EDI is a technology for facilitation of information between two established companies. Before two companies effectively link their EDI systems, the groups need to enjoin in a series of contracts. One set of contracts would serve as agreements between both parties for the sale of goods. This process, identical to non-EDI related contacts, is purely to establish cohesion between parties. Once the groups established their relationship, the firms would consent to EDI Trading Partner Agreements that define relationships and responsibilities between information transfer systems. Typically these negotiations refer to the standards and terms for EDI interconnection. Select the links for examples of EDI Trading Partner Agreements from Raytheon and Alleghany Power.

Today, 95% of the largest businesses routinely use EDI systems for simple information transfers, such as for invoice, order, and delivery notices. However, the total number of businesses using EDI is a lowly 5%, many of which have only implemented the technology because their larger buyer required it. To quantify, that is only about 100,000 corporations in the United States.

EDI has created efficiencies between supplier and buyer, especially in the area of inventory replenishment, but there are key drawbacks to the EDI system, as well. For instance, the price to fully implement EDI into a company's internal systems, the only way to truly maximize EDI's benefits, requires a specialist - something too costly for many small businesses. Additionally, no clear EDI standard exists. Because of that, each implementation with a new partner requires a long negotiating period, the result of which is a Trading Partner Agreement. Furthermore, EDI messages are transmitted primarily on proprietary private communication links, called Value Area Networks (VANs), which could cost tens of thousands of dollars each month to maintain.

Newer technology is helping to cure some of the EDI pains. Extensible Markup Language (XML), seen by many in the 1990's as a panacea for all data transfer problems, is readily being adopted by industries to supplement EDI for information transaction. XML data does not need a VAN, but instead can flow through a companies' existing Internet link. This reduces cost and improves compatibility between firms. Of a survey by Reed Business Information of primarily manufacturing, service industry, wholesaling, and retail firms, 71 percent of respondents are working with an EDI solution, but only 56 percent admit to having interests or plans in place to deploy XML. General Electric, which operates the largest private exchange in the world - The GE Supplier Network - works with 36,000 suppliers to facilitate $20 billion of expenditures. It operates on Java and XML-based content.

Given figures like that, it is apparent that XML will soon be making an impact in the business procurement world. However, it is unclear at the current state whether XML will replace EDI or if the two technologies can peacefully coexist. Some analysts feel as though businesses will learn to use both technologies to their advantage. For instance, it is likely that companies will conduct business negotiations through public or private exchange platforms powered by XML because XML provides the flexibility needed to handle different requests for purchase (RFPs) and requests for quotes (RFQs). But once a deal has been agreed upon, the terms can be placed into the EDI system for execution of large-scale transactions. Transmitting data over EDI's private VAN link helps alleviate security concerns. Until data communicated using XML over a public Internet can be properly secured, EDI will still remain a key player in corporate procurement. Virtual Private Networks (VPNs) may be one technology added to the mix in the future to help alleviate security concerns. Furthermore, a joint initiative by the United Nations and OASIS, Electronic Business XML (ebXML) is currently underway to advance e-business though open, collaborative development of interoperability specifications and could help bring XML B2B information transfers to the main stream. (See http://www.ebxml.org for more information.)

Implementing an EDI system requires a significant investment in both hardware and software. Because of the upfront costs, EDI is primarily an option only for large, financially powerful firms. This creates problems for many smaller firms who wish to perform business with the larger companies. Leveraging their size, many large businesses demand that smaller supplier institute an EDI system with a specific set of protocols. This creates a burden on the smaller companies, who have no choice but to comply if they wish to sell their goods. In a traditional EDI system, the larger firms reap the majority of the benefits as smaller firms are forced to comply with the demands.

However, an Internet-based idea was, at the time, poised to help level the playing field. Business-to-Business (B2B) exchanges, which began to flourish in the late-1990's, are online auctions where businesses can bid to supply services or goods that other businesses need. It was thought that these "industrial-strength versions of eBay," would make procuring business items easier, faster, and cheaper. B2B exchanges were expected to replace the traditional means of supply - paper catalogs and a network of sales people - while breaking down barriers, giving the smaller suppliers and chance to compete fairly with the bigger players. At its peak of popularity, Gartner predicted that online B2B exchanges would be accountable for $7 trillion worth of transactions by 2004.

However, like many in the dot.com industry, the B2B exchange market was just one more over-hyped idea. Although nice in theory, the B2B exchanges had some serious flaws. CIO Magazine does a wonderful job explaining why the B2B exchange market collapsed: "they put the cart before the horse." B2B exchanges were bound to fail because the portal designers were more concerned with how the exchange would function instead of how users would take to the concept. In a traditional sense, business transactions were always done in secrecy - deals were done in private to prevent the competitor from gathering any knowledge about the operations. That fact was ignored in the B2B exchanges. Buyers and sellers were expected to communicate honestly and freely with each other. Procurers became hesitant to participate after realizing that this type of free sharing of information would allow competitors to see what type of products they were attempting to acquire and for what price. CIO Magazine's analysis of the B2B exchange fall-out is available here.

The San Francisco Chronicle also pointed out the flaws in the B2B industry almost a year before CIO Magazine. They cite an inability for businesses to work together, a lack of suppliers using the systems, a fear of losing control of private business information, and a resistance from buyers to try new suppliers as some of the reasons why B2B exchanges are dying off faster than expected. The full article can be found here.

However, the B2B exchange concept is not what failed, just its execution. The first round of B2B exchanges, portals that allowed multiple suppliers to bid on multiple buyers, might have failed, but large corporations have realized that the opportunity to save money and create efficiencies still exist through B2B exchanges. Now a second round of B2B exchanges, ones operated by the buyers, are emerging. Many large businesses have designed their own B2B marketplaces, some in cooperation with others in their industries, where suppliers can enter to bid on projects. The result: the firm saves money on purchases by 'webifying' their supply chain and creating additional efficiencies.