When outsourcing EDI is the right decision

By Rebecca Sykes
IDG News Service, 10/12/98

Boston - Mike Glynn's IS staff kept quitting on him.

A couple of years ago, Glynn lost three out of five of his IS staff working on Electronic Data Interchange (EDI), a mere two months after he took over as head of IS for sales and marketing at National Semiconductor Corp. in Santa Clara, Calif.

But the problem was EDI, not Glynn.

With EDI, "there's very little career path," said Glynn, who is now manager of IS business systems at National Semiconductor.

The EDI skill set is narrowly focused on messages and data, rather than business processes, and EDI practitioners cannot readily transfer to other IS jobs such as programmer, according to Glynn. EDI staffers can aspire to be the leader of an EDI group, but "for the normal corporation and going up the ladder, that's about the limit of where (they) would go," he said.

Consequently, people tend to do EDI work to gain entry into the IS field and then move on to better jobs with more pay, according to Glynn.

"As soon as you get them trained they become marketable and they leave," he said.

The solution to Glynn's revolving-door staff problem was to outsource National Semiconductor's EDI operation. For US$70,000 per month, Glynn contracted with EDI Works, which was later bought by outsourcing giant Harbinger Corp., to handle National Semiconductor's day-to-day EDI operations. At $850,000 per year, outsourcing was not cheap, but it was roughly equivalent to having an in-house staff, considering salaries, benefits, and insurance, plus the constant recruitment and training costs, according to Glynn.

"You're not going to save a lot of money (outsourcing EDI) but you're going to end up getting rid of a headache," he said.

Saving money barely figured into Bill Worthington's decision to outsource EDI at Engelhard Corp.

At the request of its customers, Engelhard, an Iselin, N.J.-based chemical manufacturer for automotive, paper, cosmetics and other industries, had EDI projects underway in many of its facilities. As Engelhard's electronic commerce coordinator, Worthington was charged with assessing whether to retain that status quo, centralize EDI in house or outsource the whole EDI operation. Worthington dismissed the decentralized status quo as inefficient but toyed with creating a centralized, in-house EDI operation until he weighed the value of an in-house staff of EDI experts.

"We believed our staff dollars were better spent in developing expertise in our core applications," Worthington said. The company was transitioning from proprietary, mainframe-based applications to client/server, including Marcam Solutions Inc.'s Protean ERP (Enterprise Resource Planning) package, and Worthington considered what kind of skills would be best for Engelhard's IS organization to build.

EDI requires "a ton of tedious work that has to be done," from archiving and retrieval services for transactions to setting up trading partners, and a staff versed in business processes, not humdrum technical details, is more valuable, Worthington said.

"The technology of EDI -- we said, 'That's important, but I can buy that'," he said. "Our decision was not about fundamentally lowering our cost but about where do we want to spend our money."

For some who consider outsourcing EDI, quality of customer service is the primary concern. Displeasing customers was the chief reason Richard Curzi was reluctant to continue outsourcing EDI when the data center his company used was sold. Curzi, information systems manager at Chiron Diagnostics, had outsourced EDI to a Chiron affiliate, but when it changed hands he was tempted to bring his EDI operation in house.

Chiron makes medical and diagnostic equipment and the chemical mixtures needed to operate the equipment, and its seven EDI trading partners were customers, rather than suppliers. Chiron used EDI to swap purchase orders and invoices with its customers, and Curzi was reluctant to put such a visible and important function in the hands of a third party which had no organizational ties to his company.

"This was a consideration that we felt was a negative to considering an outsourcing solution," Curzi said.

But other factors pointed to continuing to outsource EDI, including the upfront costs associated with bringing the EDI in-house.

Chiron had just completed the launch of several new products and the projected in-house EDI costs, which included buying the server, software and related technology and hiring people to do the mapping of the system, did not square with Chiron's mandate to keep capital spending in other areas down, Curzi said. The company's active search to merge with another large diagnostic company, one that might use incompatible technology, underscored that the time was not right for heavy capital investments in technology.

Curzi opted to outsource with GE Information Services Inc. (GEIS), and the cost was less than one-third of what it would have cost to bring the EDI operation in house, according to Curzi. Chiron's first-year investment with GEIS was under $100,000, compared to a projected sum of more than $300,000, he said.

And what of the fears about handing crucial customer-service related functions to a third party? Going the professional outsourcer route has proved more than adequate, Curzi said.

"It's really a non-issue," he said.

Doing the math

Deciding whether to outsource electronic data interchange (EDI) or do it in house presupposes that EDI makes sense for a given company in the first place.

One approach to determining whether using EDI makes sense for one's business is to take the quiz below, provided by Lance Dailey of Customer-Focused EDI Inc. in Crystal Lake, Illinois.

"The best way to start it is to pick one process that has the intensive exchange of information with a trading partner," such as accounts payable or procurement, Dailey said.

Using that process, go through the exercise below to discover where one's company stands in relation to the average company, Dailey advised. Trade associations and trade publications can help determine the "industry rates" mentioned in the last several questions, he said.

"In today's world nobody can afford to be below average, (especially) when you consider that against your competition you rated below average," Dailey said.

1. Annual Document/Information Volume
What is the annual volume of documents/information flows for the key process in question (in 1,000)?

If there are
0 document
100 documents
500 documents
1,000 documents
10,000 documents

You get
0 point
5 points
10 points
15 points
20 points

2. Document/Information Flows in Electronic Format
What is the current percentage of documents/information flows already in electronic format?

If it's	0%	25%	50%	75%	90%
You get	0 point	5 points	10 points	15 points	20 points

3. Current Cycle Times
What is the current cycle time for key process as a percentage of average for industry/functional area?

If it's	200%	150%	125%	100%	50%
You get	0 point	5 points	10 points	15 points	20 points

4. Current Error Rates
What is the current error rate for key process as a percentage of average for industry/functional area?

If it's	200%	150%	125%	100%	50%
You get	0 point	5 points	10 points	15 points	20 points

5. Current Transaction Costs
What is the current transaction costs for key process as a percentage of average for industry/functional area?

If it's	200%	150%	125%	100%	50%
You get	0 point	5 points	10 points	15 points	20 points

Add up the points for the question (1) through (5)

	POINTS
(1) Doc/Info flow volume
(2) Electronic Format %
(3) Current Cycle Times
(4) Current Error Rates
(5) Current Transaction Costs
TOTAL SCORE

The total score is the benchmark score.

World Class Level: 90-100 Points
Average Level: 60-89 Points
Below Average Level: Below 60 points

Source: Customer-Focused EDI Inc.