Electronic Commerce Before the Internet

The first electronically based commercial communications were transmitted by telegraph, then telex and finally fax. But these non-computerized transactions were lacking a key component: interactivity. They were essentially one-way messages, leaving no room for back and forth responses and even assurance that messages were received.

In the late 1970s, companies developed their own computer-to-computer communications networks for sending and receiving business-critical information and documents among key trading partners. The motivation was to cut costs: electronic commerce (EC) meant less paper, envelopes, postage, telephone, fewer couriers and leaner staffs required to sort, match, file, reconcile and send mail. These networks made back-office operations dramatically more efficient as companies were able to replace traditional and slower data entry and mailing methods.

EC networks also had many added benefits when it came to relationships with trading partners, specifically suppliers and customers. It let companies improve the coordination and management of critical business processes such as product design, sales and marketing. With networks, product concepts, design plans and new pricing could be shared instantly and electronically.

EC and the Seven Dwarfs
Yet there was something unsettling in the power that these networks gave large corporations. In effect, the networks let large companies dictate how their trading partners sent and received basic transaction information. Consequently, they also dictated the kinds of technologies and standards used by suppliers and customers. Because much of it was proprietary, a supplier might have to set up several systems to handle communications with the different companies to which it sold products. This added major costs to doing business and shut some smaller suppliers out of contracts because the price tag for hooking up separate networks was prohibitive and slashed into their margins.

Buyers also felt the inefficiencies. For instance, if a firm wanted to place an order with a supplier, it might have to log on to several terminals to get a competitive bid. Several years ago, a client led a visiting Gartner Group analyst into a large room with seven separate terminals. Each represented a different supplier and each was named after one of the dwarfs from Walt Disney’s tale of Snow White and the Seven Dwarfs.

Of course, this situation presented many challenges for the suppliers who were selling to this company, especially the one whose terminal was named Dopey.

EDI Sets Standards
To address these complexities, electronic data interchange (EDI) was created in the 1980s. EDI was supposed to standardize computer-to-computer, business-to-business EC. The problem, as is often the case with technology issues, was that many sets of standards emerged. For instance, large companies continued to set their own standards for their own industries (e.g., automotive, transportation and retail). Industries with strong trade associations, such as the National Wholesale Druggists Association, created another set for companies in their industries. The American National Standards Institute designed yet another group of rules of the road for industries that didn’t have their own standards; and in the mid-1980s the United Nations sponsored a project that developed international EDI regulations for global transactions like banking, known as Electronic Data Interchange For Administration, Commerce and Transport, or EDIFACT.

Value Added Networks to the Rescue
Many companies found that implementing the new standards was just as time consuming, complex and expensive as the proprietary pre-EDI computer-to-computer networks. To solve this dilemma, value added networks (VANs) stepped in. VANs are private communications networks that emerged to provide an array of EC services to other companies. The first VANs grew out of the large corporate EC players like General Electric (General Electric Information Services or GEIS) and IBM (Advantis). These companies were well-positioned to provide EC services since they had excess computing and networking capacity that they could lease out in pieces to smaller companies, a practice known as time-sharing. Then and now, VANs typically supply the software with EDI standards that enable companies to integrate their own internal applications and business practices with those of their trading partners.

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