Hundreds of thousands of organizations across the globe have come to rely on the savings and efficiencies of EDI (Electronic Data Interchange) to conserve resources, remain competitive and do more with less. In some cases, entire Industries are now completely integrated with EDI. Can the Public Sector follow suit?
Electronic Data Interchange – A set of documented standards for formatting a document in a way that enables computer systems to communicate with no human interaction. By specifying the line number (segment) and character position of specific data elements, an EDI 850 PO, for instance, says a PO Number will be exactly “here." Additionally, 1–3 character codes are used in place of repeating data to reduce file size and increase transmission speed.
Using EDI, sending and receiving data for transactions can be completely automated, requiring no re-keying of data. The process easily integrates into existing processes and workflows, so all existing documentation, approvals and audit processes remain unchanged.
Value for the Public Sector (ROI)
With EDI information is traded in minutes instead of days, keying errors are eliminated from every step after the origination of the document, and anyone can trade with anyone else with little or no human intervention thanks to the EDI standard having universal meaning. Further enhancements come from using “turnaround” documents, which populate response documents directly with the inbound data further reducing effort as well as opportunity for induced errors.
Several commercial and academic studies have attempted to quantify the cost of the effort surrounding issuing a Purchase Order (PO), and processing an invoice. By combining costs associated with the people, systems and processes and calculating that cost across all POs, results range from $30 to $138 per PO depending on the depth and scope of the study. The wide difference is the level of detail the study goes to in determining the effort to remediate errors in manually processed orders. Alternatively, the cost for issuing a PO (and processing the related transactions) via EDI is between $2–$4.
The Grocery, Retail and Automotive Manufacturing industries were early adopters of EDI technology in the late 70's and early 80's. These organizations routinely have tens of thousands of transactions per month. For instance, one national grocery chain regularly issues 140,000 POs per month to stock thousands of stores with products. That particular company is also the author of the study that set the cost of a manual PO at $138, and the cost of an EDI PO at $2. At even a moderate adoption rate among vendors, the tangible savings were well over $5 Million per month.
Unfortunately, those savings required substantial investment. The software that translates data into and out of EDI is generally complex, and as a result fairly expensive. Adding to that were the costs for hardware, networks, and the people required to run and maintain it all. For the first twenty or thirty years, the start up costs to a functional EDI system regularly ran to the millions. For those with a high enough volume of transactions, the ROI was very attractive, and very short time frame. But only the largest organizations had the transaction volume to justify the costs.
EDI in the Cloud (SaaS)
One aspect of the EDI industry that kept the prices elevated for a very long time was a limited number of EDI providers. A central function of EDI is the actual transfer of the data. From the late 70's through the 90’s there were essentially 3 EDI service providers. They offered the translation software, but more importantly, they were the owners of the physical copper lines the data traveled on (AT&T and MCI because they already owned their own telecom lines, and IBM because they had the resources to build their own network). The reliance of EDI on these networks acted as a limiting factor for new companies attempting to enter the market.
With the rapid expansion of the Internet through the 90's, and a new way to send data over public networks the iron grip of the Big 3 was loosened significantly. Rather than being the end of the EDI industry as was frequently predicted, it had exactly the opposite effect. Companies sprang up to take advantage of the data transfer capability of the internet, and offered EDI translation software that while still relatively expensive it was significantly more cost effective than previous options.
Then, as early as 1998, EDI companies began moving their software to the internet. These were the forerunners of todays “Cloud” software vendors, and SaaS or Software as a Service. With the advent of software in the cloud, and widescale public networks (in the form of the internet), EDI became a viable resource for even very small companies. With no software or hardware to buy and maintain, small procurement operations could now deploy a fully functioning and integrated EDI system for very little upfront cost. More importantly, vendors and suppliers had access to tools, offered on a subscription model that let them compete with their much larger competitors on an even playing field.
Across the board in industries from Specialty Retail and Healthcare to Niche Manufacturing, organizations with PO volumes as low as 10 or even 5 per vendor per month are making use of the efficiencies of EDI. Vendors and suppliers with as few as one or two transactions per month with a customer are also able to participate.
EDI for the Public Sector
There are challenges to be sure. Maintaining documentation for audits, entrenched ways of working, resistance to change and asking suppliers who may be asking constituents to change how they interact are certainly issues to be dealt with. Overcoming them takes patience and effort. But they can be overcome, and the cost and efficiency savings can be dramatic. In areas where populations are shrinking, public entities are being asked to continue service levels across the board even in the face of diminishing budgets. Conversely, in those areas where populations are booming, public entities are struggling to keep up with demands for services.
Whether it is finding ways to cut costs while maintaining service levels, or providing exponentially more services with static human resources, EDI can be a lifesaver.
Several states already have legislation that specifically authorizes EDI transactions. In the absence of specific authorization, there are no prohibitions. So, as long as audit requirements can still be met with electronic transactions, the technology is a viable solution. And with a slight shift in perspective, the EDI initiative becomes an effort to benefit the broader constituent base rather than a hardship for individual members.
Very simply put; rather than telling suppliers who may be constituents that they have to do something new, a different viewpoint would be: “Switching to an EDI process will allow us to redirect resources to our core mission rather than on administrative tasks. This will benefit all of our constituents.”
That statement is backed up with a documentable, straight line path to saving a quarter million dollars per year for every 100 vendors in the system.
It is most certainly time for Public Sector entities to embrace the efficiencies and cost savings afforded by EDI.