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EDI Outsourcing

Understanding the Basics of EDI


What is EDI outsourcing?

EDI outsourcing is the process of having a third-party manage a part or the entire process of using EDI to exchange data with trading partners. While businesses of many sizes use EDI outsourcing, the primary benefit is usually associated with smaller businesses. There are three major ways of EDI outsourcing:

1. EDI Service Bureaus
2. Complete EDI outsourcing
3. Customer & Supplier "Onboarding"

EDI Outsourcing with Service Bureaus

This is the most common type of EDI outsourcing and is common with smaller companies. A typical scenario involves a small business dealing with a large retailer or manufacturer where the small business is frequently unfamiliar with EDI and begins using EDI outsourcing as an effective means of becoming "EDI compliant". While on a long-term basis EDI outsourcing can become expensive, the short-term ease of use benefits and the benefits to low-volume users of EDI can be attractive. The long-term drawback of EDI outsourcing is that it can become costly.


Complete EDI Outsourcing

Complete EDI outsourcing involves a strategic decision that EDI is neither a competency center, nor a competitive requirement which the organization must take advantage of, or respond to. In this context, EDI outsourcing makes sense for an organization that wants to focus its resources on their core business. It should be noted however that EDI outsourcing increases in cost with usage, so low usage is a critical requirement for an organization that is outsourcing the entire EDI process.


Customer and Supplier Onboarding

When a large organization (i.e. a retailer) uses EDI outsourcing for its "onboarding" process, it means that the work required to help make suppliers EDI 'compliant' is outsourced to a third-party. In this context, EDI outsourcing can be beneficial to retailers that do not have the in-house manpower or processes to help all their suppliers become EDI compliant. For retailers the decision to use EDI outsourcing for the onboarding process is usually related to the amount of effort needed vs. the benefit achieved by having onboarding as in in-house competency.


What to Consider before Using EDI Outsourcing:

There are a number of points to consider before engaging in EDI outsourcing. First and foremost is the issues of experience. How long has the EDI outsourcing provider been in business? Second is the issue of the specific type of EDI outsourcing they provide. Different organizations provide different levels of EDI outsourcing and support. Understanding these two issues is a first critical step before embarking on the EDI outsourcing path.


Will you Benefit from EDI Outsourcing?

In many situations companies that use EDI outsourcing have found that the benefits of EDI outsourcing do not outweigh the cost of using EDI outsourcing. This is especially true when EDI outsourcing takes place of the entire EDI process for an organization. The reason for this is that the most efficient use of EDI involves a coupling of the EDI process to the internal processes of the business. An EDI outsourcing company can never have the same deep understanding of your business processes and the effect of EDI on your organization that an in-house EDI department would have. For this reason it's critical to compare all potential outcomes of EDI outsourcing, including worst case calculations to effectively compare if EDI outsourcing will truly provide a significantly higher overall return on investment than having an in-house EDI solution.


Will you Outgrow EDI Outsourcing?

As the business grows, the decision of when to move away from an EDI outsourcing solution will eventually become critical. Ultimately the decision will come back to a discussion of how strategic EDI has become to your business. Companies often realize that EDI has become a strategic issue because their bigger competitors are all using EDI more effectively. This type of "response to competitive pressures" is a key reason why businesses often leave EDI outsourcing and bring EDI in house. Beyond the 'strategic' reasons is also the simple matter of cost of EDI outsourcing. As your EDI use grows the variable cost nature of the EDI outsourcing model means your costs will increase accordingly. This 'cross-over' point, the point at which the annual cost of an EDI outsourcing service becomes prohibitively expensive, is often one of the key driving factors to businesses exchanging EDI outsourcing for an in-house solution.


Plan your Exit Early

The right way to plan your exit from EDI outsourcing however is to create a plan of exit before the cost associated with EDI outsourcing becomes prohibitively high. This is especially true when you consider that through EDI outsourcing it is much harder to enjoy some of the hidden, but very real benefits, of an in-house EDI solution. One critical example of this is integration of your EDI data into your back-end ERP or accounting system. Through EDI outsourcing providers it is often impossible to have data automatically sent to your back-end system automatically without human interaction. This manual process of taking data generated by your EDI outsourcing provider and re-keying it into your in-house systems should be factored into your cost equations associated with EDI outsourcing.


Alternatives to EDI Outsourcing

Lastly, before you embark on an EDI outsourcing strategy, consider other limiting factors as well as other advantages of in-house solutions. EDI outsourcing providers often limit the number of trading partners with whom you can connect. You should also consider the security aspects of using an EDI outsourcing solution where some of your competitors will also be accessing data. Over time you will find that such solutions are best for your long-term business.

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