Electronic commerce in the '90s -- how far have we come?

How did e-commerce evolve and what is plaguing its acceptance now?

By Robert E. Lee

October  1997
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The concept of electronic commerce is certainly not a new one. This latest rage in Internet trends has long been brewing. We take you through its history and show you where it's at now. How are companies implementing it and why are consumers still holding back? (2,800 words)

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Consider that over 20 years ago, electronic data interchange (EDI) was ramping up and has been widely implemented to transact business. Through EDI you can order products and services, negotiate prices, confirm orders, communicate shipping information and even invoice and receive payments. In the structure of EDI, information is transformed into universal formats that are expected to be understood at the receiving end and follows process steps that aid in ensuring that the transactions are correctly received and acted upon. But this is a technology has required a high level of effort to implement, often causing new programs to be written for host systems, the modification of data structures in the host systems to manage the process, plus human interaction when transaction records don't fit the expected structures. If the standard transaction sets didn't fit the EDI model, many companies would cooperatively agree to modify the definition for a given record field and transmit the data in an otherwise inappropriate space -- rendering the transaction vendor specific.

Coincident with that was the fax, which is certainly an electronic device that is perhaps the most widely deployed data communications technology in the world. It has the characteristics of a flexible system, where it just passes through whatever the sender has to communicate. Forms, which can be changed at a moment's notice, could be faxed out to the person filling it out, then immediately returned, all without any programming. Even without specific forms, because a person would subsequently enter the information, the input forms don't need to be defined in terms of the recipient; instead they could be in a format the sender preferred. This attribute serves to keep printed materials and faxes ahead of other technologies in transmitting many types of information.

But electronic commerce goes back further. How about the phone? Now you're looking at least half a century of experience, where transactions were sped up, first by voice, then by the touch-tone technology that has enabled everything from simple account balance information to full money management, course registrations, contest entry and many other innovative transactions. Would you believe that as far back as the 1839 talk of electronic commerce filled the air as the telegraph burst onto the scene. It promised an age of electronic commerce, as transactions were sent out over the wire, in a much closer fashion to today's networks in the form of dots and dashes in Morse code.


Do you know where I'm headed?
At the Internet Commerce Expo held in Los Angeles September 8-11, 1997, the primary focus of the session speakers was commerce to the consumer. Consider the market values forecasted in areas like online brokerage, where Randy Goldman, vice president of electronic brokerage product development at Charles Schwab & Co., reported that as of July 22, 1997 there were over $60 billion in customer assets with 2.5 to 4 million hits per day on its product. Forrester Research predicted that by 2001 online investing dollars would reach $524 billion. How about the Neilsen/Commerce Net survey from March 1996 that found 42 percent of Internet users had an income over $50,000 and that 50 percent are managers or professionals? Numbers like these have to have retailers drooling over accessing this market in a more cost-effective medium.

In all of the historical contexts cited above, it has always been the consumers who were the last to use the technology. Arguably, some never reached the consumer phase. Only the phone, and then the fax, have really taken the market for electronic commerce out to the consumer. The business establishments have embraced (be it grudgingly) all of the other technologies, including EDI. Consider the model shown in Table 1. On a relative scale, it is easy to see how a single raw material supplier sees its product grow exponentially as it is incorporated into products further down the line. Table 2 goes the opposite direction -- again showing the same depth of complexity as a final product purchased by a consumer is broken back into the possible product choices and then components that create the product the consumer purchases. Here a consumer could choose from among 10 products, which in turn are made up of hundreds of components and so on.

Table 1
Channel Point Magnitude
Raw Material Supplier 1
Component Manufacturer 10
Product Manufacturer 100
Distributor 1,000
Retailer 10,000
Consumer 100,000

Table 2
Stage Magnitude
Chosen Product 1
Available Products 10
Product Components 100
Component Suppliers 1,000
Raw Material Suppliers 10,000

In this chain of relationships, a single product creates a trickle down of information that eventually may go to more than 10,000 destinations. Consider that total market demand, as measured in the final consumer purchase, affects the decisions made by everyone in the chain to invest and produce. True electronic commerce should then deal directly with the information flow between all points in this chain. As a consumer purchases a product, the real activity begins, where according to Carol Schmitt, vice president of marketing at S2 Systems, more than 90 percent of the transactions that are electronic commerce are actually transacted. Seeing this relationship -- that a single point of sale to the consumer generates dozens of downstream transactions -- it should become obvious where the focus of your efforts should go.

This doesn't leave out the consumer end of the equation. Jeet Singh, president/CEO of the Art Technology Group, spoke at Internet Expo in August 1997 about the next true hurdle in electronic commerce -- the need to develop relationships with the customer. Bolstered by Forrester Research findings from August 1996 that Fortune 1000 companies were shifting focus in electronic commerce to customer acquisition as their primary challenge, Singh seconded that position and added that it is the customer relationship that is really at stake. It is through personalization -- the total customization of the electronic commerce experience -- that consumers (and business-to-business relationships) will be drawn away from more traditional purchasing methods.

Why it's business to business first
It is Internet infrastructure that commands our attention in the challenges to be met now. And it is business that must meet those challenges. Jay M. Tenenbaum, chairman and founder of CommerceNet, reflected on this during the launch of CommerceNet Southeast in Atlanta in the fall of 1996. Everything then pointed to having the infrastructure and software technologies funded by the organizations that would benefit most immediately, and that is business according to Tenenbaum.

Because the demand for product must be met more effectively when the consumer floodgate is finally opened, the complete electronic channel must be ready. This is really analogous to opening a new resort, where every detail, from the buildings and grounds to the staff, and finally all of the supplies and services that are to be provided, must be ready to go before the door is opened to the first guest. Electronic commerce on the Internet is more like a shoestring project where every bit of functionality is somehow present, but none of it was designed from the ground up to be totally integrated with every other part of the process. What is there is often being forced to fit with the total solution. In short, the guests were allowed to arrive long before the resort was ready, and now extensive compromises must be made as the industry attempts to meet the demand and restructure itself to eventually do it right. Singh went on to note that the first generation of electronic commerce has been technology centric, focusing on: security, payment standards, transaction servers and storefront technologies.

In a well-designed system, agreements are made between the constituents before the development begins. Start with HTML standards. These have evolved from a "standard" which was under the control of the World Wide Web Consortium (W3C) and implemented by the initial browsers to meet the standard to a battle between the major players. Initially it was Netscape and Microsoft and then with the addition of Java, Sun, fighting the battle to control these standards by implementing proprietary features to enhance their products. The market acceptance of these non-standard features forced the W3C to embrace their work and recognize the de facto standards, in an attempt to regain control. But even this doesn't bring everything together.

Over the past two years, the credit card and banking industries have been divided on the payment technology, fighting over the standards to use. This is again pitting Microsoft, who partnered with Visa on the Secure Electronic Transaction, SET, against Netscape, who partnered with MasterCard, IBM, CyberCash, and GTE to develop the Secured Electronic Payment Protocol, SEP. Thanks to Microsoft's marketing clout, SET is now embraced by all of these players in an effort to move electronic commerce to a new level of acceptance.

Perhaps more than any other issue, it is security over the Internet that has plagued acceptance of electronic commerce -- perception, more than reality, acts as the barrier to companies and consumers engaging in this activity. While many gains have been made with the various encryption technologies and secured Internet protocols like Secured Sockets Layer (SSL), it is still public perception that an encrypted transaction can be deciphered that scares many consumers and business users.

Electronic data interchange has long addressed the security issues in electronic commerce. By placing a trusted third party, the value-added networks (VANs), in the middle of all transactions, both vendor and customer could feel secure in the knowledge that their transactions were safe from prying eyes. The Internet model could eliminate this model of information exchange for several reasons. First, the direct connection capability of Internet-based systems, with adequate security, allows trading partners to exchange information real-time without the need of an intermediary. Second, the cumbersome standards of EDI can be bypassed for application-specific transactions coupled with standards-based transactions that have emerged outside of EDI.

One other major hurdle in the journey to electronic commerce has been the integration of legacy systems in both the EDI and Internet worlds. Middleware solutions have been slow in coming, especially prior to two years ago, where solutions were being developed to the old client/server paradigm that didn't include the Internet browser as the basis of the universal client.

How to get there
In the midst of the many standards being formed to conduct electronic commerce, order is emerging. Rising up from the security created at the protocol level with SSL, other techniques, including encryption of the data, are beginning to assuage the security concerns of the market. Transaction standards, like SET, begin to create easily implemented solutions to move money across the Internet in a secured fashion. Next, add Java to the solution set, allowing applications to be developed across client and server platforms. With the addition of Java virtual machines onto many host platforms, legacy systems become yet another data source available to Internet technology-based applications. Each of these areas are being developed in an object-oriented framework, enabling the technologies to be plugged into a solution as required and replaced as new versions or alternative technologies become available.

SunConnect is an excellent example of how Sun is moving electronic commerce forward. This application solution leverages the many Sun products, including SunScreen and the Java Electronic Commerce Framework, into a secured financial transaction environment across the Internet. Add to that solutions from third-party developers, like Actra Business Systems's Actra ECXpert, an EDI solution for the Internet being developed by GE Information Services and Netscape, or Transact from Open Market, plus many others, and you can see that electronic commerce is emerging as a viable option today in the framework of the Internet.

USWeb, a leading solution provider solely focused on Internet technology-based solutions, took the component approach to solving a major problem for Harley-Davidson. USWeb documented with Harley-Davidson that the warranty claims process took three weeks to complete, with a one in three error rate. Harley-Davidson needed a solution it could deploy to its dealers everywhere, one that took advantage of existing computing resources internally and externally and one that could be developed in a modular model. USWeb recognized the advantage Internet technologies presented to the project, including the universal client capability of the browser. Now, according to USWeb, warranty claims take hours to days with a magnitude improvement in errors. In many cases, when the claim is entered online, a complete claims history is available to the customer, and the claim can be acted upon right away.

USWeb and Harley-Davidson picked this project because it was an area in deep need of improvement and could be deployed rapidly -- in weeks versus months. The key infrastructure element that made this easy was the fact that everyone has access to a browser, where the client side of the application became platform independent, plus the ease of gaining access to the Internet made placing the system online much simpler. With improved security systems, the data and process are kept in check for Harley-Davidson and its dealers.

Using the sphere of influence that you have over your immediate trading circle, both suppliers and customers, look at what processes can be best integrated through direct contact. The checklist of tasks to get into electronic commerce is long, as you can see in Table 3. Several new factors affect the success of an Internet-based project. The primary is the inclusion of external organizations -- not just outside the IS department or the application group that requests this new application -- but actual vendors and customers. Even more than before, industrywide collaboration may be desired for some applications to fuel a larger industry surge in business through this new medium. Also needed will be graphics designers and overall experts on how to best present information in this highly interactive and responsive medium. Gone are the simple screens of yesterday, and here now are the complex days of bad interface designs when time and effort aren't invested early on to create the right approach for each application.

Select a needy and small enough process to start.
Involve your trading partners and get their needs and technology capabilities defined up front.
Map out the process based on the capability of the technology and fulfilling the outstanding requests for improvements.
Design an infrastructure that secures your internal systems and data while publishing the content to be accessed through the Internet.
Select the required middleware and Web server technologies to develop your applications, with an eye towards flexibility in adapting to the rapid pace of technology change.
Prototype the screens first (pay attention to the graphics and design issues), then create the interconnects to the data and finish with the required backend processing.
After this point, you are back into normal software implementation cycles.

Is this the final road?
As the network improves, multimedia will begin to truly ride the Internet, and users will really be ready to trust this new medium. The advent of object-oriented software, true universal clients, cross-platform capabilities, widely accepted and implemented standards, plus seemingly universal connectivity has opened the door to electronic commerce.

This is the start of a fantastic roller coaster ride, where global competition will really emerge because the Internet truly knows no boundaries. So don't wait to get involved. Go find that unique, much-needed, customer-focused project to begin your transition. Get online with someone in your trading chain and take everyone on, one fast step at a time.


About the author
Robert E. Lee is a technology consultant, speaker, columnist, and author who has been in the computer industry for 20 years. He specializes in networking, Internet strategies, systems analysis and design activities, and has participated in the Windows NT and Internet Information Server betas since the start of those products. In addition to several other recent feature stories, Rob wrote the June 1997 SunWorld news story, "Cisco throws its support behind Microsoft's directory service vaporware." Reach Robert at rob.lee@sunworld.com.

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