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X12 Blog

Electronic Data Exchange | A Quick Primer for Busy CEOs

To help you stay on track employing the best EDI operational strategies, X12 offers a 3-blog series explaining the essentials of automating data exchange. This first blog presents some factors to consider in choosing an EDI in-house versus hosted approach that best scales to your business needs from members of the X12 Business to Everything (B2X) Subcommittee.

Few of us think about what happens behind the scenes when conducting business electronically. The automated exchange of data from one business to another seamlessly connects just about every B2B workflow, from purchase orders to reconciliation to payments. Of course, underpinning this ever increasing demand to digitize high volumes of information is EDI, or electronic data interchange, the essential glue that connects business partners worldwide.

Thanks to EDI, companies can move structured transmission of large data files between each other in countless ways with confidence and validation, both cooperating and adopting its framework to facilitate the process. Based on a longstanding history, EDI data exchange today connects countless organizations, with major retailers such as Amazon and Walmart relying on EDI to synchronize their supply chains, facilitating business communication, for instance, on individual orders for a single T-shirt in the millions.

EDI first emerged in the early 1970s as a way to digitize and electronically exchange information from one business to another, automating traditional paper communication, such as purchase orders and invoices. The electronic communications or EDI messages, which are the same information found in a paper document, are based on standards such as those created by X12, which define how data is formatted.

Nearly half a century later, the goal for electronic transactions largely remains the same, ensuring ongoing modernization of the business enterprise. To propel EDI digitization in the 2020s, application programming interfaces (APIs) and other methods of data integration have emerged that promise to streamline data flow across businesses in a more effective way.

Why I Should Care

For CEOs who seek to transform data digitization to manage a wide array of business data with their trading partners, consider the following questions:

  • Is our EDI framework sustainable now and in the future?
  • Are the right EDI computing requirements in place to facilitate profitable ecommerce transactions smoothly, rapidly and cost effectively?
  • Are we doing everything possible to streamline and automate our administrative efficiencies and to prevent us from having to rebuild?

The Cost of EDI Depends on your Approach

The cost of funding a company's EDI initiative is influenced by three approaches:

  1. Develop and maintain EDI operations in-house;
  2. Outsource EDI operations to a third-party service host provider; and
  3. Do a hybrid combination of both approaches.

Calculating the cost of an EDI implementation is crucial to ensure that the electronic data exchange will deliver real-time improvements that financially benefit your business.

In-house Versus Hosted: The Best Option for your Business

Here are some factors to consider when choosing the right approach to best scale to your business needs including your EDI transaction volume. The goal of your decision is to mitigate overall cost of ownership, streamline business activities and help increase productivity.

With multiple levels utilizing an in-house EDI program, here are some supporting components to consider:

  • EDI software (commonly called a "Translator")
  • Communications software
  • EDI transmission methods to utilize
  • EDI personnel, e.g., EDI specialists, mapping specialists, consultants, coordinators, managers, directors or other
  • "Mapping" software (or hire consultants to create data mapping off-site for installation)
  • Ongoing upgrades, support and maintenance
  • Business continuity planning and testing

Your investment gets you to the starting point with an in-house EDI system that is operated and managed internally or by contracted resources. If your company is the "buyer," dubbed the "hub" in EDI terms, you can create an EDI implementation guide for trading partners to ensure compliance and mandate testing and certification, for example. Conversely, if your company is the "seller," called the "spoke," your EDI operations must conform to every trading partner's EDI implementation guide and more. Both setups will call for different requirements interacting with each business partner that you want to connect with via EDI as your trading community evolves and grows.

Some larger organizations have even opted to operate their own EDI networks for their trading partners to connect to directly. This has the advantages of internal management, control and security, but it is not something to be undertaken lightly. The disadvantages are loss of trusted third-party verification (called non-repudiation) on document tracking, no third-party archiving/reporting and having to handle all trading partner issues internally on a one-on-one basis.

Little surprise then that most organizations have chosen instead to work with some form of third-party provider who can supply the EDI infrastructure without their having to make that initial investment. This can be particularly important for small- and medium-size businesses that simply do not have the people or money for this level of investment within their company. Some larger companies also take the hybrid approach and out-source some components of an EDI program to take advantage of the economies of scale that a hosted EDI provider brings.