Wal-Mart cuts the VAN out of EDI

By Tim Wilson
Network World Outsourcing Newsletter, 09/23/02

For decades, the only way to " outsource " the transmission of electronic data interchange traffic has been to use value-added networks. But earlier this month, retail giant Wal-Mart issued a new edict that could take most of its EDI activity out of the VANs' hands and put it on the Internet.

Wal-Mart officials disclosed at the beginning of September that the company is building a new EDI platform based on technology from iSoft that will enable its tens of thousands of suppliers to send and receive EDI data via the Web, rather than using a VAN. And over time, the retail giant plans to mandate the use of AS2 - an enhanced standard that adds security and scalability to Web-based EDI - among all of its supplier partners.

The Wal-Mart mandate could be a serious blow to EDI VAN companies, such as GE Global Exchange Services, which has been the primary carriers of EDI traffic since the technology became popular more than 30 years ago. Corporations have long viewed VANs as the only service providers that could adequately provide the network reliability, performance and translation services that are required for mission-critical EDI transactions, such as orders and invoice payment.

With the introduction of the AS2 standard, however, Wal-Mart now feels that Web-based EDI is secure and reliable enough to serve as the platform for its supplier communications. The retail giant stands to save millions of dollars in VAN fees by using the public Internet, and the Web-based standard actually can accommodate more types of communications and online transactions than the older EDI standards.

For Wal-Mart's partners, the new mandate means deploying new software. The iSoft solution, which is Wal-Mart's preferred EDI package, is being offered to Wal-Mart suppliers at no license fee, with a $300 annual support charge. Wal-Mart business partners are also able to use a competing package from IPNet, which is offering a free connection to Wal-Mart if the partners buy software that can connect them to five other trading partners.

The ability to cut costs and get suppliers online quickly could bring some new attention for AS2, which provides guidelines for adding new security capabilities to Web-based EDI. The AS2 standard includes specifications for trading community management, public key encryption, digital signatures and non-repudiation. The new standard goes a long way toward resolving corporations' concerns about the security of EDI traffic on the Web.

By eliminating the VAN, however, Wal-Mart may be taking on more effort than it anticipates. Besides security, VANs provide an outsourced method of handling some key EDI functions, including transaction management and auditing services that can be time-consuming and costly. Without the VAN, Wal-Mart will now have to perform those services itself, which could reduce its cost savings.

In addition, Wal-Mart's new strategy could have an impact on the reliability and availability of its EDI transmissions. While most VANs offer a closed network that carries only EDI traffic, the AS2-based solution will rely on the Web as its primary infrastructure. Thus far, the public Internet has proved to be spotty in its performance, due to the high variability in traffic volumes that it must carry each day.

With its new mandate, Wal-Mart is essentially eliminating its EDI outsourcer - the VAN - and insourcing all of its EDI technology and activities. While this new approach stands to save the retail giant significantly in the short term, the longer-term costs and impacts may erode the strategy's benefits. Over time, Wal-Mart may find that VAN services, while expensive, delivered some values that are difficult to replace.