The "Long Tail" of e-commerce standards

Business-to-business (B2B) data standards are popular mechanisms for ensuring uniformity among the independent organizations that collaborate in a supply chain. Their most important benefit is that they simplify trade between organizations by providing a common framework for business processes. They have been developed for a variety of functions, including manufacturing, quality assurance, and information technology, to name just a few.

A number of competing standards have evolved in the area of business-to-business electronic commerce. The advent of the Internet in the late 1990s introduced a "do-it-yourself" model that empowered any organization, large or small, to create its own e-commerce standards. The result has been a proliferation of hundreds of different B2B standards designed to automate industry-specific business processes. As one industry observer recently joked, "The great thing about B2B e-commerce standards is that there are so many of them to choose from!"

Article Figures

[Figure 1] The long tail in general marketsEnlarge this image

[Figure 2] Typical electronic commerce transactions in the supply chainEnlarge this image

[Figure 3] Examples of industry-specific XML-based standardsEnlarge this image

[Figure 4] Long tail of B2B e-commerce standardsEnlarge this image

In some cases, all of the participants in a value chain may agree upon a common standard. In other cases, they may elect not to develop standards at all. For certain supply chain activities, there may be multiple competing standards for the same function. With multiple standards in place, companies can embrace whichever one offers the greatest competitive advantage in the marketplace.

But is there a point at which having many standards and many choices inhibits rather than improves supply chain collaboration? One way to answer that question is to use the "Long Tail" concept as a framework for evaluating the benefits and challenges created by the proliferation of technology standards for supply chain business processes. In addition, there are some emerging technologies— such as "cloud computing" and software- as-a-service (SaaS)—that can help supply chain professionals tackle this complexity and use the multiplicity of B2B standards to their advantage.

The Long Tail and mass markets
The Long Tail is a statistical concept that is often used to describe mass-market behavior. Stated simply, this concept suggests that 80 percent of the population will adopt a few of the most popular behaviors, while the remaining 20 percent will choose from a wide variety of less popular, niche approaches. Figure 1 provides a graphic representation of this principle.

Although the Long Tail has been studied by academics since the mid-20th century, the concept was not widely popularized until 2004, when journalist Chris Anderson published an article about it in Wired magazine. The article, simply titled "The Long Tail" (which later became a book of the same name), illustrated how new Internet business models developed by pioneers such as Amazon.com, Netflix, and Apple have enabled an entirely new economic model for the media and entertainment industry.

As Anderson explained, traditional mass-market economics have led to product strategies that focus on developing blockbuster "hits" that appeal to the mass entertainment market. The problem is that very few products become blockbusters. Anderson used the example of Wal-Mart, which he said must sell at least 100,000 copies of a compact disc (CD) to cover its retail overhead and make a sufficient profit—yet less than 1 percent of CDs sell that many copies. Anderson proposed that the entertainment industry is shifting away from the traditional mass-market model toward a broader market of niche-oriented "microsegments." That change is possible because a nearly unlimited selection of books, movies, and music is now available through Internet channels.

B2B standards proliferate
A similar situation has developed in B2B electronic commerce, where a few standards dominate and a number of other standards serve niche segments. In the 1980s and 1990s, electronic data interchange (EDI) was the dominant e-commerce standard. EDI enabled businesses to exchange data with one another electronically using a standard format defined by a joint government-industry working group. Since its inception, EDI has been utilized by nearly every industry sector, from transportation and banking to retail and automotive.

Early investments in EDI focused on automating high-volume, structured business processes such as the issuance of purchase orders, delivery of invoices,or the communication of shipment locations and delivery dates. (See Figure 2.) During this period, EDI usage primarily was concentrated among large companies. The high costs associated with transmitting documents over private value-added networks (VANs)— third-party businesses that facilitated the data transmissions and ensured data integrity—made it difficult for smaller businesses to participate in EDI. The relative immaturity of the technology and limited demand by the market combined to discourage the development of alternative standards to EDI.

Beginning in the late 1990s, the Internet fundamentally changed the economics and technology paradigms for B2B e-commerce. Documents could be exchanged using Internet protocols such as file transfer protocol (FTP) and hypertext transfer protocol (HTTP), thereby liberating e-commerce from the traditional private networking models used for EDI. In particular, extensible markup language (XML) was created as an open standard to allow sharing of information between business applications, especially over the Internet. New groups of nonprofit organizations, often referred to as "dot orgs," were formed with the goal of developing an XML-based successor to EDI. Together, the dot orgs have introduced dozens of new XML-based standards designed to meet the specialized needs of different vertical industries. Figure 3 lists a few examples.

As the popularity of XML grew in the early part of this decade, the number of different standards grew. B2B e-commerce standards were being developed not just for major industries but also for subsectors within industries. Consider these two examples:

Meat and poultry—A subset of U.S. food suppliers created Meat and Poultry XML (MPXML). The MPXML creators believed that meat and poultry products had unique attributes that required a separate standard. For example, unlike other consumer packaged goods, meat and poultry products have variable weights, which lead to inconsistent packaging dimensions and highly customized price models.

Automotive aftermarket—The Automotive Aftermarket Industry Association (AAIA) created the Product Information Exchange Standard (PIES) for electronically cataloging car parts. Suppliers publish their catalogs electronically, and aftermarket retailers can immediately upload them into their parts-ordering systems. PIES can be used to communicate more than 200 different attributes for each aftermarket part, including pricing, packaging, dimensions, and warranty information.

Global vs. niche standards
The examples above illustrate how B2B e-commerce standards have proliferated over the past 10 years thanks to the widespread use of the Internet. The new XML standards offer a level of industry specialization and technology flexibility that is not possible with traditional EDI. Yet despite the benefits they offer, the new XML standards have failed to achieve critical mass, and no XML-based standard has succeeded in replacing EDI. In fact, XML has yet to grow beyond 1020 percent of the total message volume; the remaining B2B transactions are still EDI-based. If you were to plot the various B2B e-commerce standards on a Long Tail diagram, the result would be as shown in Figure 4.

The short head in Figure 4 is populated by the handful of dominant standards in worldwide use across many industry sectors. EDI—with its two major variants, ANSI X12 (North America) and EDIFACT (Europe and Asia)—is certainly the most prevalent. The only other noteworthy non-XML standard is the Society for Worldwide Interbank Financial Telecommunication's SWIFT FIN message format, which is widely used in the international financial services sector. Office Open XML, the standard used for the exchange of Microsoft Office documents and spreadsheets, is quickly gaining adoption as Microsoft's Office 2007 is deployed on more and more desktops. All of the other standards are used by only a relatively small community of trading partners in certain industry sectors.

Although many of the standards plotted on the Long Tail diagram have yet to achieve a critical mass of adoption, these e-commerce frameworks are enabling a level of collaboration within business communities that was never possible with traditional EDI. Examples include:

Consumer packaged goods—The Global Upstream Supply Initiative (GUSI) has templates for four different order-fulfillment models commonly used between consumer packaged goods manufacturers and suppliers of packaging, ingredients, and chemicals. The four models include traditional order management, vendor-managed inventory, scheduling agreement, and consignment process. While such models could be administered through EDI, the industry decided that it needed a separate standard to accommodate the high degree of customization required for the message structure and sequence.

High technology—RosettaNet enables high-tech manufacturers to exchange information related to design specifications, semiconductor testing, materials composition, and warranty management using templates called partner interface processes (PIPs). There are new PIPs under development for siliconwafer maps and product end-of-life notifications. Such detailed, industry-specific, business-process templates were not practical with EDI.

To illustrate the power of the Long Tail in B2B ecommerce, it is helpful to review an example of a niche standard and its impact on business performance. Consider the case of the Green Coffee XML standard. Green Coffee XML (the name refers to the color of the beans when harvested) is utilized by coffee growers, brokers, and buyers to ensure uniformity of contracts, bills of lading, and other commercial documents.

Even within the supply chain of an individual commodity such as coffee, there is a surprising degree of variability. For example, there are five different units of measure for weighing the beans and nine different types of sales contracts in use within the coffee sector. By developing a set of XML documents that is specifically designed for coffee imports and exports, the coffee industry can achieve higher levels of efficiency for its unique business processes. For example, the Green Coffee Association reports that the specialized e-commerce standards have enabled users to achieve lower days sales outstanding, higher "perfect order" fill rates, and lower total landed costs.

The downside of niche standards
While specialized e-commerce standards like Green Coffee XML can offer greater efficiencies within a particular market subsegment, they can also complicate e-commerce for trading partners in adjacent industries. For example, other companies involved in the coffee supply chain might include:

• Consumer packaged goods (CPG) companies that convert the beans into a package for resale. CPG manufacturers typically use EDI or GUSI for B2B e-commerce.
• Government agencies that tax the buyers' and sellers' importing and exporting activities. Trade agencies typically use EDI for B2B e-commerce.
• Transportation providers that carry the coffee beans from their point of origin to their final destination. Ocean and ground freight carriers typically use EDI for B2B e-commerce.
• Commercial insurers that underwrite cargo policies that reimburse the owner of the coffee beans for unforeseen damages caused during shipping. Insurers have a specialized standard called ACORD (Association for Cooperative Operations Research and Development) for B2B e-commerce.
• Financial institutions that facilitate the transfer of funds between buyers and sellers of coffee beans using letters of credit and other forms of international payments. Banks prefer to use the MX (ISO 20022 XML) and SWIFT MT standard messages for B2B e-commerce.

In short, using the Green Coffee XML standard as a single standard is not practical when the full value chain is considered.

The coffee sector is not unique in the challenges it confronts with B2B standards. As today's economy is dominated by highly diversified, multinational conglomerates, there are very few supply chains that conform to a true vertical-industry model. For example, the semiconductor industry (which theoretically is part of the high-tech value chain) has diversified well beyond its traditional customer base of computer manufacturers. Semiconductor companies also sell their chips into the automotive, medical equipment, aerospace, and defense sectors. The semiconductor industry has developed highly sophisticated RosettaNet PIPs to support its unique business processes. However, the RosettaNet standards have not yet been widely adopted outside of the high-tech industry. Consequently, chip manufacturers must support multiple B2B standards in order to communicate with their diverse customer base.

The divergence of standards across industries has implications beyond just complicating technology management. When buyers and sellers use competing e-commerce standards, it can slow down transactions and delay the implementation of business relationships. Orders may not begin to flow until the e-commerce systems have been tested and deployed. In some cases, a lack of interoperable standards could deter two parties from conducting e-commerce altogether.

Many companies have attempted to avoid the challenges of the Long Tail by forcing standards on their supply chain partners. The success of such an approach depends upon the procurement budget of the company and its position in the supply chain. For example, large organizations such as Wal-Mart and General Motors (GM) that have significant purchasing power can effectively dictate B2B e-commerce standards to their supplier communities. However, the average company (even those in the Fortune 500) has a much smaller purchasing budget than GM or Wal-Mart and therefore wields far less influence over its suppliers.

Furthermore, many large buyers are also suppliers and are selling to Wal-Mart or GM, for instance. In the supplier role, most cannot effectively dictate standards to their customers. Instead, suppliers must be willing to accommodate whichever B2B e-commerce standards their customers request. This kind of flexibility relative to e-commerce is critical if companies want to be viewed as "easy to do business with."

In other words, the customer-facing operations of even the world's largest companies will have to confront the challenges posed by the Long Tail of B2B ecommerce standards.

Convergence and proliferation
It is unclear whether the number of electronic commerce standards will continue to grow or will contract. There has been some consolidation of standards in recent years, as several of the sponsoring associations have adopted multi-industry charters. For example:

GS1—Global Standards 1 (GS1) sponsors the global data-synchronization initiative as well as package- labeling specifications such as bar codes and radio frequency identification (RFID) for retail and consumer goods. Recently, GS1 has expanded its focus into the health care and pharmaceutical sectors.

OAGi—The Open Applications Group (OAGi) has worked extensively in the automotive sector on XML. Recently, Chemical Industry Data Exchange (CIDX), the chemical industry standards organization, merged with OAGi in an effort to further harmonize standards across multiple industries. CIDX has been a proponent of cross-industry collaboration for several years. Since its inception, it has maintained working relationships with groups such as Responsible Agricultural Product and Information Distribution (RAPID) in the agricultural sector, papiNet in forestry, and Petroleum Industry Data Exchange (PIDX) in the oil and gas industry.

While there are numerous signs of consolidation and harmonization among standards groups, there also are instances of divergence and competition. Consider the following examples:

Procure-to-Pay—SWIFT has recently developed a new suite of XML messages to support its Trade Services Utility offering. The transactions have been given generic names such as baseline, commercial, and transportation documents. However, the intent is to replicate the common supply chain documents of purchase order, invoice, and shipment notices. SWIFT claims the messages will only be used between banks to support supply chain finance. Nonetheless, this move creates a new group of supply chain standards.

High tech—The automotive sector's OAGi recently expanded its charter to include high-tech XML schemas. Historically, high-tech XML was the exclusive domain of RosettaNet. However, it appears that in the future, multiple standards groups will be governing the messages for the electronics supply chain.

Coping with multiple standards
Ideally, businesses should be able to take advantage of the specialized e-commerce frameworks developed for their particular industries and be able to use more generalized standards to communicate with business partners in other sectors. By doing so, companies would be able to gain the competitive advantage that comes with niche standards while also maintaining a high degree of interoperability across industries.

There is a process by which an electronic message created in one e-commerce standard can be converted into the format of another standard. Using one of many commercially available document-translation software packages, a programmer can map the data fields from one message framework into the fields of another standard. This endeavor, however, can prove to be quite expensive. If a company has a large number of business partners in a wide range of industries, there may be a need for several thousand such "maps."

Another approach to minimizing Long Tail challenges would be to "shield" businesses from the various standards at the application layer. For example, Internet browsers such as Google's Chrome and Microsoft's Internet Explorer shield end users from the various standards used for digital images. All major browsers can display images in a variety of formats, including JPEG, GIF, BMP, and TIF. Applying that same approach to B2B e-commerce, perhaps enterprise resource planning (ERP) vendors such as SAP, Oracle, JDA, QAD, and Ariba might provide a library of embedded maps that could transform data into and out of various standard formats. The effect would be to mask end users from the proliferation of competing data standards.

Unfortunately, the opposite trend has emerged, in part because ERP vendors have become contributors to the proliferation of standards. Each of the major ERP vendors has its own internal data structures, which in many cases have become e-commerce standards themselves. For example, one of the most popular document types used in the manufacturing sector was not developed through a standards process at all, but rather by the vendor SAP. The SAP IDOC format is among the top five document types used in supply chains today. Another example is Ariba's popular cXML format, which can be used to share data between e-procurement applications.

Emerging technologies and the Long Tail
New techniques such as low-cost offshore development, software-as-a-service (SaaS), and "cloud computing" have the potential to simplify the management of multiple e-commerce standards in the supply chain.

Low-cost offshore development: The process of mapping data from one e-commerce standard to another has been viewed as too expensive by many participants in the supply chain. However, leveraging lower-cost offshore resources for map development could radically change the economics of this function. Offshore map development will be most efficient when it is available as a shared service provided to multiple companies. A third-party vendor, whether specializing in B2B e-commerce or offering a more generalized IT outsourcing service, can deliver economies of scale that are not possible for most enterprises. Vendors can create a pool of highly skilled mapping personnel who are conversant in all of the various B2B e-commerce standards in an offshore location, such as India, the Philippines, or Mexico, at one-tenth of the current cost.

Software-as-a-service (SaaS) and cloud computing: Under the traditional information technology model, companies have paid millions of dollars to purchase hardware and license software, which their own internal IT organizations then customize, support, host, and upgrade. With both cloud computing and SaaS, the maintenance, hosting, and support of the technology are provided by a third-party vendor.

Under the cloud computing model, corporations can rent computer processing and storage capacity from a third-party provider as needed. Cloud computing is frequently compared to a utility, such as electrical power service, in which customers subscribe to the service and scale their usage up and down as needed. SaaS offers a similar paradigm. However, instead of providing just raw computing power and storage, SaaS allows a company to subscribe to a software application.

Both SaaS and cloud computing are gaining popularity with corporate IT departments because they offer lower upfront costs, more predictable fees, and greater flexibility for changing vendors. When combined with low-cost offshore development, SaaS and cloud computing could provide an elegant solution to the Long Tail dilemma.

Consider an example of how such technologies might be combined to simplify e-commerce. In the near future, corporations may be able to participate in network-based, "cloud computing utilities" that can convert electronic documents from one standard to another. Imagine, for example, an electronic invoicing utility that could accept an invoicing file from a seller's accounts receivable software in one of 100 different source-file formats (EDI, XML, papiNet, RosettaNet, and more). The cloud utility would examine the bills to create a list of target customers. It would then access a network-based directory of major corporations to determine the appropriate electronic invoicing requirements for each account. The invoices could be reformatted using mapping software (delivered as a service) into one of 100 different file formats before being transmitted to the end customers. The utility would also ensure that the appropriate data fields, digital signatures, and audit trails were recorded to comply with local tax regulations. Several technology vendors, dubbed "invoicing networks," are already in the process of developing limited deployments of such a model today.

For better or worse?
There is no question that the exponential rise in the number of standards over the past decade is making B2B e-commerce more complicated than ever before. Considerable effort is required to share data among companies utilizing different standards. The greatest challenges exist for companies that need to electronically collaborate across industries. So for many, the Long Tail is making B2B e-commerce more challenging, expensive, and complex.

But for others, the Long Tail phenomenon is unlocking the potential to collaborate with business partners in ways never before possible. Those that are willing to invest the effort to master the new e-commerce paradigms can gain operational efficiencies that provide a long-term competitive differentiation in the marketplace.

The question then becomes, "What is the optimal number of e-commerce standards?" It would be premature to offer an answer at this point. Yet it seems clear that if industries take advantage of developments such as cloud computing, SaaS, and offshore IT development, they will be able to determine the mix of standards that will allow for an appropriate balance between vertical specialization and cross-sector interoperability in the supply chain.