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EDI & ROI Don’t Always Mix

In an economy that requires every decision to be economically justified, every business process, application, and change to organizational function is subject to an ROI (return-on-investment) evaluation. But is there a return on investment calculation for electronic data interchange (EDI), or is ROI simply a matter of keeping or gaining a customer?

For suppliers, a decision to participate in EDI with a customer often comes down to asking whether you want to do business with that particular customer. Most retailers, and an increasing number of up-chain suppliers, will only do business with suppliers that will do business their way, which means via EDI or some other kind of electronic transaction set.

Is it realistic to commit the resources necessary to determine an ROI for EDI? This comes down to the difference between finding a return on investment and maximizing the efficiency in terms of cost for a function like EDI — two fundamentally different disciplines. Presumably, the function of ROI is part of a decision making process, one that helps an organization determine whether its efforts and expenditures are worthwhile. This is far different from exploring options that lead to decisions about which processes, tools, and methods should be used to improve functionality of a given process.

Discussions about analyzing the investment to be made on implementing EDI are neverending. But when a supplier is faced with the demands of a new or existing customer, the ROI determination generally amounts to a question of whether the supplier wants to accept orders from this customer or not. That’s not to say there is no calculus in the process, but those calculations are fairly straightforward, amounting to comparing the expected profitability of the relationship to the startup and ongoing costs of an EDI enablement. Given the wide range of options available from EDI software and services providers, there are likely to be few cases in which the costs of enablement outweigh the profitability of the partnership.

The second evaluation — that of determining the most advantageous EDI tools and facilities available for a particular company — is a much more interesting and complex exercise, and one that should be taken on later in the life of a company’s EDI experience. But at that point the valuation is based on reductions in expenses, offloading of responsibilities, replacing older and possibly more complex systems, and many other factors. These issues are normal process lifecycle issues, and while there may be some ways to judge a return on investment based on the changes being contemplated, the point of deciding whether the investment is justified has long since passed when the company decided to trade electronically with its trading partner.

Is there an ROI to EDI? For suppliers to larger manufacturers and to retailers, the question is more akin to asking whether a company needs to have a telephone. It’s unlikely that an active and growing supplier can survive and flourish without it. But there is a plethora of choices once the initial decision has been made.

10 comments on “EDI & ROI Don’t Always Mix

  1. Houngbo_Hospice
    August 11, 2011

    The standard EDI should guarantee  significant reduction of the processing time and cost. Only then can EDI and ROI “peacefully” mix, I suppose.

  2. Barbara Jorgensen
    August 12, 2011

    This is a really interesting question. In electroncis distrbution, it generally isn't even posed. If a supplier, distrbutor and custoemr want to be linked, it's EDI or nothing. The industry has been looking for a less expensive laternative to EDI for decades and hasn't found on yet. The cloud is promising, but still a ways away. Maabe if mroe copaneis ran this litmus test better ways would be found.

  3. Scott Koegler
    August 12, 2011

    Barbara – I'm pretty sure that EDI is (and will be) the low cost solution, simply because it is so pervasive. The economies to be gained are by using advanced facilities like (as you point out) cloud or SaaS platforms. These bring economies of scale and reduced internal costs by moving the capital and maintenance costs of supporting locally installed EDI processing applications to multi-tenent platforms.

    It's my belief that costs and efforts required to replace EDI would be extreme and not achieve any real cost reductions – even if they were ever to be enacted. The costs of EDI don't lie in the format, but in the old-school transport and support systems.

  4. Barbara Jorgensen
    August 12, 2011

    Hi Scott–amazing you could read through the typos of the last comment 🙂 From what I understand, at least in electronics distribution, just about every EDI link (supplier to distributor, distributor to customer) is unique. Therefore, a significant investment is required for each link. Distributors such as Arrow and Avnet, which have hundreds of suppliers and hundreds of thousands of customers, therefore spend a lot of money on EDI. While it's true that they can leverage economies of scale, and many of these costs are NREs, it's still a significant outlay. Distributors consider it cost of doing business, so I guess the ROI could be measured. I'll ask them about it for a future post.

    For small companies, on the customer and supplier side, the cost can be prohibitive. That's why e-commerce has been examined as an alternative, but lack of a standard continues to hinder that. RosettaNet had a limited adoption but is still used, I think.

    Really interesting blog–thanks

  5. Scott Koegler
    August 12, 2011

    Barbara – Yes… I do understand the differences in transaction details. However that is precisely one of the advantages of a SaaS based service. As an example:

     

    Arrow has only 1 set of transaction details that all their suppliers must adopt. Avnet uses the same EDI documents but has different details. Their suppliers (many are the same as Arrow's) must now have 2 sets of transaction maps – one for each customer. And so on, so that the more customers the supplier has, the more document maps they need to support.

    Imagine that Arrow and Avnet both use a SaaS based service (not necessarily the same service) that understands their document maps. They keep them updated and any suppliers can use that SaaS EDI service to map their own transactions to their customers. That means the suppliers only have their own document maps to deal with, and those are translated to/from their customers by the SaaS service.

    In addition, changes that Arrow makes to their maps are incorporated one time by the SaaS provider, meaning the supplier does not need to know or manage their customers' changes.

    That is the economy of scale that I'm talking about.

  6. Barbara Jorgensen
    August 12, 2011

    Absolutely agree on the advantages of SaaS. Do you know why it hasn't caught on the the channel yet?

  7. Scott Koegler
    August 12, 2011

    It's catching on in some verticals, but my guess is that most larger enterprises like Arrow have existing internal EDI systems and entrenched constituents. SaaS essentially outsources 80% of those internal functions. So unless there is some reason to change (acquisition, internal structure) there is little incentive for existing staff to recommend change.

  8. DataCrunch
    August 14, 2011

    It’s just a matter of time.  Many companies utilizing EDI are also running their systems on legacy mainframes, probably still using the original COBOL or RPG applications.  Eventually they will modernize as the expense to maintain these legacy systems and transactions will become too costly.  Give it 5-7 years.

  9. Tim Votapka
    August 15, 2011

    EDI should almost be synonymous with ROI, particularly if you have a system that's been written for the needs at hand as well as for the needs to come. I've worked with an EDI provider and they stress the point that a good system is one that can grow as the transactional volume grows.

  10. mfbertozzi
    August 15, 2011

    I agree with you Dave. Especially for Western manufacturers, EDI are associated to legacy (for instance invoice, administration, account). The only doubt, actually is how is feeling from companies in migration towards new platforms or services (as SaaS) due permanent status of financial crisis.

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