDI technology in all forms compared to the PG. Table III about here Assessing the different perceptions of alternative business tools for the different usergroups by means of a t-test does confirm that the PG shows overall more interest in substitute services. All means are less than two on a scale of one to four, indicating that the majority of firms are not seeing substitute services as a future option. Based on these findings substitute services to IEDI were at least not yet embraced by SMEs at the time of the survey. Thus, we found that hypothesis H1 is not supported.
Key organizational features In Table IV the variables on organisational structure and product type do not show significant difference between the groups. The variables that measure the size of a company show significant differences between the groups, turnover (p
