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Measuring the business value of information technology: the case of financial electronic data interchange… Bergeron, Marielle 1994

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MEASURING THE BUSINESS VALUE OF INFORMATION TECHNOLOGY: THE CASE OF FINANCIAL ELECTRONIC DATA INTERCHANGE (EDI) IN CANADA  by MARIELLE BERGERON  B.A.A., Ecole des Hautes Etudes Commerciales, 1977 C.A., Canadian Institute of Chartered Accountants, 1980 M.Sc. (Computer Science), Concordia University, 1985  A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES Faculty of Commerce and Business Administration  We accept this thesis as conforming , to the required standard  THE UNIVERSITY OF BRITISH COLUMBIA September 1994 ®Marielle Bergeron, 1994  In presenting this thesis in partial fulfillment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission.  (Signature)  Department of Commvers and Business Administration  The University of British Columbia Vancouver, Canada Date  Feb. 28/94  ABSTRACT  Why and how much should we invest in this information technology  (IT)?  The  difficulty to formulate well-justiified, convincing answers to those questions asked by corporate decision-makers has been identified as a major impediment to one rapid adoption of IT innovations by the business community. This study investigates the fundamental construct underlying these questions by performing a formal assessment of the business value of financial electronic data interchange (EDI) technology for corporate adopters in Canada. Three major Canadian financial institutions, seven cross-industry financial EDI user organizations (originators and receivers), several reference firms and more than fifty individuals actively participated in this study which follows a triangulation data collection approach. Within a cohesive financial EDI value measurement framework based on the theory of capital budgeting, a set of realistic and flexible models for measuring the business value of financial EDI was developed from a rigorous, item-by-item analysis of the data. Following a scenario-based approach, the data and models were used to estimate the magnitude of potential net benefits of financial EDI to corporate adopters. A formal evaluation of the expected and actual costs and benefits of financial EDI to participating user firms was conducted using the models. Several major conclusions were drawn from this in-depth study of financial EDI investments including, among others, the substantiated observation that from a payment process perspective, financial EDI is potentially more beneficial to corporate receivers than originators. Compared to non-financial EDI applications, potential economic gains from reduced payment cycles accrue primarily to the supplier community, rather than the initiators of financial EDI systems. Major contributions of this study include first, the development of a theory-based value  Ill  measurement framework, and second, the presentation and application of a structured, iterative methodology for the evaluation of financial EDI investments. The proposed financial EDI cost/benefit models also offer a useful, practical set of tools to potential and actual user firms in evaluating the organizational value of future or current financial EDI programs. Finally, the study is also intended to assist Canadian financial institutions in their financial EDI diffusion effort.  IV  TABLE OF CONTENTS  Abstract  ii  List of Tables  vi  List of Figures  vii  Acknowledgements  viii  CHAPTER I: A. B. C. D.  Interorganizational Payments in Canada Research Objectives Importance of the Study Definitions and Scope of Financial EDI  CHAPTER II: A. B. C.  A. B. C. D. E. F. G. H. I.  8 16 20  RESEARCH METHODOLOGY  Overall Research Design Sample Financial Institutions Financial EDI Usage in Canada Sample Financial EDI User Organizations Data Collection Reliability Confidentiality  CHAPTER IV:  1 2 4 5  THEORETICAL FRAMEWORK  Literature Review Overall Research Framework Financial EDI Value Measurement Framework  CHAPTER III: A. B. C. D. E. F. G.  INTRODUCTION  29 29 30 33 36 42 43  BENEFITS OF FINANCIAL EDI  Introduction Potential Payment Process Savings Potential Payment Cycle Gains Other Potential Financial EDI Benefits Financial EDI Benefit Model for Corporate Originators Expected and Actual Financial EDI Benefits to Participating Originators Financial EDI Benefit Model for Corporate Receivers Expected and Actual Financial EDI Benefits to Participating Receivers Conclusions  44 47 50 70 81 102 121 140 149  CHAPTER V: A. B. C. D. E.  Introduction Potential Financial EDI Costs Financial EDI Cost Model Expected and Actual Financial EDI Costs to Participating Adopters Conclusions  CHAPTER VI: A. B. C.  153 154 161 164 173  BUSINESS VALUE OF FINANCIAL EDI  Risk Assessment of Financial EDI Financial EDI Business Value Model Potential Factors Influencing the Business Value of Financial EDI  CHAPTER VII: A. B. C.  COSTS OF FINANCIAL EDI  176 179 183  CONCLUSIONS  Contributions of the Study Limitations of the Study Future Directions  REFERENCES  186 189 189 192  APPENDICES A. B. C. D. E. F. G. H. I. J. K.  Interview Guide with Financial Institutions Financial EDI Usage Form Interview Guide with Financial EDI User Organizations Confidentiality Statement Potential Payment Process Savings for Corporate Originators Potential Payment Process Savings for Corporate Receivers Listing of Financial EDI Benefit Model for Corporate Originators Listing of Financial EDI Benefit Model for Corporate Receivers Listing of Financial EDI Cost Model Listing of Financial EDI Business Value Model Simulation Data for Financial EDI Models  201 214 215 242 243 277 295 308 320 323 327  VI  LIST OF TABLES  Table 2.1 Table 2.2 Table 2.3  Representative Aggregate IT Investment Studies Representative Functional IT Investment Studies Representative Studies of Factors influencing the Success of lOS/EDI Implementation Table 2.4 Potential Benefits of Financial EDI Table 3.1 Distribution of Participating Financial EDI User Organizations Table 3.2 Measurement of Potential Financial EDI Benefits for Corporate Originators: Reduced Payment Transaction Costs Table 3.3 Measurement of Potential Financial EDI Benefits for Corporate Receivers: Reduced Payment Transaction Costs Table 3.4 Measurement of Potential Financial EDI Benefits for Corporate Originators and Receivers Table 3.5 Measurement of Potential Financial EDI Costs for Corporate Originators and Receivers Table 4.1 Statistics on Cheque-Based Payment Cycles Table 4.2 Influence of Financial EDI on Trade Credit Cycle Table 4.3 Control Analysis of Trade Credit Cycles Table 4.4 Perceived Potential Benefits of Financial EDI Table 4.5 Influence of Financial EDI on Cash Discounts Lost Table 4.6 Financial EDI Benefit Model for Corporate Originators Table 4.7 Computerized Cheques vs. EDI Payments/Remittances Table 4.8 EFTs with Paper Remittances vs. EDI Payments/Remittances Table 4.9 EFT-Express Supported by Voided Cheques vs. EDI Payments/ Remittances Table 4.10 Outbound Financial EDI Benefits to Participating Originators Table 4.11 Financial EDI Benefit Model for Corporate Receivers Table 4.12 Cheques Mailed Directly vs. EDI Payments/Remittances Table 4.13 Paper Lockbox Services vs. EDI Payments/Remittances Table 4.14 EFTs with Paper Remittances vs. EDI Payments/Remittances Table 4.15 Inbound Financial EDI Benefits to Participating Receivers Table 5.1 Financial EDI Cost Model for Corporate Adopters Table 5.2 Financial EDI Costs to Participating Adopters Table 6.1 Perceived Financial EDI Implementation Risk Table 6.2 Financial EDI Business Value Model for Corporate Adopters  10 11 14 25 35 37 38 39 40 63 67 70 71 80 82 95 99 101 103 122 134 137 139 141 162 165 173 180  VII  LIST OF FIGURES  Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure  1.1 2.1 2.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 6.1 F.I  Flow of Money and Data with Financial EDI 7 A Business Value View of Financial EDI Implementation 17 Evolution of Financial EDI Value Over Time 22 Multiple Co-Existing Payment Environments 47 Trade Credit Cycle in a Paper-Based Environment 53 Equilibrium between Pre-EDI and Post-EDI Payment Cycles 62 Multiple-Baseline Analysis of Trade Credit Cycle Across Groups 65 Multiple-Baseline Analysis of Trade Value Settlement Across Groups . . . . 69 Potential Variable Unit Process Savings at /?/v = 5 96 Break-Even Analysis of Multiple A/P EDI Scenarios 97 Potential Variable Unit Process Savings at /?o = 40 and /?/v = 5 134 Break-Even Analysis of Multiple A/R EDI Scenarios 136 Potential Factors Influencing the Business Value of Financial EDI 184 Multiple-Baseline Analysis of Partial Payment Rate Across Groups 290  VIII  ACKNOWLEDGEMENTS  Financial support for this research project by the following major Canadian financial institutions is gratefully acknowledged: Alberta Treasury Branches Bank of Montreal Hongkong Bank of Canada Royal Bank of Canada Toronto-Dominion Bank.  Further thanks go to the following Canadian organizations for their highly appreciated participation in this study: Bank of Montreal IBM Canada Limited Imperial Oil Limited Jones Box and Label Co. Limited Province of British Columbia Royal Bank of Canada Standard Products (Canada) Limited Toronto-Dominion Bank Trimac Transportation Services University Hospital of London.  I am also very grateful to my advisor, Al Dexter, for his positive attitude and extremely efficient support throughout this research project. It was a pleasure to work with Al and learn from his experience. I also thank the committee members, Izak Benbasat and Maurice Levi, for their insight and valuable advice. Finally, I would like to extend my gratitude to Michele Bergeron and Michele Perigny for their understanding, encouragements and dearest friendship. They gave me the motivation to keep going.  I. INTRODUCTION  A. Interorganizational Payments in Canada In Canada, the volume of cheques is estimated at 2.5 billion per year'. Assuming the same distribution applies to Canada as to the United States (Steiner and Teixeira 1990: 81 f, the total volume consists of: 200 million (8%) individual-to-individual (or bank) cheques; 1.2 billion (48%) individual-to-corporation cheques; 600 million (24%) corporation-to-individual cheques; and, 500 million (20%) corporation-to-corporation cheques. In 1988, less than 2.8% of target cheques had been displaced by electronic funds transfers (EFT), and the bulk of those EFT payments were from corporations to individuals (Steiner and Teixeira 1990; Ballance 1992). This study focuses on the last category of cheques which represent interorganizational payments, also denoted corporate-to-corporate or simply corporate payments. In 1988, the almost non-existence of EFT corporate payments was explained by the limited information transfer capabilities of the Canadian EFT banking network (Getgood 1992). Indeed, in addition to the basic funds transfer information (i.e. payor, payee, bank, branch, account number and amount), an EFT payment contains very limited descriptive information (typically a crossreference number). In comparison, the remittance portion of a corporate payment can carry information on several dozens invoices. In the early 1989, the creation of an inter-financial institution EDI committee, called  ' This figure is based on the 1988-1992 annual flow of inter-bank payment items through the Automated Clearing Settlement System (ACSS) of the Canadian Payments Association (CPA) which represents approximately 70% of total cheques in Canada. ^ This assumption does not take into account the higher proportion of cheques from the government to individuals in Canada than the U.S. due to the lack of statistics from the CPA.  2 lnter*EDI Committee, began a major cooperative EDI initiative in the Canadian banking industry (lnter*EDI 1989-91). As a result, EFT has been blended w i t h EDI to create a new payment method referred to as financial EDI. In contrast to an EFT payment, an EDI payment can accommodate the transfer of both funds and remittance data because the Canadian EDI banking network supports virtually unlimited descriptive information relative t o a corporate payment. Ballance ( 1 9 9 2 : 27) reported that "Few businesses had truly analyzed the cost of producing a paper check....Each company that did the analysis came up w i t h a different number, but all found that, instead of the expected cents or even a f e w dollars, the cost w a s $ 1 0 , $ 2 0 or even $30 per check and more."^ The cost of processing a paper-based invoice could also be added to these figures if one considers that the EDI payment process is triggered by the delivery of goods and services rather than by the receipt of an invoice. Under the assumption that financial EDI is embraced by the Canadian business community, each dollar per transaction saved by this new method of payment would translate into 5 0 0 million dollar savings per year at the national level considering the high volume of corporate cheques that could be potentially displaced'^.  B. Research Objectives The difficulty to justify large and complex innovations has been identified as a major factor inhibiting a rapid adoption of technological innovations by organizations (Davis 1 9 8 6 ;  ^ Some cheques could possibly go as high as $30 and more but at the national level, an average cost of $20 per corporate-to-corporate cheque would mean 10 billion dollars per year. This equals 1.5% of the gross domestic product (GDP) or 20% of the financial system in Canada. *  Even though we recognize that the payment requirements of small and medium size companies may differ from larger firms, it was not possible to present a detailed breakdown of corporate payments by firm size due to the lack of statistics from the CPA.  Nault et al. 1994). Similarly, Swatman and Swatman stated that: "The first obstacle to the diffusion of EDI is the difficulty of quantifying its benefits, causing organizations which are not convinced that EDI will be of real use to defer the decision to participate." (Swatman and Swatman 1991: 355). In that context, the basic question for the present research study is:  What is the  business value of financial EDI for corporate adopters in Canada? This national perspective highlights the fact that the payment and cash management systems in Canada differ from other countries, including the United States (Globecon Group 1988; Ballance and Dido 1992). The expression "business value" also emphasizes the primary goal of this study which is to determine what financial EDI is worth for organizations, as opposed to individuals, industries or nations. More specifically, the objectives of this study are to:  1.  Develop a theory-based value measurement framework that takes into account the cost, benefit and risk of implementing financial EDI in an organization;  2.  Determine which types of corporate payment transactions, if any, cannot be converted to financial EDI;  3.  Investigate what the expected and actual costs and benefits of financial EDI are to current user organizations;  4.  Develop models to use for measuring the expected and actual business value of financial EDI to corporate adopters (originators and receivers);  5.  Evaluate the magnitude of potential net benefits of financial EDI to corporate adopters (originators and receivers) on a per-payment transaction basis.  4 The study is also intended to assist Canadian financial institutions in their financial EDI diffusion effort by providing in-depth assessment material on corporate payment systems, procedures and practices. The study also analyzed the development and adoption problems, issues and concerns raised by actual financial EDI user organizations. Access to these firms was gained under the seal of confidentiality.  C. Importance of the Study Some organizations have long recognized the key role that EDI could play in their quest for efficiency improvements and competitive advantage. The practitioner literature abounds with anecdotal stories of successful EDI initiatives. However, we observe that EDI has by no means reached the explosive rates of adoption predicted, year after year, by practitioners around the world! In Canada, the actual adoption rate of EDI in number of corporate users is estimated at less than 5% of its potential (Wrigley 1991). Under the premise that widespread adoption of EDI will enhance the global competitiveness of Canadian organizations, this low penetration has called for more formal research on EDI, particularly in the areas of adoption, economics and architectural issues (Dexter etal. 1991). By investigating the business value of EDI in the financial corporate arena, this study represents a step in the right direction as illustrated by the following comment made to the author by a banker in corporate electronic banking: "EDI is a transport process from which we derive products....The first product that we really focused on is an EDI-based payment function [i.e. financial EDI]....We have a series of services now emerging from the same technology platform [e.g. information reporting, trade-type services, accounts payable and receivable management]....If you are focusing the activities of this [research] project on anything but financial EDI, then  5 you should investigate the benefit process, the actual derivables....We haven't got any really good, concise study."  Indeed, one of the major objectives of this study is to provide a complete set of models for measuring the business value of financial EDI technology to potential and actual corporate adopters across industries in accordance with the following statement of an honored researcher: "Academic accounting [MIS]--like engineering, medicine, law, etc.--is obliged to provide a range of tools for practitioners to choose from....You may say, actual practice expects the researchers at professional schools to offer different sets of ready-made tools for different purposes. And rightly so, because it would be most inefficient to force practitioners to forge for themselves those tools from the material supplied by positive accounting [MIS] theory." (Mattessich 1995a: Chpt. 10, 18). Furthermore, the study empirically evaluates both the organizational costs and benefits of a specific IT innovation or application based on objective, quantitative measures. With due respect to prior high quality research in this area (see Tables 2.1 to 2.3 in the next chapter), previous functional IT investment studies have tended to focus on a relatively limited set of quantifiable benefits, and when a larger set is examined, qualitative perceptual benefit measures tend to be used in spite of Pentland's (1989) findings that major discrepancies can exist between user perceptions of performance improvements and actual results.  D. Definitions and Scope of Financial EDI EDI is defined as the "computer-to-computer transmission of business transactions in a standard format" (EDI Council of Canada).  It involves the use of computer and  communications technology to exchange standardized business transactions between  6 organizations. EDI can be viewed as an interorganizational information system (lOS) defined as "automated information systems shared by two or more companies" (Cash and Konsynski 1985). Within the classification of lOS proposed by Johnston and Vitale (1988), EDI falls into the category of systems whose prime information function is the handling of boundary transactions between organizations. Financial EDI is a subset of EDI for the "computer-to-computer (application-toapplication) transmission of payment-related business transactions in a standard format". In the context of this study, financial EDI refers primarily to the exchange of standardized payment orders and remittance advice between organizations. This definition is consistent with the original scope of the Canadian banking industry's ED! initiative which excluded the transmission of invoices in EDI format. However, the models prepared here could readily be applied to the broader analysis which includes the transmission of invoices. Four groups of organizations are involved in the exchange of EDI payments/remittances as illustrated in Figure 1.1: (1) financial institutions which participate in the Canadian ED! banking network i.e., payor bank and payee bank; (2) corporate originators which introduce financial EDI into their accounts payable and disbursement processes i.e., payor corporation; (3) corporate receivers which introduce financial EDI into their accounts receivable and collection processes i.e., payee corporation; and, (4) value-added networks (VAN) which may also participate in the transport of electronic payments i.e., payor VAN and payee VAN. The above categories are not mutually exclusive. For instance, an originator of EDI payments to its suppliers may also be the beneficiary of EDI payments from its customers. EDI network providers may be originators and/or receivers of EDI payments.  This study  assesses the business value of financial EDI for corporate adopters (originators and receivers), as opposed to service providers (financial institutions and value-added networks). For the  purpose of this study, corporate adopters of financial EDI are defined as firms which issue and/or receive payment/remittance transactions in EDI format i.e., the firm operates a computerized financial EDI system or application.  r  PAYOR VAN  1 1  !  1 EDI ($ / Data) ^  PAYOR BANK  1 EDI (S / Data) .  PAYEE BANK  1 1 1 1 1  1  1 PAYOR CORP.  n  PAYEE VAN  1 EDI (Data only)  PAYEE CORP.  Figure 1 . 1 - Flow of Money and Data with Financial EDI  Organization of this Thesis In Chapter II, a survey of the literature which pertains to the applications of economic and financial theory in IT value research is presented.  An overall research framework  integrating various models from the IS implementation and diffusion of innovations literature is developed, as well as a financial EDI value measurement framework based on the theory of capital budgeting. In Chapter III, the research approach is described and the detailed data collection protocol is presented. Data is analyzed and the proposed models for measuring the benefits, costs and business value of financial EDI to corporate adopters are presented in Chapters IV, V and VI respectively.  These models are also applied to the evaluation of  financial EDI investments. Chapter VII summarizes the results.  II. THEORETICAL FRAMEWORK  A. Literature Review Bakos and Kemerer (1992) provide a very comprehensive survey of the applications of economic theory in IT research. Six areas of economic theory are presented: information economics, production economics, economic models of organizational performance, industrial organization, institutional economics, and macroeconomic studies of IT impact. Each area analyses the economics of IT from a different perspective. Information economics establishes the value of information as its ability to increase the expected utility of a decision-maker. Production economics focuses on the economics of providing IT resources. Economic models of organizational performance covers economic and decision-theoretic models of organizational efficiency, as well as empirical attempts to document the organizational benefits from IT investments. Industrial organization refers to the broad field within microeconomics that studies business behavior and its implications for firm conduct and market structure.  Institutional economics covers the applications of  transaction cost theory and agency theory to the domain of IT.  Finally, macroeconomic  studies of IT impact deals with economic variables at the economy-wide level of aggregation. Three of these areas can play a role in determining the business value or economic impacts of EDI technology for an organization:  economic models of organizational  performance, industrial organization, and institutional economics (transaction cost theory). The stream of research on the impact of IT on organizational performance, often referred to as IT value research, is empirical in nature. Studies in this area may be categorized into two groups: aggregate IT investment studies which determine the effects of changes in aggregate levels of IT investments on overall firm or business unit performance, and functional IT  9 investment studies which determine the effects of specific IT applications on functionally related performance at activity or aggregated levels (Dos Santos and Peffers 1993). The six studies summarized in Table 2.1 are representative of the research that falls into the first category (Cron and Sobol 1983; Bender 1986; Loveman 1988; Alpar and Kim 1990; Harris and Katz 1991; Weill 1992). The relatively modest success achieved to date in this line of research has been attributed to several factors, including (i) the use of simple bivariate correlation analysis to link IT expenditures to bottom-line indicators (McKeen and Smith 1992), (ii) the dilution of the value of IT in aggregate performance measures (Kauffman and Weill 1989), and (iii) the questionable reliability of IT investment measures considering the noticeable trend toward decentralization of IT expenditures to functional departments (Weill and Olson 1989). This holistic viewpoint overlooks the fact that a reductionist approach is most frequently followed in practice to assess the advisability of investments in IT (Maltin 1979; Strassman et al. 1988; Lederer and Mendelow 1988; Katz 1993).  Table 2.2 offers a  representative sample of studies that focus on specific IT applications and consequently fall into the second type of IT value research (Banker and Kauffman 1988; Pentland 1989; Banker et ai. 1990; Venkatraman and Zaheer 1990; Kekre and Mukhopadhyay 1992; Srinivasan et al. 1994). Contrary to aggregate IT investment studies, the studies in Table 2.2 are based on a benchmarking approach rather than a cost/benefit approach (Venkatraman and Zaheer 1990).  They all investigate performance improvements for different levels of system  utilization (often IS/IT presence) rather than different levels of system investment. Several researchers view this latter line of research as the most promising avenue for IT value research. Various reasons support their stand, including (i) studies of investments in specific IT applications are more likely to provide results that can be useful to managers  Table 2.1 Representative Aggregate IT Investment Studies Author(s)  Unit of Analysis  Independent Variables  Dependent Variables  Type of Analysis  Key findings  Cron/ Sobol (1983)  Firm (138 medical wholesalers)  - Computer ownership - Number of applications - Type of applications  - Profitability (ROA; profits/sales; return on net worth) - Competitive advantage (sales growth)  Analysis of variance  - Firms with heavy computer usage are either very strong or very weak financial performers.  Bender (1986)  Firm (132 life insurance companies)  - IT expenses/operating expenses (total and by type of IT expenditures)  - Efficiency (operating expenses/ premium income)  Regression analysis  - A range in the IT expenses/operating expenses ratio of 15% to 25% produces optimum results. - Some types of IT expenditures have a greater impact on the total expense position of a company.  Loveman (1988)  Firm/SBU (60 manufacturers)  -  - Sales (adjusted for inventory changes)  Production function Time series  - No evidence of significant positive impact from IT.  Alpar/ Kim (1990)  Firm (624-759 banks)  - IS expenses - IT index (number of ATMs; number of computerized business functions) - Labor - Capital - Time deposits  - Loans (3 types) - Demand deposits  Cost function Time series  - 10% increase in IT associated with 1.9% decrease in total costs. - IT contributed to a reduction in demand deposits and increase in time deposits. - IT is capital using and labor saving.  Harris/ Katz (1991)  Firm (40 life insurance companies)  - IT expenses/operating expenses - IT expenses/income  - Efficiency (operating expenses/ premium income)  Contrasts Analysis of variance Time series  - Top performing firms had higher growth in IT expense ratios and lower growth in operating expenses than weak performers.  Weill (1992)  Firm/SBU (33 valve manufacturers)  - IT expenses/sales (total and by type of applications) - Conversion effectiveness factors (top management commitment; user satisfaction; IT experience; political turbulence)  - Profitability (ROA) - Competitive advantage (sales growth) - Productivity (non-production labor/ sales and %change)  Hierarchical regression Time series  - No significant relationship between total IT investment and any performance measures. - Heavy use of transactional IT associated with strong firm performance. - Higher conversion effectiveness associated with strong financial performers.  IT capital Labor Materials Non-IT services Non-IT capital  o  Table 2 . 2 Representative Functional IT Investment Studies Author(s)  IS/IT  Unit of Analysis  Independent Variables  Dependent Variables  Type of Analysis  Key findings  Banker/ Kauffman (1988)  ATM  SBU ( 5 0 8 bank branches)  - Presence of A T M at a bank branch - Connection to regional shared A T M n e t w o r k - Various banking environment factors  - Competitive advantage (demand and savings deposit share markets)  Multiplicative competitive interaction model  - Use of A T M enables branch t o protect rather t h a n g r o w market share. - Consumers are willing to pay for regional access to shared n e t w o r k .  Pentland (1989)  EUC  Individual ( 1 1 0 0 revenue agents)  - Use of various generic PC packages - Various user characteristics and adoption factors  -  Efficiency (labor hours per audit) - Effectiveness (client reports)  Regression analysis  - No discernible productivity improvement. - Major discrepancy b e t w e e n user perceptions of improved productivity and actual results.  Banl<er/ Kauffman/ Morey (1990)  POS  SBU (89 restaurants of Hardee)  - Presence of Positran at a restaurant - Various restaurant descriptors  -  Data envelopment analysis  - Reduced materials waste in highpercentage-breakfast sales restaurants.  Venkatraman/ Zaheer (1990)  lOS  Individual ( 1 5 6 insurance agents)  - Presence of electronic integration w i t h insurance earners  -  Efficiency (number of policies in force) - Effectiveness (total premium and commissions) - N e w business (number of new policies)  Quasi-experiment  - Improvements only in terms of increases in n e w business policies.  Kekre/ Mukhopadhyay (1992)  EDI  Firm ( 6 5 outside processors of LTV Steel)  - Transaction d e n s i t y - Perceived good management - Various manufacturing environment factors  -  Inventory (retention time b y materials) - Quality (processing defects) - Performance (customer satisfaction)  OLS and 2SLS regression  - High transaction density permits l o w e r inventory levels. - Lower inventory levels are associated w i t h improved quality. - The combined effect of reduced inventory and higher quality raises performance levels.  Srinivasan/ Kekre/ Mukhopadhyay (1994)  EDI  Firm ( 1 9 3 suppliers of Chrysler)  - Presence of EDI at a supplier - Receipt of JIT schedule - Percentage of partners w i t h EDI links - Various supplier material f l o w characteristics  -  Logit model  - Suppliers receiving EDI JIT schedule achieve better shipment performance. - Shipment errors diminish as a higher fraction of customers is handled t h r o u g h EDI.  Efficiency (materials costs as a f u n c t i o n of breakfast and nonbreakfast sales)  Performance (shipment discrepancies)  12 responsible for making investment decisions (Dos Santos and Peffers 1993), and (ii) research designs involving clearly identified technology and user groups or organizations offer the greatest potential for finding interesting results (Lucas 1993). A shortcoming of this type of research is that it masks the interaction among individual projects and fails to appreciate the synergistic value of the portfolio of projects as a concerted whole (McKeen and Smith 1993). Since the early 1980s, much of the MIS literature has been concerned with the strategic value of IT investments. Porter's (1980) model of competitive forces suggests a point of view based on the dynamics of an economic game where participants include industry competitors, customers, suppliers and potential entrants. In that context, IT investments are viewed as strategic weapons that can be used to secure competitive advantage (Benjamin et al. 1984; Ives and Learmonth 1984; McFarlan 1984; Porter and Millar 1985; Bakos and Treacy 1986; Benjamin et al. 1990). Most of the relevant studies in this domain seek to make the case through the development of conceptual frameworks and ex post examples of successful strategic IT (e.g. American Hospital Supply ASAP System 1985; Pacific Pride Commercial Fueling System 1985; Singapore TradeNet 1990). More formal frameworks and economic models based on the theory of industrial organization (Tirole 1988) have been recently developed for interorganizational systems (Meier 1990; Nault 1990; Baruaetal. 1991; demons and Kleindorfer 1992; Nault et al. 1994). Of particular interest is the model of Nault et al. (1994) for the adoption of communication-based innovations: lOS and EDI. The pricing structure of this model covers lump-sum charges or incentives for adoption, as well as premiums or discounts on transacted goods prices. Other relevant frameworks have also been developed from the work of Williamson (1981) on transaction costs and organizational efficient boundaries (Ciborra 1985; Malone et al. 1987; Bakos 1991; Gurbaxani and Whang 1991; Lohtia 1991). Williamson's transaction  13 cost theory suggests that the relative desirability of markets and hierarchies is related to the relative importance of production and coordination costs.  Because the essence of  coordination involves communicating and processing information, the use of lOS/EDI seems likely to change the flow of goods and services within an industry value-added chain, or between industries for financial EDI. From a different research perspective, some recent empirical studies have focused on the identification of key factors influencing the success of lOS/EDI in terms of development, adoption and/or value. Table 2.3 provides an overview of the research frameworks of four representative studies (Reich and Benbasat 1990; Bergeron and Raymond 1992; O'Callaghan et al. 1992; Saunders and Clark 1992). Two of these studies attempt to establish causal relationships between various potentially influential factors and IT value constructs of EDI advantages (Bergeron and Raymond 1992) and competitive advantage (Reich and Benbasat 1990), but these dependent variables were not measured quantitatively. A main conclusion of a recent, extensive survey of the MIS literature is that "Not enough field study research attempts to measure the influence of MIS effort on organizational performance." (DeLone and McLean 1992: 81). This study seeks to partially bridge the gap by performing a formal assessment of the business value of financial EDI technology for corporate adopters in Canada. The finance literature also provides a theoretical foundation for corporate investment decisions, often referred to as capital budgeting. Several methods or techniques can be used in deciding whether or not to make an investment, such as the payback method, the return on investment, the net present value and the internal rate of return (Fame and Miller 1972; Myers 1976; Copeland and Weston 1983). These traditional techniques are all based on the cost/benefit or net cash flow model for project evaluation.  Table 2.3 Representative Studies of Factors Influencing the Success of lOS/EDI Implementation  Author(s)  lOS/ EDI  Unit of Analysis  Independent Variables  Dependent Variables  Type of Analysis  Key findings  Reich/ Benbasat (1990)  coss  Firm (9 user firms; 11 COSS)  Potential factors influencing: - COSS development - COSS adoption - Competitive advantage  - COSS development (first mover/follower) - COSS adoption (rate of adoption; penetration) - Competitive advantage (profitability; competitive strength)  Case study  - Commonalities among first-movers include, among others: strong business drive; presence of a champion; proactive IS function; and previous COSS experience. - Factors discriminating between fast and slow adoption rate include, among others: degree of champion continuity; support to the sales force; and awareness of need. - Factors differentiating winners and losers include: adoption penetration; time in marketplace and persistence.  Bergeron/ Raymond (1992)  EDI  Firm (140 user firms)  -  - Operational advantages - Managerial advantages - Strategic advantages  Stepwise regression  - Organizational benefits provided by EDI are perceived to be operational and managerial rather than strategic in nature. - More rigorous implementations associated with more successful firms.  O'Callaghan/ Kauffman/ Konsynski (1992)  lOS/ EDI  Individual (1242 insurance agents)  -  Efficiency advantage Service advantage System compatibility Organizational incompatibility - Influence of EDI adoptions - Influence of EDI source firm - Influence of industry promotion  - Actual lOS/EDI adoption - Share of business  Multivariate logit Quasi-experiment  - Focus on expected benefits of EDI; relatively less attention to initial adoption costs. - No positive impact of influence by other adopting agents, source firms or formal industry structures. - Agents expand the share of their business devoted to the carriers with which they have EDI linkages.  Saunders/ Clark (1992)  EDI  Firm (192 vendors of Chaparral Steel)  -  - Intent to adopt EDI  Stepwise regression  - Only perceived EDI costs negatively contributed to the intent to adopt EDI.  Organizational support Implementation process Control procedures Level of integration Imposition of partners  Perceived benefits Perceived costs Net dependency Trust  15 The difficulty of applying the financial model to IS projects arises from various reasons, including the intangibility of many IS costs and benefits (Parker and Benson 1988) and the lack of accurate data on which to base cost and benefit projections (Lay 1985). Given the uncertainty inherent to IS investments, the financial model could include a risk assessment of the project in terms of system development risk (Barki et al. 1992), as well as the business risk of not receiving the expected system's net benefits over time (Du6 1989). According to a recent international survey (Bacon 1992), the probability of achieving benefits and the probability of project completion are the second and third most frequently used decision criteria in selecting IT investments, after budgetary constraint. Similarly, Due argues that even though "Payback is the most commonly used method of comparing the costs and benefits of systems because its is easily performed and understood....Present-value analysis plus risk assessment provides the truest picture of economic feasibility of new system development alternatives." (Due 1989: 17, 19). Financial EDI impacts the payment processes and practices of corporate adopters. Two bodies of literature closely related to this area of study are cash management and industrial engineering. The primary goal of cash management is to optimize the availability of funds for use by treasurers (Sarpkaya 1986; Hampton and Wagner 1991). Whether disbursing or collecting money, money movements involve lags and delays. The expression "trade credit cycle" refers to the period of time between the delivery of goods or services and the receipt of cash on hand in a form that can be disbursed or invested. Many kinds of trade credit delays can be identified, including invoicing, postage, payment terms, cheque production, deposit processing and bank clearing delays. Financial EDI/EFT technology eliminates some of these delays and its impact on bottom-line results can be very significant (Lovejoy 1990; Keller 1990; Masonson 1990).  16 At the turn of the century, Taylor revolutionized the workplace with his ideas on work organization, task decomposition, and job measurement.  In contemporary industrial  engineering, IT is viewed as a powerful tool for increasing business efficiency through the redesign or reengineering of work flows and business processes within and between organizations (Davenport and Short 1990; Hammer 1990). Similarly, practitioners generally agree that the magnitude of EDI benefits is related to its level of integration into business applications, processes and practices. In addition to anecdotal evidence, the recent survey of Bergeron and Raymond (1992) provides some support for this EDI integration-benefits relationship. The authors' analysis of value items and factors included in the dependent "EDI advantages" construct was also particularly useful.  B. Overall Research Framework Figure 2.1 depicts the overall conceptual framework of the study. This framework presents an integrative, financial EDI (FEDI) value-oriented view of various implementation models proposed by researchers in the areas of IS implementation and diffusion of innovations (Rogers 1983; Kwon and Zmud 1987; Reich and Benbasat 1990; Bacon 1992; DeLone and McLean 1992). The financial EDI implementation process is subdivided into four phases:  (1) the  initiation stage where the expected value of financial EDI is assessed and the investment decision is made; (2) the development stage where the system is acquired/custom-made, tested and installed; (3) the adoption stage which covers the acceptance and use of financial EDI within the organization and among its business partners; and, (4) the evaluation stage where the realized actual value of the system is assessed. The feedback loop highlights the dynamic nature of this process.  17  FEDI Business Value Potential Factors Influencing \FEDI Deveiopmenty  FEDI Implementation  Initiation  Development  Adoption  Evaluation  Process  t Feedbadc  Figure 2.1 - A Business Value View of Financial EDI Implementation  The framework in Figure 2.1 was developed to illustrate the interconnection between the concept of IT business value and the process of implementing specific IT applications or innovations into organizations, namely financial EDI technology in the context of this study. In previous functional IT investment studies, the relationship between these aspects was underdeveloped. IT value has tended to be examined as an outcome of IT utilization, rather than as the end-result of all aspects of the IS implementation process; therefore the proposed framework presents a more integrated, connective model. Moreover, previous research on investments in specific IT applications appears limited in scope by studying only a few benefit variables. The framework taken here is global in scope: this approach examines both cost variables as well as benefits, and comprises an in-depth and extensive evaluation of financial EDI investments. From a process perspective, the model integrates Rogers' (1983) two stages of  18 innovation diffusion, initiation and adoption, with Reich and Benbasat's (1990) approach to lOS implementation by further dividing Rogers' adoption stage into financial EDI development and financial EDI adoption. This approach is consistent with Kwon and Zmud's (1987) view of the IS implementation process. The post-adoption evaluation stage is added to stress the need for a cost/benefit tracking program of IS projects (Bacon 1992). From a value perspective, the model identifies two distinct time-dependent financial EDI value constructs: its expected value for the organization which is based on a forecast of future implementation results, and its actual value for the organization which accounts for realized implementation results. This dual representation of financial EDI value captures the essence of both ex ante economic and ex post accounting approaches to the evaluation of corporate projects or investments. In that context, the success of financial EDI implementation can be expressed either as the extent to which the actual value of the system is positive to the firm (S,), or the extent to which the expected value of the system is realized assuming only projects having positive expected value are accepted (S2). Both approaches are examined in this study.  8, = Actual Value ^ 0 Sj = Actual Value ^ Expected Value ^ 0  The first success measure (S,) is expressed in post-implementation or actual terms only. It is the single, valid measure of corporate investment success in finance, because the discount rate in net present value (NPV) calculations, often called the "cost of capital", is established from the point of view of the shareholder. Given that a corporate project with a positive actual value implies a realized rate of return higher than in capital markets, it is thus a successful investment for the shareholder.  19 The evaluation timing becomes a critical issue in this measurement because an information system with a negative value in the short-run may prove to be very profitable in the long-run. This remark is particularly a propos for financial EDI technology given its relatively recent introduction into the Canadian business marketplace. In this context, it may be impossible to judge financial EDI success solely on the basis of the first success measure (S,) and the second success measure (S2) offers an alternative assessment approach. Nevertheless, some meaningful observations on the ability of an organization to rapidly realize the value of financial EDI can be made when the evaluation is performed across organizations at the same point in time in the implementation process e.g., one year after the system was put into production. The second success measure (S2) takes into account the fact that multiple, competing projects having positive expected net present value are presented to corporate decision-makers and frequently, only the most promising projects can be implemented within the budgetary constraints of a firm. The expected or target value of selected investments then becomes an important, internal management baseline for measuring success. Organizational budgetary practices commonly encompass the allocation of resources to major capital investments (IT and non-IT) as well as operating expenditures (e.g. labor). From an IT investment perspective, the second measure is based on traditional postimplementation evaluation or a post-mortem of IT projects in organizations. This measure assumes that a time variable is attached to the realization of the expected value of the system as in most cost/benefit analysis methods. Consequently, the level of success of financial EDI can be evaluated throughout the implementation process by comparing the actual and expected values of the system i.e., one year, two years, or more, after the investment decision was made. The validity of this measurement depends on both the reasonableness  20 of pre-implementation expectations and the measurement reliability of post-implementation results. The potential factors associated with the development and adoption stages represent a set of independent variables influencing the success of financial EDI. When the success construct is defined in terms of business value or organizational performance, variables such as system quality, usage and user satisfaction are then considered as explanatory or mediator rather than criteria variables (Kauffman and Weill 1989; DeLone and McLean 1992). As an example, the diffusion strategy of an organization can influence the level of financial EDI adoption among business partners which, in turn, directly impacts the benefits, and thus the value, of financial EDI to the originating firm. Although this research is not an adoption study on financial EDI technology, the framework proposed by Reich and Benbasat (1990) concerning factors influencing the success of customer-oriented strategic systems was used as a starting point for the identification of potential factors influencing the business value of financial EDI to corporate adopters. This framework was adapted by Benbasat et al. (1993) to include potential factors influencing EDI development and EDI adoption.  C. Financial EDI Value Measurement Framework The proposed framework for measuring the value of financial EDI investments is based on the theory of capital budgeting (Fama and Miller 1972; Myers 1976; Copeland and Weston 1983). The model applies to both ex ante and ex post analyses of financial EDI value. It was developed in a two-step approach: first, by applying basic corporate investment decision concepts to IS projects and then, by expanding definitions to include investment evaluation items specifically relevant to financial EDI technology.  21 In order to be profitable or cost beneficial to the firm, the one-time initial investment IQ in any corporate project must be less than its ongoing net benefits i.e., its ongoing benefits B, minus its ongoing costs Cf, over N pre-defined periods of time:  £  (5, - C , ) - / o > 0  <2.1)  In the practitioner domain, the time horizon for the evaluation of IS investments is often limited to five years (/V=5) because of the relatively short life cycle of information technologies. The initial investment /^can also be viewed as an integral part of an IS project. This view is supported in the overall research framework (see Figure 2.1) by showing the development of financial EDI as one of the four major stages of the implementation process. Considering that the development phase of an information system can span over more than one period or year, equation 2.1 then becomes:  E iB,-C,)-J:i,>0 t-D  (2.2)  t-1  where D is the development elapsed time in years after which the system is ready for adoption or deployment, and put into production. Figure 2.2 depicts the evolution of the cumulative business value of financial EDI technology over time. Once the decision to adopt financial EDI is made at tg, the corporate adopter incurs one-time investment costs (/,) until the development stage is completed at tp. The project then enters into the adoption phase and the ongoing net benefits (B^ - C,) stream begins. However, it can take some time before the cumulative financial EDI value becomes positive to the firm as illustrated by the break-even point tg^ in Figure 2.2.  22  1  -  1  1 1  _!..„,_  to  ^D  ^BE  1  t^  1  t^i  Time  Figure 2.2 - Evolution of Financial EDI Value Over Time  The fact that further development work may be required after tp is incorporated into the model by identifying post-production system enhancement costs as one element of the ongoing cost vector C,.  Once the adoption stage is completed at t^, meaning that EDI  payment transactions are exchanged with all target partners, the system continues to be in operation until it is abandoned or replaced by a more advanced technology at f/v i.e., after N years from the investment decision dateV At the initiation phase of an IS project, the basic equation 2.2 could be rewritten as equation 2.3 following the net present value plus risk assessment model:  ^  (1 - r,y " ^ (1 . r,r  > 0  (2.3)  ^ Note that t^ can be equal to t^j when, for instance, a high financial EDI penetration rate is targeted and new partners are added on a relatively frequent basis.  23  where: r^ is the discount rate for ongoing net benefits and r, is the discount rate for the onetime initial investment. In the context of this study, the net benefits discount rate {r^ incorporates the shareholder cost of capital to compute NPV as well as the probability of not realizing the expected net benefits of financial EDI. This approach is consistent with Due's (1989) description of the "present-value analysis plus risk assessment" method of determining the economic feasibility of IS projects. The method is based on the net present value model where the organization's minimum expected rate of return is used as discount factor. It also includes a business risk assessment component expressed in terms of decreasing probabilities of receiving the system's net benefits over the system's expected lifetime. The initial investment discount rate (/>) refers to the shareholder cost of capital, and it also considers the probability of not completing the financial EDI development project within budget. The latter element takes into account Barki et al.'s (1992) research work on risk and uncertainty factors in software development, including technological newness, application size, user and IS expertise, application complexity, and organizational environment. Two distinct discount rates are specified in equation 2.3 because the probability distribution of initial investments is not necessary the same as the probability distribution of ongoing net benefits. Indeed, in actual practice, IT development costs tend to be underestimated (Wrigley and Dexter 1991), while ongoing net benefits of IS projects often are overstated partly because the benefit realization process is often more difficult and costly than originally anticipated (e.g. lower adoption rates and higher diffusion costs). The net benefits discount rate (r^) could also incorporate an assessment of the relative significance of expected non-monetary benefits of financial EDI to the firm i.e., quantifiable  24 benefits not transformed into monetary equivalents and qualitative benefits. According to Myers (1976) however, this approach referred to as adjusted present value (APV) should be held in reserve for cases where the NPV is negative. The definitions of one-time investment costs (/,), ongoing system benefits (fl,) and ongoing system costs (C,) in equation 2.3 are expanded in the following subsections which deal more specifically with investments in financial EDI technology. These enhancements were developed from previous research and case studies of actual financial EDI user organizations.  a) Initial Investment In accordance with the overall research framework in Figure 2 . 1 , the initial investment in financial EDI can be divided into two major cost categories: (i) one-time development costs (Id) incurred by the firm to setup its financial EDI system or application e.g., communications hardware/software, mailbox with a network provider and EDI translation software; and, (ii) one-time adoption costs (la) to gain acceptance of financial EDI among internal users and external partners e.g., education, training and marketing documentation, and EDI start up software for external partners. For a given development period t, the initial investment vector in financial EDI can then be expressed as:  /, - {Id, . la,)  (2.4)  b) Ongoing Adoption Benefits Bergeron and Raymond (1992) applied the taxonomy of Anthony (1965) to EDI and characterized the advantages of EDI as being either at the operational level (administrative costs savings and transaction speed), the managerial level (information quality and operations  25 management) or the strategic level (competitive advantage). Potential benefits of financial EDI are classified along the same dimension in Table 2.4. This table also distinguishes between quantitative and qualitative benefits, the former category being further divided into monetary and non-monetary benefits. These benefits were identified from a review of the current EDI literature in both research and practitioner domains.  Table 2.4 Potential Benefits of Financial EDI  Operational Benefits  Quantitative Monetary Benefits  Quantitative Non-monetary Benefits  Qualitative Benefits  Reduced payment transaction costs  Reduced payment transaction cycle time  Key catalyst for payment process reengineering  Reduced payment error/ problem resolution costs  Reduced payment error/ problem rate  Enhanced data security and integrity  Value gained from EDI discounts on transacted goods price  Renegotiation of more favourable payment/ discount terms  Reduced payment transaction uncertainty  Value gained from more timely EDI payments/ Improved cash flow Managerial Benefits  Improved cash flow forecasting Improved relationships with partners Strategic Benefits  Competitive advantage Competitive necessity  From a measurement perspective, the potential monetary benefits of financial EDI in Table 2.4 can be grouped into three basic categories: (i) ongoing payment process savings  26 {Bp) derived from a comparison of the cost of processing payments via EDI versus the cost of processing payments under the previous payment method, (ii) one-time economic gains^ (Be) resulting from changes in payment frequency and cycle time, and (iii) other monetary benefits (Bo) attributable to financial EDI such as the value gained from EDI discounts on transacted goods prices. For a given adoption period t, the ongoing benefit vector of financial EDI can then be expressed as:  B, - (Bp, + Be, + Bo,)  (2.5)  It should be noted that the cost of payment errors and problems, as well as the cost of operating, supporting and maintaining existing payment systems are implicitly included into the pre-EDI and post-EDI costs of processing payments, and thus the resulting payment process savings (Bp). The following frequently mentioned benefits of EDI in general were not included in Table 2.4 because they are outside the scope of financial EDI value: (1) reduced inventory level and associated inventory carrying costs; (2) reduced operations cycle time; (3) reduced decision cycle time; and, (4) improved client service quality. For internal validity purposes, these benefit subcategories of EDI value in general were nevertheless included in the list of potential benefits of financial EDI provided to study participants. Their perception of the applicability of these investment evaluation items to financial EDI in particular is discussed in Chapter IV, section D. However, the models prepared here could readily be applied to the broader analysis of EDI in general which includes these benefits.  ^ The terms "savings" and "gains" also refer to losses, hence to benefits of a positive or negative magnitude to the firm.  27 c) Ongoing Adoption Costs The ongoing adoption costs of financial EDI can be divided into three major cost categories:  (i) the ongoing roll out costs iCr) incurred by the firm to get more external  partners on board, (ii) one-time enhancement costs iCe) to improve the functionality of the existing payment systems e.g., automating the application of remittance data and building flexible delivery capabilities for remittance advices, and (iii) ongoing organizational costs {Co) for organizational and business process changes, including the cost of organizational disruption and resistance to change. For a given adoption period t, the ongoing cost vector of financial EDI can then be expressed as:  C, - {Cr, + Ce, + Co,)  (2.6)  By combining equations 2.3 to 2.6, a financial EDI project would then be profitable or cost beneficial to the firm if:  ^  {{Bp, H - Be, ^ Bo,) - (Cr, ^ Ce, ^ Co,))  where: t = Time index (typically a year) N = Number of time periods under analysis D = Development elapsed time at the adoption stage: Bp, = Payment process cost savings Be, = Economic gains from payment cycle changes Bo, = Other monetary benefits Or, = Roll out costs Ce, - System enhancement costs Co, = Other organizational costs /•g = Net benefits discount rate  ^  (Id, ^ la,) ^ ^  ^^ 7)  28 and at the Idt /a, r,  development stage: = One-time setup costs = One-time adoption costs = Initial investment discount rate.  One salient feature of this model is its generalizability to any financial EDI project which is safeguarded by the use of generic value parameters, such as other monetary benefits (Bo) and other organizational costs (Co). For instance, if the implementation of financial EDI into a given organization results in reduced cash discounts lost (on late payments) or lower product prices for the firm, then these economic impacts would be accounted for as other monetary benefits of financial EDI technology. The applicability of the model to non-financial EDI projects is limited by the specificity of payment-related parameters, such as ongoing payment process savings {Bp) and one-time payment cycle gains (Be). Nevertheless, these domain-specific parameters can be replaced by other variables without necessarily undermining the generic structure of the proposed value measurement framework. For example, the economic gains from payment cycle changes (Be), which represent reduced accounts receivable carrying costs for the corporate adopter of inbound financial EDI, could be replaced by reduced physical inventory carrying costs in the case of non-financial, just-in-time EDI systems or applications (e.g. purchase orders and shipment notices).  29 III. RESEARCH METHODOLOGY  A. Overall Research Design In theory, a longitudinal study would be the most appropriate method to investigate the basic research question. However, the application of this approach to a wide variety of organizations can be very problematic in practice because independent organizations follow different system implementation timetables which can span several years. Alternatively, the retrospective history of financial EDI implementation can be reconstituted through the available documentation and structured questioning of key players involved in the process. This study follows such an historical process-oriented case research strategy.  B. Sample Financial Institutions The Canadian banking industry is composed of 11 domestic chartered banks, 54 subsidiaries of foreign banks, 3,500 caisses populaires and credit unions, and a few parabanking institutions, trust companies and mortgage-loan companies (OSF11994; Valcin 1988). Over 94% of Canadian business deals with the six large, national chartered banks (Ballance and Westover 1992)\ These major banks thus represent an invaluable source of information on the state of financial EDI in Canada. Furthermore, they often play a critical role in the inception and development of financial EDI among their corporate customers. Three of the major chartered banks in Canada agreed to participate and fund this study: Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank. Their corporate client base represents approximately 50% of the total business population in Canada. The three  ^ The six major domestic chartered banks are in decreasing order of total assets: Royal Bank of Canada, CI.B.C., Bank of Montreal, Bank of Nova Scotia, Toronto-Dominion Bank and Banque Nationale du Canada.  30 participating banks were the starting point for this empirical investigation. The interview guide in Appendix A was structured to lead the prime participant of each bank through the chronological history of financial EDI from a banking perspective.  Data gathered from  participants also include standard pricing schedules, names and contacts of financial EDI adopters, as well as statistics on the usage of financial EDI in Canada. On average, three interview sessions totalling five hours were conducted with each participant. Two other major financial institutions also agreed to fund this research: Hongkong Bank of Canada and Alberta Treasury Branches, but their active participation in the study is limited by the fact that they are not yet fully financial EDI capable.  C. Financial EDI Usage in Canada Financial EDI in Canada is at a very early stage of adoption, and since its introduction into the Canadian business marketplace in 1989, the actual usage growth of financial EDI is far from reaching the initial expectations of the Canadian banking industry.  Most user  organizations exchange few EDI payments with a small number of partners and these payments tend to settle high dollar value trade. The Canadian Payments Association (CPA) maintains monthly statistics on the volume and monetary value of payments flowing through the Automated Clearing Settlement System (ACSS) by type of payments and direct clearing financial institution, but no statistics on the payors and payees.  It is important to realize that the CPA's data cover only inter-bank  payments. As of August 1993, seven of the fourteen direct clearers in Canada were EDI active, including the three banks participating in this study. The CPA's EDI payment stream has been in place only since July 1992. Even though the volume of inter-bank EDI payments doubled over the next 14-month period, it was still less  31 than 1,000 items in August 1993, as compared to 25 million inter-bank EFTs and 1 50 million inter-bank cheques. Assuming 20% of these cheques are corporate-to-corporate (Steiner and Teixera 1990: 81), this means that the penetration of financial EDI in Canada was less than 0.01 % of its potential in terms of volume of payments as of August 1993. The three participating banks were also asked to complete the financial EDI usage form in Appendix B for the month of August 1993. This form covers both intra-bank and inter-bank financial EDI activities measured in terms of number of financial EDI user organizations (originators and receivers), volume of EDI payments and monetary value of EDI payments (delivered and received). As of August 1993, the participating banks reported having 32 corporate originators and 213 corporate receivers of EDI payments. transactions in EDI format (ANSI X.I2).  All originators issued their payment  However, the beneficiaries of these payments  received their remittance advice in various formats: 50 firms received ED! remittances (23%); 12 firms received print electronic files in proprietary format (6%); and, 37 firms received fax reports (17%). It was not possible to determine in which format the remaining 114 firms (54%) received their remittances because these transactions were not delivered through the Canadian EDI banking system; they were delivered either through value-added networks or directly from the originators to the receivers. Some of the participating banks classify firms which receive proprietary file, fax or paper remittances as financial EDI user organizations. However, for the purpose of this study, only those firms which issue and/or receive payment/remittance transactions in EDI format are viewed as financial EDI users from an MIS perspective, i.e. the firm operates a computerized financial EDI system or application.  32 In August 1 9 9 3 , the participating banks delivered 5 2 % and received 8 2 % of inter-banl< EDI payments. Assuming these banks shared 5 0 % of the Canadian financial EDI market or more, the total population of financial EDI user organizations in Canada can then be estimated at less than 4 0 0 firms as of August 1993.  There are almost 9 0 0 , 0 0 0 Canadian firms  (Statistics Canada 1993)^. Thus, the penetration of financial EDI in Canada was then less than 0.1 % of its potential in terms of number of financial EDI user organizations. Based on a recent survey of 4 6 0 firms in British Columbia (Malatest & Associates 1 9 9 3 ) , this observation would hold even if the potential user population was limited to firms w i t h computer capabilities i.e., more than 8 0 % of sample firms^. In August 1 9 9 3 , the participating banks reported that their 3 2 originators issued almost 1,700 EDI payments, 7 4 % of which were intra-bank and 2 6 % were inter-bank"*, t o a maximum number of 2 0 0 EDI and non-EDI capable receivers.  Consequently, an originator  issues on average 53 EDI payments per month to 6 or 7 of its business partners. Based on the volume and value of inter-bank EDI payments exchanged from July 1 9 9 2 t o August 1 9 9 3 , the mean value of an EDI payment is more than $ 2 0 0 , 0 0 0 , as compared t o $ 1 , 0 0 0 for EFT direct deposits and $ 2 5 0 for EFT pre-authorized debits mostly between corporations and individuals. In summary, financial EDI in Canada is at a very early stage of adoption, and since its  ^ According to the Business Register database of Statistics Canada, there were 892,005 business entities in Canada as of June 1993, 59% of which had less than five employees, 37% had between five and forty-nine employees and 4 % had fifty employees or more. ^ From five specific industry sectors, approximately 80% of sample firms in this survey have less than five employees. *  The distribution of payment items in Canada is generally assumed to be roughly 30% intra-bank and 70% inter-bank. It is the opposite for ED! payments based on figures reported by the participating banks. However, some of these figures could not be reconciled with the CPA's ACSS reports for August 1993 and should therefore be viewed as maxima.  33 introduction into the Canadian corporate marketplace in 1989^, the actual usage g r o w t h of financial EDI is far from reaching the initial expectations of the Canadian banking industry®. Most users exchange f e w EDI payments with a small number of their business partners and these payments tend to settle relatively high dollar value trading business.  D. Sample Financial EDI User Organizations Considering the relatively small size of the financial EDI user population in Canada, it w a s decided that a convenience sample generated jointly by the participating banks and the author would provide the best coverage of the spectrum of financial EDI adopters in Canada. Six potential selection criteria were identified as particularly relevant for the generation of this sample. 1. Role in the EDI payment process. The sample should include corporate originators and receivers of EDI payments in order to understand both business perspectives; 2.  Firm size. The sample should include small and medium size companies w h i c h  represent the vast majority of Canadian businesses, as well as larger hub companies, mostly dominant buyers, which have played and continue to play a critical role in the diffusion of EDI in Canada (EDI Research 1990). Firm size is expressed in terms of annual sales or annual budgets in the case of governmental agencies, as well as number of employees. 3.  Geographic location. As a Canada-wide study, the sample should include firms  from different regions of the country i.e.. Eastern, Central and Western Canada;  ^ In this study, the term "corporate" is always used in its broad sense and refers to organizations, as opposed to individuals. It should not be confused with its narrower use in the banking industry to designate the market segment of large-size firms e.g., over $500 million annual sales. ® These expectations were documented in the confidential business cases of the participating banks as well as the lnter*EDI Rules, Specifications and Standards (lnter*EDI 1989-91).  34 4. Industry sector. The sample should include both public and private organizations from different industry sectors e.g., primary, manufacturing and services, in order to account for the diversity of organizational and competitive environments in Canada; 5. Existing EDI applications. The sample should include firms which started their EDI program with financial and non-financial transaction sets because investment  and  implementation decisions may differ by EDI operational firms, as compared to less experienced firms in EDI. 6. Financial EDI penetration. The sample should include both successful and less successful implementations of financial EDI in order to alleviate the risk of selection bias towards success stories. In a simple form, this concept of success can be expressed as the number of financial EDI partners relative to the total number of firms in the partner base of the participating organization. Each participating bank was asked to assist the author in the selection of four representative clients for the study and help secure access to these companies. Due to confidentiality concerns and resource constraints of candidate participants, the difficulties experienced by some participating banks in securing access to their customers, and reservations expressed by potential users on the fruitfulness of their participation given the very limited scope of their current financial EDI applications, the sample of financial EDI user organizations for this study includes seven firms''. Their distribution with respect to the above selection criteria is shown in Table 3 . 1 . Financial EDI penetration is the most poorly-covered criterion and as anticipated from the previous analysis of financial EDI usage in Canada, all seven participating firms were  ^ Three firms from Bank-A, two firms from Bank-B, one firm from Bank-C and one firm with co-leading EDI banks: Bank-C and a non-participating bank.  35 exchanging EDI payments with relatively few partners at the time of the research (less than 2%). To correct for the current under-coverage of broader financial EDI implementations, discussions were engaged with user firms which seem to have achieved higher penetration rates of financial EDI. One of them agreed to participate in the study. However, the on-site work revealed that this firm too falls into the less than 2% category of financial EDI penetration expressed in terms of relative number of financial EDI partners.  Table 3.1 Distribution of Participating Financial EDI User Organizations  Role in EDI Payment Process  Firm Size  Industry Sector  Financial EDI Penetration  Originator  4  Receiver  2  Both  1  Annual Sales (Budget) Less than $50M  1  $50-250M  Geographic Location  Firm Size  Eastern Canada  0  Central Canada  5  Western Canada  2  Number of Employees Less than 500  1  2  500-2,500  3  More than $250M  4  More than 2,500  3  Private  5  Primary  0  Public  2  Manufacturing  2  Services  3  Integrated  2  Yes  5  No  2  Industry Sector  Number of FEDI Partners Less than 2%  7  2-20%  0  More than 20%  0  Existing EDI Applications  36 E. Data Collection This study follows a triangulation data collection approach combining: (1) extensive structured interviews with key participants in the areas of IS/IT, Treasury, Accounts Payable (A/P) and Cash Disbursement, Accounts Receivable (A/R) and Collection, Purchasing and Sales; (2) the participation of interrelated companies (banks, originators and receivers); (3) the review of financial EDI project documentation (e.g. business cases and cost/benefit tracking reports); (4) the cross-validation of participant responses with financial records (e.g. invoices and bank statements); and, (5) the gathering of sample data to support the alleged benefits of financial EDI (e.g. payment cycle time and error/problem reductions). The structured interview guide in Appendix C was used to lead the financial EDI user participants through the chronological history of financial EDI, from idea generation to results. It contains more than 200 questions, some of which were based on Reich's (1988) question set. Many questions were specifically developed to gather "hard" data on the quantitative financial EDI value items listed in Tables 3.2 to 3.5. These cost/benefit items and associated measures were identified from a review of the current EDI literature in both research and practitioner domains. The financial EDI cost/benefit analysis worksheet developed by NACHA (1993: 25-37) was particularly useful. Tables 3.2 to 3.4 provide operational definitions for the potential quantifiable benefits of financial EDI summarized in Table 2.4. The potential costs of financial EDI in Table 3.5 are classified along three dimensions: (1) their frequency of occurrence i.e., one-time set up and ongoing costs; (2) the stage to which they refer in the overall research framework (see Figure 2.1) i.e., development and adoption costs; and, (3) generally accepted categories of IS costs e.g., hardware, software and documentation costs. Likert scales (from 1 to 10) and descriptive rating scales (e.g. completely eliminated-  37 Table 3.2 Measurement of Potential Financial EDI Benefits for Corporate Originators: Reduced Payment Transaction Costs Description  Measures  Questions  Forms costs  Cost for cheque and remittance stock  -  3.6-8 3.11-15 3.17,19 3.18-19  Paper handling costs  Personnel costs for the printing and preparation of outgoing cheques including association with remittance data, signing, stuffing, mailing, and filing of paper documents  - Cheque run frequency - Number of activities - Time required per activity per cheque run - Extent of control/security procedures  3.4 3.22 3.21,2324,41 3.20,2526  Paper delivery costs  Envelopes, postage and other delivery charges (e.g. courier) associated with paper payments  - Volume of cheques per delivery method - Cost of envelopes - 430 per stamp - Other reported charges  3.27,30  Items Pre-EDI items:  Reconciliation costs  Personnel costs for monthly bank reconciliations (outstanding cheques)  Volume of cheques Ratio of invoices/cheque Cost of cheque forms Cost of remittance forms  - Number of activities - Volume of cancelled cheques - Time required per month  3.28-29 3.31 3.35 3.36 3.37  Bank charges for paper payments  Cheque clearing fees, tape transmissions, reconciliation, stop payments and other bank charges for paper payments  - Bank fees reported by users - Price lists of banks  3.38-39  Paper storage costs  Cost of storage and retrieval of paper documents  -  3.40 3.43 3.42,44 3.45  EDI transmission costs  Mailbox, transactions, report and other transmission charges for the origination of EDI payments/ remittances  - Volume of EDI payments - VAN/bank/third party network fees  8.9 9.1-2  Banic charges for EDI payments  Payment clearing, report and other bank charges for EDI payments  - Bank fees reported by users - EDI price lists of banks  9.3 6.4  Other EDI payment costs  Other costs associated with the origination of payments in an EDI environment  - Level of IS/IT integration - Presence of a BPR team - Extent of process changes  3.5 7.3 9.4-9  Number of copies Years and boxes in storage Retrieval frequency Storage charges  Post-EDI items:  38 Table 3.3 Measurement of Potential Financial EDI Benefits for Corporate Receivers: Reduced Payment Transaction Costs Description  Measures  Questions  Paper handling costs  Personnel costs for processing paper payment receipts including mail pick up and opening, preparation of bank deposits, application of remittance data to accounts receivable, and filing of paper documents  -  4.8-9 4.10-12 4.13,25 4.14-15 4.27 4.16-17, 26,29,33  Paper delivery costs  Personnel and transportation costs for pick up and rush cheques (e.g. courier)  - Volume of cheques per delivery method - Pick up time required - Other reported charges  4.18-19  Bank charges for paper payments  Deposits, returned cheques, lockbox service and other bank charges for paper payments  - Bank fees reported by users - Price lists of banks  4.30-31  Paper storage costs  Cost of storage and retrieval of paper documents  -  4.32 4.35 4.34,36 4.37  EDI transmission costs  Mailbox, transactions, report and other transmission charges for the receipt of EDI payments/ remittances  - Volume of EDI payments - VAN/bank/third party network fees  8.9 9.1-2  Bank charges for EDI payments  Deposits, report and other bank charges for EDI payments  - Bank fees reported by users - EDI price lists of banks  9.3 6.4  Other EDI payment costs  Other costs associated with the receipt of payments in an EDI environment  - Level of IS/IT integration - Presence of a BPR team - Extent of process changes  4.7 7.3 9.4-9  Items Pre-EDI items:  Volume of cheques Ratio of invoices/cheque Number of activities Frequency of activities Volume of returned cheques Time required per activity  Number of photocopies Years and boxes in storage Retrieval frequency Storage charges  4.20 4.20  Post-EDI items:  39 Table 3.4 Measurement of Potential Financial EDI Benefits for Corporate Originators and Receivers Questions  Benefits  Description  Measures  Reduced payment error/problem rate  Reductions in the types and frequency of errors/problems associated with paper payments as a result of financial EDI implementation  Pre- and post-EDI measures: - Types of errors/problems - Frequency of occurrence  Reduced payment error/problem resolution costs  Personnel cost savings and other financial savings from error/problem reductions  Pre- and post- EDI measures: - Resolution time required - Other reported savings  Reduced payment transaction cycle time  Payment cycle time reductions expressed in days from the date goods/services are received at the buyer site to the date funds are made available into the seller bank account  For a period of 6 months before and after EDI: - Payment cycles for a sample of EDI partners - Payment cycles for a sample of "equivalent" non-EDI partners  9.21-23, 27-28  Renegotiation of more favourable payment/discount terms  Changes in payment/discount terms attributable to financial EDI  For a period of 6 months before and after EDI: - Payment/discount terms for a sample of EDI partners - Payment/discount terms for a sample of "equivalent" nonEDI partners  9.17,2728  Value gained from more timely EDI payments/ improved cash flow  Financial value of more timely EDI payments as a result of float reductions and renegotiated payment terms (due date)  Post-EDI measures: - Realized gains (losses) - Potential gains (losses)  9.25 9.26  Value gained from EDI discounts on transacted goods price  Financial value of renegotiated discount terms on transacted goods price  Post-EDI measures: - Realized gains (losses) - Potential gains (losses)  9.18 9.19-20  9.10,16 3.36, 9.11-12  9.13 9.14-16  40 Table 3.5 Measurement of Potential Financial EDI Costs for Corporate Originators and Receivers Costs One-time set up costs  ' Development 1 costs j  1 j i  j  Ongoing costs  I Hardware costs 1 1  1 Software and j programming 1 costs  j Other costs  Items  Questions  Computer systems (new, upgrade, machine time)  7.5  Communications hardware (modem, lines)  7.7-8  Security/authentication hardware  7.7-8  Translator software/programming  7.7-8  Modifications and interfaces to existing A/P and A/R systems  7.7-8  Communications software/programming  7.7-8  Security/authentication software/ programming  7.7-8  Standards/data maps design  5.6,7.11  Pilot testing and conversion  7.14  VAN/bank/third party set up fees  6.4,7.7-8  1 Adoption 1 costs I  | Software and 1 programming j costs  Start up software/programming for external partners  7.9-10  ! 1  i Documentation 1 costs  Internal users materials for education, training and operation  8.17,19  External partners materials for education, training, marketing and implementation  8.18-19  Hardware maintenance/upgrade  7.20  Software maintenance/enhancements  7.20  Standards maintenance/enhancements  7.20  VAN/bank/third party ongoing fees  6.4,9.1-3  Other EDI payment processing costs  9.4-9  Seminars, conferences and other education/marketing program efforts  8.15,2021  Internal users support  7.2,16-18  External partners support  7.2,8.2025  Organizational changes and business process redesign/reengineering  3.5,4.7, 7.3, 9.4-6, 9.29-30  Organizational disruption and union resistance  9.31-32  i Development ! costs  i Maintenance costs j  j Adoption 1 costs  i Usage costs I  1  1 Support costs  I  j Other costs  41 significantly reduced-slightly reduced-status quo) were also used for qualitative financial EDI value items, including an assessment of the risk of implementing financial EDI into the organization (see questions 6.21-23). Respondents' ratings are presented and interpreted in in Chapter IV, section D on other potential financial EDI benefits, as well as in Chapter VI, section A on risk assessment of financial EDI. Structured interviews were conducted with 33 participants of the seven financial EDI user organizations, some of them in group sessions upon participants' request. For example, one business manager asked that both the Manager of Financial Operations and the EDI Coordinator be present during the interview so that any questions of a technical or financial nature be answered immediately. In some cases, up to three sessions with key informants (e.g. A/P managers and EDI project leaders) were necessary to cover most of the interview questions in Appendix C, while sessions with other individuals were aimed at obtaining specific answers to a pre-identified subset of questions. Overall, 36 individual and group sessions totalling 61 hours of structured interviews were conducted at the seven participating financial EDI user sites across Canada. The on-site work also involved the collection and review of financial and project documentation (e.g. bank/VAN invoices and financial EDI cost/benefit analyses), as well as the gathering of sample data on payment errors/problems and payment cycle times, whenever possible. These activities account for 55 hours of additional work at the participating user sites. The data collection process required from a few days to more than one week of field work in elapsed time depending on the location and time availability of the participants. Additional conversations and study material exchanges with participants, often other than the interviewees, were also necessary to complete this phase of the study e.g., for details on specific business subprocesses and data validation. Furthermore, several persons  42 from reference firms were contacted over the phone or in face-to-face meetings to obtain more information on specific topics related to the study, such as the postage delays in Canada, the cost of mail distribution within an organization, the cost of outsourcing cheque printing services, and telecommunication costs in relation with EDI network agreements. Overall, more than 50 individuals actively participated in this study.  F. Reliability Data were collected largely from extensive interviews with key participants directly involved in the initiation, development and adoption of financial EDI. This data collection method is likely to suffer from problems such as staff turnover, recall of the interviewees and shading of the truth. collection method.  These problems are alleviated by the proposed triangulation data  Other data-reliability safeguards include:  proceedings on tape;  the recording of interview  the use of a questioning method based on Bouchard's (1976)  "funnelling" concept; the ongoing review of study materials by source participants and faculty members of the thesis supervisory committee; and, the author's multidisciplinary experience in the accounting and IS fields. Furthermore, the data collection method for some variables, such as the number of errors/problems and float days, follows a multiple-baseline design across groups (Komaki 1977). Whenever possible, data were collected randomly for a relatively large number of data points over a period of six months before and after the implementation of financial EDI (e.g. one payment per week). This approach enhances the internal validity of research findings because potential sources of confounding can be more easily ruled out when the quasitreatment (use of financial EDI) is naturally introduced at different times in independent organizations (Cook and Campbell 1976).  43 G. Confidentiality The difficulty to gain access to financial records was expected to arise during this research as a result of the well-known reluctance of organizations to disclose financial data (Attewell and Rule 1991). We believed that the explicit confidentiality statement in Appendix D would significantly alleviate such reservations. Nevertheless, some data collection problems were encountered due to confidentiality concerns expressed by both actual and potential participants. For example, one large-size organization refused to participate in the study on this ground. A key individual in one of the participating organizations also refused to provide relevant documentation to the author. These problems had two major consequences from a research perspective. First, they led to a smaller sample of participating financial EDI user organizations than originally planned. Second, they limited the degree of triangulation between potential sources of information. For instance, data gathered from the firm which had limited participation are primarily based on extensive, structured interviews with seven participants in the areas of A/P, Treasury, Financial Reporting, Operations, IS and Business Process Reengineering (BPR). However, it was not possible to corroborate some of their statements with the financial EDI project documentation and financial records (e.g. bankA/AN invoices and IS charge-back reports). Nevertheless, some participants of this firm did provide useful supporting evidence (e.g. A/P reports and project flowcharts) and its financial EDI pilot partner was specifically asked to participate in the study afterwards. The partner firm was very cooperative and the on-site work, at the other end of the customer-supplier relationship, included the review of correspondence between the two firms, as well as the gathering of sample payment data to support some of the alleged benefits of financial EDI (e.g. payment cycle gains and reduced error/problem rate).  44 IV. BENEFITS OF FINANCIAL EDI  A. Introduction Detailed financial EDI benefit models for corporate originators and receivers are presented in this chapter. These models were developed in a three-step approach. First, a review of the current EDI literature in both research and practitioner domains, combined with the author's experience and interviews with participating bankers (service providers), have led to the identification of the financial EDI benefit evaluation items and associated measures presented in the previous chapter (see Tables 3.2 to 3.4). These elements were then used as the basis for the extensive data collection at participating financial EDI user organizations-cf. interview guide in Appendix C. Finally, the proposed benefit models were derived from a rigorous, item-by-item analysis of the data gathered from participating and reference firms. The knowledge gained from in-depth case studies of actual corporate financial EDI users has also allowed the development of benefit models which take into account the business reality of corporate adopters. For instance, it was implicitly assumed in Tables 3.2 to 3.4 that pre-EDI interorganizational payment exchanges were based on paper cheques. In practice however, several alternative payment methods are currently being used by the Canadian business community, including direct deposits, pre-authorized debits and lockbox services with or without electronic remittances. The proposed benefit models account for this reality as well as other real-life business situations not originally anticipated. Consistent with the financial EDI value measurement framework described in Chapter II (see equation 2.5), the three major categories of potential benefits of financial EDI to corporate adopters are analyzed in this chapter: potential payment process savings (Bp) in section B; potential payment cycle gains {Be) in section C; and, other potential financial EDI  45 benefits {Bo) in section D. The detailed financial EDI benefit models derived from this analysis are presented in sections E and G, for corporate originators and receivers respectively. The data and models are also used to simulate and estimate the magnitude of potential net benefits of financial EDI per payment transaction. In sections F and H, a formal evaluation of the expected and actual benefits of implementing financial EDI into the participating user firms is conducted using the models. Major conclusions drawn from this in-depth study of financial EDI benefits are presented in section I. Given the fact that a payment receiver does not need to be EDI capable (Wallace and Payne 1994), one could then argue that an assessment of the value-added by financial EDI to corporate adopters should be based on a comparative analysis of EFT and EDI technologies, rather than paper cheques and EDI. This approach suggests a closer relationship between EDI and EFT bank pricing policies and setup procedures. The spectrum of costs for the processing of pre-EDI and post-EDI corporate payment transactions is surprisingly wide. An illustrative example is bank EDI transaction fees which range, in case studies, from $0.23 to $4.00 per payment, after controlling for similar quantities of invoice items and pricing standardization. This observation is not limited to bank fees, and applies to each and every cost/benefit element analyzed in this chapter. These broad cost ranges can be explained by analyzing a series of factors from the diversity of corporate disbursement/collection systems, procedures and practices, to the negotiation power of user firms vis-a-vis external service providers. From a payment process perspective, financial EDI is potentially more beneficial to corporate receivers than originators. Receivers have relatively higher potential variable process savings per payment transaction. However, the diffusion of financial EDI technology is mainly customer-driven and unless a critical mass is achieved (Lyttle 1988; Gurbaxani 1990),  46 suppliers might not have sufficient volumes of EDI payment receipts to justify the ongoing fixed costs of operating a financial EDI application. Moreover, a major source of potential process benefits for corporate receivers originates from the automatic application of EDI remittance details to open A/R invoices, but the IS/IT integration of both systems is a sine qua non condition to their realization (lacovou et al. 1994). Compared to non-financial EDI applications (Meier 1991), potential economic gains from reduced payment cycles accrue primarily to the supplier community, rather than the initiators of financial EDI systems (mostly dominant buyers). The actual economic impact of payment cycle changes and other financial EDI benefits can be more significant than payment process savings to corporate adopters. The implementation of financial EDI does not automatically lead to positive benefits to corporate adopters. The magnitude of potential benefits depends on several factors but generally speaking, analysis of potential benefits for EDI payment originators and receivers stresses the need to implement cost-efficient financial EDI applications, mainly in firms with lower-end or average pre-EDI payment process costs and with relatively effective pre-EDI cash management practices. In actual practice, a 100% implementation (McCusker 1993) of financial EDI would imply the EDI conversion of various types of payments to different beneficiary groups. A significant proportion of A/P payments are currently made to employees for travel advances and expense reimbursements, as well as to occasional or irregular vendors.  Manual or  computerized rush or quick cheques are also issued by corporate originators on a regular basis. Current financial EDI standards and practices of the Canadian banking community do not efficiently support these frequently used A/P payment types.  47 B. Potential Payment Process Savings This section examines the first element of the financial EDI ongoing benefit vector presented in Chapter II (see equation 2.5), namely potential payment process savings (Bp). For the purpose of this study, potential payment process savings or benefits are defined as the difference between the cost of processing pre-EDI and post-EDI payment transactions. The reasoning underlying this transaction cost reduction or avoidance approach is that a given transaction could be processed through different co-existing computerized environments as shown in Figure 4 . 1 .  Pre-EDI Environment  Post-EDI Environment  Figure 4.1 - Multiple Co-Existing Payment Environments  Figure 4.1 illustrates the case of one participating originator which settles trade by issuing either computerized cheques, EFT direct deposits with or without paper remittances, or EDI payments/remittances. Other mixes of payment transaction processing environments could co-exist in a single organization. Similarly, some large-size firms have built "clearing  48 house" systems to centrally manage the format of interorganizational business transactions in accordance with their partner IS/IT capabilities. As an example, if the cost of processing one payment transaction is $10 before and $8 after financial EDI, then the firm records savings of $2 for each payment transaction converted to financial EDI. In this context, potential payment process savings as a result of financial EDI implementation can be expressed as follows:  where Bp / n B, C7 C)  = = = = = =  Payment process cost savings Cost category index Number of different cost categories Benefits (payment process savings) per category Pre-EDI payment process costs per category Post-EDI payment process costs per category.  Following a process-driven evaluation methodology, seven cost categories in = 7) for the processing of pre-EDI and post-EDI payment transactions were identified in this study. These cost categories apply to originators and receivers alike, although cost elements within each category are not necessarily the same because the underlying business processes are managed differently. Cost categories for the analysis of potential payment process savings include: 1. Bank service charges; 2. 3. 4. 5. 6. 7.  Paper form costs; Transaction delivery/receipt charges; Labor costs; Existing system operation, maintenance and support costs; Paper storage and retrieval costs; Other payment processing costs.  49 As suggested above, each payment process cost category can be further divided into a number of subcategories or elements.  For example, pre-EDI bank service charges can  include cheque fees, other cheque processing fees (e.g. stop payments and account reconciliation services), as well as EFT direct deposit fees. Moreover, estimating the costs associated with each subcategory often imply multiple cost evaluation items. For instance, post-EDI bank service charges can include a fixed monthly account maintenance fee, a unit EDI payment fee, as well as a unit EDI invoice item fee. The large number of cost elements or items analyzed is also attributable to the fact that this study examines corporate payment processes (A/P disbursement and A/R collection) across organizations and industries. Thus, it takes into account the diversity of payment systems, procedures and practices in Canada.  However, not all items are relevant to a  specific situation or organization. Detailed equations for the estimation and computation of potential payment process savings are found in Appendix E for corporate originators and Appendix F for corporate receivers. The notation used is consistent with equation 4 . 1 . Within each of the seven payment process cost categories, C j , C^, and 5, identify pre-EDI cost, post-EDI cost and resulting benefit equations respectively. Only potentially different elements between pre-EDI and post-EDI payment processes are considered. Therefore, the analysis would not cover, for example, the selection of invoices for payment because this activity remains basically the same whether paper or EDI payment transactions are generated afterwards. All variables are expressed on an annual basis (e.g. volume of cheques and fixed EDI account maintenance fee) unless a different unit of measurement is explicitly stated (e.g. unit bank fee and labor time per activity). Volume variables can refer to the whole vendor base of the firm, a specific group of vendors, or a single vendor. Consequently, the evaluation  50 methodology can be applied to evolutionary financial EDI levels of adoption among business partners over time.  C. Potential Payment Cycle Gains This section examines the second element of the financial EDI ongoing benefit vector presented in Chapter II (see equation 2.5), namely potential economic gains from payment cycle changes (Be). The impact of payment cycle changes on bottom-line results of a firm can be very significant (Lovejoy 1990; Keller 1990; Masonson 1990). For instance, in this study, one participating receiver evaluated in its analysis of financial EDI opportunities that a reduction of six days in the collection period of 4 0 % of its annual credit sales would result in accounts receivable carrying cost savings of more than one million dollars. This section on payment cycle gains is organized in three parts, and applies to both EDI payment originators as well as receivers. In the first subsection, the concept of trade credit cycle is introduced and several kinds of time lags or delays are described. The potential impact of financial EDI on payment cycles is examined in the second subsection. The third subsection presents empirical findings on the actual impact of financial EDI on payment cycles of participating user firms. The trade credit cycle in a paper-based environment can be divided into two subcycles: the invoice processing cycle which refers to the front-end part of the billing-settlement process (e.g. invoice receipt, matching, approval and keying); and, the payment processing cycle which refers to the back-end part of the billing-settlement process (e.g. cheque printing, mailing, receipt and deposit). Each subcycle can be further divided into four major time slots or time lags. Sustainable changes in any of these time slots as a result of financial EDI implementation would affect the total trade credit cycle time of the corporate adopter.  51 Financial EDI implementation can lead to either a reduction or an increase of the payment cycle time. The technology may also have no impact on the payment cycle of specific partner groups, such as discount vendors, suppliers paid via EFT, utility companies and governmental agencies. A reduction in payment cycle time translates into economic gains of a positive magnitude to corporate receivers and of a negative magnitude to corporate originators. An increase in payment cycle time would have the reverse impact. These economic impacts can be very significant. For example, a three-day reduction of the payment cycle time on a single payment worth one million dollars translates into $822 savings to the receiving firm at an annual interest rate of 10%. This economic aspect partly explains the use of more time-efficient collection methods, such as bank lockbox services and cheque pick-up/courier systems. Financial EDI has an influence on the predictability of payments. As the predictability of payments increases, an organization can manage its cash flows more effectively.  For  example, the corporate adopter may be in a position to negotiate more favourable cash investment/credit terms with its bank. Reduced variability of payments may also lead to a lower unproductive cash buffer or threshold.  1 . Trade Credit Cycle For the purpose of this study, the construct of trade credit cycle is defined as the period of time, expressed in days, between the date goods or services^ are delivered to the buyer and the date their monetary trade value is received by the seller in a form that can be disbursed or invested. The latter date typically corresponds to the date funds are actually  ^  For reporting simplicity, the term "goods" will be used hereafter to refer to the trade of both goods and services between organizations.  52 deposited or credited to the seller's bank account. Figure 4.2 depicts the trade credit cycle in a paper-based environment (adapted from Keller 1990: 16). It can be divided into two broad timeframes corresponding to the front-end invoice processing cycle and the back-end payment processing cycle.  Financial EDI, as  defined in this study, can directly affect the back-end payment processing cycle, or simply payment cycle. Figure 4.2 indicates that the cut-off point between the two subcycles is the payment initiation which refers to the process of selecting invoices for payment. In most computerized A/P systems, this process is an integral part of the cheque run routine whose selection algorithm is based on a combination of parameters, such as the invoice date, the invoice receipt date, the cheque run date, the invoice payment/discount terms, and/or the A/P disbursement policy of the firm. In that context, the date printed on cheques could be viewed as an appropriate operational definition of the payment cycle starting point, but two practical issues limit the use of this definition across organizations. First, postdated cheques can be produced during a cheque run as in the case of one participating originator which generates postdated cheques over $ 10,000 to utility companies and over $50,000 for other disbursements. This procedure was established by the firm to avoid late payment penalties and ensure that cheques are in the supplier hands on due date in accordance with the firm's A/P disbursement policy. In this case, the time difference between the cheque date and the cheque deposit date at the bank does not provide a realistic characterization of the payment cycle time. Second, and more importantly, is the fact that pre-EDI payment environments are not limited to the processing of paper cheques sent directly from buyers to sellers. Other payment and collection methods, such as EFT direct deposits and lockbox services, are also used by  Suppliers  Postal Services  Invoice Production & Mailing  Invoice Delivery  Invoice Date  Goods/ Services Receipt Date  Customers  Invoice Receipt & Approval  Invoice Receipt Date  Invoice Processing Cycle  Invoice Holding  Cheque Production & Mailing  Invoice Keying Date  Cheque Date  Payment Initiation Date  Postal Services  Suppliers  Cheque Delivery  Cheque Receipt & Deposit  Cheque Receipt Date  Bank Deposit Date  Payment Processing Cycle  Funds Credit Date  Figure 4 . 2 - Trade Credit Cycle in a Paper-Based Environnnent  CJl CAJ  54 the participating firms as well as their business partners. In these cases, it may be impossible to determine the exact payment initiation date. Even more so, when the study is conducted at a receiver site. Therefore, the trade credit cycle was used in this study for measuring the economic impact of payment cycle changes as a result of financial EDI.  a) Invoice Processing Cycle As illustrated in Figure 4.2, the invoice processing cycle in a paper-based environment refers to the period of time between the receipt of goods and the payment initiation at the customer site. This cycle is made up of four major time lags or delays corresponding to time requirements for: (1) the production and mailing of invoices by suppliers, (2) the delivery of invoices through Canada Post or alternate routes; (3) the receipt, approval and keying of invoices by customers; and, (4) an invoice holding period. Once an invoice has been received, approved and keyed into the buyer's A/P system, it is held in the system until it becomes due for payment according to the firm's due date algorithm which typically includes two basic parameters: a baseline payment date and a payment time lag. At the payment initiation stage, cheques are generated for all invoices falling into the user-specified range of due dates. 1. Baseline Payment Date. In a paper-based environment, payment due dates are often computed either from the invoice date, or from the invoice receipt date. In case studies, four originators out of five base their due date calculations on the invoice date, while the invoice receipt date is used by the remainder. As explained by a participating receiver: "It can take up to seven days before the invoice is mailed-two to three days before the driver gets back and invoicing is done only three times a week." Adding postal delays for invoices leads to potential time lags of ten days, or more, between the delivery of goods and the invoice  55 receipt at the customer site. On the other hand, this study reveals that some suppliers generate the invoice at the same time as the bill of lading and thus, the buyer receives both documents with the goods. In this case, the invoice can be dated prior to the actual receipt of goods at the customer site which leads to negative time lags between these two dates. This situation becomes apparent upon observing when the customer firm prepares a receipt report or records the actual date of goods receipt in its A/P system. 2. Payment Time Lag. At least one other time variable must be used in due date calculations in addition to the invoice date or the invoice receipt date. This time variable may, or may not, reflect the invoice payment/discount terms depending on the A/P disbursement policy of the customer firm. For example, one participating originator's policy is to pay all non-discount suppliers 45 days from the invoice date regardless of the actual payment terms negotiated with the supplier at the procurement stage. Payment/discount terms vary across industries, organizations and product lines. At least five basic payment/discount schemes were identified in this study: (i) the frequently used net 30 days;  (ii) 2% discount in 10 days, net 30 days;  (iii) net 7 days in the  transportation industry; (iv) net 25th day proximo in the automotive industry; and, (v) fixedday-of-the-month invoiceless payments. Many variations of these basic schemes were also identified, including net 24 days, 1 % discount in 15 days, and 1 % discount 10th day proximo. A supplier may also have different payment/discount terms by product or product line.  b) Payment Processing Cycle As illustrated in Figure 4.2, the payment processing cycle in a paper-based environment refers to the period of time between the payment initiation at the buyer site and the date  56 funds are actually deposited or credited into the seller's bank account. It can also be divided into four major time lags or delays corresponding to time requirements for: (1) the production and mailing of cheques by customers; (2) the delivery of cheques through Canada Post or alternate routes; (3) the receipt and deposit of cheques by suppliers; and, (4) the clearing of cheques through the banking system. 1.  Cheque Production and Mailing Delays. Time delays between the initiation of  payments and the actual mailing of cheques are a function of the time required to comply with the buyer's A/P procedures (e.g. cheque signing and payment audit procedures--cf. Appendix E), as well as the buyer's A/P disbursement policy.  For instance, the Comptroller of a  participating firm reported that it can take up two weeks before cheques are actually mailed. The fact that these cheques must be signed by senior officers does not fully explain this delay. The firm is also intentionally delaying the mailing of cheques as part of its cash management policy: "We would like to wait 45 days before mailing cheques but in reality, it is closer to 37 or 38 days." 2. Cheque Delivery Delays. In Canada, postal delays vary depending on the location size and geographic region of both the mail originator and recipient. For major urban centres, Canada Post has committed to deliver lettermail within two business days in the same city, three business days in the same province and four business days in different provinces. According to a quarterly survey of Ernst & Young (1994), these delivery service objectives are achieved at a 98% performance level across Canada. On a calendar basis, this translates into delays of up to six days between major urban centres in Canada. No delivery standards are publicized by the crown corporation for minor urban centres but according to one of its representatives, up to three business days (or five calendar days) can be added for lettermail sent to or from minor urban centres. Possibly  57 longer delays may also apply to mail sent to or from the United States. These postal delays partly explain why some suppliers have established cheque pick up/courier systems with their high trade value customers. Such procedures may also induce the client firm to process cheques more quickly, while eliminating the risk of cheques lost or mangled in the mail and the recourse to classical late payment excuses like "the cheque is in the maii"2. On the other hand, two participating originators out of five have reported producing cheques in advance to cover for these delays in accordance with their firm's A/P disbursement policy: "In the paper world, we print that cheque three business days ahead of time to allow mailing time to our supplier"; and, "Our company's goal is to pay vendors on the day the money is due. However, there is also the reality that some businesses take our cheques but don't clear them for several days-we have an advantage." 3. Cheque Receipt and Deposit delays. As suggested in the latter comment, time delays between the receipt and deposit of cheques are a function of the seller's A/R collection procedures (e.g. distribution of incoming mail and frequency of deposits--cf. Appendix F). For instance, one participant who has performed a detailed analysis of his firm's A/P float noted: "The government often was not very good at processing their cheques [payment receipts] on time if you can believe that." The elimination of internal cheque receipt and deposit delays is one of the key reasons why corporate receivers setup bank lockboxes in major urban centres. This A/R collection method also reduces cheque postal delays by directing mailed payments to lockboxes within the geographic regions from which a large volume of payments emanate (Lovejoy 1990).  ^  Some business practices aimed at reducing collection periods may seem expensive, but recall a three-day reduction of the payment cycle on a single payment worth one million dollars translates into $822 savings to the receiving firm at an annual interest rate of 10%.  58 4. Cheque Clearing Delays. Contrary to the U.S. banking system, "the Canadian payments system has literally no bank-induced float" (Ballance 1992: 25). This means that deposits made at the firm's bank branch before a pre-determined time of the day will be credited the same day to the seller's bank account. A longer lead time may be involved in deposits from remote bank branches. In the United States, according to the Director of Finance of a participating supplier with a large cross-border client base, it can take up to three business days for the Federal Treasury to clear cheques.  2. Potential Impact of Financial EDI on Payment Cycle From a Canadian originator's perspective, the predictability of payments is limited by two of the four payment time lags described above: the postal system and suppliers' payment receipt and deposit processes. This observation assumes that corporate Treasurers are aware of not only which cheques have been produced on a given day, but also when and how these cheques were delivered, because several activities, involving potentially different business units or functions, take place after the printing of cheques (e.g. cheque signing, payment audit and special handling~cf. Appendix E). Financial EDI technology can eliminate these elements of uncertainty because of its streamlining effect on the interorganizational payment process, and because the Canadian banking industry guarantees that funds will be debited to the buyer's bank account and credited to the seller's bank account on value date as specified in the EDI payment transactions. It should be noted however, that a transmission lead time of up to two days is required by some of the participating banks. From a Canadian receiver's perspective, the predictability of payment receipts depends on customers' A/P invoice and payment processes, as well the postal system. Even though  59 financial EDI can eliminate the latter element of uncertainty at the payment level, unexpected time lags can still happen at the invoice processing level in a paper-based environment e.g., invoice mailing, approval and keying delays. Potential economic gains (or losses) from payment cycle changes expressed in days can be estimated as follows based on the monetary value of trade with a single business partner, a group of partners, or the whole partner base of the firm:  Be - (r - r ) Mplk  <4-2)  where Be f* t~ Mp / k  = = = = = =  Economic gains from payment cycle changes Post-EDI payment cycle time (in days) Pre-EDI payment cycle time (in days) Monetary value of EDI payments Interest rate (on a daily basis) Payment cycle gains reduction factor.  The payment cycle gains reduction factor {k) is added in the above equation to account for the fact that potential payment cycle changes as a result of financial EDI implementation can vary across business partners, and even across relatively independent business units of a single partner. Furthermore, financial EDI may have no impact on the payment cycle of specific partner groups, such as discount vendors, suppliers paid via EFT, utility companies and governmental agencies. For example, one participating originator issues EDI payments on a weekly basis to Revenue Canada for employee income tax deductions, Canadian pension plan contributions and unemployment insurance premiums. Revenue Canada was its only "EDI partner" at the time of the research and payments to the Receiver General represented 11 % of total corporate disbursements in dollars. The firm had always deposited its high dollar value payments to the government at the bank, on due date, to avoid losing interest or incurring late payment  60 penalties. The conversion of these payments to financial EDI has generated no payment cycle changes and thus, no associated economic gains or losses. The above example reflects the case of a manufacturing, capital-intensive firm. For labor-intensive service firms, the relative value of these payments may be even more significant. For instance, a reference firm reported that 2 1 % of its gross wage bill is paid directly to the government.  When salaries represent a large proportion of business  expenditures, doing financial EDI with the government may translate into an adoption rate of 20% or more in terms of relative monetary value of corporate payments. A reduction in payment cycle time as a result of financial EDI implementation translates into economic gains of a positive magnitude to corporate receivers and of a negative magnitude to corporate originators. An increase in payment cycle time would have the reverse impact. The rationale behind this statement is easy to comprehend from a receiver perspective. If a firm receives funds three days earlier, for example, it is then in a position to invest the money for three more days, or to reduce its debt burden three days in advance (e.g. credit line). As the predictability of payment receipts increases, the firm may also be in a position to  manage  its cash flows more effectively  e.g., more favourable  cash  investment/credit terms and lower unproductive cash buffer or threshold^. From an originator perspective, two extreme scenarios on the wide spectrum of cash management practices are examined under the assumption that a firm issues 100 A/P cheques totalling one million dollars during a weekly cheque run. In the first scenario, the firm does not know when cheques will be cashed and thus transfers one million dollars to its chequing, non-interest account on the cheque run date. Payment cycle changes, once the cheques have  ^  The analogy with the lower buffer stock principle of inventory management as a result of just-intime (JIT) production systems (Schonberger 1982) is worth noting.  61 been released, have no direct economic impact in this case. If the cheque production is delayed by three days though, the firm would benefit from three days of investment/debt interest. As the predictability of payments increases, the originator can manage its cash flow more effectively and in the second scenario, funds transfers are made on actual cheque clearing dates. In this case, an average reduction of three days in the payment cycle time would have the same impact as a cheque run executed three days earlier. A similar conclusion would apply to daily interest operating accounts. The actual position of a firm between these two extremes depends on a series of factors including, for example, the type of banking accounts and agreements, collection methods employed by the supplier community and the level of sophistication of cash flow forecasting tools. For the purpose of this study, it is assumed that changes throughout the payment cycle can have an economic impact on corporate originators (e.g. payment initiation, delivery and deposit changes). In that context, it is possible to create a post-EDI situation where neither the payment originators, nor the receivers as a whole, would record payment cycle gains or losses. Practitioners refer to it as a "win-win situation" for both parties. Figure 4.3 depicts such an equilibrium state between pre-EDI and post-EDI payment environments. The settlement of paper cheques in Figure 4.3 is expressed in monetary trade value as a linear function of the payment cycle time in days from the cheque production date. The function might not be exactly linear, but it decreases over time as cheques are cashed by the beneficiaries. It is thus possible to derive an equilibrium state by increasing EDI payment terms by a number of X-days such that the extended post-EDI settlement region A equals the extended pre-EDI settlement region B.  62  Figure 4.3 - Equilibrium between Pre-EDI and Post-EDI Payment Cycles  From an originator perspective, this situation leads to an economic status quo. But from an individual receiver perspective, it can lead to incremental payment cycle gains or losses depending on the supplier's pre-EDI collection procedures and practices (e.g. pick up cheques vs. mail cheques and bank lockbox vs. direct mail).  3. Actual Impact of Financial EDI on Payment Cycle For measuring the actual impact of financial EDI on payment cycles, sample business transaction data were gathered at participating user sites. As explained earlier, cheque dates cannot always be used as an indicator of the payment cycle initiation point, and Table 4.1 summarizes cases where it was possible to do so. The statistics illustrate the wide variability of payment cycles across organizations in a cheque-based environment.  Payment cycles  expressed as the elapsed time in days between the cheque date and cheque clearing date range from 1 to 15 days with mean values between 2.9 and 6.8 days.  63 These statistics originate from sample business transactions with three business partners of two participating firms over a period of six or twelve consecutive months. On average, one transaction per week was randomly selected from the total population of invoices or payments exchanged with these partners during the time periods under analysis.  Table 4.1 Statistics on Cheque-based Payment Cycles n'  f  mean  s.d.  min.  max.  Partner-A  26  6  5.5  1.3  2  9  Partner-B  52  12  6.8  3.0  2  15  Partner-C  ir  12  2.9  1.1  1  5  5.9  2.7  1  15  Sample Firm-A Firm-B  Across firms  89  ' Number of observations or data points. ^ Number of consecutive months under analysis. ° Both cheques and electronic payments were exchanged over the one-year period.  The computerized financial system of the participating firm was used as much as possible in the data collection process for selecting and tracking the chronological history of sample business transactions, from the receipt of goods to the clearing of funds. In all cases however, data extraction from source documents was also necessary to complete this phase of the study e.g., remittance advices, receipt reports and bank statements. In one particular case, the data collection process was entirely performed based on source documents because historical data had been purged from the on-line computerized financial system of the firm. In this case, the process started by retrieving paper deposit sheets produced for the partner of interest over a period of one year. The microfilm system of the firm was then used to randomly select one invoice per deposit on a weekly basis, and to extract relevant historical information on these transactions. The research method for measuring the influence of financial EDI on payment cycles  64 follows a multiple-baseline design across groups (Komaki 1977). The data collection process described above was replicated over a period of six months before and after the first real-life EDI payment transaction with one of the largest, non-discount, Canadian EDI partner of three participating firms. The whole trade credit cycle was covered (from the receipt of goods to the clearing of funds), as opposed to a focus of analysis on the payment processing subcycle as in Table 4 . 1 . Figure 4.4 provides a graphical representation of the sample transactional data collected at the three financial EDI user sites. Trade credit cycles expressed in days from the goods shipment date are plotted on the same two-year time scale for the three firms i.e., from November 1991 to October 1993. The limit lines on the X-axes indicate the transmission date of the first-real EDI payment transactions.  a) Firm-A The graph of Firm-A shows an increase in trade credit days after financial EDI, as well as a decrease in the variability of payments excluding the two post-EDI outliers (8 days and 62 days). This graph reflects post-EDI payment cycle changes introduced by the largest Canadian customer of the participating receiver, and according to the source participant: "If you look at this client'^, you will find that our payment terms have increased by 6 days. They were paying us 24, and now they are paying 30. So they have already received the financial benefit from better controlling their cash flow. However, that was really only an internal thing to them because we have given them 30 days already, and if they had paid net 30 days, there would be no changes as a result of EDI." The last part of this comment is particularly interesting because it highlights the fact  '*  Underlined generic words within quotes were edited to ensure confidentiality.  65 Firm-A  Firm-B  Months 70  Firm-C  «, 60  5 50 •^ 40 U  ^iW^KvJVn^^  30  o  •S 20 10 12  18  24  Months Figure 4.4 - Multiple-Baseline Analysis of Trade Credit Cycle Across Groups  66 that payment cycle changes can be introduced by originators and receivers regardless of financial EDI technology. In this particular case for example, the study reveals that there were two entries for this receiver on the vendor master file of the originator in question: one entry with terms of 7 days, and one with 30 days. Moreover, cheques were printed and mailed several days in advance to the participating receiver. Both factors could have been adjusted prior to financial EDI but as noted in the relevant literature, EDI is often a catalyst for the correction of problems and streamlining of work flows and business processes (e.g. Emmelhainz 1990: 34).  b) Firm-B The graph of Firm-B also shows an increase in trade cycle days after financial EDI. These changes were intentionally introduced by the largest customer of the participating receiver. This client firm systematically increased by three days the payment terms of all suppliers paid electronically: "Under the Electronic Funds Transfer (EFT) system your payment will be deposited in your firm's bank account three days after the terms date....The EFT system will be a great assistance in your cash management as studies indicated the current mail system takes a minimum of 4 to 5 days. Therefore, your payment will be received earlier and you will always know the exact date your funds will be deposited under the EFT payment system" (extract from a letter to the participating receiver). In this particular case however, the participating firm was already receiving EFTs for a period of one and a half years before financial EDI and thus, payment cycle changes in Figure 4.4 represent incremental EDI payment delays for Firm-B.  67 c) Firm-C Contrary to the previous two cases, the graph of Firm-C shows a decrease in payment cycle days as well as a decrease in the variability of payments after financial EDI. These changes were introduced by the participating originator which now generates EDI payment transactions every three days (as opposed to daily cheques) with a transmission lead time to the bank of two business days. Consequently, pre-EDI cheque processing delays from 2 to 9 days had been converted into 1 to 5 days for EDI payments i.e., -1 to 1 payment initiation days plus 2 to 4 payment clearing days on a calendar basis.  The t test of relationship between the presence of financial EDI and payment cycle days was applied to the sample transactional data. This test produces the same results as the Ftest of the bivariate regression model since t^ is equal to F (Emory and Cooper 1991: 605). The test results are given in Table 4.2, together with Pearson correlation coefficients.  Table 4.2 Influence of Financial EDI on Trade Credit Cycle Pre-EDI Sample  Post-EDI  Test Results  n  mean  s.d.  n  mean  s.d.  n  r  t  Firm-A  Partner-A  23  24.8  9.8  24  30.8  9.9  47  0.30  -2.1*  FIrm-B  Partner-B  25  39.2  9.4  31  43.0  9.2  56  0.20  -1.5  Firm-C  Partner-C  26  48.2  4.4  28  45.6  2.8  54  -0.39  74  37.9  12.5  83  40.3  10.0  157  0.11  Across firms  2.5* -1.4  Statistically significant a t p <.05.  T results are statistically significant at the five percent level (p < .05) for two firms out of three. The Pearson correlation coefficients show that financial EDI can have a positive, or a negative, impact on payment cycles (a zero impact is also possible). This observation  68 provides a plausible explanation for the non-significance of financial EDI presence over the pooled sample data across firms. For the purpose of this study. Figure 4.5 depicts an alternative, possibly more conclusive graphical representation of the same payment data. For each firm, the figure illustrates how the monetary trade value of sample post-EDI transactions was settled over time, as compared to pre-EDI transactions. The post-EDI settlement slopes of Firm-A and Firm-B have moved to the right resulting in more favourable cash outflows for the originators and less favourable cash inflows for the receivers from a timing standpoint. It is the opposite in the case of Firm-C. Assuming the annual value of trade between each firm and their partner amounts to ten million dollars, these post-EDI payment cycle changes translate into annual losses ranging from $9,500 to $11,200 at an interest rate of 10%. The baseline research method can also be used with financial ratios, rather than sample business transactions.  As an alternative test, this approach was applied to the average  monthly collection period ratios of Firm-C for a period of six months before and after the implementation of financial EDI with the partner of interest. This ratio is the average number of days an accounts receivable remains outstanding: "It is usually determined by dividing a firm's year-end receivables balance by the average daily credit sales based on a 360-day year" (Moyer et al. 1987: 175). Month-end receivable balances were used in the analysis, and the 28.3 average days of outstanding receivables for the period of six months after financial EDI, compared to 20.8 mean days for the pre-EDI time period, is consistent with the results in Table 4.2. Finally, and as a control measure, the baseline research method was also applied to "equivalent" non-EDI partners over the same period of six months before and after financial EDI implementation. The intent of this additional procedure is to ensure that post-EDI changes  69 1.0  Firm-A  0.8 u 0.6 l-c  H u 0.4 > u 0.2 a!  EDI Mix  0.0 20  30  40  Trade Credit Days 1.0  Firm-B  u 0.8 -  3 at  >  M  0.6  H u 0.4 > ^  02 J  0.0 20  30  EDI EFT  60  40  Trade Credit Days 1.0 Firm-C 3  0.8  o  0.6 0.4  <2 0.2  EDI Cheque  -L  0.0 10  20  30  40  50  60  Trade Credit Days  Figure 4 . 5 - Multiple-Baseline Analysis of Trade Value Settlement Across Groups  70 in payment cycles are not attributable to global changes in the disbursement/collection policy and practices of the participating firms during the one-year period under analysis. The notion of equivalence was defined as non-discount partners with similar annual volumes of transactions. For each firm, comparative statistical results between EDI and non-EDI partners are summarized in Table 4.3.  Table 4.3 Control Analysis of Trade Credit Cycles Post-EDI  Pre-EDI n  mean  s.d.  n  mean  s.d.  n  EDI partner  6'  20.8  4.8  6  28.3  3.7  12  0.69  -2.8*  Non-EDI partner  6  20.6  3.5  6  25.2  5.2  12  0.51  -1.8  EDI partner  25  39.2  9.4  31  43.0  9.2  56  0.20  -1.5  Non-EDI partner  26  28.1  11.1  26  29.1  23.6  52  0.03  -0.2  EDI partner  26  48.2  4.4  28  45.6  2.8  54  -0.39  2.5*  Non-EDI partner  25  50.3  3.3  27  49.5  4.0  52  -0.11  0.8  Sample Firm-A  Firm-B  FIrm-C  Test Results r  t  " Firm-A's analysis is based on month-end collection period ratios. * Statistically significant a t p <.05.  As expected. Table 4.3 shows non-significant changes for all three non-EDI partners. However, care should be taken in interpreting the statistical results for Firm-A because of the relatively small sample size of monthly financial ratios over a one-year period.  D. Other Potential Financial EDI Benefits Potential payoffs of financial EDI technology to corporate adopters extend beyond payment process savings and payment cycle gains. A list of twenty-two potential benefits of EDI in general, and financial EDI in particular, was developed based on the current EDI  71 literature in both research and practitioner domains (e.g. Giobecon Group 1 9 8 8 ; Sokol 1 9 8 9 ; Emmelhainz 1 9 9 0 ; Bergeron and Raymond 1992^), and is reproduced in Table 4 . 4 .  Table 4.4 Perceived Potential Benefits of Financial EDI Participant Responses' Potential EDI Benefits  mean  s.d.  min.  max.  1.  Reduced transaction costs  6.4  2.8  1  10  2.  Improved process efficiency  8.7  1.8  5  10  3.  Increased labor productivity  7.6  2.3  3  10  4.  Reduced transaction cycle time (float)  6.6  1.8  3  10  5.  Reduced operations cycle time  4.8  3.0  8  6.  Reduced decision cycle time  3.5  2.9  10  7.  More timely payments  6.7  2.6  10  8.  Improved cash flow  7.4  1.4  9.  Reduced number of errors/problems (resolution costs)  6.7  3.0  10  10. Renegotiation of more favourable payment/discount terms  5.5  3.0  10  11. Reduced inventory level (carrying costs)  2.3  2.7  10  12. Use of EDI as a key catalyst for process reengineering  5.7  3.7  10  13. Enhanced data security and integrity  6.0  2.4  10  14. Reduced transaction uncertainty (acknowledgement)  6.9  2.7  10  15. Improved cash flow forecasting  6.7  2.5  10  16. Improved information timeliness  7.0  2.5  10  17. Improved information accessability  6.5  3.1  10  18. Improved information accuracy  6.2  3.4  10  19. Improved relationships with partners  8.0  1.5  5  10  20. Improved client service quality  5.8  3.1  1  10  2 1 . Competitive advantage  7.6  2.2  3  10  22. Avoidance of competitive disadvantage (competitive necessity)  5.8  2.0  3  10  5  10  From eleven participants of the seven financial EDI user firms (/?= 11).  Education and marketing materials gathered from the participating banks also provided a useful source of information on the potential benefits of financial EDI in particular.  72 The purpose of this benefit list is twofold. First, it was used to build the financial EDI benefit model presented in Chapter II (see Table 2.4 and equation 2.5) by combining closely related items such as more timely payments (item 7) with improved cash flow (item 8), and by eliminating items which are outside the scope of financial EDI such as reduced operations cycle time (item 6) and reduced inventory level (item 11). Second, several participants of the seven financial EDI user organizations were asked to qualify the relevance of these twenty-two potential benefits in their company's decision to invest in financial EDI. The participants used a scale of 1 to 10 for their responses, 10 being extremely important and 1 being completely irrelevant to the adoption decision, and statistics on their ratings are included in Table 4.4. Although the sample size is small (n = ^^f,  these ratings provide some additional  support to two specific aspects of the proposed financial EDI value measurement model. First, participants generally agree that the following benefits of EDI in general are beyond the scope of financial EDI in particular: (i) reduced inventory level and associated carrying costs; (ii) reduced operations cycle;  and, (iii) reduced decision cycle time.  Their exclusion in the  financial EDI value measurement framework is thus consistent with the perception of actual financial EDI users. Second, participants generally perceive the following benefits of EDI in general as being the most important for financial EDI in particular: (i) improved process efficiency which refers to the first major category of financial EDI benefits examined in section B (i.e. payment process savings); (ii) improved relationships with partners; and, (iii) competitive advantage. The last two benefit items can be classified as intangible benefits in the sense that, on an  ^  The small sample size limits the generalizability or external validity of findings due to its lack of representiveness of the population of financial EDI user organizations in Canada.  73 individual basis, it is almost impossible to evaluate their impact in monetary terms. Nevertheless, the financial EDI value measurement framework could incorporate a global assessment of their relative importance expressed as a monetary benefit adjustment factor. The magnitude of this adjustment factor could be determined from user ratings similar to those in Table 4.4, because they cover both quantitative and qualitative potential benefits of financial EDI. Rating results would then be converted into an equivalent benefit premium rate based on previous research or past history of systems implementation. According to the relevant financial literature however, this approach referred to as adjusted present value (APV) should be held in reserve for cases where the net present value (NPV) of corporate projects is negative (Myers 1976). Participants were also asked if, based on their experience, other potential benefits of financial EDI could be added to the list. This open-ended question was aimed at discovering possibly overlooked financial EDI-specific benefit items. It was also intended as a validity check of the participant's understanding of the list items. For example, one participant who gave the lowest possible rate to reduced transaction costs (item 1) mentioned, as other benefits, less manual interventions and less manual handling in spite of the fact that both items are clearly related to the concept of reduced transaction costs. The interview setting under which the rating was performed allowed the author to immediately note such discrepancies and prompt the respondents for additional explanations; nonetheless, statistics in Table 4.4 are based on their original responses. The following additional potential benefits of financial ED! were mentioned by the participants: (i) job enhancement for data entry personnel; (ii) negotiation of lower product prices; (iii) reduced cash discounts lost as payment transaction speed increases; and, (iv) the need for staying abreast of the technology because according to the source participant: "We  74 want to take advantage of the technology if there are benefits to be gained and the only way to do that is to keep on top of it."  A participant also interpreted reduced transaction  uncertainty (item 14) as increased predictability of payments which, in retrospect, is a more appropriate interpretation of the concept of uncertainty than the limited reference that was made in the list to reduced transaction uncertainty (acknowledgement). In the remainder of this section, potential EDI benefits falling outside the scope of financial EDI in particular are discussed first. Then several potential benefits of financial EDI, other than payment process savings and economic gains from payment cycle changes, are examined in more detail, including:  improved partner relationships, competitive role of  financial EDI, more favourable transacted goods prices, business process reengineering, reduced cash discounts lost (on late payments), improved information accuracy, and other potential financial EDI benefits. Among these potential benefits of financial EDI technology, payment process redesign or reengineering effort (e.g. A/P systems consolidation) and more favourable transacted goods prices can be particularly significant to corporate adopters. The latter construct can also take various forms at the operational level, such as the negotiation of more favourable product prices, increased discounts on product prices, as well as increased cash discounts on payment.  a) Benefits Beyond the Scope of Financial EDI As mentioned in Chapter II, section C, four of the potential benefits of EDI in Table 4.4 were originally identified as being outside the scope of financial EDI: reduced operations cycle time (item 5), reduced decision cycle time (item 6), reduced inventory level and associated carrying costs (item 11) and improved client service quality (item 20). The participants clearly  75 share this view as far as reduced inventory level is concerned; it has the lowest mean value of 2.3. One participant however gave the highest possible rating to this potential benefit item and when prompted for an explanation of his surprising qualifier, he added that: "Often when you start asking for just-in-time, they [suppliers] want to be paid faster." The participants also gave particularly low ratings (i.e. mean value under 5) to both reduced operations cycle time and reduced decision cycle time. However, this observation does not hold for the fourth item, improved client service quality.  In the literature, this  potential benefit item tends to be associated with the integration of EDI into customeroriented, quick response systems such as point-of-purchase sales tracking and automatic inventory replenishment systems (e.g. Emmelhainz 1990: 36).  The interpretation of  respondents could have been more global in scope as in the case of the participant who identified a client-oriented philosophy as one of the key characteristics of early financial EDI adopters from the supplier community.  b) Improved Relationships with Partners Improved relationships with partners (item 19) obtained the second highest mean value, after improved process efficiency (item 2) which is part of the first benefit category analyzed in this study i.e., payment process savings--cf. section B and Appendices E and F. Improved relationships with partners is a frequently mentioned benefit in the EDI literature (e.g. Sokol 1989; Emmelhainz 1990; Swatman and Swatman 1991; lacovou et al. 1994).  In that  context, its omission in two recent surveys on EDI in Canada is surprising (Bergeron and Raymond 1992; EDI Group 1993).  76 c) Competitive Role of Financial EDI Competitive advantage was ranked the third most important potential benefit of financial EDI (mean value of 7.6). On this competitiveness issue, several participants from the private sector were also asked if financial EDI was viewed as a "competitive weapon" or as a "competitive necessity" at the time of the project initiation. In the former case, financial EDI would play a proactive role in the firm's quest for sustainable advantages over its competitors. In the latter case, financial EDI would play a more reactive role as a means to avoid being at a disadvantage in the face of competition, or as a necessity if the firm is forced into it by a significant partner. The respondents' perception of the competitive nature of financial EDI does not fit such a dichotomous classification for various reasons. First, a firm may face different competitor groups which react differently to EDI as in the case of this originator: "There may be some competitive advantage over smaller competitors but the major competitors will be there with us." Second, one's assessment of the competitive role of financial EDI may vary depending on his evaluation timeframe as in the case of this originator:  "We put it [competitive  advantage] in the business case [for financial EDI]...and we recognized that eventually it would be a competitive necessity. I would certainly not say that right now it is." Third, a firm may act as both a buyer and a supplier of goods or services to other organizations, and even though its financial EDI program was initiated from one perspective or the other, EDI could have been looked at from a broader perspective as in the case of this originator: "I don't see financial EDI as being a weapon at all....Where I saw EDI [in general] as being an advantage is to get the technology working, we are EDI capable, we understand the technology. This gives us a competitive advantage over non-EDI capable suppliers when customers decide to trade electronically."  77 Finally, the concept of competitiveness encompasses a large variety of operational options which are not necessarily mutually exclusive, as in the case of this receiver: "It is a little bit of both. It depends what application you are using it in. I think it is a necessity if you are dealing in an industry where you have to be on top of your technology....Now as a weapon, we will be able to use it, our costs will not go up as quickly as of all our competitors will."  d) More Favourable Discounts on Transacted Goods Prices Nault et al. (1994) has demonstrated that discounts on transacted goods prices enhances benefits to ongoing business transactions. In their paper which addresses adoption resistance to electronic communication innovations, the authors argue that explicit consideration of discount on transacted goods prices can contribute to an increased diffusion of lOS/EDI. Similarly, Ballance (1992: 27) reported that "Sellers were beginning to enforce terms or, alternatively, negotiate on price with their buyers on the basis of efficient and prompt payment practices." As suggested in the above quote, the concept of discounts on transacted goods prices can take various forms at the operational level, and includes the negotiation of more favourable product prices, increased product price discounts as well as increased cash discounts (on payment). For example, one participating originator reported that the latest contract renegotiation with its suppliers has led to a discount increase of about 1 % on product prices irrespective of the fact that suppliers were EDI operational or not. The Business Manager is convinced that "EDI was a major part of the renegotiation strategy". However, he also mentioned several other potentially influential factors, such as (i) the broader contract focus, (ii) the uniqueness of the negotiation process and, (iii) the  78 negotiators' skills. Furthermore, the financial EDI project of this originator covered both the receipt of incoming invoices and the origination of outgoing payments in EDI format. Under these circumstances, it is almost impossible to evaluate the extent and value of increased discounts specifically attributable to the origination of EDI payments. In other situations, it is easier to establish a direct causal relationship between financial EDI/EFT implementation and reduced transaction goods prices, mainly when the reduction comes from incremental cash discounts (on payment). For example, this supplier firm had made it clear to its customer base that: "A 2% savings is available on each purchase of this product if payment is made by Electronic Funds Transfer (EFT)" (extract from a letter to the participating originator). In case studies however, none of the participating firms has benefited from explicit incremental financial EDI cash discounts and several participants have mentioned, as this Purchasing Manager, that: "We have to do more work in this area. We have to approach it before the contract is expired"; and, this Treasurer: "That is one of the things we should have done before we get up and running with everybody". As a concluding remark on cash discounts, it is worth noting that this pricing incentive for more timely payments does not always work in practice because buyers tend to take discounts whether they pay invoices on time or not. This was the case for one of the largest customers of a participating receiver which recently eliminated cash discounts from its payment terms with this client. Based on a detailed analysis, the Credit Manager evaluated that this change would save $425,000 annually to the firm. Several cost/benefit evaluation items were taken into account in the analysis, including past unauthorized discounts taken, unauthorized discounts recovered, annual cash flow lost as a result of longer payment delays, as well as labor cost savings in rebilling discounts.  79 e) Key Catalyst to Business Process Reengineering EDI is often viewed as a key catalyst for streamlining and redesigning work flows and business processes (Sokol 1989; Davenport and Short 1990; Emmelhainz 1990; Hammer 1990; Bain 1992). Payment process changes as a result of financial EDI implementation are classified in two groups for the purpose of this study: (i) direct payment process changes within the disbursement and collection flows of the firm due primarily to the elimination of paper payment transactions; and, (ii) indirect payment process changes made by the firm since the introduction of financial EDI. Potential benefits from the first category of process changes are an integral part of the analysis of potential payment process savings for corporate originators in Appendix E and corporate receivers in Appendix F.  Typical examples of the economic impact of direct  payment process changes include labor cost savings from the elimination of manual tasks, such as cheque signing by senior officers and payment association with back-up documents, as well as savings on paper forms which become worthless in an electronic payment exchange environment. As far as the second category is concerned, two major indirect payment process changes have been identified in case studies. Two years ago, a participating originator had completely eliminated the operation of an outdated A/P system. This change led to a 36% reduction in the annual volume of cheques issued at the time. The firm has also recently decided to outsource the cheque printing function to its bank, and incremental ongoing process savings have also resulted from this change.  f) Reduced Cash Discounts Lost One participating originator publicly stated that reduced cash discounts lost was one  80 of the four benefits of financial EDI to the firm, the other three referring to decreases in errors, staffing/workload and product costs. To support this claim, the firm was asked to perform a detailed analysis of discounts lost six months before and after the first real-life EDI payment with two of its largest suppliers. Summarized in Table 4.5, the analysis results show that financial EDI can have a negative, or a positive, impact on cash discounts lost (a zero impact is also possible). In the case of Partner-A, positive changes were recorded in terms of both number of transactions and value of discounts lost. In the case of Partner-B, there was a slight improvement in terms of number of transactions, but the amount of discounts lost has increased by 47%. A single transaction with a discounts lost of $233.62 explains most of the variance.  Table 4.5 Influence of Financial EDI on Cash Discounts Lost Pre-EDI  Post-EDI  Variance  Partner-A (1 % discount) 130  62  -68  Total cash discounts lost  1,259.99  916.66  -343.33  Cash discounts lost rate  0.079%  0.058%  -0.021%  17  15  -2  376.88  554.58  177.70  0.2%  0.29%  0.09%  Number of invoices with discounts lost  Partner-B (2% discount) Number of invoices with discounts lost Total cash discounts lost Cash discounts lost rate  g) Improved Information Accuracy The origination of outgoing EDI payments/remittances does not require the keying of new data into the A/P system, once the invoice processing cycle has been comp!eted~cf. Figure 4.2 on trade credit cycle in a paper-based environment. In that context, the potential  81 impact of financial EDI on improved information accuracy is minimum from a corporate originator perspective. However, the technology can eliminate cheque encoding errors made by financial institutions (e.g. cheque number and amount) which provide account reconciliation services to their corporate customers. In this study, potential savings on the resolution of these errors at the customer site are accounted for as potential payment process savings--cf. labor costs in Appendix E.  h) Other Potential Financial EDI Benefits Among other potential benefits of financial EDI, a participating bank has waived the cheque fees of its corporate customer on both Canadian and U.S. dollars bank accounts. This special agreement translates into approximately $2,400 annual savings to the firm before accounting for savings through transaction processing. Another participant reported that the bank has not charged EDI payment transaction fees to the firm for a certain period of time after the implementation of outbound financial EDI. This kind of adoption incentives or rewards are best understood in light of the fact that financial EDI is at a very early stage of diffusion in the Canadian business community--cf. Chapter III, section C on financial EDI usage in Canada.  E. Financial EDI Benefit Model for Corporate Originators The proposed financial EDI benefit model for corporate originators is presented in Table 4.6. The model is divided into five parts. Relevant financial EDI adoption measures are specified in the first part. Then the model estimates benefits along the three major benefit categories identified in the financial EDI value measurement framework (see equation 2.5 in  PRE-EDI PAYMENT ENVIRONMENT Measurement Items I. ADOPTION MEASURES A/P vendor base (before adoption): Total number of vendors Total volume of cheques Total volume of EFTs Total volume of remittance Items Total value of payments Level of adoption: Volume of cheques Volume of EFTs  II. PAYMENT PROCESS SAVINGS 1. Bank Service Charges Cheque processing fees: Monthly banking package fee Unit cheque fee Unit account reconciliation fee Unit cheque sorting fee Unit cheque reproduction fee Unit stop payment fee Other cheque processing fees EFT processing fees: Monthly EFT account maintenance fee Unit EFT transmission fee Unit connect time fee Unit EFT payment fee Other EFT processing fees  Table 4.6 Financial EDI Benefit Model for Corporate Originators POST-EDI PAYMENT ENVIRONMENT Input Measurement Items  Input  Level of adoption: Number of FEDI vendors Volume of EDI payments Volume of EDI remittance Items Value of EDI payments  G V V V V V FA/ F V V V FA/  Output  0% 0% 0% 0%  Cheque cost reduction factors and savings: Banking package fees Cheque fees Account reconciliation fees Cheque sorting fees Cheque reproduction fees Stop payment fees Other cheque processing fees  0% 100% 100% 100% 100% 0% 0%  0 0 0 0 0 0 _0_ 0  EFT cost reduction factors and savings: EFT account maintenance fees EFT transmission fees EFT connect time fees EFT payment fees Other EFT processing fees  0% 0% 0% 100% 0%  0 0 0 0 0 0  EDI processing costs: Monthly EDI account maintenance fee Unit EDI transmission fee Unit EDI payment fee Unit EDI invoice fee  0 0 0 0 CO  PRE-EDI PAYMENT ENVIRONMENT Measurement Items  Table 4.6 Financial EDI Benefit Model for Corporate Originators POST-EDI PAYMENT ENVIRONMENT C Input Measurement Items Unit EDI data segment fee Other EDI processing fees  C V FA/  Input 0 0  Bank Service Savings 2. Paper Form Costs Unit cheque form cost Unit envelope form cost Other paper form costs  V V FA/  0 Form cost reduction factors and savings: 0 Cheque form costs 0 Envelope form costs Other paper form costs Paper Form Savings  3. Transaction Delivery Charges Unit postage rate Unit courier rate Unit fax transmission cost Other delivery charges  V V V FA/  0 Delivery cost reduction factors and savings: 0 Postage charges 0 Courier charges 0 Fax transmission costs Other delivery charges EDI delivery costs: Networic membership fee Monthly mailbox fee Unit network transmission fee Unit network transaction fee Unit network kilocharacter fee Telecommunication costs  F F V V V FA/  100% 100% 0%  0 0 0 0  100% 100% 100% 0%  0 0 0 0 0  0 0 0 0 0 0  0 0 0 0 0 0 0 0  0% 0% 0% 0%| 0% 0% 0%  0 0 0 0 0 0 0  Transaction Delivery Savings 4. Labor Costs Regular cheque run: Cheque printing labor time Cheque printing labor rate Payment association labor time Payment association labor rate Mechanized cheque signing labor time Mechanized cheque signing labor rate Manual cheque signing labor time  V V V  0 0 0 0 0 0 0  Labor cost reduction factors and savings: Cheque printing Payment association with back-up documents Mechanized cheque signing Manual cheque signing Payment audit Cheque special handling Envelope stuffing and mailing  Output 0 0 0 0  CO CA3  PRE-EDI PAYMENT ENVIRONMENT Measurement Items Manual cheque signing labor rate Payment audit labor time Payment audit labor rate Special handling labor time Special handling labor rate Stuffing and mailing labor time Stuffing and mailing labor rate Other activities labor time Other activities labor rate Rush/quick cheque run: Average labor time per activity Average labor rate per activity Manual cheque writing: Average labor time per activity Average labor rate per activity Cheque reconciliation: Average labor time per month Average labor rate Payment inquiries: Volume of payment inquiries Average labor time per inquiry Average labor rate Error/problem resolution: Average error/problem rate Average resolution time per error/problem Average labor rate EFT specific activities: Activity frequency Average labor time per activity Average labor rate Other payment activities: Activity frequency Average labor time per activity Average labor rate  Table 4.6 Financial EDI Benefit Model for Corporate Originators POST-EDI PAYMENT ENVIRONMENT Input Measurement Items 0 Other regular cheque run activities 0 Rush/quick cheque run activities 0 Manual cheque writing activities 0 Cheque reconciliation 0 Payment inquiries 0 Error/problem resolution 0 EFT specific activities 0 Other payment activities 0 EDI specific activities: 0 Activity frequency 0 Average labor time per activity 0 Average labor rate 0 0  Input 0% 0% 0% 0% 0% 0% 0% 0%  Output 0 0 0 0 0 0 0 0  0 0 0  0 0 0 0 0 0% 0 0 0 0 0 0 0 0 Labor Savings  00 •1^  PRE-EDI PAYMENT ENVIRONMENT Measurement Items 5. Existing System Costs Cheque printing subsystem costs Cheque reconciliation subsystem costs EFT release subsystem costs Other A/P subsystem costs  Table 4.6 Financial EDI Benefit Model for Corporate Originators POST-EDI PAYMENT ENVIRONMENT C Input Measurement Items F/V F/V FA/ F/V  C  0 A/P system cost reduction factors and savings: 0 Cheque printing system cost 0 Cheque reconciliation system cost 0 EFT release subsystem costs Other A/P subsystem costs EDI system costs: Monthly EDI maintenance costs Monthly EDI support costs Unit EDI transmission cost Unit EDI payment operation cost Unit EDI kilocharacter operation cost  F F V V V  Input  0% 0% 0% 0%  0 0 0 0 0  0 0 0 0 0  0 0 0 0 0 0 0  0% 0%  0 0 0 0  Existing System Savings 6. Paper Storage Costs Unit standard box storage cost Unit reproduction cost Other storage costs  7. Other Payment Costs Equipment costs Equipment service costs Other payment costs  III. PAYMENT CYCLE GAINS Average payment cycle time (in days): Cheque production and mailing Cheque delivery Cheque receipt and deposit Cheque clearing  V V FN  F F F/V  0 Storage cost reduction factors and savings: 0 Standard box storage costs 0 Paper reproduction costs Other storage costs Paper Storage Savings 0 Other cost reduction factors and savings: 0 Equipment costs 0 Equipment service costs Other payment costs Other payment savings PAYMENT PROCESS SAVINGS Average payment cycle time (in days): 0 EDI payment transmission 0 EDI payment lead time to the bank 0 Other EDI payment delays 0 Annual interest rate Payment cycle gains reduction factor  Qo/o  FN  Output  0% 0% 0%  0 0 0 0% 100%  0 0 0 0 0  00  PRE-EDI PAYMENT ENVIRONMENT Measurement Items  Table 4.6 Financial EDI Benefit Model for Corporate Originators POST-EDI PAYMENT ENVIRONMENT C Input Measurement Items PAYMENT CYCLE GAINS  C  Input  Output 0  IV. OTHER FINANCIAL EDI BENEFITS Increased discounts on product cost Increased cash discounts Payment process reengineering benefits Reduced cash discounts lost Reduced late payment penalties Other benefits OTHER FINANCIAL EDI BENEFITS TOTAL FINANCIAL EDI BENEFITS V. INTERMEDIATE VARIABLES Frequency of EFT transmissions Average connect time per EFT transmission Ratio of cheque forms to cheque Cheque delivery methods: % mailed cheques % courier cheques % other cheques (e.g. picl(-up, COD courier) [Total percentage] EFT remittance delivery methods: % EFTs without remittances % EFTs with mailed remittances % EFTs with courier remittances % EFTs with faxed remittances % EFTs with other remittances [Total percentage] Frequency of regular cheque runs Average number of cheques per regular run Frequency of rush/quick cheque runs Average number of cheques per rush/quicl< runs Frequency of manual cheque writing sessions Average number of cheques per session [Total volume of cheques] Bank reconciliation labor time per month % time for oustanding cheques identification  0 Frequency of EDI transmissions 0 EDI data conversion factors: 1 Average number of data segments per paymeni Average number of data segments per invoice 0% Average number of KC per payment 0% Average number of KC's per invoice 0% EDI remittance delivery methods: 0% % EDI payments without remittances % EDI payments with mailed remittances 0% % EDI payments with courier remittances 0% % EDI payments with faxed remittances 0% % EDI payments with EDI remittances 0% % EDI payments with other remittances [Total percentage] 0% 0% 0 0 0 0 0 0 0 0 0%  0% 0% 0 0 0 0  0 0 0 0 0 0 0 0  0 0 0 0 0 0% 0% 0% 0% 0% 0% 0%  1  CO  en  Table 4.6 Financial EDI Benefit Model for Corporate Originators POST-EDI PAYMENT ENVIRONMENT PRE-EDI PAYMENT ENVIRONMENT Measurement Items C Input Measurement Items [Cheque reconciliation labor time] 0 Volume of supplier & management inquiries 0 0% % inquiries related to payments 0 [Volume of payment inquiries] Cheque errors/problems: 0 Stop payments/lost cheques Cancelled cheques 0 Cheque reconciliation errors 0 Unclaimed funds 0 Other errors/problems 0 0 [Total cheque errors/problems] EFT errors/problems 0 Monthly bank boxes of cheques 0 Number of years in storage 0 0 [Maximum volume of cheques] [Number of standard boxes in storage] 0 Monthly cheque microfilms/fiches 0 Monthly standard boxes of remittances 0 Number of years in storage 0 0 [Number of standard boxes in storage] 0 Monthly remittance microfilms/films  C  Input  Output  00  88 Chapter II): payment process savings (Bp) as per equation 4.1 in section B''; payment cycle gains {Be) as per equation 4.2 in section C; and, other financial EDI benefits (Bo) examined in section D.  Intermediate variables are included in the last part of the model for the  computation of equations E.I to E.20. In this section, the proposed model is first described in some detail.  The model  validation protocol is then presented. Finally, the model is executed under different business scenarios and simulation results are interpreted.  a) Model Description The proposed financial EDI benefit model for corporate adopters was developed in Lotus, and the application listing is reproduced in Appendix G. The model is divided into two major vertical blocks for pre-EDI and post-EDI payment environments. Each block includes a measurement item descriptor, an indicator of the cost category (C) when applicable, and a column for input values by the user. Output values computed by the application are displayed in a separate, additional column in the post-EDI environment block. The proposed model does not assume that all pre-EDI costs are automatically eliminated by the implementation of financial EDI. It supports a more realistic view of the benefit realization process via the specification of post-EDI cost reduction factors to account for, among other potentially influential factors, the nature of costs, the level of automated controls, and the extent of process changes introduced by the firm. Default cost reduction factors are computed by the application based on the nature of costs, but these post-EDI input values can be overridden by the user.  ^  Detailed equations underlying the generic equation 4.1 in section B are found in Appendix E on potential payment process savings for corporate originators (see equations E.I to E.20).  89 For global (G) and fixed (F) costs, the application assumes a zero factor of cost reduction because these items would be reduced through negotiations or upon a 100% financial EDI implementation.  For variable (V) costs, the application assumes either a  proportional reduction factor expressed as the level of financial EDI penetration relative to the firm's partner base, or a 100% reduction factor per transaction when associated costs are measured on a unit basis applicable to a large proportion or to all payment transactions converted to EDI. The status of the A/P vendor base is specified in Part I of the model, together with the incremental level of financial EDI adoption under analysis. Both constructs are expressed in terms of four variable sets: (i) number of corporate vendors; (ii) annual volume of corporate payments by type i.e., cheque, EFT and EDI; (iii) annual volume of remittance or invoice items; and, (iv) monetary value of corporate payments or trade. The volume of EFTs can refer to direct deposits transmitted in batch files or EFT-express transactions. The level of financial EDI adoption can refer to the whole vendor base, a specific group of vendors, or a single partner of the firm. Part II of the model on process payment savings covers the seven benefit categories analyzed in section B: bank service charges, paper form costs, transaction delivery charges, labor costs, existing system costs, paper storage costs, and other payment costs e.g., equipment costs. All variables are specified on an annual basis unless a different unit of measurement is explicitly mentioned e.g., unit cheque fee and monthly system maintenance cost. Labor time and rate variables are expressed on an hourly basis. Part III of the model on payment cycle gains is based on the payment cycle time lags or delays analysis in section D, and covers: cheque production and mailing, cheque delivery, cheque receipt and deposit, cheque clearing, EDI payment initiation, and EDI transmission  90 delays. Some of the other potential financial EDI benefits examined in section E are included in Part IV of the model which can be expanded by the user as needed. A salient feature of the proposed model is its structural flexibility which allows the user to analyze the economic impacts of various pre-EDI and post-EDI A/P disbursement scenarios e.g., in-house vs. outsourced cheque printing services and direct communications vs. VAN. The user can also limit the scope of his/her analysis to pre-EDI payment transactions by setting post-EDI adoption measures to zero and adjusting default post-EDI cost reduction factors for global and fixed costs. It should be noted that for simplicity, the model includes only one price per evaluation item e.g., unit cheque fee, unit postage rate and unit storage box cost.  In some cases  however more than one pricing base may be applicable. For instance, a Canadian buyer with a U.S. supplier base can manage bank accounts in Cdn$ and US$ to which different unit cheque fees apply. The standard rate to mail cheques from Canada to the U.S. is different from the standard rate within Canada, and so on. These situations can be handled in at least three different ways depending on the business context. First, a pre-EDI item line can be added to the model for each additional pricing base and post-EDI calculations can be adjusted accordingly. Second, a weighted average price can be computed based on relative payment transaction volumes. Finally, distinct analyses can be performed for different partner groups e.g., Canadian and U.S. vendor bases.  b) Model Validation There is a wealth of information dealing with issues of validity in the fields of simulation modelling, development of computer software, and auditing (Benbasat and Dhaliwal 1989).  Several methodological or philosophical positions in the context of validating  91 (verifying) economic and simulation models are described in the literature. Bunge (1983: 70) for example, lists unanimism (intersubjective agreement), pragmatism (success in reality), rationalism (logical assessment of synthetic premises), empiricism (observation and measurement) and critical rationalism (lack of negative evidence) as some of the philosophical camps with regard to validation. Instrumentalism in positive economics asserts that predictive power or adequacy is the only relevant test of validity, thus taking a more narrow view of empiricism (Friedman 1953; Samuelson 1963). Validation techniques used in this study are primarily based on the view that empirical observation and measurement are central to model validation. They include the comparison of model outcomes with financial EDI documentation gathered at participating user sites, the review of study analyses by source participants, as well as the model utilization for assessing potential and actual benefits of financial EDI to corporate adopters. The proposed financial EDI benefit model for corporate originators was first compared with available documentation, including: (i) the financial EDI cost/benefit analyses of two participating originators which cover about 40% and 60% of the model's benefit categories; (ii) the detailed analysis of pre-EDI costs performed by another originator assuming a zero level of financial EDI adoption; and, (iii) financial records gathered at participating user firms (e.g. bankA/AN invoices and bank statements).  Participants were also asked to review study  analyses of specific benefit categories, such as labor time requirements per payment process activity and payment cycle changes. The model was executed with the same input values as in source documents, and results were compared by benefit category as well as on an aggregate basis. In all cases, output values of source documents could be reproduced by the model or application. However, relatively minor grouping adjustments and data conversions were necessary at the  92 input level, because structural and computational differences exist between the model and source documents. For instance, the cost/benefit analysis of the first participating firm follows the traditional capital budgeting structure: benefits, ongoing system costs and initial investment. In contrast to this approach, the analysis of the second firm follows basically the same transaction cost reduction structure as the model. However, the latter analysis assumes an automatic 100% elimination of pre-EDI payment process costs, while a more realistic view of the benefit realisation process is incorporated into the model via the specification of pre-EDI cost reduction factors. These factors account for the nature of pre-EDI costs (e.g. fixed vs. variable costs), as well as the existence of intervening or value moderator variables such as the extent of process changes introduced by the firm. Data conversions on labor costs were required between the analysis of pre-EDI costs performed by the third firm and the model due to the fact that different labor attribution methods are used. In the former case, labor time is prorated by payment type and employee, while it is allocated on an activity basis in the model. In the following subsection, the data and model are used to simulate and estimate the magnitude of potential net benefits of financial EDI to corporate originators. This model application follows a scenario-based approach, and interpretation of results can be viewed as a reasonability test of model outcomes.  The reporting structure of simulation data in  Appendix K differs from the model to fit the proposed break-even analysis method: pre-EDI variable unit costs, post-EDI variable unit costs and post-EDI fixed costs. In section F, the model is used to assess actual benefits of financial EDI to participating originators. Inconsistencies and/or omissions noted in source analyses were corrected as an integral part of the evaluation process. For example, one firm included VAN monthly mailbox  93 fee as a fixed post-EDI cost, but omitted to take into account VAN transaction fees on payment and kilocharacter of information transmitted. Another firm estimated significant payment cycle gains as a result of inbound financial EDI implementation (incoming payments), but neglected to assess the impact of outbound financial EDI implementation (outgoing payments) on payment cycle time.  c) Model Simulation Several different units of measurement are being used in the proposed financial EDI benefit model for corporate originators. For instance, some costs are measured on the basis of one cheque, one EFT transaction or one exception case (e.g. stop payments). Other costs are measured on an activity basis and vary depending on the activity frequency (e.g. labor costs per cheque run). Generally speaking however, pre-EDI and post-EDI variable costs can be standardized over two basic units of measurement: payment (P) and invoice item (N). Variable unit savings as a result of financial EDI implementation can then be estimated as follows:  B-(C,-C;)-C;  R^  <4.3)  where B Cp Cp C^ /?/v  = = = = =  Post-EDI variable unit process savings per payment Pre-EDI variable unit costs per payment Post-EDI variable unit costs per payment Post-EDI variable unit costs per invoice item Ratio of invoices to payment.  In the above equation, potential post-EDI variable payment process savings {B) are inversely affected by the ratio of invoices to payment (R^). For instance, if the variable cost of processing one EDI remittance item is evaluated at $0.10, then the EDI conversion of one cheque for ten invoices will cost $0.90 more on a payment basis than the conversion of one  94 cheque for a single invoice. In case studies of corporate originators, the aggregate ratio of invoices to payment ranges from 1.4 to 5. However, significantly higher ratios can apply to individual partners or group of partners.  For example, daily payments from a participating originator to its  transporter cover on average 125 invoices or invoice records. Monthly payments from the largest client of a participating receiver settle up to 500 invoices. The relatively high proportion of payments made to occasional vendors, also referred to as irregular suppliers, one-time vendors or short-term relationships, partly explains the low aggregate ratio of invoices to payment because these payments typically cover a single invoice, in case studies, occasional vendors represent between 35% and 70% of vendor bases, and some participants have expressed serious reservations on their conversion to EDI as illustrated in the following comments: "I can't see how EDI would handle quick payments [to occasional vendors]"; and, "I would not bother doing EDI with an occasional supplier. I would use paper. I am not even sure it is worth the setup time." Three pre-EDI A/P disbursement scenarios are analyzed in more detail below: computerized cheques mailed to suppliers; remittances mailed to suppliers;  (1)  (2) EFT direct deposits with separate paper  and, (3) EFT-express transactions supported by voided  cheques. The analysis shows that the magnitude of potential payment savings as a result of outbound financial EDI implementation varies depending on the magnitude of pre-EDI costs associated with each payment method, namely: EFT-express, cheques and EFTs in decreasing magnitude of potential payment savings. The proposed financial EDI model for corporate originators can accommodate additional payment methods, such as manual cheques and EFTs without remittances, but these payment types are not specifically examined here.  95 a) Computerized Cheques vs. EDI Payments/Remittances. The model was used to assess potential process savings from the EDI conversion of computerized cheques mailed directly to suppliers. The model was run with extreme values on the wide spectrum of corporate payment process costs. Lower-end and higher-end input values, before and after financial EDI, reflect their counterpart from available data sources, including:  case studies of participating financial EDI user firms;  pricing schedules of  participating banks; available surveys (e.g. Stewart Associates 1991); and, data collected from reference firms. It was assumed that all payment transactions are settled between Canadian business partners in Canadian dollars, and that EDI payment orders flow through the Canadian EDI banking network with their associated EDI remittance advices. Appendix K provides details on input as well as output simulation data.  For the  purpose of this analysis, pre-EDI and post-EDI variable costs were standardized and classified along the two basic units of measurement in equation 4.3 i.e., payment (P) and invoice item (N). Fixed costs were grouped together. An average was also computed from lower-end and higher-end values, and Table 4.7 summarizes the simulation results.  Table 4.7 Computerized Cheques vs. EDI Payments/Remittances Post-EDI Costs  Pre-EDI Costs Simulation Results  Low  Avg  High  Low  Avg  High  Variable Unit Costs Per payment Per remittance item  1.21  4.35  9.17  0.10  2.43  4.76  0.01  0.09  0.16  900  7,415  13,930  Rxed Costs Per year  Pre-EDI fixed costs are not included in the table because the simulation does not  96 assume a 100% financial EDI implementation. However, it does assume that pre-EDI variable costs are completely eliminated on a unit basis and therefore, resulting savings should be interpreted as maximum potential financial EDI process benefits for corporate originators. Figure 4.6 gives the potential variable payment process savings (5) derived from the three levels of pre-EDI and post-EDI simulation costs in Table 4.7, at an average ratio of five invoices per payment (/?/v = 5). In three cases out of nine, financial EDI leads to variable unit process savings of a negative magnitude to the firm. These results are explained by the relatively low cost of producing computerized cheques for some firms. Indeed, the analysis reveals that the unit cost per cheque can be as low as $1.21 (see Table 4.7) and consequently, a firm will automatically incur losses if it is charged the higher-end bank fee of $3.00 for the processing of EDI payment/remittance transactions.  Post-EDI Unit Costs Low  Pre-EDI Unit Costs  Avg  High  Low  1.06  -1.67  -4.35  Avg  4.20  1.47  -1.21  High  9.02  6.29  3.61  Figure 4.6 - Potential Variable Unit Process Savings atRff=B  The first graph of Figure 4.7 depicts the corresponding break-even annual volumes of EDI payment transactions for the three levels of post-EDI fixed costs in Table 4.7.  The  absence of data bars® in the graph is explained by either negative post-EDI savings, or break-  ® Data bar identifiers refer to the nine scenarios in Figure 4.6 e.g., "LH" for lower-end pre-EDI unit costs and higher-end post-EDI unit costs.  Break-even Volumes  Break-even Volumes O O O  O O O T  C (D  r > r X  CD  0)  (D  3  SL < (A  c! s  o o o o  00  o o o  o o o  o o o  0\  o o o  00  o o o  o o o o  r r \\S\S\S\SSS1  r >  r >  r  r  \\\\M  a  > >  c  X  •5" (D  r ac  >  o o o  0\  o o o  o o o o  00  o o o  ^a  AAJ  o > ffrvi o  o o o  T  T  > r  o  >  o o o  r r ^^wTTSJ  I  >  ON  Break-even Volumes  O o  >  SS^^  X r  ^^^TTT^  EC >  fa  •0  g  SSSSSSSSSS3  > ^W^m  ^^^^^^^  a a  X X  m  >  > X X r  X  fa  > S^&^s  n;]  W o CD 09  5"  Q• • r > Ed  m m X a (D (A M  r >a m  3  Q• •  •n  or > < X »•  a n o  o  3(D Q C CD  98 even volumes exceeding 10,000 transactions. Ten cases out of twenty-seven fall into that category, and three more have break-even volumes greater than 5,000 transactions. These findings lead to the conclusion that implementing financial EDI into the organization is not automatically a cost beneficial venture for corporate originators from a payment process perspective. Potential benefits to the firm depend on the magnitude of preEDI and post-EDI variable and fixed costs, as well as the relative volume of invoices to payments.  Figure 4.7 also stresses the need to implement cost-efficient financial EDI  applications, mainly in firms with lower-end and average pre-EDI costs. This observation applies to both internal and external financial EDI operating expenditures, such as ongoing system costs, bank fees and network charges. For example, a firm could avoid the use of multi-intermediaries for the transport of EDI payment transactions e.g., bank and VAN network services. From a payment cycle perspective, financial EDI has the potential to eliminate payment time delays~cf. section C. However, unless the originating firm takes counteractions, the corresponding benefits accrue primarily to the receiving firm.  This particular aspect of  financial EDI, combined with the possibility of relatively low or even negative payment process savings, provides a plausible explanation for the lack of enthusiasm demonstrated by Canadian hubs, mostly dominant buyers, towards financial EDI (Lapierre 1994: B3). Indeed, potentially significant benefits from reduced business cycles, other than the payment cycle, generally accrue to the initiator of the EDI system (Meier 1991) e.g., reduced inventory carrying costs^ as a result of just-in-time EDI applications.  ^  A widely used inventory carrying cost rate is 25% of the inventory value (Darlington et al. 1985; Schonberger 1987).  99 b) EFTs with Separate Paper Remittances vs. EDI Payments/Remittances The simulation methodology described earlier was also applied to this second A/P disbursement scenario. Here the originating firm issues EFT direct deposits into its suppliers' bank accounts. The payment requests are transmitted to the bank in batch files as for EFTs to individuals (e.g. payroll). The originator also prints and mails separate paper remittances to suppliers. Detailed input/output simulation data are provided in Appendix K, and Table 4.8 summarizes the simulation results.  Table 4.8 EFTs with Paper Remittances vs. EDI Payments/Remittances Post-EDI Costs  Pre-EDI Costs Simulation Results  Low  Avg  High  Low  Avg  High  Variable Unit Costs Per payment Per remittance item  0.89  2.68  5.22  0.10  2.43  4.76  0.01  0.09  0.16  900  7,415  13,930  Fixed Costs Per year  Pre-EDI variable unit costs for batch EFTs are less than computerized cheques (see Table 4.7) partly because of lower bank transaction fees: $0.45 for EFTs as compared to $0.79 for cheques at the higher-end of the cost spectrum^°. This observation encompasses associated bank service charges for the reconciliation, sorting and reproduction of cheques. Moreover, the simulation assumes that payment inquiry and error/problem resolution labor costs are eliminated by financial EDI technology because these are paper payment-related costs. The same reasoning must then be applied to EFTs which are also electronic payment transactions.  10  The price difference can be viewed as an incentive to adopt EFT technology.  100 The second graph of Figure 4.7 shows corresponding break-even annual EDI payment volumes at a ratio of five invoices per payment {R^ = 5). As expected, the number of cases with positive unit process savings, or break-even volumes lower than 10,000 payments, has decreased compared to computerized cheques (i.e. from 17 to 10 cases out of 27). From a payment cycle perspective, the typical lead time for processing EFTs within the Canadian banking system is 48 hours prior to actual value date. In some situations, it can be four days (Ballance 1992: 27).  On the other hand, EDI payments/remittances can be  processed the same day within the Canadian EDI banking network although some participating financial institutions require a two-day lead time. When compared to EFTs with separate paper remittances, the value-added by financial EDI comprises the following key elements: (i) the generation of remittance information in standardized electronic format; (ii) the elimination of paper remittance processing costs; (iii) the absence of delivery time lags between the funds transfers and associated remittance details; and, (iv) reduced payment clearing delays. The resulting benefits accrue primarily to receiving firms and thus, one could argue that potential process savings from the EDI conversion of EFTs with separate remittances should be used as a baseline for assessing the financial EDI value-added to corporate originators.  c) EFT-Express Supported by Voided Cheques vs. EDI Payments/Remittances Finally in this third A/P disbursement scenario, cheques are produced as usual but only the remittance portion (cheque stub) is mailed to suppliers. The cheques themselves are voided and used as supporting documents to the data entry of EFT direct deposit requests (EFT-express requests) into the cash management system of the originating firm.  This  procedure ensures that payments will be credited on time into the suppliers' bank accounts.  101 Details on input/output simulation data are provided in Appendix K, and the simulation results are summarized in Table 4.9.  Table 4.9 EFT-Express Supported by Voided Cheques vs. EDI Payments/Remittances Post-EDI Costs  Pre-EDI Costs Simulation Results  Low  Avg  High  Low  Avg  High  Variable Unit Costs Per payment  4.31  10.69  18.94  Per remittance item  0.10  2.43  4.76  0.01  0.09  0.16  900  7,415  13,930  Fixed Costs Per year  Pre-EDI variable unit costs in the above table are significantly higher than computerized cheques (see Table 4.7) mainly because of the relatively high cost of processing EFT-express transactions in terms of both bank fees and labor costs. Indeed, higher-end bank transaction fees exceed $5, and up to one hour of labor may be required to process 5-10 EFT-express payment transactions. The third graph of Figure 4.7 depicts the corresponding break-even annual volumes of EDI payments/remittances at a ratio of five invoices per payment {Rf^ = 5). As expected, the number of cases with positive unit process savings, or break-even volumes lower than 10,000 payments, has increased compared to the two previous scenarios i.e., 24 cases out of 27. The conversion of this type of payment transactions to financial EDI has thus the potential to bring higher process benefits to corporate originators.  102 F. Expected and Actual Financial EDI Benefits to Participating Originators Table 4.10 summarizes the estimated actual benefits of financial EDI to the five participating originators (Firm-A to Firm-E) along the same structure as the proposed benefit model for corporate originators in section E. For two of the participating originators (Firm-A and Firm-B), the table also includes expected benefits by the firm at the project initiation stage. Figures have been rounded to the nearest hundred dollars and thus, null actual benefit values do not mean that the benefit category has been omitted in the evaluation, but rather that the resulting post-EDI savings, if any, are negligible i.e., less than $50.00. None of the participating originators has performed a post-implementation evaluation or a post-mortem of their financial EDI project at the time of the research. One firm has planned to do so for its pilot project, but the evaluation report was not yet completed after one year from the date the system was declared in production. This evidence implies that the evaluation of actual benefits had to become an integral part of the present study in all cases. The model in section E was used as the primary tool for achieving this study goal. It was uniformly applied to the five participating originators, and results are presented on a firmby-firm basis below. A variance analysis approach is followed for the participating originators which performed a cost/benefit analysis of their financial EDI program (Firm-A and Firm-B). In this case, the evaluation is primarily based on a comparison of actual versus expected benefits. Otherwise, the evaluation focuses on significant pre-EDI and post-EDI elements explaining the magnitude of actual benefits (Firm-C to Firm-E). Expected and actual financial EDI benefits are presented on an annual basis in Table 4.10 and therefore, they do not reflect cumulative benefits to the firm when the financial EDI application has been operational for more than a year.  Furthermore, the table does not  distinguish between ongoing and one-time benefits to the firm.  These aspects of the  Table 4.10 Outbound Financial EDI Benefits to Participating Originators Firm-A  Time in Production (in years)  Firm-B  Expected  Estimated Actual  Expected  1  1  4  100  19  Estimated Actual 3/2  Firm-C  Rrm-D  Rrm-E  Estimated Actual  Estimated Actual  Estimated Actual  %  1  1/2  Level of Adoption Nunnber of FED! partners Volume of ED! payments Volume of EDI remittance items Value of EDI payments Rate of Adoption Number of FEDI partners Volume of EDI payments Volume of EDI remittance items Value of EDI payments Payment Process Savings Bank transaction fees  8,200  540  82,000  4,500 14M  3% 33% 82% 1,800 -2,100  22,200  70  1  1  1  4,300  250  52  12  21,500 522M  31,200 16M  52 3.5M  12 2M  0.4%  0%  0.2%  0%  6%  0.1%  0.7%  0%  6% 44%  5% 0.2%  0.3% 11%  0% 0%  5,000 -400  -17,500  -900  -700  32,600 -1,900  -600  -600 0  -100 0  0.6% 2% 5% 16% -1,800  22%  0  Paper form costs  1,300  100  4,300  800  0  Transaction delivery charges  3,000  -600  10,300  1,800  -2,700  0  0 -100  0  -200  20,200  3,100  2,000  -300  -400  -400  -300  -300  -16,200  0  0  Paper Storage Costs  0  0  0  0  0  0  0  Other Payment Costs  0  0  0  0  0  0  0  0  -6,900  0  -85,800  15,800  0  Labor costs Existing System Costs  Payment Cycle Gains" Other Financial EDI Benefits Total Rnancial EDI Benefits  0 1,800  2,800 -5,900  0 32,600  114,500" 33,700  0  0  -1,700  -900  ' In relation to the total monetary value of financial EDI trade at the time of analysis. " Estimated A/P systems consolidation and cheque printing outsourcing benefits. ' Maximum increased product discounts which could partly be attributed to influential factors other than financial EDI.  0 150,000= 149,900  O  w  104 investment evaluation process are modeled in Chapter VI on the business value of financial EDI. The time in production is defined as the elapsed time between the transmission date of the first real-life EDI payment with the initial pilot partner and the research date at the financial EDI user site. For comparison purposes, expected benefits by the firm are presented at about the same point in time. This evaluation of expected and actual financial EDI benefits to participating originators revealed that only a subset of potential benefits were considered by firms which performed a formal ex ante analysis of their financial EDI program. In some cases, missing elements, once incorporated into the analysis, had significant negative impacts on actual benefits of financial EDI to the firm (e.g. VAN fees and reduced payment cycle time). The actual economic impact of payment cycle changes and other financial EDI benefits can be more significant to corporate adopters than payment process savings. Among other financial EDI benefits, this evaluation identified two substantial sources of actual benefits to participating firms: (i) indirect payment process redesign or reengineering e.g., A/P systems consolidation; and, (ii) discounts on transacted goods prices. The magnitude of financial EDI benefits to corporate originators depends on a series of factors, including among others: (i) the level of adoption among business partners; (ii) the level of process automation prior to financial EDI;  (iii) the extent of process changes  introduced by the firm; (iv) the level of IS/IT integration between the financial EDI system and existing A/P application; and, (v) third party pricing policies.  1 . Firm-A At the initiation stage, Firm-A evaluated potential variable unit process savings from financial EDI implementation at $0.39 per payment transaction. At an expected adoption level  105 of 8,200 payments, this translates into $3,200 ongoing annual savings. After subtracting $1,400 ongoing fixed costs (bank EDI maintenance fee, VAN mailbox fee and EDI software maintenance), the firm was projecting $1,800 ongoing annual payment process savings as shown in Table 4.10. Only hard cost/benefit items were considered in the ex ante analysis, although softer potential benefits such as lower product cost, reduced cash discounts lost and labour cost savings were mentioned as potential qualitative benefits. The financial EDI post-implementation evaluation revealed that the firm has lost $5,900 after one year of system operation. Six key factors explain the $7,700 negative net variance: (i) a lower level of adoption than expected; (ii) missing payment process evaluation items in the firm's ex ante analysis; (iii) the partial IS/IT integration between existing A/P and financial EDI systems; (iv) the limited extent of payment process changes introduced by the firm; (v) the economic impact of payment cycle changes as a result of financial EDI implementation; and, (vi) other unexpected or non-quantified financial EDI benefits.  a)  Level of Financial EDI Adoption At the initiation phase, the firm's expected benefits were based on the assumption that  100 of its top vendors, representing only 3% of the number of suppliers but 33% of the annual volume of payments, would receive EDI payment transactions after one year. Handsigned letters from the Vice-President of Finance were sent to the 100 targeted vendors but the A/P Manager rapidly realized that this kind of mass diffusion strategy would not work: "When I sent out those letters I planned them and I made sure I had no other appointments for the following week...because I fully expected I had lots of these vendor forms ready to just sit back and my phone would be ringing out the hook-people wanted to jump into that. I was quite shocked at the vendors' reaction to EDI-the resistance out there". The firm received  106 only three responses. A one-to-one communication strategy was then adopted and potential vendors were contacted mainly through telephone calls. From the vendor log maintained by the firm, 69 suppliers had been contacted over the past year: 19 were receiving EDI payment transactions at the time of the research", 46 were at various stages of implementation, and 4 had refused to embark on financial EDI because of costs, reluctance to change existing procedures and lack of requests from other customers. According to the A/P Manager, the 19 early adopters of financial EDI share three major characteristics: (i) they have a client-oriented approach, (ii) they are all proactive firms, and (iii) they are generally large size companies. More recently, the firm has organized a seminar to foster a more rapid adoption of EDI by other industry buyers: "...when we have 3 or 4 more buyers live with EDI, we may all of a sudden have 4 buyers calling up a vendor at the same week and even a small vendor who relies solely on the industry for their business will have to go EDI....Those buyers will be more aggressive than we are. I have been really nice with the vendors." At the actual level of financial EDI adoption, annual payment process savings would amount to -$1,200 according to the original analysis of the firm i.e., 540 EDI payment transactions X $0.39 variable unit savings - $1,400 annual fixed costs = -$1,200 annual or $2.20 unit process losses.  b) Process Evaluation Completeness The firm's expected variable savings of $0.39 per EDI payment transaction were derived by subtracting $0.23 post-EDI variable unit costs (bank EDI fee) to $0.62 pre-EDI  "  Some of the 19 suppliers may in fact receive an electronic print file, fax or printout of the remittance detail if they are not yet financial EDI capable.  107 variable unit costs (bank cheque fee, cheque/envelope form costs and postage fee). However, EDI payments are actually transmitted to the bank via a value-added network (VAN). The VAN transaction delivery charges amount to $0.85 per ED! payment transaction at a ratio of ten remittance or invoice items per payment. After adjustments for the actual ratio of invoice items to payment and VAN discounts (10%), this cost item explains most of the remaining variance in Table 4.10 as far as payment process savings are concerned. The overlooking of VAN transaction fees is surprising given that the VAN monthly mailbox fee was included in the firm's ex ante analysis as a fixed cost. If VAN transaction fees have been considered at the initiation phase, the analysis would have shown -$0.38 (after discounts) rather than $0.39 variable savings per EDI payment transaction.  c) Level of IS/IT Integration Based on the data collected at the participating originator site, labor costs for the processing of cheques can be estimated at $1.53 per transaction. At an actual level of adoption of 540 EDI payments, this translates into $800 potential ongoing annual savings. However, Table 4.10 shows -$200 negative actual labor cost savings, and the partial IS/IT integration between the A/P and financial EDI applications partly explains the variance of $1,000^2 At the initiation stage, the decision was made by management to implement financial EDI as a stand-alone system running on an existing PC. A bridge program was developed by the external EDI software/network provider to maintain vendor banking information on PC and to integrate this information with payment data downloaded from the mainframe prior to its  ^^ The A/P Manager believes that financial EDI has alleviated the pressure on staff to process an invoice before its due date.  108 transmission to the bank.  The transmission protocol is manually executed by the A/P  manager. The bank account reconciiiator also treats EDI payments as cheques and manually flagged them as cashed during the month-end bank reconciliation process. These additional recurring financial EDI-specific activities account for roughly 60% of the non-realized labor cost savings.  d) Extent of Process Changes The remaining variance is explained by the limited extent of payment process changes introduced by the firm as a result of financial EDI implementation. For instance, copies of cheques issued were previously attached to back-up documents e.g., purchase orders, receipt reports and supplier invoices. The cost of performing this activity is included in the estimated $1.53 unit labor cost per cheque. However, this activity was not actually eliminated after financial EDI because the EDI transmission report is now used for exactly the same purpose. The same observation applies to the perforation and filing of paid documents.  e) Payment Cycle Changes The study reveals that the payment cycle time of the firm has been reduced on average by three days as a result of financial EDI implementation. At an annual interest rate of 6%, this translates into $6,900 losses to the firm. It should be noted however, that the A/P policy of the firm is to pay its suppliers 45 days from the invoice date. Consequently, the reduced post-EDI payment cycle time contributes at getting the actual trade settlement date closer to the payment terms negotiated with suppliers at the procurement stage.  109 f) Other Financial EDI Benefits Nault et al. (1994) demonstrate the positive impact of lump-sum price incentives to encourage the adoption of electronic communication innovations. In this particular case, the bank has waived cheque fees of the financial EDI corporate adopter on both its Cdn$ and US$ bank accounts. This translates into annual savings of approximately $2,400 shown as other financial EDI benefits in Table 4.10. This evaluation category also includes $400 reduced losses on cash discounts. Mentioned as a qualitative benefit, the latter item was not originally quantified by the firm.  2. Firm-B This case was particularly interesting to study in light of the fact that the outbound financial EDI application of the firm has been operational for a period of three years and a half at the time of the research. At the initiation phase, the firm has prepared a formal cost/benefit analysis of its A/P EDI initiative and the expected benefits of $32,600 for Firm-B in Table 4.10 were extracted from this analysis. The analysis scope was limited to a specific subset of cheques representing 4 5 % of the total volume of cheques issued by the firm at the time. The cost of processing these cheques was evaluated at $ 1.79 per transaction and unit savings from their conversion to EDI were estimated at $1.21 per payment. The analysis was based on a detailed review of the firm's A/P and disbursement process. It was assumed that 44% of targeted cheques would be converted to EDI over a four-year period and that financial EDI would eliminate all costs associated with their production. At an annual inflation rate of 5% for paper and EDI costs, this translates into $32,600 annual payment process savings i.e., 22,200 EDI payments X $1.47 unit savings after inflation = $32,600 expected benefits.  110 Actual benefits of financial EDI to the firm at the same point in time can be estimated at $33,700, and the positive net variance of $1,100 can be explained by the following key factors: (i) the actual level of financial EDI adoption; (ii) the extent of payment process changes introduced by the firm; (iii) the economic impact of payment cycle changes; and, (iv) other financial EDI benefits to the firm.  a) Level of Financial EDI Adoption Over a period of three years and a half, the actual level of financial EDI adoption or penetration among the firm's suppliers has reached 19% of the expected level of adoption expressed in terms of volume of payment transactions. This single fact explains most of the payment process variance in Table 4.10 i.e., 22,200 expected EDI payments - 4,300 actual EDI payments X $1.47 unit savings = $26,300 explained variance. As indicated in the table, the current A/P EDI vendor base of the firm comprises roughly 70 firms representing 0.4% of the total number of suppliers. The firm has participated and organized several seminars and conferences on EDI; but according to the A/P project leader, its financial EDI diffusion strategy to suppliers was largely based on one-to-one communications, mainly through telephone calls. The A/P project leader also pointed out that: "When I went into this, my perception of EDI was that a lot of people were doing it because of all the seminars that were out there and all the conferences. I thought a lot more people were doing it and when we started doing it, I realized there was not that many people doing it. It was more of a perception than a fact. This was a bit of a delusion for me....It was a long struggle. It's getting better now. It has come a long way in the past three years but there is still a long way to go." At the time of the research, the firm has stopped actively promoting financial EDI to  Ill its suppliers because of the new A/P system being installed as well as resource constraints; according to the source participant however: "If a supplier comes to us or the bank comes to us, we will set them [suppliers] up. But as far as going out hunting for people, we are not doing that any more."  b) Extent of Process Changes Much development effort has been put into the automation of stringent controls and security procedures for the generation and transmission of outgoing EDI payments. Nevertheless, auditing of EDI payments is still performed on a random basis by the firm. The non-elimination of this activity explains most of the remaining variance as far as payment process savings are concerned.  c) Payment Cycle Changes The A/P EDI analysis of the firm did not take into account the potential economic impact of financial EDI technology on payment cycle.  This observation is surprising  considering that the A/R EDI analysis of the firm includes significant expected benefits from reduced collection cycle time, and according to the author of both analyses: "Float [from an A/P perspective] was not an issue for us. EDI is the right way to do business. Our suppliers are very important to us. Without them, we can't deliver quality products to our customers. Any way, we have the capability in our payment system to stipulate when the payment is going to take place." Before financial EDI, the firm was producing cheques three business days in advance of due dates to allow for mailing delays to suppliers. The firm did not want to completely revamp its A/P system, so EDI payments are being sent three business days in advance to the  112 bank which releases them on due date. Consequently, cheque receipt and deposit delays have been eliminated at the supplier end as a result of financial EDI implementation. The economic impact of payment cycle changes is estimated at -$85,800 in Table 4.10 i.e., $522M value of EDI payment transactions X 6% interest rate X 1/365 days = $85,800 payment cycle losses.  d) Other Financial EDI Benefits A few months ago, it was decided that the A/P processor position in Treasury would be eliminated and the printing of cheques for non-EDI suppliers was outsourced to the bank. This decision could have been made regardless of financial EDI, but the technology has enabled the firm to readily transmit A/P payments requests and associated remittance advices to the bank in EDI format. The service provider prints and mails cheques to non-EDI suppliers on behalf of its corporate customer. Given the enabling function of financial EDI in this payment process change, additional annual savings of $27,300 were included in Table 4.10 as other actual financial EDI benefits. Based on the original analysis of the firm, these benefits represent the time required by the A/P processor to handle the annual volume of outsourced cheques i.e., 63,500 outsourced cheques X $0.43 A/P processor unit cost after inflation = $27,300 ongoing annual savings. Other potential cost savings associated with bank cheque fees, paper form costs, postage charges, and labor costs for manually signed high-dollar-value cheques, payment audit and payment inquiries, were excluded given that cheques are still produced even though it is by an external service provider. Two years ago, the firm has also completely eliminated the operation of an outdated A/P system whose payment stream has been consolidated with the current system under  113 analysis. This led to a reduction of 36% in the volume of cheques issued by the firm at the time. The unit cost of processing these cheques was estimated at $15 which translates into $600,000 annual benefits. Prompted for an explanation on the significant difference between this $15 estimate and the $ 1.79 for the current system, the financial ED! project leader simply qualified the older system as "more manual". Here again, the A/P systems consolidation could have been achieved regardless of financial EDI technology. However, the complete elimination of cheque production was part of the original financial EDI vision of the firm, and the consolidation of existing A/P systems represents a significant step in that direction. Consequently, the corresponding payoffs are viewed as indirect payment process redesign or reengineering benefits in the context of this study, and are classified as other financial EDI benefits. The $ 15 estimate was not formally documented by the firm and it was not possible to substantiate the alleged $600,000 ongoing annual benefits from a research perspective. Based on the actual cheque volume reduction and the detailed analysis of the firm, a more conservative estimate of $87,200 is included in Table 4.10 i.e., 40,000 annual payments X $2.18 unit savings after inflation = $87,200 ongoing annual savings. Finally, the firm also claims approximately $40,000 annual savings from a reduction of five days in the GST reimbursement process with the Canadian government. These savings were not included in Table 4.10 as other financial EDI benefits, because they implied the implementation of a specific EDI transaction set (813-GST Remittance) which falls outside the scope of the present study.  3. Firm-C At the initiation phase, Firm-C has also performed a formal cost/benefit analysis of its  114 outbound financial EDI initiative. Unfortunately, access to the project documentation was denied by the information keeper for reasons that remain obscure. The post-implementation evaluation is based on a more recent detailed analysis of pre-EDI payment process costs performed by the newly appointed A/P Manager. In Table 4.10, the evaluation of -$1,600 actual financial EDI losses takes into consideration the following key elements: (i) the actual level of financial EDI adoption; (ii) the type of corporate payments converted to financial EDI;  (iii) the magnitude of post-EDI  payment process costs to the firm; and, (iv) the economic impact of payment cycle changes as a result of financial EDI implementation.  a) Level of Financial EDI Adoption At the time of the research, the financial EDI system was operational for more than a year, but EDI payments were still being sent only to the pilot vendor on a daily basis. Few months ago, the roll out of financial EDI was transferred from the A/P function to the newly created Business Process Reengineering (BPR) team as part of a fully integrated supplier order management cycle program with less than a dozen major vendors. Two other full business cycle programs are also being tested by the BPR team: customer order management cycle and financial reporting cycle, in the spring of 1994, senior management should make a decision on the future of these programs.  b) Type of Corporate Payments In his analysis, the A/P manager estimated the actual cost of processing paper-based payments at $5.02 per invoice: $2.31 for the front-end processing of invoices (e.g. keying, data processing and filing of invoices) and $2.71 for the back-end processing of payments  115 (e.g. printing, stuffing and mailing of cheques).  Even though the front-end part of this  estimation falls outside the scope of the present study, it is worth noting that the cost of $2.31 assumes approved invoices are received in the A/P department: "...the receipt of the invoice, the matching to a purchase order or approving for payment, they [responsible departments] perceive that represents about 70% of the cost of paying an invoice." As far as the back-end processing of payments is concerned, the cost of $2.71 per invoice translates into $5.42 per cheque considering the aggregate firm's ratio of two invoices per payment. This estimation covers cheques as well as EFT-express payment transactions. When broken down by payment type, the unit cost of processing pre-EDI payment transactions can be evaluated at $5.37 for computerized cheques, and $10.70 for on-line EFTs supported by voided cheques. The latter payment method was predominantly used to settle trade with the financial EDI partner, and the evaluation of actual benefits in Table 4.10 reflects the $10.70 pre-EDI unit cost for EFT-express payment transactions.  c) Magnitude of Post-EDI Process Costs In Table 4.10, post-EDI payment process costs are evaluated at $20,200 per year, broken down as follows: $2.08 variable unit transmission and system operation costs charged on a kilocharacter basis; and, $13,200 fixed costs for monthly bank EDI minimum account fees, system maintenance and support costs. These relatively high costs are partly explained by the fact that, on average, an EDI payment has 125 remittance items associated with it. Moreover, the financial EDI application was implemented on mainframe and an authentication software package was purchased and installed especially for financial EDI.  The A/P  department bears the cost of maintaining and supporting the secured EDI environment.  116 d) Payment Cycles Changes Finally, this study reveals that the payment cycle time with the firm's financial EDI partner has increased by six days after the technology has been implemented. At an annual interest rate of 6%, this translates into $16,800 savings to the originating firm.  4. Firm-D No business case was prepared by Firm-D at the financial EDI initiation phase because the project was viewed as both a learning and a marketing tool: "Whether it is EDI or some other form of transferring data, something has to happen and I want us to be in a position to say we are ready to go." Furthermore, the firm had already setup an EDI system on PC four years ago in response to a request from one of its larger customers.  This former EDI program was  interrupted by the initiator early in the implementation process and the participating firm's EDI system remained unused since then. This situation explains the non-attribution of actual system maintenance costs to financial EDI technology in Table 4.10. The post-implementation evaluation takes into account the following key elements: adoption;  (ii) the category of business partners;  (i) the actual of financial EDI  and, (iii) the level of IS/IT integration  between the A/P and the financial EDI systems.  a) Level of Financial EDI Adoption The idea for this outbound financial EDI project originated from the Comptroller in mid1992. He first shared his idea with the firm's bank branch which did not seem to be aware of financial EDI. It took some time before he was put in contact with the EDI team at the bank head office: "The technology is great but somebody has to market it better then they  117 are marketing it. It is ridiculous and I think this is part of the reason why I am not seeing a lot of suppliers out there EDI capable." At the time of the research, the financial EDI system was operational, and nine months have elapsed from the date of the first real-life transaction; however, EDI payments were still sent only to the pilot partner on a weekly basis. Because of a lack of internal IS resources at the time, the Comptroller has learned and upgraded the existing EDI system on his own. He feels that he cannot do anything else at this point: "This is as far as I can possibly take it [financial EDI] now," it has to be integrated with the A/P system and "I just don't have the know-how to manipulate files".  b) Category of Business Partners The unique financial EDI partner of the firm at the time of the research is Revenue Canada. Weekly EDI payments to the government for employee income tax deductions, Canadian pension plan contributions and unemployment insurance premiums represent 11 % of total corporate disbursements in dollars. No economic impact on payment cycle time is shown in Table 4.10 because the firm had always deposited its high dollar value payments to the government at the bank, on due date, to avoid losing interest or incurring late payment penalties.  c) Level of IS/IT Integration In its current stage of development, payment and remittance data are keyed into the financial EDI application before its transmission to the bank. The lack of IS/IT integration between exisiting A/P and financial EDI systems explains the negative labor cost savings in Table 4.10. The integration will be undertaken by the IS group after the A/P system has been  118 migrated to the new PC network computing platform of the firm, and as stated by the IS Manager: "It [A/P EDI] is not at the top of the priority list right now." In fact, it was ranked 16 out of the 22 projects identified in the latest IS plan of the firm.  Nevertheless, the  Comptroller believes the A/P EDI integration should be completed by the end of 1994.  5. Firm-E The financial EDI project of Firm-E was initiated as part of an integrated EDI pilot project with one external partner. The project scope covered the receipt of EDI invoices from the pilot supplier as well as the origination of EDI payments to that supplier. This pilot project was viewed as a fundamental building block for the future evolution of EDI into the organization. A business case outlining the pilot concept and implementation strategies was prepared by the firm, but it did not include a formal analysis of the expected costs/benefits of EDI to the firm. It was decided that this analysis should be based on the actual results of the pilot project and therefore, delayed to the post-pilot evaluation phase. At the time of the research, one year has elapsed from the date the financial EDI application was declared in production, but the evaluation report was not yet completed. The post-pilot evaluation in Table 4.10 is based on a detailed analysis of pre-EDI payment costs performed by a prime business unit involved in the payment process of the firm. It also incorporates data collected from three other closely involved business units. Two key evaluation elements led to the estimated $149,900 actual benefits for the first year of financial EDI operation: the actual level of financial EDI adoption and other financial EDI benefits to the firm.  119 a) Level of Financial EDI Adoption At an actual level of twelve EDI payments/remittances per year, most of the payment process savings in Table 4.10 are immaterial i.e., less than $50. Moreover, the quoted $10 EDI transmission fee has been waived by the bank during the pilot project. The outsourcing EDI service firm does not charge the $0.90 system cost per kilocharacter transmitted, because invoicing its customer would cost more than the revenues. At the time of the research, the firm was not actively promoting a broader adoption of financial EDI among its suppliers because of at least four influential factors: (i) higher IS/IT priorities; (ii) the limited actual usage of the existing A/P system with EDI capabilities; (iii) the lack of IS/IT integration between existing A/P and EDI applications; and, (iv) and a major integrated EDI program currently under development. 1. Higher IS/IT Priorities. It is the responsibility of the EDI active business unit to expand its EDI vendor base, but the division is pursuing higher system priorities at the present time as illustrated by the following comment of the Business Manager: "We really want to focus on point of sale [system] before we focus on EDI...but we will go with suppliers who want to do EDI." 2. Limited A/P System Usage. The firm currently operates three distinct A/P systems. The relatively independent operational business units use either one of the three systems. However, EDI capabilities have been built only into the latest A/P system which is far less utilized by the business community (i.e. approximately 2% of the total volume of payments). The adoption of this A/P system among internal business units can thus be viewed as a prerequisite to a larger scale diffusion of financial EDI among external partners. 3. Level of IS/IT Integration. The financial EDI application is not fully integrated with the newer A/P system. The remittance information is currently keyed into the application, and  120 this explains the negative labor cost savings in Table 4.10. A project is under way to enhance the functionality of the existing A/P system. In the future, it should be able to handle multiple payment request and remittance advice formats in accordance with the diverse requirements of the corporate receiver community e.g., EDI payments/remittances and EDI/EFT payments with separate fax or paper remittances. 4. Major Integrated EDI Program. The firm is in the process of implementing a major integrated EDI program with its suppliers.  The program covers the full order-invoicing-  payment cycle. To be ready when this larger scale ED! program would be launched was one of the reasons motivating the initiation of the financial EDI pilot project.  However, the  integrated EDI program is still at the development phase at this point in time.  b) Other Financial EDI Benefits Some significant financial ED! benefits were mentioned by the participants including, (1) trimmed turnaround time from 70 days down to between 10 and 14 days, (2) reduced billing error rate from 15% down to 1 %, (3) increased discounts on transacted goods prices of about 1 %, and (4) administrative cost savings of 1.5 million dollars. A direct relationship between the financial EDI pilot project and three of these claims could not be substantiated from a research perspective, because the alleged benefits are closely related to non-EDI components of the overall invoicing-payment process. Indeed, the trimmed turnaround time and administrative cost savings can be associated with the redesign of the billing process which took place few years before financial EDI. The reduced error rate can be related to the point of sale system which is a very specific, non-EDI component of the invoicing-payment process. Table 4.10 only includes increased product discounts negotiated with suppliers.  121 because the Business Manager is convinced that "EDI was a major part of that renegotiation strategy."  However, it was not possible to determine the extent and value of the part  attributable to financial EDI in the context of this study and consequently. Table 4.10 shows maximum annual increased product discounts with an appropriate footnote.  G. Financial EDI Benefit Model for Corporate Receivers The proposed financial EDI benefit model for corporate receivers is presented in Table 4 . 1 1 . Similarly to its counterpart for corporate originators in section E, the model is divided into five parts. Relevant financial EDI adoption measures are specified in the first part. Then the model estimates benefits along the three major benefit categories identified in the financial EDI value measurement framework (see equation 2.5 in Chapter 11): payment process savings (Bp) as per equation 4.1 in section B^^; payment cycle gains (Be) as per equation 4.2 in section C; and, other financial EDI benefits (Bo) examined in section D. Intermediate variables are included in the last part of the model for the computation of equations F.I to F.9. In this section, the proposed benefit model for corporate receivers is first described in some detail. The model validation protocol is then presented. Finally, the model is executed under different business scenarios and simulation results are interpreted.  1 . Model Description The proposed financial EDI benefit model for corporate receivers was developed in Lotus, and the application listing is reproduced in Appendix H. The model follows exactly the same structure as the proposed model for corporate originators in section E, and is divided into  ^^ Detailed equations underlying the generic equation 4.1 in section B are found in Appendix F on potential payment process savings for corporate receivers (see equations F.I to F.9).  PRE-EDI PAYMENT ENVIRONMENT Measurement Items I. ADOPTION MEASURES A/R client base (before adoption): Total number of clients Total volume of cheques Total volume of EFTs Total volume of paper remittance Items Total volume of electronic remittance Items Total value of payments Level of adoption: Volume of cheques Volume of EFTs Volume of paper remittance items Volume of electronic remittance items II. PAYMENT PROCESS SAVINGS 1. Bank Service Charges Deposit processing fees: Monthly banking package fee Unit deposit fee Unit remote deposit fee Unit cheque deposited fee Unit returned cheque fee Other deposit processing fees Lockbox processing fees: Monthly lockbox maintenance fee Unit lockbox cheque fee Other lockbox processing fees EFT processing fees: Monthly EFT account maintenance fee Unit EFT direct deposit receipt fee Unit EFT pre-authorized debit fee Other EFT processing fees  Table 4.11 Financial EDI Benefit Model for Corporate Receivers POST-EDI PAYMENT ENVIRONMENT Input Measurement Items  Input  Level of adoption: Volume of FEDI clients Volume of EDI payments Volume of EDI remittance items Value of EDI payments  G V V V V F/V F V F/V F V V FA/  Output  0% 0% 0% 0%  Deposit cost reduction factors and savings: Banking package Deposit fees Remote deposit fees Cheque deposited fees Returned cheque fees Other deposit processing fees  0% 0% 0% 100% 0% 0%  0 0 0 0 0 0  Lockbox cost reduction factors and savings: Lockbox maintenance fees Lockbox cheque fees Other lockbox processing fees  0% 100% 0%  0 0 0  EFT cost reduction factors and savings: EFT account maintenance fees EFT direct deposit receipt fees EFT pre-authorized debit fees Other EFT processing fees  0% 100% 100% 0%  0 0 0 0  EDI processing costs:  fO  PRE-EDI PAYMENT ENVIRONMENT Measurement Items  Table 4.11 Financial EDI Benefit Model for Corporate Receivers POST-EDI PAYMENT ENVIRONMENT C Input Measurement Items Monthly EDI account maintenance fee Unit EDI transmission fee Unit EDI payment fee Unit EDI invoice fee Unit EDI data segment fee  C F V V V V  Input 0 0 0 0 0  Bank Service Savings 2. Paper Form Costs Unit deposit form cost Other paper form costs  V FN  0 Form cost reduction factors and savings: 0 Deposit form costs Other paper form costs Paper Form Savings  3. Transaction Receipt Charges Unit pick-up cost Unit COD courier rate Unit fax receipt cost Other receipt costs  V V V FA/  0 Receipt cost reduction factors and savings: 0 Pick-up charges 0 COD courier charges 0 Fax receipt costs Other receipt costs EDI receipt costs: Network membership fee Monthly mailbox fee Unit network transmission fee Unit network transaction fee Unit network kilocharacter fee Telecommunication costs  F F V V V FN  0% 0%  0 0 0  100% 100% 100% 0%  0 0 0 0 0  0 0 0 0 0 0  0 0 0 0 0 0 0 0  0% 0% 0% 0% 0%  0 0 0 0 0  Transaction Receipt Savings 4. Labor Costs Incoming mail handling: Daily volume of incoming pieces of mail Average daily labor time Average labor rate Bank deposit preparation: Average labor time per HO deposit  V  Labor cost reduction factors and savings: Incoming mail handling Bank deposit preparation Bank depositing Paper remittance application 0 Electronic remittance reconciliation  0 0 0  Output 0 0 0 0 0 0 0  W  PRE-EDI PAYMENT ENVIRONMENT Measurement Items Average labor time per remote deposit Average labor rate Bank depositing: Average labor time per deposit Average labor rate Paper remittance application: Application frequency Average labor time Average labor rate Electronic remittance reconciliation: Reconciliation frequency Average labor time Average labor rate Collection follow-up and inquiries: Volume of late payments Average labor time per late payment Average labor rate Error/problem resolution: Average error/problem rate Average resolution time per error/problem Average labor rate Other cheque receipt activities: Activity frequency Average labor time per activity Average labor rate Other EFT payment receipt activities: Activity frequency Average labor time per activity Average labor rate  Table 4.11 Financial EDI Benefit Model for Corporate Receivers POST-EDI PAYMENT ENVIRONMENT Input Measurement Items 0 Collection follow-up and inquiries 0 Error/problem resolution Other cheque receipt activities 0 Other EFT payment receipt activities 0 EDI specific activities: 0 Activity frequency 0 Average labor time per activity 0 Average labor rate  Input 0% 0% 0% 0%  0 0 0 0 0 0 0% 0 0 0 0 0 0 0 0 Labor Savings  5. Existing System Costs A/R application subsystem cost Other collection subsystem costs  FA^ F/V  A/R system cost reduction factors and savings: A/R application subsystem cost Other collection subsystem costs  0% 0%  Output 0 0 0 0  PRE-EDI PAYMENT ENVIRONMENT Measurement Items  Table 4.11 Financial EDI Benefit Model for Corporate Receivers POST-EDI PAYMENT ENVIRONMENT C Input Measurement Items EDI system costs: Monthly EDI maintenance costs Monthly EDI support costs Unit EDI transmission cost Unit EDI payment operation cost Unit EDI kilocharacter operation cost  C  Input  Output  F F V V V  0 0 0 0 0  0 0 0 0 0 0 0  0% 0% 0%  0 0 0 0  0% 0% 0%  0 0 0 0 0 0 0  Existing System Savings 6. Paper Storage Costs Unit standard box storage cost Unit reproduction cost Other storage costs  V V FA/  0 Storage cost reduction factors and savings: 0 Standard box storage cost 0 Paper reproduction cost Other storage costs Paper Storage Savings  7. Other payment costs Equipment costs Equipment service costs Other payment costs  F F FN  0 Other cost reduction factors and savings: 0 Equipment costs 0 Equipment service costs Other payment costs EDI other payment costs Other Payment Savings PAYMENT PROCESS SAVINGS  III. PAYMENT CYCLE GAINS Average payment cycle time (in days): Cheque production and mailing Cheque delivery Cheque receipt and deposit Cheque clearing  Average payment cycle time (in days): 0 EDI payment transmission 0 EDI payment lead time to the bank 0 Other EDI payment delays 0 Annual interest rate Payment cycle gains reduction factor PAYMENT CYCLE GAINS  F/V  0  0 0 0 0% 100% 0  IV. OTHER FINANCIAL EDI BENEFITS Increased discounts on product cost Increased cash discounts Payment process reengineering benefits  0% 0% 0  0 0 0  N3 Ol  PRE-EDI PAYMEfyiT ENVIRONMENT Measurement Items  V. INTERMEDIATE VARIABLES Cheque receipt methods: % mailed cheques % pick-up cheques % COD courier cheques % cheques deposited by clients % lockbox cheques % other cheques [Total percentage] EFT payment receipt methods: % EFT direct deposits % EFT pre-authorized debits % EFT other payments [Total percentage] EFT remittance receipt methods: % EFTs without remittances % EFTs with mailed remittances % EFTs with COD courier remittances % EFTs with faxed remittances % EFTs with other remittances [Total percentage] Number of bank lockboxes Average frequency of lockbox deposits Number of remote deposit sites Average frequency of deposits to the bank: Head office Remote sites [Total lockbox deposits] [Total local deposits] [Total remote deposits]  Table 4.11 Financial EDI Benefit Model for Corporate Receivers POST-EDI PAYMENT ENVIRONMENT Input I Measurement Items Reduced cash discounts lost Reduced late payment penalties Other benefits OTHER FINANCIAL EDI BENEFITS TOTAL FINANCIAL EDI BENEFITS  Input  Output 0 0 0  Frequency of EDI transmissions  0% EDI data conversion factors: 0% Average number of data segments per paymeni 0% Average number of data segments per invoice 0% Average number of KC per payment 0% Average number of KC's per invoice 0% EDI remittance delivery methods: 0% % EDI payments without remittances 0% 0% 0%  % % % % %  EDI payments with mailed remittances EDI payments with COD courier remittances EDI payments with faxed remittances EDI payments with EDI remittances EDI payments with other remittances [Total percentage]  0 0 0 0 0% 0% 0% 0% 0% 0% 0%  0% 0% 0% 0% 0% 0% 0 0 0  0 0 0 0 0  —'  to  Table 4.11 Financial EDI Benefit Model for Corporate Receivers PRE-EDI PAYMENT ENVIRONMENT POST-EDI PAYMENT ENVIRONMENT Measurement Items Input Measurement Items C [Total deposits] 0 1 Ratio of deposit forms to deposit Cheque receipt errors/problems: 0 Unidentified payments 0 Partial payments 0 Unauthorized cash discounts 0 Returned cheques 0 Other errors/problems 0 [Total cheque errors/problems] 0 EFT receipt errors/problems 0 Monthly remittance standard boxes 0 Number of years In storage 0 [Number of standard boxes In storage] 0 Monthly remittance microfllms/flches  C  Input  Output  128 two major vertical blocks for pre-EDI and post-EDI payment receipt environments. Each block includes a measurement item descriptor, an indicator of the cost category (C) when applicable, and a column for input values by the user. Output values computed by the application are displayed in a separate, additional column in the post-EDI environment. The model for corporate receivers also includes post-EDI cost reduction factors to support a realistic view of the benefit realization process. Default factors are computed by the application using the same logic as for corporate originators, and input values can be overridden by the user. The status of the A/R client base is specified in Part I of the model as well as the incremental level of financial EDI adoption for analysis. These constructs are defined as for corporate originators except that corporate EFTs now refer to direct deposits (credits) and preauthorized debits. The remittance data medium is also specified in the adoption measures section of the model (i.e. paper or electronic) because of its potentially significant impact on post-EDI process savings. Indeed, the level of process automation prior to financial EDI is viewed as a key factor influencing the magnitude of potential EDI payment process benefits to the receiving firm. Part II of the model on payment process savings covers the seven benefit categories analyzed in section B: bank service charges, paper form costs, transaction delivery charges, labor costs, existing system costs, paper storage costs, and other payment receipt costs e.g., equipment costs. All variables are specified on an annual basis unless a different unit of measurement is explicitly mentioned e.g., unit deposit fee and monthly system maintenance costs. Labor time and rate variables are expressed on an hourly basis. Part III of the model on payment cycle gains is based on section C, and other potential financial EDI benefits examined in section D are included in Part IV of the model.  129 The proposed financial EDI benefit model for corporate receivers offers the same structural flexibility that its counterpart did for corporate originators. For simplicity, the model also includes only one price per evaluation item e.g., unit cheque deposited fee, monthly mailbox fee and unit storage box cost. The three options described in the previous section are also available to corporate receivers when multi-pricing bases co-exist.  2. Model Validation As its counterpart for corporate originators, techniques used for validating the proposed financial EDI benefit model for corporate receivers are primarily based on the view that empirical observation and measurement are central to model validation. They include the comparison of model outcomes with financial EDI documentation gathered at participating user sites, the review of study analyses by source participants, as well as the model utilization for assessing potential and actual benefits of financial EDI to corporate adopters. The proposed financial EDI benefit model for corporate receivers was first compared with available documentation, including:  (i) the financial EDI benefit analyses of two  partipating receivers which cover about 10% and 50% of the model's benefit categories; and, (ii) financial records gathered at participating user firms (e.g. bank/VAN invoices and bank statements).  Participants were also asked to review study analyses of specific benefit  categories, such as labor time requirements per payment process activity and payment cycle changes. The model was executed with the same input values as in source documents, and results were compared by benefit category as well as on an aggregate basis. In all cases, output values of source documents could be reproduced by the model or application. However, relatively minor grouping adjustments and data conversions were necessary at the  130 input level, because structural and computational differences exist between the model and source documents. For instance, the benefit analysis of the first participating receiver covers only expected labor cost savings on the application of remittance items to A/R open invoices of the firm's pilot customer. The evaluation is based on an average of 4 days per month of clerical labor work, and assumes a 100% elimination of labor costs. Alternatively, the model expects labor time estimates on a remittance item basis. Because the model supports a more realistic view of the benefit realization process via the specification of pre-EDI cost reduction factors, it can also take into account the 20% to 30% EDI remittances which end up as "rejected" transactions that must be reconciled manually due to system limitations. Another example is courier cost savings as a result of inbound financial EDI implementation which are estimated in absolute terms in the expected benefit analysis of the second participating firm (i.e. 10 couriers/day), while they are specified as a percentage of cheque receipts in the model. In the following subsection, the data and model are used to simulate and estimate the magnitude of potential net benefits of financial EDI to corporate receivers.  This model  application follows a scenario-based approach, and interpretation of results can be viewed as a reasonabiiity test of model outcomes.  The reporting structure of simulation data in  Appendix K differs from the model to fit the proposed break-even analysis method: pre-EDI variable unit costs, post-EDI variable unit costs and post-EDI fixed costs. In section H, the model is used to assess actual benefits of financial EDI to participating receivers. Inconsistencies and/or omissions noted in source analyses were corrected as an integral part of the evaluation process. For example, the benefit analysis of one participating receiver was based on the assumption that 40% of its payment receipts would be converted  131 to EDI within five years. This expected financial EDI adoption rate was applied to both the volume of payments and monetary value of payments. In reality however, less than 1 % of EDI payment receipts from major customers represent 13% of the firm's credit sales.  3 . Model Simulation  Several different units of measurement are being used in the proposed financial EDI benefit model for corporate receivers. For instance, some costs are measured on the basis of one deposit, one payment receipt or one exception case (e.g. returned cheques). Other costs are measured on an activity basis and vary depending on the activity frequency (e.g. A/R application labor costs). Generally speaking however, pre-EDI and post-EDI variable costs can be standardized over three basic units of measurement: deposit (D), payment receipt (P), and invoice item (N). Variable unit savings as a result of financial EDI implementation can then be estimated as follows:  B ~  ^ (Cp-c;)  ^ (c^ _ c;) R^  (4.4)  where B Co /?£, Cp Cp C^ C^ /?/v  = Post-EDI variable unit process savings per payment = Pre-EDI variable unit costs per deposit = Ratio of cheques t o deposit = Pre-EDI variable unit costs per payment = Post-EDI variable unit costs per payment = Pre-EDI variable unit costs per invoice item = Post-EDI variable unit costs per invoice item = Ratio of invoices to payment.  In the above equation, potential post-EDI variable payment process savings {B) are inversely affected by the ratio of cheques to deposit (/?£,). Indeed, if daily deposits to the bank  132 prior to financial EDI included five cheques on average for example, the fact that one-fifth of these cheques are being converted to EDI will not eliminate the need to deposit the remaining four cheques received on a daily basis. At best, the impact of financial EDI will be to reduce the cost of deposits by one-fifth as specified in equation 4.4. On the other hand, potential post-EDI variable payment process savings (B) increase as a function of the ratio of invoices per payment (/?/v). For instance, if the variable savings per invoice item (C/^ - C^) are evaluated at $0.10, then the EDI conversion of one cheque for ten invoices will bring $0.90 more savings on a payment basis than the conversion of one cheque for a single invoice. The combination of both ratios (/?o and R/^) characterizes the trade volume pattern of a supplier firm, and both ratios have a direct impact on potential financial EDI process savings to the organization. For example, in the automotive industry, a firm may trade with relatively few clients paying on a monthly basis (low /?£,), but each payment covers a very large number of invoices or invoice records for the extensive trade that took place during the month (high R^). In the transportation industry, a firm may have both a large number of clients paying regularly (high R^) as well as a large volume of invoices per payment (high R^). The same rationale can be applied to specific partner groups (e.g. top customers vs. occasional clients), and even to individual partners. Three pre-EDI A/R collection scenarios are analyzed in more detail below: (1) cheques received directly from customers and deposited locally; (2) cheques received through a bank lockbox with paper remittances forwarded to the firm; and, (3) receipt of EFT direct deposits with paper remittances.  Here again, the analysis shows that the magnitude of potential  payment savings as a result of financial EDI implementation varies depending on the magnitude of pre-EDI costs associated with each collection method.  133 The proposed financial EDI benefit model for corporate receivers can accommodate additional payment receipt methods, such as cheques deposited from remote sites, pickup/courier cheques and EFT pre-authorized debits, but these payment types or collection methods are not specifically examined here.  a) Cheques Mailed Directly vs. EDI Payments/Remittances The model was used to assess potential process savings from the EDI conversion of cheques sent directly to suppliers which physically deposit them at their local branch bank. The model was run with extreme values on the wide spectrum of corporate payment process costs. Lower-end and higher-end input values, before and after financial EDI, reflect their counterpart from available data sources, including: case studies of participating financial EDI firms;  pricing schedules of participating banks;  available surveys (e.g. Stewart and  Associates 1991); and, data collected from reference firms. It was assumed that all payment transactions are settled between Canadian business partners in Canadian dollars, and that EDI payment orders flow through the Canadian EDI banking network with their associated EDI remittance advices. Appendix K provides details on input as well as output simulation data.  For the  purpose of this analysis, pre-EDI and post-EDI variable costs were standardized and classified along the three basic units of measurement in equation 4.4 i.e., deposit (D), payment (P) and invoice item (N). Fixed costs were grouped together. An average was also computed from lower-end and higher-end values, and Table 4.12 summarizes the simulation results. Pre-EDI fixed costs are not included in the table because the simulation does not assume a 100% financial EDI implementation. However, it does assume that pre-EDI variable costs are completely eliminated on a unit basis and therefore, resulting savings should be  134 interpreted as maximum potential financial EDI process benefits for corporate receivers.  Table 4.12 Cheques Mailed Directly vs. EDI Payments/Remittances Post-EDI Costs  Pre-EDI Costs Simulation Results  Low  Avg  High  Low  High  Avg  Variable Unit Costs Per deposit  6.84  14.44  24.56  Per payment  1.02  3.02  6.47  0.10  2.93  5.76  Per remittance item  0.24  1.31  2.92  0.02  0.09  0.16  900  7,175  13,450  Fixed Costs Per year  Under the first A/R collection scenario, the receipt of cheques is centralized because it is assumed that cheques are deposited locally (vs. from remote branches). If the deposit frequency is daily, then an average ratio of 4 0 cheques per deposit {/?£, = 40) means an annual volume of 1 0 , 0 0 0 payment receipts. Based on this premise. Figure 4.8 gives the potential variable payment process savings (5) derived from the three levels of pre-EDI and post-EDI simulation costs in Table 4 . 1 2 , at a ratio of five invoices per payment (/?/v=5).  Post-EDI Unit Costs Low  Pre-EDI Unit Costs  Avg  High  Low  2.19  -0.99  -4.17  Avg  9.73  6.55  3.37  High  21.58  18.40  15.22  Figure 4.8 - Potential Variable Unit Process Savings at /?o=40 and /?>»=5  135 The above potential payment process savings for corporate receivers are generally higher than their counterpart for corporate originators (see Figure 4.6). The mean savings for the nine scenarios amount to $7.99, as compared to $2.05 for originators. These results are primarily explained by the fact that remittance data are keyed into the A/R system, while no data entry activity is directly associated with the production of cheques. Nonetheless, financial EDI leads to unit savings of a negative magnitude to the firm in two cases out of nine, namely when pre-EDI costs are relatively low while post-EDI costs are at the higher-end of the cost spectrum (e.g. bank EDI transaction receipt fees in the range of $3 to $4). Savings opportunities on relatively costly deposits at the bank are also significantly reduced on a payment basis at a ratio of forty cheques per deposit. The first graph of Figure 4.9 illustrates the corresponding break-even EDI payment volumes for the three levels of post-EDI fixed costs in Table 4.12. The absence of data bars in the graph is explained by either post-EDI negative unit savings, or break-even volumes exceeding the total annual volume of payments, in more than half of the cases (i.e. 14 out of 27), break-even volumes are less than 1,000 EDI payments per annum. From a payment cycle perspective, the collection scenario under analysis offers the most promising opportunities to suppliers, although actual payment cycle time reductions are customer-driven. Indeed, when payment receipts are centralized, cheques can be mailed from originating points across Canada. This translates into postal time lags from 2 to 6 calendar days between major urban centres, and up to 9 calendar days in the case of minor urban centres~cf. section C.  Cheque receipt and deposit time lags are also applicable to this  scenario. Sample data collected at participating financial EDI user sites reveal that up to 6 calendar days can be added to maximum postal delays i.e., 15 days - 9 days = 6 days (see Table 4.1).  Break-even Volumes to O  o o  o o o  ON  o o o T  -n c5' c  OO  o o o  Break-even Volumes  Break-even Volumes o o o o  (O  o o o  A  o o o  OS  o o o  o o o o  00  o o o  o o o  o  v^  o o o  o o o  1  1  "I a  r  p W^^T^V^n  ^^mm p i^ ^ \ \ \ s \^TT^^-TTM  I  r >  r  r>  r  r  >  on CD  X  O O O  o o1  -  a  I CD  O O  OO  <  CD  > 3  SL  o  eg  o  o  f  ^^vi  > >  5^5^s3  ci O o  > X  ^  % ^^m  £  c  fcsi > X  ^ ^ ^ ^ ^ V \ V *!  X  ? fa > 53  I b  r fa s>  X  g  a  •o CD  > 3D  m  g w o CD 3 09  Q •  5'  r > K  CA  •^ \ \ '^  •  o  ^ »••  ^  09  Sa  Q • O  Q• • t- > a  r > ff O <  «  m  b  o o o X  -^ 09  ^* W  CD  a  O  o  O 3CD Q C CD CA CA3  c;^  137 Assuming a mean payment value of $1,000, potential unit payment cycle gains as a result of financial EDI implementation can then be estimated between $0.55 and $4.11 at an annual interest rate of 10%. Reducing the payment cycle time by three days on a single payment worth one million dollars translates into $822 savings to the receiving firm at the same interest rate. This economic aspect partly explains the use of more time-efficient collection methods, such as lockbox services and cheque pick-up/courier systems.  b) Paper Lockbox Services vs. EDI Payments/Remittances In the second A/R collection scenario, cheques are mailed by customers to a bank lockbox instead of directly to suppliers. The bank deposits the cheques into the receiver's bank account and forwards the associated paper remittances to the firm. The simulation methodology previously described was consistently applied to all scenarios analyzed in this subsection. Input/output simulation data are given in Appendix K, and Table 4.13 summarizes the simulation results.  Table 4.13 Paper Lockbox Services vs. EDI Payments/Remittances Pre-EDI Costs Simulation Results  Low  Avg  Post-EDI Costs High  Low  Avg  High  Variable Unit Costs Per deposit  0.14  0.33  0.52  Per payment  1.98  3.78  6.63  0.10  2.93  5.76  Per remittance item  0.24  1.31  2.92  0.02  0.09  0.16  900  7,175  13,450  Fixed Costs Per year  Pre-EDI variable deposit costs in the table are significantly lower than cheques mailed directly to suppliers (see Table 4.12), mainly because lockbox services eliminates the need for  138 depositing cheques at the bank. At the payment level, the lockbox collection method also eliminates the need to prepare deposits^'*, and the cost of handling incoming mail is now estimated on a deposit basis rather than on an individual payment basis. Finally, lockbox service fees have been added to the simulation data. Pre-EDI collection follow-up, remittance storage and A/R application remain unchanged because payment receipts are still chequebased, and remittances are still processed by the firm from paper documents. The second graph of Figure 4.9 shows the corresponding break-even annual payment volumes at the same relative volume ratios i.e., /?o = 40 and F!N = 5- Compared to cheques, the situation for firms with lower-end pre-EDI costs has improved because lockbox fees exceed the cost of processing cheque receipts by the firm. It is the opposite for firms with higher-end pre-EDI costs. In terms of payment cycle, this scenario offers less improvement opportunities than cheque receipts at a centralized location because the receiving firm has already reduced delays by directing payments to strategically located lockboxes.  c) EFTs with Paper Remittances vs. EDI Payments/Remittances Finally under this third A/R collection scenario, suppliers are the recipients of electronic funds transfers originated as direct deposits from their customers.  The customer also  produces remittance advices on paper which are mailed to the supplier.  Table 4.14  summarizes the simulation results in this case. Pre-EDI variable unit costs in the table are significantly lower than both direct and lockbox cheques (see Tables 4.12 and 4.13). The unit of measurement by deposit is no longer relevant because incoming mail handling costs are evaluated on a payment basis as for  Labor costs for the preparation of bank deposits are estimated on a payment basis rather than on a deposit basis because the time required varies as a function of the volume of payment receipts.  139 cheques. Also, to the author's knowledge, the receipt of EFT credits is free of bank charges to the beneficiary other than possibly deposit/credit fees. Moreover, because the simulation assumes that financial EDI eliminates collection follow-up costs, the same reasoning must then be applied to electronic funds transfers.  Table 4.14 EFTs with Paper Remittances vs. EDI Payments/Remittances Post-EDI Costs  Pre-EDI Costs Simulation Results  Low  Avg  High  Low  Avg  High  Variable Unit Costs Per payment  0.16  0.59  1.60  0.10  2.93  5.76  Per remittance item  0.24  1.31  2.92  0.02  0.09  0.16  900  7,175  13,450  Fixed Costs Per year  The third graph of Figure 4.9 shows that break-even annual payment volumes for EFT direct deposits with paper remittances have worsened in all cases as compared to lockbox and direct cheques. However, the graph still indicates relatively low break-even volumes in ten cases out of twenty-seven (i.e. lower than 1,000 payments).  This comparative investigation of pre-EDI and post-EDI payment transaction costs shows that the implementation of financial EDI does not automatically lead to positive benefits to corporate adopters.  The magnitude of potential benefits depends on several factors,  including among others: (i) the trade volume pattern of the firm, (ii) the relative magnitude of pre-EDI and post-EDI payment process costs, and, (iii) changes in payment cycle time. The position of an organization on the wide spectrum of both pre-EDI and post-EDI payment process costs has, in turn, a direct impact on potential net benefits of financial EDI  140 to the firm. For example, if a corporate originator with lower-end pre-EDI costs is charged $3 or $4 per EDI payment/remittance, then the firm might automatically incur net process losses for each payment transaction converted to financial EDI regardless of the actual level of adoption among its business partners. Generally speaking, the analysis stresses the need to implement cost-efficient financial EDI applications, mainly in firms with lower-end or average pre-EDI payment process costs. This observation is even more applicable to firms having fairly efficient pre-EDI cash management practices (e.g. EFT direct deposits and lockbox services).  For instance, an  organization could avoid the utilization of multi-intermediaries in the transport of EDI payment transactions (e.g. bank and VAN). From a payment process perspective, financial EDI technology is potentially more beneficial to corporate receivers than originators. Receivers have relatively higher potential variable process savings per payment transaction. Considering that potential payment cycle time reductions as a result of financial EDI implementation also favour receiving firms, the combination of both aspects provides a plausible explanation for its slow adoption by Canadian hubs, mostly dominant buyers.  H. Expected and Actual Financial EDI Benefits to Participating Receivers Table 4.15 summarizes the estimated actual benefits of financial EDI to the three participating receivers (Firm-A to Firm-C) along the same structure as the proposed benefit model for corporate receivers in section G. For two of the participating firms (Firm-A and Firm-B), the table also includes the expected benefits by the firm at the project initiation stage. Figures have also been rounded to the nearest hundred dollars, and none of the firms has performed a post-implementation evaluation or a post-mortem of their financial EDI project at  Table 4.15 Inbound Rnanciai EDI Benefits to Participating Receivers Firm-A Expected Time in Production (in years)  5  Rrm-B  Estimated Actual 4/2  Expected Pilof^  Firm-C  Estimated Actual  Estimated Actual  2  1%  Level of Adoption 10  1  1  3  51,000  500  25  100  650  6,000  IB  30,000 350M  10,000 113M  52,000 44M  Number of FED! partners Volume of EDI payments Volume of EDI remittance items Value of EDI payments Rate of Adoption Number of FEDI partners  1.5% 2%  1.5% 8%  0.2% 2%  32%  53% 57%  10% 15%  Volume of EDI payments  40%  Volume of EDI remittance items Value of EDI payments  0.1% 0.4% 7%  40%  13%  86,000  6,700 600  6,500 0  9,900 -700  13,900  0  0  0 0  0 2,500  Payment Process Savings Bank transaction fees Paper form costs  48,000 0  -4,800  Transaction delivery charges  17,000  200  0  Labor costs  21,000  6,500  10,600  16,200  0  0  0  Existing System Costs  0  5,900 0  Paper Storage Costs  0  0  0  0  0  Other Payment Costs  0  0  0  0  0  143,800  0  -27,900  -15,800  0 6,500  0  0  -18,000  -1,900  Payment Cycle Gains'  1,110,000"  Other Financial EDI Benefits  0  0  Total Financial EDI Benefits  1,196,000  150,500  * In relation to the total monetary value of financial EDI trade at the time of analysis. ^ Expected benefits from a reduction of six days in accounts receivable carrying costs. ' The analysis covered only the client pilot division.  142 the time of the research.  1 . Firm-A At the initiation stage, Firm-A has performed an overall assessment of financial EDI opportunities. Expected benefits in Table 4.15 were extracted from this analysis. Three key elements explain the significant variance between expected and actual benefits: (i) the lower level of financial EDI adoption than expected; (ii) the level of payment process automation prior to financial EDI; and, (iii) the economic impact of payment cycle changes as a result of financial EDI implementation.  a) Level of Financial EDI Adoption Expected financial EDI benefits by the firm were based on the assumption that 4 0 % of payment receipts in terms of volume and value would be converted to financial EDI within a period of five years. At the time of the research, the firm was A/R EDI operational for a period of more than four years; but, it was receiving EDI payment transactions from only ten customers. The financial EDI project leader explains this relatively low rate of adoption as follows: "It takes such a long time to become EDI capable, that's why we don't have that many customers on board. Customers have their own internal resource problems, and they have to enable their A/P system, and they needed a dedicated project manager. It is not a high priority for them." Much effort was allocated to promoting financial EDI to customers and in hindsight, the project leader believes that one of the things he would do differently is: "I would work with the suppliers group and wait for the customers." This comment reflects the firm's current diffusion strategy with respect to inbound financial EDI: "If they [customers] come  143 to us, we will add them on. But just to do the missionary selling, there is not a big return on our investment to have one head count doing it."  b) Level of Process Automation Prior to financial EDI, the firm was already receiving a significant proportion of its remittance advices in electronic, proprietary format as part of the lockbox services provided by its receiving bank. This system was implemented back in the mid 1980's;  however,  payment receipts with more than 40 remittance items are not keyed by the bank due to a system limitation. This was the case for the pilot partner with whom more than 1,000 invoices are exchanged on a monthly basis. The actual labor cost savings in Table 4.15 reflects the cost of manually entering the pilot partner's remittance data into the A/R system. For the other partners, it reflects the cost of reconciling unmatched electronic remittances.  c) Payment Cycle Changes In Table 4.15, the most significant expected benefit of inbound financial EDI results from an anticipated reduction of six days in the collection payment cycle and associated carrying costs. Due to financial user resource constraints, it was not possible to perform an on-site analysis of actual payment cycle changes. But according to the Treasurer, the firm may have benefit from "2 to 3-day float savings" which explain the payment cycle gains of $143,800 in Table 4.15 i.e., $350M actual financial EDI trade value X 6% interest rate X 2.5/365 days = $143,800 payment cycle gains.  2. Firm-B In the spring of 1990, Firm-B was asked to participate in the financial EDI program of  144 a major division of its largest customer. At the time, the expected benefits of doing financial EDI with this client division were estimated at four days of labor time savings per month for a corresponding volume of 500 paid invoices: three days to key remittance data into the accounts receivable (A/R) system and one day in problem solving to balance paid invoice amounts with the total deposit amount. As shown in Table 4.15, this translates into $6,500 ongoing annual labor cost savings. The Credit Manager added that these savings are "not really reduced transaction costs...it's the ability to take on more volume without expanding your costs." Four key elements explain the negative net variance of -$ 18,000 between the expected and actual benefits of financial EDI to the firm:  (i) the higher level of adoption than  forecasted; (ii) the lower automatic A/R application rate than expected; (iii) the magnitude of post-EDI payment process costs; and, (iv) the economic impact of payment cycle changes as a result of financial EDI implementation.  a) Level of Financial EDI Adoption The scope of the ex ante benefit analysis of the firm was limited to the pilot division of its largest customer. After two years in operation, payment receipts from four divisions of this client are being handled through the A/R EDI application. This explains the higher actual labor cost savings than originally forecasted in Table 4.15. The firm did not attempt to promote financial EDI to other customers because according to the IS Director: "We don't have the resources to push it." The firm is also not really in a position to do so in the face of some of its much larger size clients. Furthermore, the organization wants to implement an alternative solution for the automation of its payment receipts through the bank lockbox currently used for paper-based payments. In the near  145 future, the bank will send the remittance data associated with these payments as EDI lockbox transactions, thus eliminating the need to input them into the A/R system. According to the Credit Manager, "The lockbox system would work as efficiently as the EDI system once we get them on and frankly, I don't know if the big EDI picture will be worth any more in the future because you have duplication of services here."  b) Automatic A/R Application Rate The expected financial EDI benefits to the firm were based on the assumption that the technology would completely eliminate the need to manually apply remittance information to the A/R system. If this assumption has held in practice. Table 4.15 would have shown annual labor cost savings of $14,200 instead of $10,600. However, the Credit manager estimates that only 70-80% of the expected benefits of financial EDI were realized. This percentage can be viewed as a surrogate of the automatic A/R application rate achieved by the system when invoice details received via EDI are matched with open invoices of the A/R system.  In  hindsight, the source participant would "do the programming right off the start better" in order to achieve a higher automatic application rate.  c) Magnitude of Post-EDI Process Costs The ex ante analysis of the firm did not take into consideration the cost of implementing financial EDI into the organization, and according to the EDI coordinator:  "It  was like we are going to do this. It was not a case of how much it will cost but what resources do you need to do it." The most significant post-EDI process cost to the firm is the EDI payment receipt fee from the bank. Each transaction costs $4 and the minimum monthly charge is $60. The firm  146 currently receives less than fifteen EDI payment transactions a month. It is thus charged the monthly minimum fee of $60 which translates into $7.20 per payment receipt at the actual level of financial EDI adoption. No savings were recorded on pre-EDI bank fees because the firm was the beneficiary of EFT transactions and lockbox services are priced on a fixedamount monthly basis.  d) Payment Cycle Changes From a payment cycle perspective, this study reveals that the financial EDI pilot division has increased its payment terms by three days on average as a result of financial EDI implementation which explains the -$27,900 actual payment cycle losses in Table 4.15 i.e., $113M actual financial EDI trade value X 50% with the pilot division X 6% interest rate X 3/365 days = -$27,900 payment cycle losses.  3. Firm-C In late 1 9 9 1 , Firm-C was asked to participate in the financial EDI pilot project of its largest Canadian customer. The decision to be part of this financial EDI pilot project was promptly made by senior management and according to the Director of Finance, people believed that: "We can't leave this opportunity because it will build a stronger relation with our client....It is part of our EDI mission, so let's do it". At the time, no cost/benefit analysis was made to support this decision. Since then, the firm has developed a formal cost/benefit analysis methodology to assess the profitability of potential EDI trading agreements before entering into them. The post-implementation evaluation in Table 4.15 is based on the data collected at the participating receiver site. Four key elements explain the estimated -$1,900 actual annual  147 financial EDI losses: (i) the actual level of financial EDI adoption; (ii) the magnitude of pre-EDI payment processing costs; (iii) the magnitude of post-EDI payment processing costs; and, (iv) the economic impact of payment cycle changes.  a) Level of Financial EDI Adoption At the time of the research, this inbound financial EDI application was in production for a period of more than one and a half years. The firm was receiving real-life EDI payments from three clients, two Canadian and one American, and it was at the testing phase with two other customers. According to the Director of Finance, the firm is not really promoting financial EDI/EFT to its clients: "It would be a soft sales from an EFT side. We don't push a lot of advantages of EFT. What we say is if you want to do it, we are able to do it with you as a partner. We kind of sell the partnership side of the process. We are not selling them that there is a lot of big savings for them to do this." On the other hand, the firm pursues a much more aggressive marketing strategy for its EDI invoice capabilities "because there are huge tangible benefits they [clients] can see almost immediately."  The firm markets its EDI infrastructure as a value-added service to its  customers that can "provide them with state-of-the-art type technology that will cut down paper work for them and us." However, the Director of Finance only considers this project to be a partial success because his original goal was to deal with ten major customers via EDI as of the date of the on-site study, but "we have not got anywhere close to the top ten customers."  148 b) Magnitude of Pre-EDI Process Costs The firm has established a pick-up/courier system with its top Canadian customers to minimize mailing delays.  Its two Canadian financial EDI partners are among those, and  eliminating express delivery charges results in $3,700 annual savings at an average courier rate of $12 per cheque. Even though the manual A/R application process is relatively timeefficient, the high ratio of invoices to cheque for these clients accounts for most of the labor cost savings in Table 4.15 i.e., 650 payments X 80 invoices per payment on average X $0.30 = $15,600.  c) Magnitude of Post-EDI Process Costs For its two Canadian financial EDI clients, the firm is charged $4 per EDI payment flowing through the Canadian EDI banking network. For its American financial EDI client, the firm is charged a monthly EDI maintenance fee of $300, and a transaction fee of $0.50 per EDI payment flowing through the Automated Clearing House (ACH) system. This translates into almost $5,000 in annual EDI bank fees, or $7.70 per payment receipt based on the actual level of financial EDI adoption. The firm also incurs EDI network receipt fees estimated at $1.60 per payment transaction.  d) Payment Cycle Changes Finally, this study reveals that the payment cycle time with the Canadian pilot financial EDI partner has increased by six days after the technology has been implemented. At an annual interest rate of 6%, this translates into -$16,800 losses to the receiving firm.  149 I. Conclusions Several major conclusions can be drawn from the in-depth study of financial EDI benefits to corporate adopters, originators and receivers. A benefit analysis across firms cannot be limited to mailed cheques versus EDI payments/remittances because many other payment types and delivery methods are currently being used by the Canadian business community. Examples of payment types in addition to cheques include corporate EFT direct deposits, EFT pre-authorized debits and bank lockbox services with or without electronic remittances.  Examples of delivery methods in addition to postal services include pick-up  cheques, courier cheques and fax remittances. Both components of a corporate payment transaction, the payment instruction and remittance information, may also travel separately through possibly alternate routes. A key difference between financial EDI and other types of EDI applications is that the payment receiver does not need to be EDI capable (Wallace and Payne 1994). If the latter cannot accept an electronic EDI remittance advice, the participating banks will send the advice to the receiver in an alternative format e.g., electronic print file, fax or hardcopy. The bank list prices for these alternative delivery options are generally higher than EDI remittance receipts, and the pricing difference can be viewed as an incentive to adopt financial EDI technology. However, some larger firms have elected to internally manage the delivery of remittances to their EDI and non-EDI capable suppliers. In that context, one could argue that an assessment of the value-added by financial EDI to corporate adopters should be based on a comparative analysis of EFT direct deposits with separate remittances and EDI payments/remittances, rather than paper cheques and EDI payments/remittances. This approach suggests a closer relationship between EDI and EFT related service charges. From a banking standpoint, transaction fees are typically lower for  150 EFTs than cheques for the originator and, to the author's knowledge, free of charges for the receiver.  The receipt of mail remittances is also free of charges for the receiver.  This  approach also suggests a closer relationship between EDI and EFT setup procedures, the latter being entirely left to the originator within the Canadian EFT banking system. The spectrum of corporate costs for the processing of pre-EDI and post-EDI payment transactions is surprisingly wide. An illustrative example is bank fees for the processing of EDI payments/remittances which range, in case studies, from $0.23 to $4.00 per payment, after controlling for similar quantities of invoice items and pricing standardization.  This  observation is not limited to bank fees, and applies to each and every cost/benefit category or item analyzed in the present study. These broad cost ranges can be explained by analyzing a series of factors from the diversity of corporate disbursement/collection systems, procedures and practices, to the negotiation power of user firms vis-^-vis external service providers. Financial EDI technology is potentially more beneficial to corporate receivers than originators from a payment process perspective. Receivers have relatively higher potential variable process savings per payment transaction. Considering that potential payment cycle time reductions as a result of financial EDI implementation also favour receiving firms, the combination of both aspects provides a plausible explanation for its slow adoption by Canadian hubs, mostly dominant buyers. This situation is particular to financial EDI in the sense that, potentially significant benefits from other types of business cycle time reductions accrue primarily to the initiator of the EDI system (Meier 1991) e.g., reduced inventory carrying costs from just-in-time EDI applications. On the other hand, the diffusion of financial EDI technology is mainly customer-driven and unless a critical mass is achieved (Lyttle 1988; Gurbaxani 1990), the supplier firm might not have a sufficient volume of EDI payment receipts to justify the ongoing fixed costs of  151 operating a financial EDI application. Moreover, a major source of potential process benefits for corporate receivers originates from the automatic application of EDI remittance details to open invoices of the A/R system, but the IS/IT integration of both systems is a sine qua non condition to their realization (lacovou et al. 1994). The implementation of financial EDI does not automatically lead to positive benefits to corporate adopters. The magnitude of potential benefits depends on several factors, including among others: (i) the trade volume pattern of the firm, (ii) the relative magnitude of pre-EDI and post-EDI payment process costs, (iii) payment cycle changes, and (iv) other financial EDI economic impacts. The relative magnitude of pre-EDI and post-EDI payment process costs depends, in turn, on the level of process automation prior to financial EDI, the extent of process changes introduced by the firm, the level of IS/IT integration, third party pricing policies, and other factors summarized in Chapter VI.  Generally speaking however, the  analysis of potential benefits for EDI payment originators and receivers stresses the need to implement cost-efficient financial EDI applications, mainly in firms with lower-end or average pre-EDI payment process costs and with relatively efficient pre-EDI cash management practices. The actual economic impact of payment cycle changes and other financial EDI benefits can be more significant to corporate adopters than payment process savings. Among other financial EDI benefits, this study identifies two substantial sources of actual benefits to participating firms: (i) indirect payment process redesign or reengineering e.g., A/P systems consolidation; and, (ii) discounts on transacted goods prices. A frequently mentioned impediment to the realization of EDI benefits is the need to maintain parallel systems until the firm is 100% EDI operational (e.g. McCusker 1993). The term "parallel" refers here to the co-existence of pre-EDI and post-EDI environments, but a  152 given business transaction is typically processed only in one of them. This assertion is based on at least two important underlying assumptions: first, that a relatively large proportion of pre-EDI costs are fixed in nature; and second, that a 100% EDI implementation would eliminate those costs. This study reveals that both assumptions are hardly sustainable for financial EDI technology. Most of the pre-EDI payment process evaluation cost items are variable or semi-variable in nature, and a 100% financial EDI implementation would not eliminate the bulk of overhead costs associated with the operation, maintenance and support of existing financial disbursement/collection applications and equipment. Finally, a 100% financial EDI implementation would imply in practice the EDI conversion of various types of payments to different beneficiary groups. Indeed, this study reveals that buyers' A/P systems are currently handling a significant porportion of payments to employees for travel advances and expense reimbursements, as well as payments to occasional or irregular vendors. Manual or computerized rush or quick cheques are also issued by corporate originators on a regular basis. Current financial EDI standards and practices of the Canadian banking community do not efficiently support these frequently used A/P payment types.  153 V. COSTS OF FINANCIAL EDI  A. Introduction The proposed financial EDI cost model for corporate adopters is presented in this chapter. The model applies to both EDI payment originators as well as receivers. It was developed following the same three-step approach as for financial EDI benefits: baseline cost evaluation items and associated measures were first identified from a review of the current literature, combined with the author's experience and interviews with participating bankers (see Table 3.5);  these elements were then used as a guideline for the extensive data  collection at participating financial EDI user organizations~cf. interview guide in Appendix C; and finally, the proposed cost model was derived from a rigorous analysis of the data gathered from participating and reference firms. Consistent with the proposed financial EDI value measurement framework described in Chapter II, the two major categories of potential financial EDI costs are analyzed in section B: the initial investment vector (/,) and ongoing adoption cost vector (C,). The proposed cost model derived from this analysis is presented in section C. In section D, financial EDI costs to participating user firms, both expected and actually incurred at the time of the research, are examined using the proposed model. Section E summarizes results. The implementation of financial EDI into an organization leads to incremental development and adoption costs whether the firm was EDI operational, or not, in non-financial areas. It is frequently mentioned in the literature that EDI is not a technical problem or issue (e.g. Swatman and Swatman 1991). However, this study reveals that the development of a financial EDI application is not necessarily a simple matter. Actual financial EDI development budgets of up to $300,000 and two-year development periods illustrates the difficulties.  154 Similarly, the costs associated with the adoption of an EDI application among external partners are often underestimated, if not simply ignored by practitioners and researchers alike. This is an area where the achievement of a critical mass could potentially bring substantial cost reductions to corporate adopters. Indeed, as more and more firms become financial EDI operational, it is predictable that the cost of linking up with them would be significantly lower than the cost of an early adopter allocating resources to the education and indoctrination of potential candidate partner firms. This analysis of financial EDI initial investments and ongoing adoption costs at actual user organization sites reenforces the need to implement cost-efficient financial EDI applications, mainly in firms with pre-EDI lower-end or average payment process costs and fairly efficient pre-EDI cash management practices.  B. Potential Financial EDI Costs Potential financial EDI costs can be grouped into two basic categories depending on their frequency of occurrence: one-time setup costs and ongoing adoption costs. The latter category originally included the ongoing cost of operating, maintaining and supporting existing payment applications (e.g. A/P, A/R, outbound and inbound financial EDI) but upon further analysis, existing system costs were considered an integral part of the cost of processing payments and therefore, incorporated in the analysis of potential payment process savings as a result of financial EDI implementation~cf. Chapter IV, section B.  1 . One-time Setup Costs In equation 2.4 and Table 3.5, one-time setup costs are further divided into one-time development costs (Id) and one-time adoption costs (la). This classification refers to the two  155 major stages of lOS/EDI implementation in the overall research framework (see Figure 2.1): the development of a financial EDI system or application, and its acceptance or adoption among internal users and external partners.  a) One-time Development Costs For the purpose of this study, one-time development costs to setup a financial EDI application are defined as system-related costs incurred by the firm from the investment decision date to the first real-life EDI payment transaction with the pilot partner. The nature of these costs varies depending on the development option selected by the firm and as described in Appendix E, three different financial EDI development scenarios were identified in this study:  (i) outsourced financial EDI capabilities;  (ii) upgrade of an existing EDI  environment; and, (iii) setup of a new EDI environment. 1. Outsourced Financial EDI Capabilities. One participating firm out of seven has elected to outsource financial EDI capabilities from its data processing service provider. In this case, it is the service provider which incurred most of the costs for the upgrade of its EDI environment to include financial EDI. Nonetheless, the user firm was closely involved in communications with the pilot partner and the bank, as well as testing of the service provider's financial EDI application. 2. Upgrade of an Existing EDI Environment. Three participating firms, already EDI active in non-financial areas, have decided to upgrade their existing EDI environment to include financial EDI. A fourth participating organization also had an unused EDI system which became operational with financial EDI. In this case, basic EDI components such as a translator and communications software are already in place, but the firm still needs to at least: (i) review and update its payment processes, work flows, controls and procedures; (ii) setup its  156 EDI software such that it can handle payment transaction sets; and, (iii) develop a bridge program or interface between its EDI system and financial applications. For outbound financial EDI, the development project may also include: (iv) the modification of existing A/P systems to manage vendor banking information, application return transactions and/or flexible payment/ remittance delivery options; and, (v) the development of a secured EDI environment e.g., acquisition and installation of an authentication software. 3. Setup of a New EDI Environment. The two remaining participating firms were also already EDI active in non-financial areas, but they elected to develop a new EDI environment for their financial applications. In this case, the firm must first acquire, install and test basic EDI hardware, software and communications components before it can perform the financial EDI development activities described in the previous scenario.  The magnitude of costs associated with the above components of a financial EDI development project depends on a series of factors, including among others: the financial EDI platform i.e., PC, minicomputer or mainframe; previous experience of IS personnel; the level of IS/IT integration; the extent of automated controls and security procedures; and, third party pricing and service policies. For example, bank EDI setup fees for corporate originators can vary between $150 and $8,000 according to the EDI pricing schedules of participating banks; however, implementation services included in these prices are obviously not the same across financial institutions.  b) One-time Adoption Costs One-time adoption costs to setup a financial EDI application are defined as adoptionrelated costs incurred by the firm from the investment decision date to the first real-life EDI  157 payment transaction with the pilot partner. They cover the pilot testing phase, as well as other one-time costs for the education, training and promotion of financial EDI among internal users and external partners e.g., documentation and start up financial EDI software for external partners. In case studies, none of the corporate originators has developed a financial EDI start up kit or quick start option for their suppliers, but some of the Canadian financial institutions did. For instance, a participating bank currently offers an add-on translator, priced at $2,000, to its cash management system. Another bank reported the current development of a basic financial EDI software on PC which should cost about $100.  2. Ongoing Adoption Costs In equation 2.6, ongoing financial EDI adoption costs are further divided into three categories: ongoing roll out costs (Cr), one-time enhancement costs (Ce), and other ongoing organizational costs (Co). Recall ongoing system usage, maintenance and support costs are part of the cost of processing payments.  a) Ongoing Roil Out Costs Once an EDI application has been developed, tested and put into production, practitioners commonly use the term "roll out" to refer to the next phase of diffusion among external partners other than the pilot partner{s). Both EDI payment originators and receivers may embark on an active diffusion program, while other firms elect to take a more reactive approach and initiate EDI payment exchanges strictly upon partners' request. A proactive firm may also decide to take a more or less aggressive or coercive stance towards the adoption of financial EDI but according to several participants, only the originator of payments (buyer)  158 "may force i t " . It is predictable that the magnitude of roll out costs on a per-partner basis increases in relation to the extent of interorganizational communications prior to the conclusion of a financial EDI agreement, verbal or written. In that context, a proactive-soliciting^ diffusion strategy where the initiator actively promotes financial EDI among its partners in an attempt to convince them of adopting the technology would be at the higher-end of the cost spectrum. A reactive-upon request diffusion strategy where the corporate adopter links up w i t h requesting partners only would be at the lower-end. A proactive-coercive diffusion strategy where the initiator basically forces its partners into adopting financial EDI would be somewhere in between. In any cases, the diffusion strategy of a firm can evolve over time as well as associated roll out costs. For example, a participating firm originally took a very proactive, non-coercive approach t o the diffusion of its financial EDI applications among corporate partners, suppliers and customers. The firm evaluates the cost of this roll out strategy at 1 to 1.5 head counts per year. A t the time of the research however, the firm's strategy had been changed t o a more reactive, upon request type of approach mainly because "there is not a big return on our investment to have one head count doing it". The w a y a given diffusion strategy is carried out or implemented by the firm can also impact its actual level of adoption and associated roll out costs. For instance the following diffusion success factors at the operational level were mentioned by study participants: (i) the identification of already EDI active, preferably financial EDI active trading partners t o link  ^  The frequently used IT adoption qualifiers "proactive" and "reactive" (e.g. Lyttle 1988; Reich and Benbasat 1990) are also applied to potential financial EDI diffusion strategies once the investment has been made by corporate adopters.  159 up with first^;  (ii) the need to make contacts with the right individual in corporations,  preferably the Vice President of Finance according to a participating A/P Manager; (iii) the conduct of group meetings, rather than one-to-one meetings, with potential candidate partners; and, (iv) an initial focus on intra-bank partners because the originator's financial institution can waive its EDI fees to suppliers. Once a financial EDI agreement is concluded, the firm incurs additional costs for setting up the willing partner in its financial ED! environment. According to study participants, the labor effort to perform this activity can vary between two hours to one day per partner, including communications with the bank, update of the A/P and EDI systems, and testing of the electronic transaction flow.  b) One-time System Enhancement Costs In two case studies, the financial EDI system was operational at the time of the research, but further system enhancements were either planned or currently being implemented by the firm.  In one case, a development project was under way to further  customize the existing A/P system for the handling of multiple payment request and remittance advice formats in accordance with the diverse requirements of the business community. In the other case, the integration of existing A/P and financial EDI systems is planned before the end of 1994. The same cost evaluation items as for one-time development costs apply to these system enhancement projects (e.g. software and programming costs) and therefore, they could have been classified as one-time development costs. However, the latter specifically  ^  Available sources of information include the EDI Council of Canada (EDICC) membership list and EDI, spread the word! business partner directory (1992). Unfortunately, there was no directory of financial EDI active firms in Canada at the time of this research.  160 refer to the initial investment before the financial EDI application is put into production. This temporal aspect justifies the inclusion of post-production system enhancements as one-time adoption costs in the context of this study, and as noted by one participant: "In hindsight, we could have delayed the [financial EDI] project until the A/P system is ready but if we had delayed it, we still wouldn't have anything." Furthermore, the need for some of these system enhancements may become apparent only after the system has been operational for some time.  c) Other Ongoing Organizational Costs It is often mentioned in the literature that EDI is not a technical issue, but a "way of doing business." Swatmanand Swatman (1991) even entitled one of their papers "Electronic Data Interchange: Organizational Opportunity, Not Technical Problem", and according to a participating financial EDI project leader: related."  "Technically 10%, EDI effort is 90% business  Such assertions are very broad in scope and refer to both intra- and inter-  organizational business process changes and adoption issues. Nevertheless, they stress the significance of non-technical effort involved in implementing EDI in general and financial EDI in particular. In the context of this study, the development and adoption costs of financial EDI refer to both technical and business-related effort.  For instance, one-time development costs  include the analysis and redesign of payment processes, work flows, controls and security procedures which is typically done by skilled users or specialized functions. This approach is consistent with the IS project management policy of many organizations, including at least two larger participating firms where a control analysis or audit control review is mandated before any new system is put in place.  161 Additional development and adoption costs not specifically included in previous cost evaluation items are accounted for in this generic cost category, including the cost of organizational changes, disruption and union resistance.  In case studies, the strongest  qualifier used by participants to describe the amount of organizational disruption caused by financial EDI was "moderate" and in at least six firms out of seven, the financial administrative staff was not unionized.  C. Financial EDI Cost Model The proposed financial EDI cost model for corporate adopters is presented in Table 5 . 1 . It was developed in Lotus and the application listing is reproduced in Appendix I. Consistent with the financial EDI value measurement framework in Chapter II, the model is divided into two blocks corresponding to the initial investment and ongoing adoption costs of financial EDI. The initial investment block covers one-time development costs (Id) as well as one-time adoption costs [la). No time variable is associated with these cost categories and the onetime setup cost items can thus be used to evaluate one-time system enhancement costs (Ce) as well. This timing aspect is modeled in Chapter VI on the business value of financial EDI for corporate adopters. The model for ongoing adoption costs is further divided into three parts. Adoption measures are specified in Part I along the same dimensions as its counterparts from a benefit perspective:  (i) number of partners, (ii) volume of payments, (iii) volume of invoice or  remittance items, and (iv) value of payments. Both target and actual financial EDI partners are accounted for, because of the time lag between the initiator's diffusion effort and actual adoption of financial EDI by the target partner community. This timing aspect is also modeled in the next chapter.  162 Table 5.1 Financial EDI Cost Model for Corporate Adopters INITIAL INVESTMENT Measurement Items 1. ONE-TIME DEVELOPMENT COSTS System analysis and design costs: EDI payment process and worl< flows EDI payment controls/security procedures EDI payment standards/data maps Othier system analysis and design costs  Input  Output  0 0 0 0  0  Hardware costs: Computer fiardware (new, upgrade, machine time) Communications tiardware (modems, lines) Security/authentication tiardware Other hardware costs  0 0 0 0  0  Software and programming costs: Translation software/programming Modifications and interfaces to existing A/P and A/R systems Communications software/programming Security/authentication software/programming Other software and programming costs  0 0 0 0 0  0  Third party setup fees: Banl< EDI setup fee VAN EDI setup fee Communications setup fee Other setup fees  0 0 0 0  0  Other one-time development costs  0  II. ONE-TIME ADOPTION COSTS Pilot testing and conversion costs: Selection of pilot partner(s) Communications with pilot partner(s) Partner setup, testing and conversion Other pilot testing and conversion costs  0 0 0 0  0  Internal one-time adoption costs: Documentation for internal users (education, training) Education and training of internal users Other internal adoption costs  0 0 0  0  External one-time adoption costs: Documentation for external partners (education, promotion) Start up software/programming for external partners Other external adoption costs  0 0 0  INITIAL INVESTMENT  0 0  0 0 0  163 Table 5.1 Financial EDI Cost Model for Corporate Adopters ONGOING ADOPTION COSTS Measurement Items 1. ADOPTION MEASURES Partner base (before adoption): Total number of partners Total volume of payments Total volume of remittance items Total value of payments Target financial EDI partner base: Target number of FEDI partners Target volume of EDI payments Target volume of EDI remittance items Target value of EDI payments Level of adoption: Number of FEDI partners Volume of EDI payments Volume of EDI remittance items Value of EDI payments II. ONGOING ROLL OUT COSTS Public education/marketing effort (seminars, conferences) Communications with target partners Partner setup, testing and conversion Other roll out costs III. OTHER ORGANIZATIONAL COSTS Internal ongoing adoption costs: Payment process reengineering Organizational disruption Resistance to change Other internal adoption costs External ongoing adoption costs: Support of FEDI external partners Other external adoption costs ONGOING ADOPTION COSTS  Input  Output  0 0 0 0 0 0 0 0 0 0 0 0  0% 0% 0% 0%  0 0 0 0  0  0 0 0 0  0  0 0  0 0  164 Parts II and III cover ongoing roll out costs (Cr) and other ongoing organizational costs (Co) respectively. The proposed financial EDI cost model for corporate adopters in Table 5.1 primarily lists, under each cost category, potential evaluation items for consideration in the investment analysis. Intermediary variables to assess the monetary value of these items were not included in the model because of the wide variety of potential underlying estimation items and methods e.g., IS development effort-lines of code, function points and regression model (Wrigley and Dexter 1991), marketing effort-conferences, group meetings, one-to-one communications {face-to-face meetings and telephone conversations), geographic location of target partners, and so on.  D. Expected and Actual Financial EDI Costs to Participating Adopters Table 5.2 summarizes the estimated actual costs of financial EDI to the seven participating user firms (Firm-A to Firm-G). Both initial investment and ongoing adoption costs are examined. The initial investment refers to the development phase from the investment decision date to the first-real-life EDI payment transaction with the pilot partner i.e., development time. Ongoing adoption costs represent the cumulative costs incurred by the firm from the date of the first real-life EDI payment transaction to the on-site study i.e., time in production. In three cases out of seven (Firm-A, Firm-B and Firm-G), the table also includes expected initial investment by the firm at the initiation phase. None of the participating firms has forecasted the ongoing costs of financial EDI adoption among business partners, although this study reveals that adoption-related costs can be significant. Also none of the firms has completed a post-implementation evaluation or a post-mortem of their financial EDI investment at the time of the research. The model in section C was used to perform the evaluation of  Table 5.2 Rnancial EDI Costs to Participating Adopters Rrm-A  Rrm-B  Rrm-D  Firm-C  Rrm-F  Firm-E  Rrm-G  Rnancial EDI Development 5  8  8  24  21  7  18  Yes  Yes  No'  No  Yes  Yes  Yes  New  Upgrade  Upgrade  Outsourced  Upgrade  Upgrade  New  FEDI platform  PC  Main/PC"  PC  Main  Mini  Main  Main  IS involvement  No  Yes  No  Yes  Yes  Yes  Yes  Medium  High  Low  Medium  High  High  High  Low  High  Low  Medium  Low  Low  High  1,800  200-300K  3-5K  200-300K  Development time (in months) Existing EDI applications Development option  Level of IS/IT integration Extent of FEDI controls/security Initial Investment Expected initial investment Estimated actual initial investment  168,000 5-8K  5-1 OK  20-50K  3-5K  200-300K  Rnancial EDI Adoption Time in production (in years) Number of FEDI partners Diffusion strategy  1  172  y*  1  2  ^%  472  19  1  1  1  1  3  80  Proactive  Pilot  On hold  On hold  Reactive  Reactive  Reactive''  5-1 OK'  10-15K"= 100-200  200-300K  Ongoing Adoption Costs Expected adoption costs Estimated actual adoption costs ' *" •^ "*  3-5K  The firm already had an EDI system on PC but it remained unused prior to financial EDI. Part of the financial EDI authentication software was implemented on PC. Future system enhancement costs assessed at the time of the research. Until recently, the firm has actively pursued a proactive, non-coercive diffusion strategy. O)  ai  166 actual costs of financial ED! to participating user firms. Results are presented on a firm-byfirm basis below. A few potentially influential factors are also presented in Table 5.2. They reflect the project state at the time of the research and include from a development perspective: (i) the existence of EDI applications prior to financial EDI; (ii) the financial ED! development option selected by the firm i.e., outsourced EDI capabilities, upgrade of an existing EDI environment or setup of a new EDI environment; (iii) the financial EDI platform i.e., PC, minicomputer or mainframe; (iv) IS involvement in the development project; (v) the level of IS/IT integration between the EDI system and financial business applications; and, (vi) the extent of automated controls and security level of the financial EDI environment. The latter variable was assessed on the basis of the existence of the following potential computerized control/security procedures: the encryption of electronic payment data, the use of an authentication software, and the automatic matching of application return transactions against EDI payments/remittances issued. A "low" qualifier was automatically assigned to clear-text payment transactions. However, this state does not necessarily reflect a lack of controls in the case of EDI payment receivers, and alternative manual controls may be enforced in the case of EDI payment originators. For instance, the bank of two participating originators is calling its corporate customers after each and every transmission to confirm the number and total value of EDI payments issued. The three participating banks also require that receivers be setup on their systems up to two weeks prior to the origination date of the first EDI payment transaction. A vendor banking information form provided by the bank is often used to that end.^  ^  According to a participating banker, similar setup procedures were also enforced in the early days of EFT, but subsequently abandoned by the Canadian banking industry.  167 From an adoption perspective, Table 5.2 includes (i) the number of operational financial EDI partners, and (ii) an indicator of the firm's diffusion strategy at the time of the research. Further explanations on qualifiers relatively to the latter variable are provided below e.g., "on hold" and "pilot".  1 . Firm-A This financial EDI system was developed within a five-month period from the investment decision date to the date of the first-real life EDI payment with the pilot vendor. The IS function was not involved in the development process because, according to the A/P Manager: "it would have taken too long if they were", and also because: "When we started our initial program, their [IS function] suggestion was not to go ahead with EDI". Similarly, one participating banker reported that: "One of the points we are making very loudly out there is that you don't need your IS department to receive financial EDI. You can become a function point in the company by installing the translation software on a PC....In order to get on that priority MIS list, you got to have your foot in the door. You got to be able to talk about the benefits." At the initiation phase, the firm evaluates the initial financial EDI investment at $ 1,800 for bank EDI setup fee, the acquisition of an EDI software on a PC and the purchase of a modem.  However, a bridge program was also developed by the external EDI software/  network provider to maintain vendor banking information on a PC and to integrate this information with payment data downloaded from the mainframe prior to its transmission to the bank. The actual $3,000-5,000 investment in Table 5.2 takes into account the $1,500 bridge program not originally forecasted by the firm, as well as user involvement in the development project.  168 From an adoption perspective, the firm follows a proactive, non-coercive marketing strategy. Over the last year, letters have been sent to 100 candidate partners, approximately 70 suppliers have been contacted, often more than once, on a one-to-one basis, and at least one EDI seminar has been organized by the firm. These marketing activities and related tasks, such as the maintenance of a vendor log and the setup of willing partners, explain the estimated actual adoption costs of $3,000-5,000 in Table 5.2.  2. Firm-B It took eight months to develop this financial EDI application from the investment decision date to the date of the first real-life EDI payment with the pilot vendor. The firm was already EDI active in non-financial areas, and upgrading its EDI mainframe environment to include the transmission of outgoing EDI/EFT payments was initially budgeted at $200,000300,000. Four people were directly involved in the development stage: the project leader, a business analyst, the A/P system programmer and an EDI support technician. The existing A/P system was modified to include vendor banking information, to flag vendors paid via EDI, and to commit payments from incoming EDI application return transactions. The transmission of EDI payments to the bank is fully integrated with the A/P system and much emphasis was put on control and security issues surrounding the transmission process. According to the project leader, no post-implementation evaluation or post-mortem of the project has been performed because "It was just implement it and go away....I barely had time to write a close-out report". Nonetheless, he feels reasonably comfortable that the actual costs of developing the outbound financial EDI application were within the initial budget parameters as reflected in Table 5.2. The table does not include an estimate of actual ongoing adoption costs of financial  169 EDI because its diffusion is now part of an integrated, full business cycle EDI pilot program with less than a dozen major vendors, and it was not possible to determine the extent and value of the part attributable to financial EDI. According to the source participant however: "The approach we are taking right now is not the approach we would take in an implementation. We are working a lot of stuff on a one-to-one basis right now because we have only a very small number of suppliers....For a large scale implementation, there is no way we would take this approach. We would get 50 trading partners in a room and communicate all at the same time....We are spending a fortune getting each one running, especially that some are located in remote geographic areas. I don't believe the way we are doing it is costjustified even if we focus on major partners. It is very costly, huge amount of time and it is not acceptable for roll out."  3. Firm-C The first-real life EDI payment transaction was sent to the pilot firm eight months after the decision to implement financial EDI has been made by this participating originator. The firm already had an unused EDI system on a PC and because of a lack of internal IS resources at the time, the Comptroller has learned and upgraded the existing EDI system on his own. He evaluates the user development effort at $5,000-8,000 as shown in Table 5.2. In its current stage of development, payment and remittance data are keyed into the financial EDI system before transmission to the bank. The diffusion strategy of the firm is qualified as "on hold" because the integration of the A/P and EDI systems is viewed as a sine qua non condition to the roll out. This system enhancement project, evaluated at $5,00010,000, has not yet been undertaken by the IS function at the time of the research which explains the null actual adoption costs in Table 5.2.  170 4. Firm-D The development of this financial EDI pilot project can be divided into two major concurrent tasks: the conversion of incoming invoices from magnetic tape to EDI at the operational level and the conversion of outgoing payments from EFT to EDI at the financial level. The development spread over a two-year period from the executive decision date to the date the system was put into production.  The latter date coincides with the firm's  commitment to sustain EDI in the long-term. These two years can be further divided into four major time slots: (1) ten months for setting up the project management environment; (2) six months for the installation and/or upgrade of the two EDI systems, up to the transmission of the first pilot EDI transactions; (3) six months of parallel processing; and, (4) two-month extension of the pilot for the duration of the supplier contract renegotiations. From a payment perspective, EDI capabilities were outsourced, and the actual $5,00010,000 initial investment in Table 5.2 reflects the user firm involvement in the development project. The EDI Coordinator evaluates this effort at one to two person-months for initial meetings with the pilot partner, testing of to the service provider's translator, and basic customization of the A/P system. At the time of the research, the A/P system was not yet fully customized and additional development work was required to complete the IS/IT integration between the financial EDI and A/P applications. Study participants evaluate these post-production system enhancements at $10,000-15,000.  5. Firm-E The firm was already EDI capable and upgrading its minicomputer EDI system to include inbound financial EDI took approximately four months in elapsed time. Nevertheless, twenty-one months went by from the adoption decision date to the date of the first real-life  171 EDI payment with the pilot client division. During the first seventeen months, the firm was primarily waiting for its client to resolve management and technical payment interchange issues with the financial institutions involved in the process. This was one of the earliest financial EDI initiatives in Canada and its realization ended up taking much longer than the three months originally planned by the initiator. At the participating receiver site, the development of financial EDI required a fair amount of effort because: (i) the application of incoming EDI remittance advices into the A/R system was automated; (ii) the firm does not have an EDI mapper so the translation of EDI payment transactions had to be coded; (iii) the client's document reference scheme is rather complex and it did not match key fields of the participating receiver's A/R system i.e., customer number and invoice number;  and, (iv) the client firm was in the process of  centralizing its A/P and disbursement function. According to the EDI Coordinator and Credit Manager, the development project required a $600 EDI software upgrade, between 3-4 person-months of IS development time, and approximately 100 hours of user involvement mainly in system specifications and testing. This translates into $20,000-30,000;  however, both the Corporate Comptroller and IS  Director evaluate the budget for financial EDI at roughly $50,000 which explains the wider cost range in Table 5.2.  The development costs were not divided between the initial  investment and subsequent system enhancement and adoption costs even though, in reality, they were, because they relate to different divisions of the same financial EDI customer firm.  6. Firm-F The first real-life EDI payment was received by the participating firm seven months after the adoption decision date. This period of time reflects mainly the development elapsed  172 time at the originating firm site. From the participating receiver perspective, the development of inbound financial EDI and its integration with the A/R system was relatively straightforward: the firm was already EDI operational in non-financial areas and the A/R system could already process input data from batch files. The EDI Coordinator evaluates the actual technical effort of implementing financial EDI at 10 hours, 5 hours to setup the EDI software and 5 hours for the A/R bridge program, which amounts to less than $500. However, the Director of Finance also mentioned his personal intervention in the business side of the development project. He also believes that most of the time spent on the pilot project was for face-to-face meetings and communications with the remote pilot customer. The combination of these aspects explains the estimated actual $3,000-5,000 initial investment in Table 5.2. From an adoption perspective, the firm "has committed to taking an aggressive approach in such areas as incorporating more trading partners, increasing EDI capacities, updating software, and generally continuing to provide input and support to its customers and the entire EDI community" (extract from a public pamphlet on EDI in general produced by the firm). However, its actual marketing strategy focuses on EDI invoice rather than payment applications because the billing area is where "there are huge tangible benefits" according to the source participant. This observation explains the "reactive" qualifier in Table 5.2 with regard to the diffusion of financial EDI in particular, as well as the actual adoption costs estimated at $100-200 which refer to the setup of current, non-pilot financial EDI partners.  7. Firm-G This participating user organization has implemented both inbound and outbound financial EDI applications. Even though the firm was already EDI operational in non-financial  173 areas, the development of financial EDI implied the installation of a new EDI system on a different computer platform. The setup work took approximately three months in elapsed time before the firm received the first EDI remittance transaction from its pilot customer; however, fifteen more months went by before the transmission of the first real-life integrated EDI payment/remittance transaction. The firm's bank has become part of the project team for this second phase of inbound financial EDI development. Upgrading the system to include outbound financial EDI took seven months in elapsed time from the date of the project team creation to the date of the first real-life EDI payment transaction to the pilot supplier. The development work went on for another six months to complete the integration of stringent, automated controls and security procedures into the transmission process of outgoing EDI payments. At the initiation phase, the firm evaluated the initial investment for outbound financial EDI at $168,000: $7,000 for a third party authentication software, $31,000 of user effort and $130,000 of IS development. No analysis has been performed by the firm to assess the cost of setting up a new EDI environment and implementing inbound financial EDI. The combination of these aspects explains the wider actual investment range in Table 5.2. From an adoption perspective, the table includes actual ongoing adoption costs of $200,000-300,000 corresponding to the cost of having 1-1.5 head counts dedicated to the promotion of financial EDI among business partners over a period of four years. At the time of the research however, the firm's diffusion strategy had recently been changed from a proactive, non-coercive to a reactive, upon request type of approach.  E. Conclusions Several major conclusions can be drawn from the in-depth study of financial EDI costs  174 to corporate adopters, originators and receivers. The implementation of financial EDI into an organization leads to incremental development and adoption costs whether the firm was EDI operational, or not, in non-financial areas.  Examples of development costs include the  acquisition and installation of an authentication software, the development of a bridge program between the EDI and financial business applications, and the redesign of payment processes. Examples of adoption costs include the pilot testing, subsequent partners setup, user training and external marketing effort. It is frequently mentioned in the literature that EDI is not a technical problem or issue (e.g. Swatman and Swatman 1991). However, this study reveals that the development of a financial EDI application is not necessarily a simple matter. Actual financial EDI development budgets of up to $300,000 and two-year development periods illustrate the difficulties. The amount of development effort depends on a series of factors summarized in Chapter VI, such as the state of existing financial and EDI systems, the level of IS/IT integration and the extent of automated payment controls and security measures. Similarly, the costs associated with the adoption of an EDI application among external partners are often underestimated, if not simply ignored by practitioners and researchers alike. This is an area where the achievement of a critical mass could potentially bring substantial cost reductions to corporate adopters. Indeed, as more and more firms become financial EDI operational, it is predictable that the cost of linking up with them would be significantly lower than the cost of an early adopter allocating resources to the education and indoctrination of potential candidate partner firms. Here again, actual ongoing adoption costs vary across organizations depending on several factors, including the diffusion strategy of the firm, the strategy's implementation effectiveness, the degree of IS/EDI sophistication of the partner community, and the initiator's market power.  175 Finally, the analysis of financial EDI initial investments and ongoing adoption costs at actual user organization sites reenforces the need to implement cost-efficient financial EDI applications, mainly in firms with pre-EDI lower-end or average payment process costs and efficient cash management practices.  176 VI. BUSINESS VALUE OF FINANCIAL EDI  A. Risk Assessment of Financial EDI In addition to benefits and costs, potential adopters may also evaluate the risk involved in implementing financial EDI into the organization before they decide whether or not to make an investment in the technology. In Chapter II, the net present value plus risk assessment method of determining the economic feasibility of financial EDI projects incorporates two parameters specifically related to the notion of investment uncertainty or risk (see equation 2.3): (i) the probability of not realizing the net benefits of financial EDI as part of the net benefits discount rate (/"g);  and, (ii) the probability of not completing the financial EDI  development project within budget as part of the initial investment discount rate {/•/). These uncertainty or risk discount rates can be estimated by reference to similar systems or by reference to the organization's past history of success in systems implementation {Du6 1987).  Two distinct rates are specified because the probability  distribution of initial investments is not necessary the same as the probability distribution of ongoing net benefits.  Indeed, in actual practice, IT development costs tend to be  underestimated (Wrigley and Dexter 1991), while ongoing net benefits of IS projects often are overstated partly because the benefit realization process is often more difficult and costly than originally anticipated (e.g. lower adoption rates and higher diffusion costs). This approach is consistent with the findings of a recent international survey (Bacon 1992) where the probability of achieving benefits and the probability of project completion were the second and third most frequently used decision criteria in selecting IT investments, after budgetary constraint. In case studies however, none of the ex ante analyses performed by four financial EDI user organizations out of seven incorporates a formal assessment of the  177 investment risk. Nevertheless, several participants of the seven firms were asked to qualify, on a scale of 1 to 10, the level of risk associated with implementing financial EDI into their organization (10 being extremely risky and 1 being no risk at ail). Two questions were included in the interview guide in Appendix C to that end (see questions 6.21 and 6.22). The first question is global in scope, while the second question repeats the five software development risk factors identified by Barki et al. (1992): technology newness, application size, expertise, application complexity and organizational environment. For each factor, specific examples of related variables were given to participants e.g., technological newness-need for new hardware/software and number of outsiders involved in the project (partners, hardware/ software vendors and network/service providers). Statistics on their ratings are given in Table 6.1.  Table 6.1 Perceived Financial EDI Implementation Risk Participant Responses Risk Elements  mean  s.d.  max.  min.  Global Risk Assessment* Implementing financial EDI  3.2  1.8  1  6  Not implementing financial EDI  5.6  2.6  1  10  Technological newness  4.9  2.1  1  8  Application size  2.9  0.6  2  4  Expertise  4.6  2.3  1  8  Application complexity  2.9  0.6  2  4  Organizational environment  5.0  2.7  2  9  System Development Risk Factors''  ' From twelve participants of the seven financial EDI user firms {n= 12). "" From seven system participants {n = 7).  Although the sample size is small {n = ^2 for global questions and n = 7 for system-  178 related questions)\ the participants' perception provides some additional support to the frequently made assertion that EDI in general, and financial EDI in particular, is not primarily a technical problem or issue. The magnitude of the uncertainty or risk discount rate (/•/) associated with the initial investment in financial EDI could be determined from ratings similar to those in Table 6 . 1 . Rating results would then be converted into an equivalent initial investment discount rate based on previous research or part history of implementation.  systems  Because IT development costs tend to be underestimated as mentioned  earlier, this discount rate could be negative. System participants generally perceive technical factors (application size and application complexity) as less risky than human and organizational factors (expertise and organizational environment), i.e. mean values of 2.9 vs 4.5-5.0 and standard deviations of 0.6 vs. 2.3-2.7. This observation supports the view that EDI in general, and financial EDI in particular, is not a technical problem from a narrow harware/software/communications standpoint. At least five participants also mentioned controls and security aspects as an important system implementation risk factor of outbound financial EDI as illustrated by the following comments: "I don't see it as something risky provided it is implemented correctly and you have the proper controls" and, "No risk at all if you have good controls and a good project leader". Participants were also asked to qualify the risk of not implementing financial EDI into their organization. This notion of risk involved in "not implementing" financial EDI refers to the concept of competitive necessity in adopting IT innovations, and EDI in particular (Benjamin et al. 1990). Its inclusion in the interview guide (see question 6.23) took into account the fact that partner request or pressure is repeatedly identified in surveys as the first  ^  The small sample size limits the generaiizability or external validity of findings due to its lack of representativeness of the population of financial EDI user organizations in Canada.  179 or second most important reason for initially implementing EDI (EDI Group 1993; EDI Research 1990; Lauzon 1990; TDCC 1989). Study participants generally perceive the risk of not implementing financial EDI as being higher than the risk of implementing it, i.e. mean values of 5.6 vs. 3.2 and maximum values of 10 vs. 6. The following key reasons support their stand: (i) the relative ease of financial EDI implementation from a technical perspective;  (ii) the fact that EDI is accepted as a  business requirement in the firm's industry; (iii) the perception than being involved in the technology is a marketable asset to the firm; and, (iv) the risk of losing an opportunity to improve the efficiency of current corporate payment processes.  B. Financial EDI Business Value Model Table 6.2 presents the proposed financial EDI business value model for corporate adopters. It was developed by the author in Lotus, and the application listing is reproduced in Appendix J. The model is divided into four major parts which summarize results from the three previous models: the proposed financial EDI benefit models for corporate originators and receivers in Chapter IV, sections E and G respectively, and the proposed financial EDI cost model for corporate adopters in Chapter V, section C. Part I of the model recapitulates the adoption measures of previous models along four dimensions: (i) the total partner base of the firm, (ii) the target partner base for the diffusion of financial EDI, (iii) yearly incremental expected/actual level of financial EDI adoption, and (iv) the cumulative rate of financial EDI adoption relative to the total partner base. In Table 6.2, the target financial EDI partner base is specified only in Year-1 for simplicity, but nothing prevents the model user to describe different target bases over time. For instance, a firm may decide to focus its roll out on major partners during the first two years, on A/P cheques to  180 Table 6.2 Financial EDI Business Value Model for Corporate Adopters Year-2 Year-3 Year-1 Year-0 1. ADOPTION MEASURES Partner Base: Total number of partners Total volume of payments Total volume of remittance items Total value of payments Target FED! Partner Base: Target number of FEDI partners Target volume of EDI payments Target volume of EDI remittance items Target value of EDI payments Incremental Level of FEDI Adoption: Number of FEDI partners Volume of EDI payments Volume of EDI remittance items Value of EDI payments Cumulative Rate of FEDI Adoption: Relative number of FEDI partners Relative volume of EDI payments Relative volume of EDI remittance items Relative value of EDI payments II. ONGOING NET BENEFITS Incremental Adoption Benefits: Ongoing payment process savings One-time payment cycle gains Other ongoing FEDI Benefits  Year-5  0 0 0 0 0 0 0 0  Incremental Adoption Costs: Ongoing roll out costs One-time system enhancement costs Other ongoing adoption costs Annual Ongoing Net Benefits III. INITIAL INVESTMENT One-time development costs One-time adoption costs Annual Initial Investment IV. BUSINESS VALUE Business Value Payback Period (in years) Return on Investment NPV Analysis plus Risl( Assessment: Discount rate of initial investment Discount rate of ongoing net benefits Discounted initial investment Discounted net benefits Present business value  Year-4  0 0 0 0  0 0 0 0  0 0 0 0  0 0 0 0  0 0 0 0  0% 0% 0% 0%  0% 0% 0% 0%  0% 0% 0% 0%  0% 0% 0% 0%  0% 0% 0% 0%  0 0 0 0  0 0 0 0  0 0 0 0  0 0 0 0  0 0 0 0  0 0 0 0 0  0 0 0 0 0  0 0 0 0 0  0 0 0 0 0  0 0 0 0 0  0 0 0 0 0.0 0% 0% 0% 0 0 0  181 employees in the third year, and on minor partners afterwards. The time lag before candidate partners become financial EDI operational is reflected in the evolution of the level of financial EDI adoption over time as compared to initial targets or objectives. Ongoing net benefits (flf - C,) are specified in Part II of the model. They summarize incremental ongoing adoption benefits along the three dimensions analyzed in Chapter IV: payment process savings (Bp), payment cycle gains (Be) and other adoption benefits (Bo); as well as incremental ongoing adoption costs examined in Chapter V: roll out costs iCr), system enhancements costs (Ce) and other adoption costs (Co). Net annual benefits are automatically computed by the application. Part III of the model covers the initial investment (/f) along the two major dimensions analyzed in Chapter V: one-time development costs (/d) and one-time adoption costs (/a). Here again. Table 6.2 shows the initial investment only in Year-1, but the model user can specify one-time investments in subsequent periods as well, because the application's business value computations can handle multiple-year development projects in accordance with the financial EDI value measurement framework in Chapter II (see equation 2.2). The last part of the model presents the resulting business value of financial EDI to potential/actual corporate adopters based on four investment evaluation methods: (i) financial EDI business value defined as the sum of the net annual benefits after investment; (ii) the payback period computed as the initial investment divided by the average net annual benefits; (iii) the return on investment (ROD expressed as the average net annual benefits over the investment; and, (iv) the net present value plus risk assessment method. Consistent with the financial EDI value measurement model in Chapter II (see equation 2.3), the model includes two distinct discount rates to compute the net present value of financial EDI implementation: the initial investment discount rate (r,) and the ongoing net  182 benefits discount rate (rg). The first three methods can be viewed as by-products of the financial model where these discount rates equal zero. A key question arose during the development of the proposed business value model: Should payment cycle gains be considered as one-time or ongoing benefits?  Ambiguous  answers can be found in the relevant literature. For instance, Parker and Benson (1988) make the distinction between value linking and value acceleration IT benefits. The authors define value linking benefits as recurring or ongoing benefits related to performance improvements. This benefit category is equivalent to payment process savings in the context of this study. On the other hand, the authors argue that value acceleration benefits are one-time benefits related to earlier achievements of benefits. They use the example of interest expense savings on shorter billing cycles to illustrate their point (Parker and Benson 1988: 115). This view suggests that economic gains from payment cycle changes be treated as one-time benefits. From a receiver perspective however, shorter payment collection periods represent a reduction in accounts receivable carrying costs, and an analogy to other corporate assets supports a competing viewpoint. For instance, one of the most frequently mentioned benefits of just-in-time management is lower inventory levels and associated carrying costs. On an annual basis, a widely used inventory carrying cost rate in North America is 25 percent of the inventory value (e.g. Schonberger 1987: 34). Inventory carrying cost savings as a result of IS/EDI implementation are commonly accounted for as a recurring evaluation item in cost/ benefit analyses (e.g. Toews 1994). This alternative view suggests that economic gains from payment cycle changes be treated as ongoing benefits. The nature of corporate asset carrying costs provide the foundation for a partial answer to this question.  Indeed, inventory carrying costs are mostly made up of recurring cost  components, such as physical location, utility and labor costs. On the other hand, the cost  183 of carrying accounts receivable is primarily related to interest, and sustainable changes in collection periods can be viewed as one-time events. An analogy would be the receipt of rents on the 1st instead of the 15th day of the month.  Once this change has been  implemented, subsequent rental revenues cashed on a fixed, monthly interval bear no incremental interest gains to the landlord. A second aspect to consider is the impact of better cash management practices as a result of increased predictability of payments. Contrary to one-time cycle changes, benefits associated with better cash management can be of a recurring nature, such as more favourable investment/credit terms and lower unproductive cash buffer or threshold. However, because of the difficulty to evaluate these benefits, economic gains from payment cycle changes are conservatively expressed as one-time benefits in the proposed financial EDI business model for corporate adopters.  C. Potential Factors Influencing the Business Value of Financial EDI Potential factors influencing the business value of financial EDI to corporate adopters are summarized in Figure 6 . 1 . These factors are presented along the same major investment evaluation categories or elements analyzed throughout this study. They incorporate findings from the relevant MIS research literature (Due 1989; Reich and Benbasat 1990; Barki et al. 1992; Bergeron and Raymond 1992; Benbasat et al. 1993; lacovou et al. 1994), as well as case studies of actual financial EDI user organizations. Figure 6.1 does not represent an exhaustive set of potential factors influencing the profitability or net value of financial EDI investments to corporate adopters. Recall in the overall research framework in Chapter II (see Figure 2.1), financial EDI value is viewed as the end-result of all aspects of the IS implementation process and therefore. Figure 6.1 simply  FEDI BUSINESS VALUE  INITIAL INVESTMENT  INVESTMENT RISK  T  ONE-TIME DEVELOPMENT COSTS - FEDI Development Option - FEDI Platform - IS Involvement - IS Competence - Existing EDI Applications - Existing Business Applications - Level of IS/IT Integration - Level of Automated Controls/Security - Project Leadership - Project Team Composition (Users, Partners & Banks) ONE-TIME ADOPTION COSTS - Extent of Pilot Testing - User Education/Training - Partner Education/Promotion - Partner Quick Start Option  T SYSTEM DEVELOPMENT RISK - Technology Newness - Application Size - User & IS Expertise - Application Complexity - Organizational Environment - Controls/Security Adequacy BUSINESS RISK - Probability of Net Benefits Realization  ONGOING BENEFITS  T  PAYMENT PROCESS SAVINGS - Volume of FEDI Transactions - Payment Types & Methods - Relative Magnitude of Pre-EDI & Post-EDI Process Costs - Trade Volume Pattern - Business Procedures & Practices - Prior Level of Process Automation - Extent of Process Changes - Level of IS/IT Integration - Level of Automated Controls/Security - Third Party Pricing Policy - Firm Negotiation Power PAYMENT CYCLE GAINS - FEDI Trade Value - Payment Cycle Changes - Business Procedures & Practices (Firm, Partners & Third Parties) - Interest Rate OTHER ADOPTION BENEFITS - Discounts on Transacted Goods Price - Business Process Reengineering - Improved Cash Management - Impact on Partner Relationships - Reduced Cash Discounts Lost/ Late Payment Penalties - Competitive Advantage/Necessity  ONGOING COSTS  t  ROLL OUT COSTS - Number of Target/Actual FEDI Partners - Firm Diffusion Strategy & Implementation Effectiveness - Partner FEDI Awareness - Third Party FEDI Promotion (Banks, EDICC & Associations) - Partner IS/IT Priorities - Partner Effort to Adopt - Partner IS/EDI Sophistication - Firm Market Power SYSTEM ENHANCEMENT COSTS (see Development Costs) OTHER ADOPTION COSTS - User Education/Training - Partner Education/Promotion - Extent of Partner Support - Business Process Reengineering - Organizational Disruption - Resistance to Change  Figure 6.1 - Potential Factors Influencing the Business Value of Financial EDI  CO  185 provides a graphical summary of some key aspects identified in the relevant literature and during the course of this study of financial EDI value in particular. Figure 6.1 does not depict temporal precedence or causal relationships among factors. For instance, third party pricing policies have an influence on the relative magnitude of pre-EDI and post-EDI process costs which have, in turn, a direct impact on potential payment process savings--cf. Chapter IV; however, both variables are shown on the same level of presentation in Figure 6.1 under payment process savings. Some variables are also listed under more than one value category. For example, the effort involved in developing a financial EDI application as well as subsequent payment process savings are influenced by the level of IS/IT integration achieved between the EDI system and existing financial business applications. Finally, Figure 6.1 does not take into account the relative importance or degree of influence of these factors. Such considerations tend to be examined in larger scale sample research studies, often based on qualitative perceptual measures (e.g. Bergeron and Raymond 1992; Pfeiffer 1992). Nonetheless, the figure first summarizes key findings from this study, and second, shows that the bottom-line value of lOS/EDI investments, and financial EDI investments in particular, depends on a large number of technical, human, organizational and environmental factors similarly to bottom-line profits of corporations in relation to shareholder investments.  186 VII. CONCLUSIONS  A. Contributions of the Study In accordance with the norm that the benefits of an information system must exceed its costs to the firm, this study empirically evaluates both the organizational costs and benefits of a specific IT application based on objective, quantitative measures.  The difficulty of  measuring those costs and, even more so, of estimating the corresponding benefits does not change the need for cost/benefit criteria (Mattessich 1995b). indeed, this need is repeatedly reenforced in the MIS research literature where the difficulty to justify complex IT innovations, and EDI applications in particular, is frequently identified as a major factor inhibiting a rapid adoption of information technologies by the business community. The major contributions of this study are twofold.  First, it proposes a cohesive  financial EDI value framework based on the theory of capital budgeting that takes into account the cost, benefit and risk of implementing financial EDI technology into an organization. This framework was developed within an overall research framework integrating various models proposed by researchers in the areas of IS implementation and diffusion of innovations. In contrast with previous functional IT investment studies, this approach examines IT value (expected and actual) as the end-result of all aspects of the IS implementation process, rather than as an outcome of IT utilization. With appropriate adjustments, the proposed value measurement framework could also be applied to non-financial EDI applications, thus being generalizable to other IT environments. Second, it presents and applies a structured, iterative methodology for the evaluation of financial EDI investments across organizations and industries. This methodology is based on an in-depth, item-by-item analysis of the cost, benefit and risk components of the business  187 value of financial EDI to corporate adopters (originators and receivers). Potential evaluation items and associated measures were initially identified from a review of the current EDI literature in both research and practitioner domains, combined with the author's experience and interviews with participating bankers (service providers). These elements were then used as a guideline for the extensive data collection at operational financial EDI user sites representing a cross-industry sample of various size firms. Reference firms also proved to be a valuable source of information on specific topics related to the study. This approach gathered detailed corporate payment data on both pre-EDI and post-EDI payment environments. It also led to the development of financial EDI cost/benefit models which take into account the business reality of corporate adopters. Following a scenariobased approach, the data and models were used to simulate and estimate the magnitude of potential net benefits of financial EDI to corporate adopters (originators and receivers). A formal evaluation of the expected and actual costs/benefits of financial EDI to participating user organizations was also performed using the models. Finally, several major conclusions were drawn from this in-depth analysis of financial EDI investments.^  For instance, the analysis revealed that, from a payment process  perspective, financial EDI is potentially more beneficial to corporate receivers than originators. Receivers have relatively higher potential variable process savings per payment transaction. Compared to non-financial EDI applications, potential economic gains from reduced payment cycles accrue primarily to the supplier community, rather than the initiators of financial EDI systems. The combination of both aspects provides a plausible explanation for the slow adoption of financial EDI technology by Canadian hubs, mostly dominant buyers.  ^  These conclusions are presented in separate, self-contained sections: section I of Chapter IV on benefits, section E of Chapter V on costs, and section A of Chapter VI on risk.  188 This study also have several potential implications for the business community. For corporate adopters, it offers a set of realistic and flexible models for measuring the organizational value of financial EDI. This practical outcome of the research could be used by potential corporate adopters to evaluate or justify the economic feasibility of future investments in financial EDI, as well as by actual user firms to sustain or conduct a postmortem of their financial EDI program. The study also revealed that financial EDI is not necessarily a cost beneficial venture for all organizations. Firms with lower-end or average pre-EDI payment process costs should be particularly careful in implementing cost-efficient financial ED! systems or applications. They could, for example, negotiate favourable EDI transaction processing agreements with external service providers based on formal analyses of their pre-EDI payment process costs. They could also avoid the use of multiple intermediaries in the transport of EDI payment transactions (e.g. bank and VAN). For firms with higher-end pre-EDI payment process costs, this study stresses the need to ensure that expected beneficial changes in payment processes and work flows are effectively implemented in practice. For instance, the corporate adopter should drive at completely eliminating unnecessary or redundant manual tasks. Potential and actual financial EDI user firms should also be aware that the economic impact of payment cycle changes and other financial ED! benefits were found to be potentially more significant in monetary terms than payment process savings. Among other potential financial EDI benefits, this study identified two sources of substantial benefits to participating firms: (i) indirect payment process redesign or reengineering e.g., A/P systems consolidation; and, (ii) discounts on transacted goods prices. Finally, the study is also intended to assist Canadian financial institutions in their financial EDI diffusion effort by providing in-depth assessment material on corporate payment  189 systems, procedures and practices. The study analyzed development and adoption problems, issues and concerns raised by actual financial EDI user organizations. Access to these firms was gained under the seal of confidentiality.  B. Limitations of the Study Apart from the known limitations of the case study data collection and analysis method (Benbasat et al. 1987; Lee 1989), including the lack of statistical power and the interpretative nature of this research approach, the generalizability of the present study is limited by its particular focus on financial EDI technology. However, and as mentioned earlier, both the proposed value measurement framework and the research methodology followed in this study could be applied, with appropriate adjustments, to the evaluation of non-financial EDI investments across organizations and industries. This study also suffered from data collection problems, mainly related to confidentiality concerns expressed by potential and actual financial EDI user organizations in spite of the fact that the study was conducted under an explicit confidentiality statement. These anticipated problems had two major consequences from a research perspective.  First, they led to a  smaller sample of participating financial EDI user organizations than originally planned. Second, they limited the degree of triangulation between potential sources of information. However, corrective actions were taken to alleviate the impact of these data collection problems whenever possible (e.g. by asking related customer and supplier firms to participate in the study).  C. Future Directions Further enhancements to the proposed set of models for measuring financial EDI  190 business value would be necessary to include, for example, intermediate variables supporting the estimation and computation of financial EDI costs, such as IS development effort and marketing effort to get acceptance among business partners.  The cost of storing and  retrieving payment transactions could be expanded to cover electronic transactions as well as paper transactions (e.g. cost of computer storage space and magnetic tapes). Further validation of the models is required. The empirical validation method followed in this study is limited by the small sample size of financial EDI user organizations.  For  instance, the seven participating user firms fall into the less than 2% category of financial EDI penetration expressed in terms of actual financial EDI partners relative to the partner base. Validating the models with firms having achieved higher penetration rates of financial EDI remains to be done. Alternative methodological validation approaches could also be applied and among others, model testing and evaluation by potential and actual financial EDI firms would highlight deficiencies with respect to key IS attributes such as usability and usefulness (Davis 1989; Moore and Benbasat 1991). Future research is needed to assess the extendability of the structured, iterative evaluation methodology presented in the study to non-financial EDI investments. This study also provides an empirical foundation for the conduct of a longitudinal investigation of financial EDI business value at the participating user organization sites. An interesting and fruitful approach would be to expand this research by comparing the Canadian EDI banking system to other nations. The United States and France would be particularly suitable candidates for this comparative study of EDI banking systems across nations given their leadership reputations in electronic banking in America and Europe respectively. In Canada, financial EDI has achieved an unprecedented level of acceptance within its banking industry infrastructure (Ballance 1992).  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Olson (1989), "Managing Investment in Information Technology: Mini Case Examples and Implications," MIS Quarterly 13(1): 3-17. Williamson, Oliver E. (1981), "The Economics of Organization: The Transaction Cost Approach," American Journal of Sociology 87(3): 548-577. Wrigley, Clive D. (1991), "Research on EDI: Present and Future," Proceedings of the 4th EDI Electronic Data Interchange Conference - EDI: Business Strategy for 90s (Moderna Organizacija Kranj): 353-367. Wrigley, Clive D. and Albert S. Dexter (1991), "A Model for Measuring Information System Size," MIS Quarterly 15(2): 244-257.  201 APPENDIX A Interview Guide with Financial Institutions  Shaded text highlights documentation to be obtained from participating financial institutions. 1. GENERAL INFORMATION 1.1  When were you appointed to your current function?  1.2  To who do you report directly?  1.3  What was your function prior to this nomination?  1.4  Since how long have you been with the bank?  1.5  How many branches does the bank have in Canada? Around the world?  1.6  How many people does the bank employ in Canada? Around the world?  1.7  How many ATM machines does the bank operate in Canada? Around the world?  1.8  What is your academic background (and age)?  1.9  What was your primary motivation for participating in this study?  1.10  What main outcomes do you expect from this study?  1.11  What are your requirements with respect to the confidentiality aspect of this study (e.g. referring to your name, the bank's name, speudo-names)?  1.12  Did you have a chance to gather the preliminary list of documentation that was faxed to you?  2. CANADIAN BANKING INDUSTRY 2.1  How would you describe the current state of the banking market's growth in Canada?  202 2.2  Which competitive forces operate most strongly in the banking industry (cf. Porter's 5-force competitive model: buyers, suppliers, rivals, new entrants and substitutes, plus regulatory constraints)?  2.3  How would you briefly describe the most significant differences between the Canadian and US banking industries? a. b. c. d. e.  Service providers (e.g. degree of concentration) Cash management practices (e.g. payment float) Financial regulations (e.g. data processing) Customer preferences/needs Other  2.4  In that context, to what extent are the EDI banking surveys conducted in the US applicable to Canada (i.e. EDI Group's banking surveys of 1990 and 1993)?  2.5  There is a clear trend in the banking industry with regard to the increasing importance of revenue sources other than interests^^. How does this tie in with the Canadian EDI initiative?  2.6  Are you personally attending the Inter-EDI Committee meetings? If ves, since its creation in the early 1989? If not, who is (name, function)?  2.7  How was the Inter-EDI Committee created exactly?  2.8  What are the main realizations of the committee to-date?  2.9  When was the CBA (Canadian Bankers Association) involved in the committee?  2.10  What is the role of the CBA in this committee?  2.11  How did you manage the competitive aspect of having all these major financial institutions sitting on the same committee?  3. FINANCIAL EDI DEFINITION AND SCOPE 3.1  How would you define financial EDI?  '^ RBC (32% of income), BMO (31 %) and TDB (30%) based on their respective annual reports for the fiscal year ended October 31, 1992.  203 3.2  Would you classify financial EDI as an interorganizational or inter-enterprise system?  3.3  What documents, or transaction sets, do you consider an integral part of financial EDI? a. b. c. d. e. f. g.  3.4  What additional products/services do you currently provide, or plan to provide, to your corporate clients through the EDI network? a. b. c. d. e.  3.5  Payment orders/remittance advices Payment acknowledgements Deposit/funds notices Bank statements Balance inquiries Invoices Other  Electronic information reporting (e.g. VISA) A/P and A/R management International trade guarantees and letters of credit Consulting services Other  Does your definition of financial EDI implicitly include these additional products/services? If not, what expression do you use to refer to them?  3.6  Does your bank consider itself a VAB (value-added bank)?  3.7  In that context, how would you describe your relationship with existing VANs (value-added networks), i.e direct competition or strategic alliances?  3.8  How would you describe the distinction between EFT (electronic funds transfer) and financial EDI in corporate banking?  3.9  Do you think your clients, and the business community in general, understand this distinction?  3.10  Do you have corporate clients who currently pay their trading partners strictly through the EFT network?  204 4. THE SYSTEM AND ITS FEATURES 4.1  How would you describe a typical EDI payment cycle or process?  4.2  Do you have a dia^fam to iiiustrate this process?  4.3  How important is the distinction between the originators and the receivers of a payment in this process (e.g. writing a cheque vs. depositing a cheque)?  4.4  Do you communicate directly with most of your EDI clients, or through a VAN?  4.5  Do you offer 24-hour transmission facilities?  4.6  How long does it take to process a payment order through the EDI network?  4.7  How do you handle postdated payment orders (maximum retention period)?  4.8  Why did you elect to support bilateral exchanges of EDI data between the financial institutions rather than going through the CPA's (Canadian Payments Association) clearing system?  4.9  What input formats is the system designed to support? a. ANSI-X12 standard b. A/P files c. Other  4.10  What output formats is the system designed to support? a. ANSI-X 12 standard b. FAX documents c. Printed documents d. Other  4.11  Do you consider that a firm who receives a FAX or printed-version of an EDI payment transaction is an EDI user?  4.12  Is your system designed to support all types of organization (e.g. originators/receivers, small/large)? If not, what are the exception cases (e.g. very small firms)?  205 4.13  Financial EDI can be viewed as a "displacement" technology. Do you think that all types of manual cheque can be displaced by the technology? If not, what are the exception cases (e.g. cheques to one-time, US or international trading partners)?  4.14  What types of more complex payment transaction can also be displaced by financial EDI? Under what conditions? a. Wire transfers b. Requests for guarantee and letter of credit c. Other  4.15  How does the system interact with your other corporate applications? a. Cash management system b. Lockbox services c. A/R collection d. Other  4.16  Do you use the system internally for your own purposes (e.g. with the bank's suppliers)?  4.17  Did you, or do you plan to, offer the system to other banks who are not EDI capable (i.e. outsourcing services)?  5. SYSTEM INITIATION 5.1  How was the idea of the EDI project generated?  5.2  Did a particular individual or group play a critical role in the inception or development of the EDI project? If yes, who are they (name, company, function, role)?  5.3  Do you think the system would have been implemented without the presence of this individual or group?  5.4  What was the original motivation for implementing the system?  5.5  Were you involved in this project from the beginning?  206 5.6  What were the targets or objectives for the EDI system? What percentage of the targets has been reached? Are they still applicable today? a. b. c. d. e. f.  Number of clients Volume of transactions Level of clients' integration Location of clients Size of clients Other  5.7  Did the bank view financial EDI as a "commodity" or a "competitive" product/service?  5.8  How did you plan to differentiate your EDI products/services from the competition?  5.9  What was the initial budget for this project?  5.10  Was it cost-justified ? On which basis?  5.11  Did the EDI project go through the normal IS planning process to get approval for development? If not, why not?  5.12  What is the cumulative budget to-date?  5.13  Can I have a copy of your EDI business cases?  6. SYSTEM DEVELOPMENT 6.1  How many people are involved in the EDI project from...? a. Your side (corporate banking) b. Technical side (IS group) c. Other  6.2  On which computer platform does the system run?  207 6.3  What are the main components of the system? Who developed them? From who were they acquired? What percentage of the total budget do they represent? a. b. c. d. e. f.  EDI translator Application interface program Mailbox environment Communications environment Quick Start option Other  6.4  Was the system built on top of an existing application (e.g. EFT network)?  6.5  What were the key milestones of the implementation project?  6.6  How long did it take to develop the system?  6.7  Since how long is it in operation?  6.8  How would you qualify the extent of technological change that was needed in your existing IS/IT infrastructure to support the EDI system (none, slight, moderate, significant)?  6.9  Were potential users/clients involved in the development of the system at any stage (not at all, a little, a lot)?  6.10  What was the nature of their involvement (stage and activity)?  6.11  Who was your pilot client? How long did the pilot test last?  6.12  Do you consider that the system is still "in development" (i.e. major enhancements)?  208 6.13  At what stage of development are the other EDI-based applications we discussed earlier? If in production, how many clients do you have now? a. b. c. d. e. f.  Electronic information reporting (e.g. VISA) A/P and A/R management International trade guaranties and letters of credit In-house EDI Outsourcing EDI Other  For comparison, how many clients are actually using your...? a. Cash management system b. Payroll system  7. SYSTEM ADOPTION [Review the global breakdown of the bank's clientele by fifm size^^ and the monthly statistics on the number of financial EDI users and the volume of payments with the interviewee] [Fill the t&i>(e in appendix with the interviewee] 7.1  What percentage of these firms, would you say, are banking with more than one financial institution?  7.2  Were most of your financial EDI clients already EDI capable (i.e. last step of the purchasing-delivery-payment cycle) ?  7.3  Do you believe financial EDI is a good starting point for a company who wants to become EDI active? Why?  ^^ In 1986, the repartition of Canadian business units in million dollars of annual revenues was estimated as follows: $2M & 800,000 firms $2-5M 40,000 $5-20M 25,000 $20M & + 5,000.  209 7.4  What strategy was used to gain acceptance of the system among your corporate clients? a. b. c. d. e. f.  Pilot program Education/training - please specify Onsite support Publicity/advertising/promotion - please specify Incentives - please specify Other  7.5  To what extent does each of the above strategic components contribute to the success of the system (not important, to some extent, to a great extent)?  7.6  How much effort and how long does it take on average to get a new client on board?  7.7  Who directly promotes financial EDI to your clientele (your group or the account managers)?  7.8  How would you qualify the bank's direct involvement in its clients' implementation projects (not at all, moderate, a lot)?  7.9  What is the nature of your involvement (stage and activity)?  7.10  In your opinion, what is the primary motivation of your clients to adopt the technology?  7.11  Which benefits of the system, measurable or otherwise, do you emphasize to your clients? a. b. c. d. e. f. g. h. i. j. k.  7.12  Reduced transaction costs Improved process efficiency Improved labor productivity Faster collection cycle (more timely payments) Less error-prone (no rekeying) Better quality information More control/security (lower risk) Better forecasting (less uncertainty, more acknowledgement) Improved business relationships Competitive advantage (local and global) Other  To what extent do you think a user-company can gain a sustainable competitive advantage from financial EDI?  210 7.13  How would you qualify the overall rate of acceptance of the system by... (not at all, slow, moderate, rapid)? a. Your clients b. The Canadian business community in general  7.14  What factors do you feel contributed to this (low or high) rate of adoption?  8. SYSTEM EVALUATION [From a bank's perspective] 8.1  For the bank, what benefits, measurable or otherwise, have resulted from the system?  8.2  What has been the impact of the system on the bank's ability to... (none, moderate, significant)? a. b. c. d. e. f. g.  8.3  I want to discuss other types of changes the system caused. In what ways did the system internally affect the bank? a. b. c. d. e. f.  8.4  Hold or increase market share Decrease costs Decrease turnaround (delivery) time Increase revenues Capture new clients Improve business relationships (client satisfaction) Stay competitive  Strategy Style (culture) Structure Systems (processes) Staff (number, skills, power) Other  In what ways do you think the system changed your clients? a. Decreased/increased price sensibility b. Decreased/increased bargaining power c. Changed their perception of the bank d. Changed their business processes e. Other  211 8.5  In what ways do you think the system changed the Canadian banking industry? a. Changed the nature/level of rivalry b. Increased entry/exit barriers c. Increased/decreased transaction costs d. Other  8.6  Overall, how would you qualify the amount of change necessary to implement the system (none, moderate, a lot)?  8.7  What is the ROI of the system? Is it comparable with the ROI of your other IS investments (greater, same, less, not calculated)?  8.8  What level of risk was involved in implementing the system (extreme, high, moderate, low, none)?  8.9  What level of risk do you perceive to be involved in NOT implementing this system (extreme, high, moderate, low, none)?  8.10  Overall, were the results different from what was expected/planned? a. b. c. d.  Yes, we were pleasantly surprised Yes, unpleasantly surprise No, we predicted well No, we did not predict at all  8.11  Do you consider this system to be a success (yes, partial, no)? Why?  8.12  In hindsight, would you do it again? What would you do differently?  [Review the first and most recent EDt prtciftQ HstS of the bank with the interviewee] 8.13  What is the average price charged by the bank to process a...? a. b. c. d. e. f.  Manual cheque EDI payment EFT payment Wire transfer Letters of guarantee and credit ATM transaction  212 8.14  What is the average fully-loaded cost of the bank to process a...? a. b. c. d. e. f.  Manual cheque EDI payment EFT payment Wire transfer Letters of guarantee and credit ATM transaction  [From a client's perspective] 8.15  In your opinion, what is the average fully-loaded cost of your clients to issue a...? a. Manual cheque b. EDI payment c. EFT payment d. Wire transfer e. Letters of guarantee and credit  8.16  From your clients' perspective, which cost/revenue categories or items can be affected by financial EDI? What are their relative monetary importance? a. b. c. d. e. f. g. h. i. j. k. I.  Cheque/deposit forms Postal charges Banking fees Personnel costs Data processing costs Communication costs Cheque/deposit handling costs Cheque/deposit control and authorization costs Bank reconciliation costs Interest revenues/losses on payment float Floor space savings Other  8.17  How long do you think it takes for your clients to see the benefits of financial EDI (e.g. 214 yrs for GM's suppliers)?  8.18  Who is gaining the most from financial EDI: the originator or the receiver of a payment?  8.19  Could you give me an example of a formal financial ED! cost/benefit analysis performed by, or for, one of your clients?  213 8.20  We often hear that suppliers are willing to offer discounts (usually 1-2%) for more timely EDI payments as an incentive for their clients to implement financial EDI. To what extent do you think theses incentives are...? a. Effective for a faster adoption of financial EDI b. Cost-justified for both parties involved  8.21  How would you qualify the overall degree of satisfaction of your clients with their financial EDI implementations (extreme, high, moderate, low, none)?  8.22  What kind of implementation problems did they encounter?  [Discuss the participation in this study of the four representative flnanciai EDI users identified by the interviewee] 8.23  On which criteria did you base the selection of these four users/clients?  8.24  What do you think would be the best way to approach them?  8.25  Could you suggest additional users/clients if some of them refuse to participate in the study?  9. SUMMARY 9.1  What do you feel are the most important factors PROMOTING the use of financial EDI by the Canadian business community?  9.2  What do you feel are the most important factors INHIBITING the use of financial EDI by the Canadian business community?  9.3  What do you feel are the most important factors which CONTRIBUTE to the success of any financial EDI project?  9.4  What do you feel are the most important factors which HINDER a successful implementation of financial EDI?  [Review the remaining EFT/EDI documentation with the interviewee: brochures, articles, newsletters, etc.]  214 APPENDIX B Financial EDI Usage Form  Other FIs  Participating Bank  a) Number of Financial EDI User Organizations Originators  Receivers  Originators  Receivers  k ? •  ?  {  — ^ ? f  ?  4  ?  7  ?  7  b) Volume of EDI Payments Payments delivered  Payments received k '  ?  Payments delivered  Payments received  ?  J  — k  ?  ' :  ?  ? 4  ?  7  ?  ?  Payments delivered  Payments received  c) Monetary Value of EDI Payments Payments delivered  Payments received k *  $  1;  j>  — k t  ' ^  1  $  <r ,  <f  ^ *  *  $  $  $  215 APPENDIX C Interview Guide with Financial EDI User Organizations  Shaded text highlights documentation to be obtained from participating financial EDI user organizations. 1 . GENERAL INFORMATION 1.1  What is your position within the company?  1.2  Do you have an organizational chart of your company?  1.3  When were you appointed to your current position?  1.4  To whom do you report directly?  1.5  What was your position before this nomination?  1.6  Since how long have you been with the company?  1.7  What is your academic and work background?  1.8  Company names will not be associated with the data collected during this study (pseudo-names), but do you mind if we mention that your company was one of our participating financial EDI user organizations?  1.9  Source participants will be asked to review all direct quotes before their inclusion in final research reports but generally speaking, do you mind having your name mentioned?  2. INDUSTRY, CORPORATE LEVEL AND IS FUNCTION 2.1  How would you briefly describe your company?  2.2  What are the total annual revenues of your company (anrtuat report)?  2.3  How many people does the company employ (annual report)?  2.4  Which market does your company serve (geographical location, customers)?  2.5  How would you describe the current state of this market's growth?  216 2.6  Which competitive forces operate most strongly in your industry (cf. Porter's 5force competitive model: buyers, suppliers, rivals, new entrants and substitutes, plus regulatory constraints)?  2.7  What are your business partner groups from a payment ORIGINATION perspective (e.g. suppliers, distributors, transporters)?  2.8  How would you describe the level of IS/IT sophistication of these partner groups? How would you describe their level of EDI sophistication?  2.9  Which departments/divisions are involved in the origination of payments to your business partners? Who is the department head? How many people does the department employ? a. b. c. d. e.  A/P and Cash Disbursement Treasury IS/IT Purchasing (negotiation of payment/discount terms) Other  2.10  To approximately how many firms/business partners do you issue payments?  2.11  What is roughly the distribution of these partners in term of firm size (large, medium, small)?  2.12  Who do you consider a large/medium/small size partner?  2.13  What are your business partner groups from a payment RECEIPT perspective (e.g. customers, retailers)?  2.14  How would you describe the level of IS/IT sophistication of these partner groups? How would you describe their level of EDI sophistication?  2.15  Which departments/divisions are involved in the receipt of payments from your business partners? Who is the department head? How many people does the department employ? a. A/R and Collection b. Treasury c. IS/IT d. Sales (negotiation of payment/discount terms) e. Other  217 2.16  From approximately how many firms/business partners do you receive payments?  2.17  What is roughly the distribution of these partners in term of firm size (large, medium, small)?  2.18  As the originator of payments, what types of electronic payments do you send? To whom? Since when? a. Direct deposits to employee bank accounts (EFTs)? b. EDI payments to suppliers c. Direct payment instructions to your bank via an on-line cash management system d. Wire transfers e. Other  2.19  As the recipient of payments, what types of electronic payments do you receive? From whom? Since when? a. b. c. d. e. f.  Pre-authorized debits to consumer bank accounts (EFTs) Direct debits from consumers (POS payment system) EDI payments from customers Lockbox deposits Wire receipts Other  2.20  Do you use direct deposits or pre-authorized debits with some of your business partners (e.g. rents, retail stores)?  2.21  From your point of view, what is the difference between an electronic payment, an EFT payment and an EDI payment?  2.22  What is the overall IS/IT infrastructure within your company (outsourced/centralized/decentralized, mainframe/mini/PCs, etc.)?  2.23  To whom does the IS/IT department head report directly?  2.24  Can I have a copy of the latest IS/tT plan of your company?  2.25  Are business application development projects generally driven by the line business or the IS/IT group?  218 2.26  How would you qualify the overall performance of the IS/IT function in terms of. (excellent, good, acceptable, poor)? a. b. c. d. e. f.  Awareness of business needs and opportunities Responsiveness to work requests from users Users support Technical competence Technological innovativeness/proactivity Project development efficiency (on time and within budget)  3. THE A/P SYSTEM AND ITS FEATURES (for EDI payment originators only) 3.1  Which A/P system or package do you use currently (e.g. custom-made, MSA, McCormack and Dodge)?  3.2  For how long have you been using this A/P system?  3.3  On which computer platform does the system run?  3.4  How many payment/cheque runs do you execute per week/month?  3.5  Does your A/P system issue electronic payments automatically? If yes, what types of electronic payments are made through your A/P system (e.g. EDI, EFT)? How do you specify to your A/P system what method of payment to use with which supplier? If no. how do you proceed to issue electronic payments?  3.6  Approximately, how many cheques do you issue through your A/P system per cheque run/week/month/year?  3.7  Do you issue cheques to individuals from your A/P system (e.g. employee expense accounts)? If yes, are they included in your total number of cheques (percentage)?  219 3.8  Do you manage ALL your payments of goods and services through your A/P system? If not, what other systems or methods of payment do you use (percentage)? a. b. c. d. e. f.  3.9  Hand-written cheques Open balance accounts Direct payment instructions to the bank Wire transfers Letters of credit Other  What percentage of your A/P cheques does each of the following groups represent? a. b. c. d.  Cheques to one-time or occasional suppliers Fixed-amount recurring charges (e.g. rents, mortgage) U.S. cheques International cheques  3.10  What is your estimate of the fully-loaded cost of issuing a cheque for your company? What cost categories/items do you include in this estimation? What are their relative importance?  3.11  Do you pay most of your suppliers on the receipt of an invoice (percentage)? What are the other transactions which trigger the payment process?  3.12  What is the ratio of purchase orders/release purchase orders to invoice in your company?  3.13  What percentage of invoices are paid by one cheque? a. 1 invoice b. 2-5 invoices c. 6-10 invoices d. 10-100 invoices e. More than 100 invoices  3.14  Do you print the remittance information on your cheque stub or on a separate remittance form? If on the cheque stub, what do you do when the number of invoices exceed the number of lines on the cheque stub (void cheques)? If on a seoarate form, is the remittance form personalized with your company logo?  220 3.15  What percentage of cheques have more than one page (stub) of remittance information attached to it?  3.16  Can I have an example of a Cheque with the remittance?  3.17  What is your estimate of the cost of cheque forms for your company?  3.18  What is your estimate of the cost of remittance forms for your company?  3.19  Can I have a copy of your latest purchase order/invoice for cheque and remittance forms?  3.20  What are your control/security procedures over the stock of cheques before and during the cheque printing process (e.g. vault, sequence control)?  3.21  Where are the cheques actually printed? How long does it take to print the cheques of a typical cheque run? When is it done (morning, afternoon, at night)? How many people and who are involved?  3.22  What activities are involved in the preparation of outgoing cheques? Who performs them? a. b. c. d. e. f.  Association of cheques with remittance data Payment authorization/audit (and association with supporting data) Cheque signing Envelope stuffing Mailing Other  3.23  In your opinion, how many hours of work are required to perform each of these activities for a typical cheque run?  3.24  Are temporary help or overtime required at peak payment time?  3.25  What are your payment authorization/audit procedures (e.g. over limit, sampling, association with supporting data)?  3.26  What are your cheque signing procedures (e.g. signature plates, double signatures)? Where do you keep your signature plates (e.g. vault)?  3.27  Do you mail most of your cheques to your suppliers (percentage)?  3.28  What is your estimate of the cost of envelopes to mail cheques for your company?  221 3.29  Can I have a copy of your latest purchase ord#r/irtvOfce iot enveJopes?  3.30  What other methods are being used for the delivery of cheques (percentage)? a. Pick up cheques b. Courier for rush cheques c. Other  3.31  What is your estimate of the cheque delivery charges for your company (e.g. stamps, courier)?  3.32  Do you use specific bank accounts for your A/P cash disbursements (US, Canadian, regions)?  3.33  Who is doing the bank reconciliation for these accounts (head office, regions, bank)?  3.34  Do you receive the cleared cheques back from the bank? What other media are being used to report cleared payments (e.g. microfiche, magnetic tape, report)?  3.35  What are the activities involved in the reconciliation of your A/P cash disbursement bank accounts (outstanding cheques)? a. b. c. d. e. f.  Preparation of cheque issue data to send bank Reconciliation of outstanding cheques Cancellation of aged outstanding cheques Preparation of bank reconciliation reports Consolidation of bank reconciliation reports (regions) Other  3.36  On average, how many cheques do you cancel per month (stop payments)?  3.37  In your opinion, how many hours of work are required to perform these reconciliation activities on a monthly basis?  222 3.38  What is your estimate of the monthly bank charges on your A/P cash disbursement bank accounts? a. b. c. d. e. f. g. h. i.  Monthly account base fee Cheque clearing fees Stop payments fees Microfiche/film/photocopies of cheques Transmissions/tapes charges Reconciliation charges Report charges Wire transfer fees Other  3.39  Can I review your latest A/P tjank statements and bank reoonciliations? Who could assist me in this review (i.e. answer questions)?  3.40  Your cheques/remittances are printed in how many copies? Who receives which original/copy? How are they filed (associated documents, sequence)? Where are they filed (space requirements)? Do you keep your cancelled cheques separately?  3.41  In your opinion, how many hours of work are required to perform these filing activities for a typical cheque run?  3.42  How often do you have to retrieve some of these documents (hourly, daily, weekly, monthly, rarely)?  3.43  When do you archive these documents (e.g. every year after the external audit)? Where are they archived (internal/external location)? For how many years do you keep them in storage? What is your estimate of the number of standard paper boxes in storage?  3.44  How often do you have to retrieve archived documents (daily, weekly, monthly, rarely)?  3.45  In your opinion, how many hours of work are required to perform these retrieval activities (current and archived documents)?  4. THE A/R SYSTEM AND ITS FEATURES (for EDI payment receivers only) 4.1  Which A/R system or package do you use currently (e.g. custom-made, MSA, McCormack and Dodge)?  223 4.2  For how long have you been using this A/R system?  4.3  On which computer platform does the system run?  4.4  Do you process your payment receipts directly or through a lockbox service? Provided by whom?  4.5  Do you use the system to manage your accounts receivable from both individual consumers and organizational customers?  4.6  What percentage of your A/R master file entries relates to your base of organizational customers or business partners?  4.7  Does your A/R system handle electronic payment receipts automatically? If ves, what types of electronic payments (e.g. EDI, EFT)? If no, how do you proceed when you receive electronic payments?  4.8  Approximately, how many cheques do you receive from your business customers per day/week/month/year?  4.9  Do you manage ALL your payment receipts for goods and services through your A/R system? If not, what other systems or methods of credit/collection do you use (percentage)? a. b. c. d. e. f.  Non-recorded payments (e.g. tax refund) Fixed-amount recurring charges (e.g. rents, mortgage) Open balance accounts Wire receipts Letters of credit Other  4.10  Do you invoice most of your business customers (percentage)? What are the other transactions which trigger the payment process?  4.11  What is the ratio of purchase orders/release purchase orders to invoice in your company?  224 4.12  What percentage of invoices are paid by one cheque? a. 1 invoice b. 2-5 invoices c. 6-10 invoices d. 10-100 invoices e. More than 100 invoices  4.13  What activities are involved in the receipt and processing of paper cheques/ remittance advices? Who performs them? a. b. c. d. e. f.  Receipt of cheques and remittance data (mail pick up/opening) Preparation of bank deposits Bank deposits Reconciliation of payments to invoices Application of remittance data to A/R (data entry) Other  4.14  On which frequency do you make bank deposits? When are they done (morning, afternoon, at night)?  4.15  On which frequency do you apply payments to your A/R system?  4.16  In your opinion, how many hours of work are required to perform each of these activities on a daily/bi-weekly/weekly basis?  4.17  Are temporary help or overtime required at peak payment time?  4.18  Do you receive most of your cheques from the mail (percentage)?  4.19  What other methods are being used for the receipt of cheques (percentage)? a. Pick up cheques b. Courier for rush cheques c. Other  4.20  What is your estimate of the payment receipt charges for your company (e.g. pick up time, courier)?  4.21  What are your collection procedures for late payments? Do you use the service of a collection agency?  4.22  Do you charge interests/penalties for late payments? Are they generally paid by your customers?  225 4.23  Do you use specific bank accounts for your A/R cash receipts (US, Canadian, regions)?  4.24  Who is doing the bank reconciliation for these accounts (head office, regions)?  4.25  What are the activities involved in the reconciliation of your A/R cash receipt bank accounts? a. b. c. d.  Reconciliation of outstanding deposits Preparation of bank reconciliation reports Consolidation of bank reconciliation reports (regions) Other  4.26  In your opinion, how many hours of work are required to perform these reconciliation activities on a monthly basis?  4.27  On average, how many cheques are returned by the bank on a monthly basis? For what reasons (e.g. insufficient funds)?  4.28  What are your procedures for returned cheques (e.g. NSF charges, re-invoicing, A/R adjustments)?  4.29  In your opinion, how many hours of work are required to handle returned cheques on a daily/weekly/monthly basis?  4.30  What is your estimate of the monthly bank charges on your A/R cash receipt bank accounts? a. b. c. d. e. f. g.  Monthly account base fee Deposit items fees Returned cheques fees Lockbox service charges Report charges Wire receipt fees Other  4.31  Can I review your latent A/R b$nk stat^nnentS eititi bank reconciliations? Who could assist me in this review (i.e. answer questions)?  4.32  Do you make photocopies of the cheques/remittances? How many? Who receives which original/photocopy? How are they filed (associated documents, sequence)? Where are they filed (space requirements)? Do you keep your returned cheques separately?  226 4.33  In your opinion, how many hours of work are required to perform these filing activities on a daily/bi-weekly/weekly basis?  4.34  How often do you have to retrieve some of these documents (hourly, daily, weekly, monthly, rarely)?  4.35  When do you archive these documents (e.g. every year after the external audit)? Where are they archived (internal/external location)? For how many years do you keep them in storage? What is your estimate of the number of standard paper boxes in storage?  4.36  How often do you have to retrieve archived documents (daily, weekly, monthly, rarely)?  4.37  In your opinion, how many hours of work are required to perform these retrieval activities (current and archived documents)?  5. THE FINANCIAL EDI SYSTEM AND ITS FEATURES 5.1  Could you briefly describe your financial EDI system?  5.2  Do you have a process diagram to illustrate your payment cycle before and after the implementation of financial EDI? If not, could you prepare one for this study?  5.3  Do you have a financial EDI operational manual/guide?  5.4  Were you already EDI capable before the decision to implement financial EDI was made? If ves. what non-financial transaction sets do you currently exchange with your business partners? Since how long? How many non-financial EDI partners do you have now?  5.5  Do you believe financial EDI is a good starting point for a company who wants to become EDI active? Why?  227 5.6  Which ANSI X I 2 payment transaction sets are you using? a. b. c. d. e. f. g.  820 821 823 824 827 829 997  -  Payment order/remittance advice Financial information reporting Lockbox Application advice Financial return notice Payment cancellation request Functional acknowledgment  5.7  Do you consider the 810 - Invoice as an integral part of financial EDI? Do you consider other transactions as an integral part of financial EDI?  5.8  Do you communicate directly with the bank or through a VAN?  5.9  When do you send/retrieve your EDI payments (frequency, time)?  5.10  Do you send/receive ALL your EDI payments together with the associated remittance information? If not, do you send/receive EDI payment instructions only? Do you send/retrieve split EDI payments?  5.11  Do you warehouse some of your EDI payments (postdated payments)? For how long?  5.12  Financial EDI can be viewed as a "displacement" technology. Do you think that ALL your paper-based payments will or can eventually be displaced by the technology? If not, what are the exception cases (e.g. rush, occasional, US, international payments)?  5.13  What types of more complex payment transactions could also be displaced by financial EDI (e.g. wire transfers, requests for letters of credit)?  6. FINANCIAL EDI INITIATION 6.1  How was the idea of the financial EDI project originated (approximative date)?  6.2  How long did it take before the idea of financial EDI was actually approved for implementation (investment decision date)?  228 6.3  Did you prepare a financial EDI business caS6^? If not, why not?  6.4  Did you obtain a formal EDI pricing iist/schedule/proposal from your bank before you decided to embark on financial EDI?  6.5  Did the financial EDI project go through the normal IS planning process to get approval for development? If not, why not? Who approved it?  6.6  Did a particular individual or group play a critical role in the inception or development of the financial EDI project (including external entities such as trade associations, EDI Councils, EDI User Groups)? If yes, who are they (name, company, function, role)?  6.7  Do you think the system would have been implemented without the presence of this individual or group?  6.8  What was the original motivation for implementing the system?  6.9  Were you involved in the project from the beginning?  6.10  What were the targets or objectives for the EDI system (years 1 to 5) in terms of...? a. b. c. d. e. f. g. h. i.  Financial EDI partner groups Number of financial EDI partners Volume of EDI payments issued/received Geographical location of financial EDI partners Size of financial EDI partners Banking affiliation of financial EDI partners Existing EDI technology at financial EDI partner sites Level of integration of financial EDI partners Other  6.11  What benefits, measurable or otherwise, did you expect from financial EDI?  6.12  Did you prepare a plan to manage/track the realizatton of these benefits over time?  229 6.13  Did you view financial EDI as a competitive "weapon" or as a competitive "necessity"? If competitive weapon, how do you think your company can gain a sustainable competitive advantage from financial EDI (e.g. entry barriers for newcomers, exit barriers for partners, difficulty to replicate by competitors)? If competitive necessity, what would have happen if you did not decide to implement financial EDI?  6.14  On a scale of 1 to 10, how would you qualify the importance of the following potential benefits of EDI (in general) in your company's decision to invest in financial EDI (10 being extremely important and 1 being completely irrelevant)? a. b. c. d. e. f. g. h. i. j. k. I. m. n. o. p. q. r. s. t. u. V.  Reduced transaction costs Improved process efficiency increased labour productivity Reduced transaction cycle time (float) Reduced operations cycle time Reduced decision cycle time More timely payments improved cash flow Reduced number of errors/problems (resolution costs) Renegotiation of more favourable payment/discount terms Reduced inventory level (carrying costs) Use of EDi as a key catalyst for process reengineering Enhanced data security and integrity Reduced transaction uncertainty (acknowledgment) Improved cash flow forecasting Improved information timeliness Improved information accessability Improved information accuracy Improved relationships with partners Improved client service quality Competitive advantage Avoidance of competitive disadvantage (competitive necessity)  6.15  Based on your experience, which potential benefits of financial EDI could be added to this list?  6.16  Based on your experience, what are the most important potential benefits of financial EDI from this list?  6.1 7  What was the initial budget for this project?  230 6.18  Was it cost-justified? On which basis? a. Expected tangible benefits minus expected costs (years 1 to 5) b. Expected ROI c. Expected intangible benefits  6.19  Is this ROI comparable to your other IS investments (greater, same, less, not calculated)?  6.20  Did you perform a formal risk a$S^$$mer)t for youf financial £Df project?  6.21  On a scale of 1 to 10, how would you qualify the level of risk involved in implementing financial EDI (10 being extremely risky and 1 being no risk at all)?  6.22  On a scale of 1 to 10, how would you qualify the importance of the following risk factors in your risk assessment (10 being extremely important and 1 being completely irrelevant)? a. Technological newness, e.g. need for new hardware/software, number of outsiders involved (partners, hardware/software vendors, network/service providers) b. Project size, e.g. relative project size, number of people on the project team/team diversity, number of insiders involved (users, user departments, hierarchical levels) c.  Lack of expertise, e.g. lack of development/application/task expertise in the project team, lack of user experience and support  d.  Project complexity, e.g. technical complexity, number of links with existing/future systems  e. Organizational environment, e.g. extent of process changes, resource insufficiency, intensity of conflicts (union resistance), lack of clarity of role definitions 6.23  On a scale of 1 to 10, what level of risk do you perceived in NOT implementing financial EDI (10 being extremely risky and 1 being no risk at all)?  6.24  What is the cumulative budget to-date?  231  7. FINANCIAL EDI DEVELOPMENT 7.1  How many people are involved in the financial EDI project from...? a. Finance (Treasury, A/P, A/R) b. IS/IT c. Purchasing/Sales d. Specialized groups (e.g. legal, internal audit, security) e. Other  7.2  How many of them would you say are dedicated to the support of... in full-time equivalent terms? a. Internal users b. External partners  7.3  Did you set up a business process reengineering team? If ves, for electronic commerce, EDI in general, or financial EDI in particular? Who were part of this reengineering team? What exactly did they do?  7.4  Do you have a chart of the financial EDI project structure?  7.5  On which computer platform does the system run (new, upgrade, machine time)?  7.6  Was the system built on top of an existing application/technology (e.g. EDI platform)? If ves. how did you split the overall costs of your EDI platform between your financial and non-financial EDI initiatives? Are they supported by two distinct project teams?  7.7  What are the main components of the system? Who developed them? From who were they acquired? a. b. c. d. e. f.  7.8  EDI translator Application interfaces/modifications Communications hardware/software Mailbox environment (VAN/bank/third party) Security/authentication hardware/software Other  What was the cost of each of these components (technology, IS/user personnel and third party set up costs)?  232 7.9  Do you offer a Quick Start option or start up kit to your business partners? If yes, who developed it? How much did it cost you? At what price do yo