EDI COST/BENEFIT ANALYSIS: DEVELOPING A METRIC FOR AUSTRALIAN INDUSTRY

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1 EDI COST/BENEFIT ANALYSIS: DEVELOPING A METRIC FOR AUSTRALIAN INDUSTRY Sherah Kurnia Paula M.C. Swatman Electronic Commerce Research Group Department of Information Systems Monash University, Melbourne, Victoria skurnia@ponderosa.is.monash.edu.au paula.swatman@is.monash.edu.au Abstract Electronic Data Interchange (EDI) has been a major document exchange since the mid 1980 s in Australia. Despite its potential benefits, however, many enterprises are still reluctant to implement EDI at least partly due to the difficulties of justifying the investment. This paper describes a long-term research project investigating the development of a generic EDI cost/benefit. The project is divided into two phases: an initial phase, in which individual researchers develop s for individual organisations; and a second phase, in which these s are tested and refined into a generic format. The paper describes the research to date, summarising the industry-specific s completed so far. Keywords Electronic Data Interchange (EDI), cost/benefit evaluation, Electronic Commerce INTRODUCTION Electronic Data Interchange (EDI), the computer-to-computer exchange of standards-based inter-company documents and information (Coathup 1988), is a major enabler of electronic commerce. Its ability to provide a medium of exchange for business documents as diverse as purchase orders, ship container bay plans, or quarantine export declarations, has made it an essential element of electronic commerce for many organisations and industries. EDI not only facilitates faster and more accurate communication, but it also supports systems which span organisational boundaries and enables management of the supply chain in many industries (Mackay, 1992). EDI, while being merely a comparatively simple set of standards for document layout, actually allows enterprises to respond to new opportunities and to the constant pressure for greater productivity, efficiency and responsiveness to the customer s needs (Pregl and Butina 1996). While it has crucial technological components, it is more concerned with changing business practices. EDI facilitates the radical restructuring of the business procedures of an organisation, leading to a paper-less environment, where the real benefits of EDI can be fully exploited (Swatman 1993).

2 EDI offers a number of benefits, which can be categorised as either operational or strategic (Annis 1992): operational benefits are normally short-term benefits and stem from the importance of EDI to internal daily business operations they include enhanced speed, increased cost savings, improved productivity, efficiency and accuracy; strategic benefits are long-term benefits and they impact the functioning of a company - they include enhanced responsiveness, improved trading partner relationships, improved management, and improved customer service. Despite the many advantages obtainable from EDI; and the lower prices and improved quality of today s computers and communications equipment, many organisations (particularly small and medium sized enterprises) are still reluctant to adopt this technology (Ferguson and Hill 1988; Parker and Swatman 1996; Tung and Turban 1996). The question of why EDI has been less successful than was predicted is the question for researchers in this field. Many reasons have been suggested for the somewhat disappointing uptake of EDI, including: the difficulty of identifying the benefits obtainable from EDI; the costs of EDI implementation and maintenance; lack of top management commitment to the implementation of EDI; concerns regarding the costs associated with EDI hardware, software and value-added network subscription the complexities of implementing EDI and of mapping internal files to EDI documents; and inadequate or inappropriate forms of training in EDI implementation and use (see, for example, Parfett 1992; Swatman and Swatman 1992; Parker and Swatman 1996). A major reason for the slow adoption of EDI among small and medium sized enterprises (SMEs), in particular, is that EDI implementation requires a relatively high investment which is difficult to justify, since the tangible costs of EDI implementation often exceed the tangible benefits (Litecky 1981; Bloch et al. 1996). In addition, management in these enterprises is often quite unaware of the long term benefits and opportunities EDI may bring (Cuk 1996; Petric et al. 1996). In essence, SME owner/managers frequently ignore the existence of strategic benefits when making a decision on whether to adopt EDI. To improve the quality of the EDI investment decision process, it is important that management gains an understanding of all the relevant issues and this means, in practice, conducting an EDI cost/benefit analysis which will identify all costs and benefits, both operational and strategic (Barker and Button 1979; Nowak 1992; Tung and Turban 1996). Without top management support, EDI implementation often becomes a perpetual pilot : a test-bed environment which never evolves into the full-scale implementation needed for effective and profitable use (van Kirk 1993). Cost/benefit analysis examines the economic feasibility of a project but it is more than simply a financial appraisal of that project. It takes into account the lifetime benefits and costs, as well as the intangible benefits, in assessing whether a project will bring improvements to the welfare of the community involved. Hornback (1994) suggests that conducting a cost/benefit analysis of EDI projects is essential for any organisation, since the costs and benefits associated with undertaking the same project in a

3 variety of organisations are bound to differ. Unfortunately, conducting a cost/benefit analysis of EDI projects is not as simple as it might appear. While identification and quantification of costs is relatively easy, the quantification of benefits is much less simple, as this exercise requires an extensive understanding of how EDI changes business procedures and practices. The intangible nature of most significant EDI benefits (for example, improved trading partner relationships, or more effective supply chain management approaches) further complicates the process of cost/benefit analysis (Litecky 1981; Lay 1985; Bloch et al. 1996; Tung and Turban 1996). A number of both practitioners and researchers (see, for example, Hoogeweegen and Wagenaar 1995) have developed practical tools designed to assist organisations undertaking EDI cost/ benefit analyses. These tools, however, while extremely useful, do not provide a thorough evaluation of the individual circumstances of each organisation s EDI implementation being designed as a one size fits all solution. A more individual approach was clearly needed for those organisations needing to understand their particular circumstances. Over a period of four years, the EDI Evaluation Project has evolved to provide a solution to this problem, with the intention of ultimately creating a generic which could be used by wouldbe EDI implementors. Such a would enable organisations of differing sizes and in differing industry sectors to identify the likely benefits flowing from EDI implementation, although its development is difficult, as it first requires individual, industry-specific s to be developed and then meticulously compared and amalgamated into a single generic. The generic will then need to be tested in different industry sectors and continuously refined and modified. The development of industry-specific s in this project may, indeed, not be possible in all industry sectors we envisage the possibility that several s may have to be developed. This project, however, attempts to cover as wide a variety of company types and industry sectors as possible. This paper describes research undertaken as part of the EDI Evaluation Project, describing the current status of this long-term project and discussing existing work-in-progress. At the time of writing four industry-specific s have been completed, and another five s are currently under development (at differing stages of completion). The paper attempts to compare the four existing s, to identify common elements. The results of the comparison provide some support for the original contention that it would be possible to develop a generic which can be applied across industry sectors. THE STRUCTURE OF THE RESEARCH PROJECT Because of the difficulty in identifying the elements of an EDI cost/benefit analysis (a difficulty which has led to the rather limited coverage of existing spread-sheet based approaches), we believed that it was important to gather as rich an understanding of the issues involved as possible. For this reason the project, which has been running for four years, is divided into two phases: in phase I (which is still on-going), each individual student project involves one student working with one company or organisation to identify an individual EDI cost/benefit (these sites are selected with as much care as possible, so that they will be representative of sector groups). Once sufficient information has been collected, a PhD project will open up for the next phase, which involves the development of the generic ;

4 in phase II (which has not yet commenced), the PhD candidate will take the existing, individual s and attempt to derive from them a more-or-less generic which s/he will then test out on a wide variety of organisations and companies in many market sectors. During the process, the will be refined and modified until, eventually we identify a which will work for all (or, at least, for a sector of) companies. The Public Sector Industry Government Department of State Services (WA) The Health Industry HBA (VIC) The Automotive Industry Rockwell Light Vehicle System (VIC) The Automotive Industry General Motor-Holden's Automotive Limited (VIC) The Export Industry Dairy Products Companies (VIC, NSW) A Generic Metric The Export Industry South Pacific Tyres (VIC) The Insurance Industry SUNCORP Advisors and Administrators (VIC) The Banking Industry CRA Limited (VIC) The Timber Industry Dindas Lew Australia (VIC) Unshaded boxes show the s that have been completed Figure 1: The Context of the Research Project Phase Ia The first research project was undertaken by a Master of Computer Science student, Peterson Tengende, at Curtin University of Technology, Western Australia. The study involved conducting a cost/ benefit analysis of the EDI project at the Western Australia Government s Department of State Services (DoSS), State Supply Division. Phase Ib Two related research projects were carried out by Bachelor of Computing (Honours) students, Choong Chin and Chinh Quach, through the Electronic Commerce Research Group (ECRG), Monash University in Choong Chin conducted a case study at General Motors-Holden s Automotive Limited, and Chinh Quach undertook a similar study at Rockwell Light Vehicle Systems, one of the components suppliers to General Motors-Holden s Automotive Limited.

5 Phase Ic The latest was developed in 1996 by a BComp(Hons) student, Sherah Kurnia, also through the ECRG at Monash University. The case study was undertaken at a Melbourne-based company, SUNCORP Advisors and Administrators, the superannuation arm of a major insurance company. Phase 1d Currently, five other industry-specific s are under development, all being undertaken by honours students within the ECRG at Monash University: Stephanie Wong has just completed the investigation of a financial EDI system at CRA Limited (now Rio Tinto), one of the largest customers of the ANZ Banking Group; Catherine Lu is analysing the use of EDI in the health industry, analysing the process of EDIbased hospital claims with HBA; Raghu Balachandran is following the export supply chain of South Pacific Tyres (a subsidiary of Pacific Dunlop Ltd); David Wong is attempting to compare the export supply chains of four companies within the dairy products supply industry; and Neal Ardeljan is looking at the import process as it applies to the timber industry, working with Dindas Lew Australia THE COMPLETED INDUSTRY-SPECIFIC METRICS The Public Sector Industry Metric The first developed was, necessarily, more experimental than those which followed (at the start of the project, it was not even clear that such a could be identified). The results of an analysis of an accounts payable EDI project in the W.A. Govt s Department of State Services State Supply Division, however, allowed Tengende to derive an EDI cost/benefit for this project. Tengende s analysis identified all costs involved in the EDI-based system (both one-off and recurring) and the benefits obtained from the reduction in paper documents and labour costs. All the costs and benefits were then formulated into a. The is separated into two parts: one for the costs and benefits involved in the first year of the EDI implementation; and the other for the years after that first year (Tengende 1993). (a) The First Year of Operation Actual Costs = Total Costs - Total Benefits where Total Costs = Hardware Costs + Software Costs + Transmission Costs + Membership Costs Total Benefits = Processing Cost Savings + Paper Savings + Inventory Savings + Quantifiable Intangible Benefits (QIB)

6 (b) The Subsequent Years Actual Costs = On-going Costs - On-going Savings On-going Costs = Transmission Costs + Software Maintenance Costs + Fixed Annual Costs On-going Savings = Processing Cost Savings + Paper Savings + Inventory Savings + Quantifiable Intangible Benefits The Processing Cost Savings are the difference between the processing costs in the paperbased and electronic-based environments, while the Paper Savings are the difference between the paper costs in the two environments. The Automotive Industry Metric Two s were developed within the automotive industry, to investigate whether analysing a supplier-customer pair would provide additional information on the same supply chain. The first was derived from the cost/benefit analysis conducted at General Motor-Holden s Automotive Limited, while the second was developed from the cost/benefit analysis carried out at Rockwell Light Vehicle Systems, an automotive components supplier to General Motor-Holden s Automotive Limited. The procedure involved in deriving the s was the same as that of Tengende, that is by identifying the costs and benefits in each case (although these costs and benefits may differ from one company to another). The two s are summarised in the following sub-sections (Chin 1995; Quach 1995). (a) General Motor-Holden s Automotive Limited Chin conducted the EDI cost/benefit analysis for the accounts payable system of the company. Like Tengende, Chin also differentiated the cost/benefit analysis for the first year of operation from that of subsequent years: The First Year of Operation Actual Savings = Total Benefits - Total Costs Total Benefits = Processing Cost Savings + Paper Cost Savings + Reduced Workforce Savings + Other Quantifiable Benefits Total Costs = Hardware Costs + Software Costs + Communication Costs + Training Costs + Personnel Costs + Integration Costs

7 The Subsequent Years Actual Savings = On-going Savings - On-going Costs On-going Savings = Processing (Labour) Cost Savings + Paper Cost Savings + Other Quantifiable Benefits On-going Costs = Hardware and Software Maintenance Costs + Communication/Transmission Costs The Reduced Workforce Savings are the total salaries of the eliminated personnel. The intangible costs and benefits were not directly included in the due to the difficulties of quantifying them in dollar terms, but were taken into consideration in the cost/benefit analysis process. (b) Rockwell Light Vehicle Systems Quach conducted the cost/benefit analysis for the manufacturing and dispatch system of the company. He incorporated the intangible benefits of the EDI project under investigation by ranking them from 1 to 10 on the basis of the value they have to management Benefit/Cost = t=y t=y (Cost Paper ) - (Cost EDI ) t=0 t=0 Initial Cost of System + SRIB Cost Paper = Cost of the paper-based system Cost EDI = Cost of the EDI-based system SRIB = Significantly Ranked Intangible Benefits Cost of the Paper-Based System Cost Paper = Transmission Paper + Labour Paper + Storage Paper The Transmission Paper is the transmission cost of paper documents in the paper-based system and the Labour Paper is the labour cost to generate paper documents. The Storage Paper is obtained from multiplying the floor space needed to store files by the average cost per square foot plus the security cost of such storage. Cost of the EDI-Based System Cost EDI = Cost EDI Once-Off + Cost EDI R ecurring

8 Cost EDI Once-Off = Hardware + Software + Installation + Training + Personnel Labour Support Cost EDI R ecurring = Cost EDI Specific + Cost EDI-Paper and Cost EDI Specific = Hardware Maintenance + Software Maintenance + Mail Box Fee + Support Cost + Transmission EDI Cost EDI-Paper = Transmission EDI-Paper + Labour EDI-Paper + Storage Paper The Cost EDI Specific is the cost associated with the use of EDI system and the Cost EDI- Paper pertains to the cost of using both EDI and paper-based system as the consequence of partial implementation of EDI. Insurance Industry Metric Kurnia carried out cost/benefit analyses of MDI (Magnetic Data Interchange) projects for the contribution collection, transfer protocol rollin and rollout systems of SUNCORP Advisors and Administrators. An MDI system is considered to be a pseudo-edi system, since the concepts only differ in terms of the communication medium used to transfer data. With some modifications and adjustments, the EDI has been derived based on the MDI cost/benefit analyses. The following presents the developed for the company (Kurnia 1996). Net Benefit EDI = Benefits EDI - Costs EDI Benefits EDI denotes lifetime benefits or cost savings resulted from the adoption of EDI system, and Costs EDI denotes lifetime costs of introducing EDI system, which include both initial and recurring costs (a) The Costs of EDI Costs EDI = Hardware Costs + Software Costs + Training Costs + Maintenance Costs + Personnel Costs + Outside Support Costs + Membership Costs + Communications Costs The Communication Costs involved in the above formula are comprised of two major components as shown in the following: Communications Costs = Communication Setup Costs + Communication Recurring Costs The Communication Setup Costs differ from one organisation to another, depending on the third party service providers involved. There are a number of costs involved in the Communication Recurring Costs which are formulated in the following.

9 Communication Recurring Costs = Login Costs + Connection Costs + Transmission Costs + Subscription Costs (b) The Benefits of EDI Benefits EDI = Document Cost Savings + Preparing Document Labour Cost Savings + Processing Related Cost Savings + Error Correction Cost Savings Document = [No of Transaction EDI * Paper Doc Cost Savings per Transaction] Cost Savings Preparing Document = Preparing Doc Labour Costs Manual for No of Doc Prepared EDI Labour Cost Savings - Preparing Doc Labour Costs EDI for No of Doc Prepared EDI Processing Related = Processing Related Costs Manual for No of Transaction EDI Cost Savings - Processing Related Costs EDI for No of Transaction EDI Error Correction = Estimated % of Error Occurrence * No of Doc Processed EDI Cost Savings * Time Spent per Doc * Hourly Rate Intangible costs and benefits are not included in the because no consistent approach yet exists for assigning realistic values to them (Litecky 1981; Lay 1985). Intangible benefits, however, were presented with as much descriptive information as possible in the cost/benefit analysis, to be assessed in conjunction with the tangible benefits. CONCLUSIONS AND FUTURE RESEARCH Each of the four existing s completed to date, while clearly developed for a single organisation, can provide useful information to other companies within the same (or a similar) industry wishing to conduct an EDI cost/benefit analysis. Different companies of the same type, however, may have additional costs or benefits. Thus, the available can only serve as a framework or, to be precise, as a starting point for other companies in conducting a cost/benefit analysis. It is important to note that the developed to date have not taken into account the costs involved in negotiations with trading partners or other members of the supply chain (although several of the s currently under development involve supply chain cost analysis). A number of common elements can be identified from the four s developed to date: each includes common costs of EDI implementation such as hardware, software, training, personnel, maintenance and communication costs. In some cases, costs for annual membership of an EDI association are included. These costs are either once-off costs or recurring costs;

10 the four s all involve processing cost savings and paper document savings and, depending on the type of the industry, inventory savings are often included in these savings; finally, error correction cost savings can also be included in the. These similarities indicate the possibility of developing a generic EDI cost/benefit by incorporating the common elements identified and the different elements of costs and benefits, in order to cater to the needs of different industry types. Intangibles, however, are not well defined in any of the s developed so far. Further research is clearly required to determine whether intangibles can, indeed, be included in the without affecting the accuracy of the analysis. This is of great importance to the project, since the identification of intangible benefits was a major factor in its initiation. The earlier s were less detailed than those which followed an inevitable result when later students are able to gain from the experiences of those who lead the way. Later s are starting to show a similarity of form and approach which bodes well for the comparability of the results, but more information is clearly needed before we can proceed to the derivation of a single. It now appears that the initial aim of a 1998 start for phase II of the project was somewhat ambitious and that a more extended phase I will be needed. The inclusion of the export and import industries will allow us to investigate the applicability of the concept outside the implementation of EDI to single business process or activity. We also hope to return to the public sector (particularly since we will now have the opportunity to compare the Victorian with the Western Australian public sector) to gain a better understanding of the differences in implementing EDI across the two major components of our society. Despite these limitations, however, the project has already produced more detailed results than we have been able to identify in any other EDI cost/benefit projects undertaken (Emmelhainz 1993; Hornback 1994). Interest in the project from both public and private sector organisations is considerable and we believe that phase I alone has the potential to offer great benefits to other organisations either those contemplating EDI implementation, who wish to engage in preimplementation evaluation; or those which have already adopted EDI and which wish to undertake a post-implementation audit. REFERENCES Australian Department of Finance (1991). Handbook of Cost/benefit Analysis. Canberra, Australian Government Publishing Service. Barker, P. and K. Button (1979). Case Studies in Economic Analysis 2: Case Studies in Cost Benefit Analysis. London, Preface Ltd. Bloch et al. (1996). Leveraging Electronic Commerce for Competitive Advantage: a Business Value Framework. The Ninth International Conference in EDI - IOS, Bled, Slovenia, Moderna Organizadija Kranj, Slovenia.

11 Chin N.C. (1995). Developing a Cost Benefit Metric to Justify EDI Projects. Department of Information Systems. Melbourne, Monash University: 98 Coathup P. (1988) Electronic Data Interchange, Computer Bulletin, 15-17, June. Cuk, J. (1996). Information Society and Total Quality Management. The Ninth International Conference in EDI - IOS, Bled, Slovenia, Moderna Organizadija, Kranj, Slovenia. Emmelhainz, M. A. (1990). Electronic Data Interchange: A Total Management Guide. New York, Van Nostrand Reinhold. Ferguson, D. M. and N. C. Hill (1988). Missing The Boat. Business Credit: Hoogeweegen, M.R. and R.W. Wagenaar (1995). Assessing Costs and Benefits of EDI. The Eight International Conference in EDI - IOS, Bled, Slovenia, Moderna Organizadija, Kranj, Slovenia. Hornback, R. (1994). An EDI Costs/Benefits Framework. System Management 22(Oct.): Kurnia, S. (1996). Developing a Cost/benefit Analysis Metric of EDI in an Insurance Company. Melbourne, Monash University: 177 Lay, P. M. W. (1985). Beware of the Cost/Benefit Model for IS Project Evaluation. Journal of Systems Management 36:6: Litecky, C. R. (1981). Intangibles in Cost/Benefit Analysis. Journal of Systems Management 32:2(February): Nowak, P. (1992). Cost Benefit Analysis and EDI. The Fifth International Electronic Data Interchange Conference, Bled, Slovenia. Parfett, M. (1992) What is EDI? A Guide to Electronic Data Interchange (2nd Ed.). NCC Blackwell: Oxford. Parker, C.M., and P.M.C. Swatman P.M.C. (1996) TREAT: Promoting SME Adoption of EDI through Education. 29th Hawaii International Conference on Systems and Software, Hawaii, January, Petric, D., Parker C.M., Swatman P.M.C. and Gricar J. (1996). Preparing Small and Medium- Sized Enterprises for EDI-EC - Experiences in Slovenia. The Ninth International Conference on EDI - IOS, Bled, Slovenia, Moderna Organizacija Kranj, Slovenia. Pregl, K. Z. and V. Butina (1996). Electronic Commerce in the Supply Chain - Strategic Challenge to the Business in Slovenia. The Ninth International Conference on EDI - IOS, Bled, Slovenia, Moderna Organizacija Kranj, Slovenia.

12 Quach, C. L. (1995). Cost/benefit Analysis of EDI: A Means for Justification. Department of Information Systems. Melbourne, Monash University: 133. Swatman, P. M. C. (1993). Integrating Electronic Data interchange into Existing Organisational Structure and Internal Application Systems: the Australian Experience. PhD Thesis. School of Computing. Perth, Curtin University. Swatman, P.M.C. and P.A. Swatman (1992) EDI System Integration: A Definition and Literature Survey. The Information Society, 8(3): Swatman, P.M.C., P.A. Swatman D.C. and Fowler (1994) A Model of EDI Integration and Strategic Business Reengineering, The Journal of Strategic Information Systems. 3(1): Tengende, P. K. (1993). Developing a Metric for Cost Benefit Analysis of EDI Projects. Master of Computing thesis. Perth, Curtin University. Tung, L.L. and E. Turban (1996). Information Technology as an Enabler of Telecommuting. International Journal of Information Management. 16: van Kirk, D. (1993) EDI Could be Coming Soon to a PC Near You. Network World, November: Whitten J.L., L.D. Bentley and V.M. Barlow (1994). Feasibility Analysis. Systems Analysis and Design Methods. Sydney, Irwin. ACKNOWLEDGEMENTS The authors would like to thank all those who have been involved in the development of past or present s (both students and organisations). COPYRIGHT Sherah Kurnia and Paula M.C. Swatman The authors assign to ACIS and educational and non-profit institutions a non-exclusive license to use this document for personal use and in courses of instruction provided that the article is used in full and this copyright statement is reproduced. The authors also grant a non-exclusive license to ACIS to publish this document in full on the World Wide Web and on CD-ROM and in printed form with the ACIS 97 conference papers, and for the documents to be published on mirrors on the World Wide Web. Any other usage is prohibited without the expressed permission of the authors.