CH 03

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68
chapter
Electronic Business
(E-Business) Systems
Some say that e-Business was born in 1910 when several
florists formed the Florists’ Telegraph Delivery group (FTD
Inc.) to exchange out-of-town orders.1 While electronic
transmission of orders may have helped the florists incre-
3
mentally improve their businesses, more recent technologi-
cal advances have supported major changes in the way ex-
isting businesses operate and enabled the creation of new
e-Businesses such as Amazon.com. Amazon.com began
Learning Objectives
business with only a few workstations and no physical sales • To appreciate the possible
locations (i.e., no “bricks and mortar”). Because it began changes to organizational
early in the era of business-to-consumer (B2C) e-Business, processes that occur when
many customers were skeptical of providing credit card in- electronic business is
formation online. To provide comfort to these customers, introduced.
Amazon.com processed credit card orders by receiving or- • To understand the major ap-
ders on one computer, writing the information to a floppy proaches used to transfer elec-
disk and physically walking the order to a separate com- tronic data during business
puter. Amazon.com could not have grown to nearly $4 bil- events processing.
lion in annual sales2 on such primitive systems. Instead,
• To recognize the complexities
Amazon.com grew by developing and implementing secure
that are introduced as elec-
transaction software, online shopping carts, and sophisti-
tronic document management
cated data analysis programs.
moves us steadily toward the
Amazon.com’s e-Business model would not be feasible paperless off ice.
without this software. The model is based on Amazon.
• To understand the complexi-
com’s “almost-in-time” inventory concept. It supplements
ties surrounding electronic
the B2C interface that you see as a customer with an inno-
data interchange that are in-
vative B2B interface for quick acquisition and shipment of
troduced when linking two dif-
non-stocked items. That is, if the item that you order is not
ferent organizations’ computer
in stock, the company gets it from its supplier for shipment
systems for joint business
to you, the customer.
event data processing.
Through the development of technology, Amazon.com
has been able to develop its e-Business model as well as use • To appreciate the challenges
its technology to provide similar services to companies such faced by organizations when
as Borders, Inc., and Toys“R”Us, Inc., which traditionally they pursue direct business
would have been its competitors. Amazon.com’s future links with customers via the
may revolve around its B2C and B2B technology capabili- Internet or other networks.
ties, rather than its ability to sell books.3 • To appreciate the business ad-
vantages gained through effec-
tive use of electronic business.
1
Frank Hayes, “The Story So Far: FTD’s flowers-by-wire network
planted the seeds of e-Commerce a century ago,” Computerworld (June
17, 2002): 24
2
Taken from the company’s 2002 income statement at http://www.
amazon.com.
3
A primary source for this vignette is Stacy Collett, “The Web’s Best Seller:
Amazon.com drew consumers to the Web in droves and forever changed in-
ventory control,” Computerworld (September 30, 2002): 40, 42.
ch03-g05 5/24/04 7:57 PM Page 69
CHAPTER 3 Electronic Business (E-Business) Systems 69
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In this chapter, we highlight our entire AIS wheel by exploring the systems
that support the electronic interaction of an organization’s business
processes and information systems with those if its customers and vendors.
These e-Business systems allow external access and interaction with the en-
terprise database and therefore require sophisticated controls to safeguard
the database. Process controls must be in place to ensure that the business
processes achieve their goals. Pervasive controls must be in place to ensure
these systems are secure, are not interrupted, and maintain the course
charted by management.
SYNOPSIS
This chapter introduces the concept of electronic business (e-Business), which was de- E-BUSINESS
fined in the Preface and Chapter 1 as the application of electronic networks (including
the Internet) to exchange information and link business processes among organizations
and/or individuals. These processes include interaction between back-office (i.e., inter-
nal) processes, such as distribution, manufacturing, and accounting; and front-office
(i.e., external) processes, such as those that connect an organization to its customers and
suppliers.4 We also explore how communications technology is revolutionizing the way
individuals and organizations conduct business.
As organizations venture down this trail of electronic communications-driven business ENTERPRISE
processes, the trail of paper including invoices, check payments, and so forth quickly dis- SYSTEMS
appears by capturing business event data at the e-Business connection with a customer
CONTROLS
or supplier and by using enterprise systems to store data and make it accessible. The evo-
lution to e-Business has been slow in the past, but advances in Internet communication
have switched the evolution into high gear. As you read and study this chapter, you
will learn about the underlying technologies that facilitate e-Business, the complexities
4
Some would distinguish the terms e-Business, the comprehensive concept we have defined, and e-Com-
merce, the external e-Business processes (i.e., the buying and selling of products and services electronically,
typically on the Internet). For simplicity, we do not distinguish the terms e-Business and e-Commerce in this
text.
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70 PART 1 Understanding Information Systems
of displacing paper records with electronic ones, the challenges faced in overcoming dif-
ferences in technology and accounting systems design in order to link two companies’
computer systems, and finally the barriers that must be overcome for successful execu-
tion of secure business events over the Internet. All these technologies, along with the
flexible processes they allow to exist, are fundamental to providing traditional companies
with the capability to implement new streamlined processes and new services for their
customers. These new technologies also have enabled e-Businesses like Amazon.com to
exist and prosper. Amazon.com’s business processes are dependent on technology to
provide efficient processing and the analysis of information to support product sales and
delivery and the acquisition of replacement products—virtually all of the company’s
value chain.
INTRODUCTION
The power of computers in transforming society is perhaps most obvious today in the
way communications have changed. Our society has evolved from one that relied on
face-to-face communication, to one in which phones became the primary medium, to a
contemporary society that is increasingly dependent on electronic messages (i.e., e-mail
and instant messaging). In essence, the richness of the media has been sacrificed for ef-
ficiency and effectiveness. In other words, the phone took away the ability to detect
emotions through an individual’s appearance, including smiles, frowns or other facial ex-
pressions. E-mail went a step beyond the phone and also took away the ability to detect
emotions through voice inflection and context sounds such as a chuckle. For example,
you may have chosen in the past to send a family member or friend a voice mail, e-mail,
or fax when you wanted to get them a message quickly, but didn’t really have time to
talk beyond what you could deliver in the message. In effect, you used technology to
make the delivery of the message more efficient. Through these actions, you made the
completion of the necessary activities a more efficient process—much like the objectives
of most business organizations in today’s heavily competitive business environment.
E-BUSINESS From a business perspective, the shift toward increasingly automated business
processes and communications based on the transfer of electronic data is designed to
ENTERPRISE achieve greater efficiencies in business processing. When an organization engages in e-
SYSTEMS Business, they complete electronic-based business events (i.e., the partial or complete
elimination of paper documentation during business processes in favor of more effi-
CONTROLS
cient electronic-based communication). These electronic-based business events entail
the interconnection of the underlying back-office processes of both organizations, ef-
fectively eliminating the errors associated with a paper-driven process. A by-product of
e-Business is often the elimination of the sales staff that would normally serve as the in-
termediary between the two parties to the business event. Bypassing the sales staff
speeds up the business event by eliminating the interaction with a salesperson, estab-
lishing a direct and therefore immediate linkage to the vendor’s computerized infor-
mation system (which for many organizations participating in e-Business today will be
their enterprise systems) for faster communication of an order, and facilitating the elec-
tronic transfer of funds for immediate payment. The business event is completed more
quickly. Additionally, the purchaser will normally electronically solicit pricing and
quickly determine the best price—increasing price efficiency as well. Even price check-
ing may be done automatically by the computer, eliminating the waste of the pur-
chaser’s time on such activities.
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Amazon.com’s success is not solely driven by its B2C sales systems. As we mentioned
earlier, sophisticated B2B systems that are integrated with Amazon.com’s suppliers’ sys-
tems must exist to support acquiring products that consumers want. When Amazon.
com needs to obtain a book or other item, it electronically sends a purchase order to the
manufacturer or distributor of the item. The vendor will provide Amazon.com with the
product (a physical flow) and also the expected warehouse delivery time—information
that is ultimately used to provide the expected shipping and delivery dates to its
customer.
B2B systems are not limited to companies that sell predominately over the Internet.
Using processes similar to Amazon.com, companies such as Wal-Mart, which sell most
of their merchandise in retail stores, also rely heavily on B2B. When the cashier at Wal-
Mart scans an item, not only are sales recorded, but the inventory balance in the ware-
house is updated. Wal-Mart’s vendors read that data and, if the warehouse quantities fall
below the desired reorder point for the item, the vendor ships replenishment stock to
Wal-Mart automatically.5 Today, the majority of e-Business volume is conducted be-
tween business trading partners rather than consumers and businesses. That is, B2B is
much bigger than B2C.
It is not just big organizations that are using such technologies to quicken the
process. For instance, your favorite pizza joint or sandwich shop may accept e-mail or
online ordering—basically allowing you to avoid being put on hold when you place your
order and the risk of the phone answerer getting the wrong ingredients on your pizza
or sandwich. You simply create the order yourself and ship it off, reducing the business’
need for people to answer the phones and take orders.
With the Internet, many organizations have the opportunity to directly reach cus-
tomers through electronic communication. The potential in this market has led to the
explosion of e-Business over the Internet. Airlines had such success with ticket sales over
the Internet, that they discontinued paying commissions to travel agents. In this chap-
ter, we will explore a variety of technologies that enable e-Business. We also will learn
about the various forms of e-Business that are used by organizations in today’s business
environment.
Throughout this text the discussion of e-Business is highlighted as it relates to vari-
ous business processes, controls, and systems development issues. Since this chapter is
specifically on e-Business, we will reserve use of the e-Business icon to those places in
the chapter where a particularly critical e-Business technology or concept is discussed.
APPLYING E-BUSINESS TO THE VALUE CHAIN

Amazon.com has grown because it has used technology to enhance the company’s value
chain and satisfy customer needs. The basic function of providing a book to a customer
is not new; for centuries booksellers have been in existence. Historically, booksellers
have stocked books that are consistent with their target customers. The customers per-
sonally visited the store for their selection, or perhaps in the case of a specialty store, cor-
responded by mail. Amazon.com’s primary innovation was to offer a vast selection of
books that were not necessarily in stock, and to have the systems in place to acquire the
nonstocked items quickly and relatively inexpensively. This concept allows a customer to
5
This process, called Vendor Managed Inventory (VMI), is described in Chapter 12.
ch03-g05 5/24/04 7:57 PM Page 72
shop at one “location” (although it may not be a physical location) for many different
items, without burdening Amazon.com with the inventory carrying expenses of tradi-
tional retailers.
A second major innovation from Amazon.com is the collection and analysis of cus-
tomer purchase data. The analysis uses sophisticated software to identify patterns and
trends in customer preferences. When such information is identified, Amazon.com sug-
gests items that customers with similar buying patterns have purchased; in other words,
items that the customer has not purchased, but might want. This process can obviously
benefit Amazon.com through increased sales but may also increase the customer’s satis-
faction by offering to them additional products they may enjoy.
Amazon.com has used each of these technology innovations to enhance its value
chain and value system. By offering a wide variety of books (and ultimately other prod-
ucts) online, and having the procurement and delivery systems in place to satisfy orders
in a timely manner, Amazon.com has been able to grow substantially. This growth has
come without having a physical retail presence or vast numbers of items in inventory.6
Another major component of Amazon.com’s value chain is the ability to market and sell
items to customers based on customer interest. Each of these items has provided Ama-
zon.com a competitive advantage in the online retailers’ marketplace—an advantage that
has persuaded some competitors (such as Borders and Toys“R”Us) to outsource their
online operations to Amazon.com.
If you have purchased a book or other item from Amazon.com (or read or heard
about the process), you are familiar with the process that we have described here. This
has been an example of B2C (business-to-consumer) e-Business. While much is written
about B2C e-Business and it is probably familiar to you, it is a small part of the overall
e-Business picture. The U.S. Census Bureau estimated that in 2001 only 7 percent of e-
Business is B2C. The remaining 93 percent falls under B2B (business-to-business) cat-
egories. B2B e-Business includes Amazon.com’s book purchases from its suppliers. It
also includes raw materials purchased electronically for manufacturing concerns and
electronic purchases by retailers, such as Wal-Mart and Kohl’s. It follows that the cost
saving and decrease in delivery time when the purchasing process is automated yields a
more efficient organization and improves the value chain.
THE CHANGING WORLD OF BUSINESS PROCESSING

For centuries, the basic manner in which commerce transpired changed very little. In
the past, a merchant would meet with a customer or another merchant and form an
agreement to provide goods to customers in exchange for cash or other goods and serv-
ices. The merchant would then record these exchanges in books of accounts, and peri-
odically consolidate the entries recorded in the books to determine how much various
individuals owed the merchant, how much the merchant owed other people, and the ex-
cess cash and assets that the merchant owned.
ENTERPRISE Over the past three decades, the relative change in commercial practices has been ex-
SYSTEMS ponential. At the leading edge of technological advance, cottage industries now are
springing up on the Internet where personal contacts and face-to-face negotiations do
not occur. Online catalogs can be viewed through an Internet browser, and orders can
immediately be placed and paid for over the Internet. Of course, the bookkeeping func-
6
In recent years, Amazon.com has increased the items stocked in inventory.
ch03-g05 5/24/04 7:57 PM Page 73
tions may be done in much the same way as the ancient merchant did them, but in many
cases the system will automatically trigger collection from the credit card company, au-
tomatically record the business event in the electronic database, and automatically up-
date all of the related accounts. Indeed, many companies are using Web development
tools from their ERP vendors to build web sites that are linked to the ERP system’s pro-
cessing and central database.
While it may appear that companies have switched from an old way of doing com-
merce to a brand new way, both methods are actually used by many organizations. The
evolution of information technology has simply provided for alternative forms of busi-
ness processes and business event data processing that enable some organizations to be-
come more efficient and effective by altering the traditional means by which they have
done business. To fully understand how technology can enable an organization to
reengineer its business processes and more effectively enter into commerce activities, you
first must have a solid understanding of how business event data processing can be com-
pleted. Once you understand how processing is done, then the exploration of the tech-
nologies that enable improved efficiencies in business event data processing will be more
meaningful.
In this chapter, the evolution of business event data processing is examined. This will
help in understanding and appreciating the evolution of business, including the differ-
ent stages of e-Business.
Automating Manual Systems

Since the earliest days of accounting when fairly primitive manual approaches were the
only available accounting information systems, accountants recognized that the cheap-
est and most efficient way to do data processing on large volumes of similar business
event data was to aggregate (i.e., batch) several events together and then periodically
complete the processing on all the event data at once. The periodic mode is the pro-
cessing mode in which a delay exists between the various data processing steps. Al-
though technically not the same, the periodic mode is heavily dependent on the use of
batch processing, and the two terms are often used interchangeably. Batch processing is
the aggregation of several business events over some period of time with the subsequent
processing of these data as a group by the information system.
Almost all manual systems use the periodic mode. If you think about how you learned
the basics of financial accounting and financial statement development, you likely started
by recording a set of journal entries that represented the business activities that had oc-
curred. These journal entries were then transferred as a group (posted) to the general
ledger and then to the trial balance. Executing the journal entry transfers as a batch was
a more efficient way of maintaining the financial statements than transferring each busi-
ness event individually to create a complete set of financial statements after each event
was recorded (i.e., after each journal entry you would have to post to the general ledger
and recreate the trial balance). In a computerized environment, the easiest approach to
automating the accounting process has been to simply mirror these manual batch pro-
cessing systems, which are relatively simple to develop, and provide for the most effi-
cient use of employees and computer hardware.
Batch processing systems typically require four basic subprocesses to be completed
before an event is converted into information reports that can be used by decision mak-
ers. Follow along with Figure 3.1 (page 74) as we explain how each of these four sub-
processes is typically completed.
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Figure 3.1 Automated Equivalent to a Manual System
Sales event Old inventory

data master
Central
Customer Sales clerk computer
Sales data New inventory

Outputs for master
Sales receipt management
Data entry clerk
(2 copies)
and PC
Cash register
Sales receipts
• Business event occurs. At the point of occurrence for the business event, the infor-
mation for the event will be recorded on a source document (by the sales clerk in
Figure 3.1). For example, if you think of one of the small businesses you might
frequent, such as a used books and CDs shop, they often will have you bring the
books and CDs you wish to purchase to a clerk at the front of the store. The clerk
will then write a description of the items purchased on a sales slip (prepared in du-
plicate) and total the sale. The clerk will return one copy to you (often a white
copy) and stuff the other copy (generally a yellow or pink copy) into the cash reg-
ister drawer.
• Record business event data. A batch of source documents will be transferred (taken
out of the cash register and sent) to a data entry operator who will take the in-
formation from the source documents and enter the data in a computerized for-
mat. The business event data are usually entered using an offline device (i.e.,
one, such as the PC in Figure 3.1, that is not directly connected to a central com-
puter or network). The resulting computerized format becomes the sales event
data store. In our used books and CDs store, the owner-manager or the employee
closing up at the end of the day may take responsibility for keying all the sales
slips into a personal computer for storage on a disk. The PC becomes simply a
data entry device for keying in the sales data. Upon completing the entry, the
copies of the sales receipts will be clipped together and stored in a file cabinet for
possible future reference.
• Update master data. After all the data have been entered into the system, the sales
event data store is brought to the computer (using a disk or CD) to be processed,
and any calculations and summarizations completed (represented by the central
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computer symbol in Figure 3.1). This information is used to update the master
data. In the sales example, this might include taking prior inventory totals and sub-
tracting out the items sold to derive the new inventory levels. The new inventory
levels are accordingly written to an updated master data store. The sales event data
also would be stored in a more permanent data store, such as the sales data store.
It would not be uncommon for the owner-manager of our used books and CDs
store to either take the data stores home and process them on a computer at home
or, perhaps even more likely, to take the information to a public accountant for
processing.
• Generate outputs. After all the calculations have been completed and the data up-
dated, the system will periodically generate the applicable reports (the report gen-
erator program in Figure 3.1). For our used books and CDs store, this might in-
clude such documents as a sales report and an inventory update report. For our
small store, both reports would probably go to the owner-manager.
Note that between each step is a time delay before the next step occurs. We might
think of this form of automated system as a pure periodic system in that the entire
process uses a periodic mode for processing. For instance, in our used books and CDs
store, the day’s sales documents are collected before being passed on for keying. After
keying, the sales data are held until the data can be transferred to the location and per-
son where the data can be used to update the master data. After the data are updated
each day, the reports still may not be generated until later—perhaps on a weekly or
monthly basis.
A disadvantage of periodic mode systems is that the only time the master data are up
to date is right after the processing has been completed. As soon as the next business
event occurs, the master data are no longer up to date. As a result, little reason exists to
provide a query capability (as discussed in Chapters 5 and 6) for data that are used in a
periodic mode system. Usually, systems users will simply get a copy of the reports gener-
ated at the end of a processing run and use this information to make their decisions until
the next processing run and a new set of reports is available. Only in rare situations will
a query capability be provided, and then only to eliminate the needless printing of re-
ports for occasional users of the information generated by the system.
Online Transaction Entry (OLTE)

Information technology improvements in recent years have provided a low-cost means
for improving the efficiency of these traditional automated equivalents to manual ac-
counting systems. The most prevalent change has been the increasing use of online
transaction entry to reduce redundancies in pure periodic mode processing (see Figure
3.2, page 76). In an online transaction entry (OLTE) system, use of data entry de-
vices allows business event data to be entered directly into the information system at the
time and place that the business event occurs. These systems merge the traditional sub-
processes of business event occurs (which includes completion of the source document)
and record business event data into a single operation. At the point of the business event,
a computer input device is used to enter the event data into the data entry system rather
than onto a source document. Generally, prices are automatically generated by the sys-
tem as the computer retrieves the data from the system data stores. Such a system is con-
sidered online because the data entry device is connected to the computer. The input
system usually also will serve as a printer that will then print document copies to serve
the still-needed role of source documents. As business events occur, they are usually ac-
cumulated either on magnetic tape or on disk.
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Figure 3.2 Online Transaction Entry (Batch Processing Environment)
Central Old inventory

computer master
Customer Sales event

data
Sales data New inventory
master
Outputs for
Register-generated management
sales receipt
(2 copies) Price list
Local system
Terminal register
If we go back to our used books and CDs store scenario, it may be that you prefer to
buy your books and CDs at one of the chain stores such as those found in shopping
malls. When you take your books and CDs to the clerk at the counter in these types of
stores, the clerk generally keys the purchase straight into the cash register. As noted in
Figure 3.2, what is occurring at this point is that the sales items are being entered into
a terminal that is creating (recording) a log of the sales event (the sales event data store),
retrieving price list information, and generating duplicate copies of the sales receipt. One
copy of the sales receipt is given to you (the customer) and the other is placed in the
cash register drawer (for filing in the audit file). Note the differences between Figures
3.1 (page 74) and 3.2. The manual recording process (in Figure 3.1) by the sales clerk
becomes a terminal entry process (in Figure 3.2), and the record input (i.e., data entry)
process in Figure 3.1 becomes part of process sales in Figure 3.2. Other than these
changes, the two processes are the same.
The use of OLTE eliminates the need to have one person enter business event data
on a source document and then have a second person perform the data entry to convert
the business event data to a computer-ready form. In an OLTE system, one person per-
forms both operations. In many contemporary systems, this data entry will be com-
pleted using bar code readers, scanners, (see Chapter 10), or RFID (Radio-Frequency
Identification) readers (see Chapter 12). The use of such technologies eliminates the
human error that can result from entering the data manually. Thus, in many OLTE sys-
tems the only human impact on the accuracy of the input data is the necessity to prop-
erly scan items into the system. Various control procedures that are used to ensure data
accuracy are discussed in detail in Chapter 9.
It should be noted that the processing of the data in Figure 3.2 is still completed on
a batch of event data at a later point in time. In the case of many sophisticated systems
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in use by businesses today, sales event data are aggregated by cash register terminals for
the entire day; after the store has closed, the data is electronically transferred over phone
lines to the computer system where the business event data are processed. This is re-
flected in Figure 3.2 by the communications line connecting the sales event data in the
local system to the central computer. The processing is typically completed overnight
while all stores in a region are closed, and updated reports are periodically generated to
reflect the sales event updates to the master data.
Note that the use of electronic communication technology does not change the tra-
ditional periodic approach, but rather makes the approach more efficient. Hence, we en-
counter one of the first steps in the evolution toward advanced-level e-Business systems.
Periodic mode systems traditionally have been the most common method for complet-
ing business event data processing. Nonetheless, with accounting information systems
being transferred almost exclusively to computerized systems, and given the rapid im-
provements in information technologies, periodic mode systems are becoming less com-
mon for most activities. However, for some applications periodic mode processing is the
preferred approach. For instance, payroll systems are a natural match with the batching
of business event data, since all employees are generally paid on a periodic basis and at
the same time. It is unrealistic to think that such an application will eventually be
processed using systems other than periodic mode.
Online Real-Time (OLRT) Processing

Among the many clichés that one hears in today’s rather harried business environment
is the phrase “time is money.” While the cliché tends to be somewhat worn out, it is de-
scriptive of the current demands on information systems. Traditional periodic mode sys-
tems that provide information primarily through periodic reports that are hours, days,
or weeks out of date can put an organization’s decision makers at a disadvantage if its
competitors are using up-to-date information to make the same decisions (e.g., recall
the importance placed on timeliness and relevance in Chapter 1). The pressures for
timely information flows coupled with significant advances in available information tech-
nologies have led to a rapid migration toward online real-time systems. Online real-time
(OLRT) systems gather business event data at the time of occurrence, update the mas-
ter data essentially instantaneously, and provide the results arising from the business
event within a very short amount of time—that is, in real-time. OLRT systems complete
all stages of business event data processing in immediate mode. Immediate mode is the
data processing mode in which little or no delay occurs between any two data process-
ing steps (as opposed to periodic mode where a significant delay occurs between two or
more data processing steps).
OLRT systems typically require three basic subprocesses to be completed before an
event is converted into information that can be used by decision makers. Follow along
with Figure 3.3 (page 78) as we discuss each of these subprocesses.
• Business event occurrence and recording of event data. At the time of the business
event, the related data are entered directly into the system. Source documents are
almost never used, as they significantly slow the process and remove some of the
advantages of nonredundant data entry. Notice that the data entry process where
the sale is entered into the system is the same as in Figure 3.2 (other than the ab-
sence of the filed copy of the sales receipt). This is consistent with the use of on-
line transaction entry (OLTE) for OLRT systems.
• Update master data. Each business event that has been entered into the system is
processed individually and any calculations and summarizations completed. This
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Figure 3.3 Online Real-Time Processing
Sales manager
Sales data
Customer
Price list
Sales receipt
Inventory master
Central computer
Sales event data

Inventory manager
Terminal register
information is then used to update the master data. Note in Figure 3.3 that the
processing is now being done on-site where the sales event data are entered.7 Be-
cause each business event is processed independently and immediately, the master
data at any given point in time will be within minutes or seconds of being up to
date. When your books and CDs store is entering your information into the ter-
minal, it may actually be using an OLRT system if it is important to the store to
know whether a given book or CD title is in stock at a given point in time—per-
haps to answer a customer’s question.
• Generate reports and support queries. It is neither practical nor desirable that re-
ports be generated after each business event is recorded and master data have been
updated. Typically, applicable reports will still be generated by the system on a pe-
riodic basis. At the same time, however, these reports will usually be instanta-
neously available through access of the system on an as-needed basis, as demon-
strated in Figure 3.3 with the communications links to the sales and inventory
managers. One of the main advantages provided by many OLRT systems is an abil-
ity to check the current status of master data items at any given point in time. In
the books and CDs store, it would allow the sales staff to quickly check whether a
given book or CD is in stock. In many cases, rather than using pre-specified re-
ports that may not necessarily provide the information that decision makers need,
these information systems users will use a query language (as discussed in Chap-
7
This is one method of accomplishing OLRT that uses expensive, continuous direct communications to a re-
motely located central computer. Many organizations use a distributed processing mode that places the com-
puter locally to avoid the costs associated with the continuous communications line; however, as in the case
shown here, the need to centrally process information for multiple locations may warrant the communications
line costs of continuous direct communication.
ch03-g05 5/24/04 7:57 PM Page 79
ters 5 and 6) to dynamically create unique reports that provide the one-time in-
formation they need to make key decisions. For instance, the store manager may
want to run a report on the inventory stock for the top-10 selling CDs and books.
While another cliché says that “you cannot buy time,” OLRT systems allow users to
nearly eliminate the delay in accessing up-to-date information. However, the primary
disadvantage of real-time systems is clearly the cost. To efficiently operate an OLRT sys-
tem, it is imperative that the point of the business event be linked directly with the com-
puter system—that is, online. Accordingly, to operate an OLRT system, online transac-
tion entry (OLTE) methods must also be used.
It was noted previously that OLTE systems are increasingly being used with systems
that primarily use the periodic mode. While the data entry performed in all OLTE sys-
tems is essentially the same, the mode of processing may vary. While a pure periodic
mode system still processes business event data in batches, an OLRT system using OLTE
will process each recorded business event in real time. In a real-time system, business
event data cannot be aggregated on a local computer to be transferred later to the data
processing center. Rather, each business event must be communicated for processing at
the time the event occurs. This results in a more expensive approach to OLTE. In
essence, rather than creating a temporary electronic communications connection to
download the data to the central computer, an OLRT system generally requires a con-
tinuous electronic communication connection that will usually necessitate the use of
some form of network. This will be addressed later in this chapter.
It should be noted here that automated systems that model manual systems and
OLRT systems are the two extremes in business event data processing. The systems that
mimic manual systems are what we might term pure periodic mode systems in that a delay
occurs between every step of the processing. On the other hand, OLRT systems repre-
sent pure immediate mode systems in that little or no delay occurs between any steps in
the processing. We note these as the extremes because many systems lie somewhere be-
tween these two extremes, exhibiting a mix of periodic and immediate mode processes at
various stages. For example, OLTE used with batch processing results in an immediate
mode approach for combining the business event occurrence and record event data steps,
while periodic mode processing might be used for the remainder of the steps.
Online Transaction Processing (OLTP)

In an effort to reduce both the expense and time delay resulting from the need to com-
municate business event data over what are sometimes great distances to complete busi-
ness event data processing in real time, many entities are turning to online transaction
processing (OLTP) systems. An OLTP system is a real-time system that performs all or
part of the processing activities at the data entry terminal location. These systems use
business event data processing terminals that have the capability to manage data, run ap-
plications, and control communications with the central processing computer and data
stores. Hence, by performing most of the processing at the terminal location, the delays
caused from electronic communications between the terminal and the central computer
are reduced or eliminated (see Figure 3.4) as is the cost associated with communicating
to the central processing location during the processing of the business event. Only the
results need be communicated. The most common applications for these systems to date
have been automatic teller machines (ATMs) and computerized reservation systems.
Note in Figure 3.4 that the electronic communication network in an OLTP system be-
comes even more complex as processing occurs at the terminal end, but then data must
be updated at all terminals. For instance, in the case of an ATM, once an individual has
ch03-g05 5/24/04 7:57 PM Page 80
Figure 3.4 Alternative Approaches to Real-Time Processing
Central
transaction
processing
Data-
base
(a) Traditional real-time processing system
Transaction Transaction
processing processing
Central
Data- processing Data-
base base
Data-
base
(b) Online transaction processing system
withdrawn money from his or her account, the system needs to update the balance at all
ATMs before additional withdrawals may be made.
CONTROLS It should be noted that most banks have converted to OLTP technology, with only a
few not yet using this advanced processing method. Microprocessor technology only re-
cently has become powerful enough to make this approach feasible for banks. You should
also note that in an OLTP system, the immediate updating of balances at the central pro-
cessing unit and the terminal locations is done with shadow data (e.g., copies of the mas-
ter data used for real-time processing) that are duplicated at each site, but for control
purposes the actual master data are usually updated once a day using batch processing.
While immediate mode-dominated systems are becoming the most prevalent method
for new business event data processing applications, they are not necessarily the end-all
solution for all applications. Both periodic mode and immediate mode approaches have
distinctive characteristics that make each a preferable option for certain types of applica-
tions. While primarily periodic mode systems, as noted earlier, are preferable for most
payroll systems, you would certainly use an immediate mode system for maintaining
working balances for ATM event data. If periodic processing was used, a person might
withdraw the entire balance out of his or her account multiple times before the system
ch03-g05 5/24/04 7:57 PM Page 81
processed the event data and updated the accounts—a significant losing proposition for
a bank. Clearly, any given application should be matched with the best or most applica-
ble processing method.
Each of the described processing methods requires data communications pathways
among PCs, terminals, and/or other systems. Technology Summary 3.1 describes the
interconnectivity of such systems.
T e c h n o l o g y S u m m a r y 3 . 1
Communication Networks
The key component for electronic communica- of computer networks worldwide that enables
tion systems is the network that provides the communication between dissimilar technology
pathways for transfer of the electronic data. platforms. The Internet is the network that con-
Communication networks range from those de- nects all the WANs to which organizations
signed to link a few computers together to the choose to allow access. With the expansion of
Internet, where the goal can almost be perceived the Internet also has come increased accessibil-
as linking all computers in the world together. ity to public databases that provide rich infor-
Within organizations, a major focus of net- mation sources, searchable on a for-fee basis
work computing has been on client server tech- (see Technology Summary 3.2, page 83).
nology. Client server technology is the physical Web browsers are software programs de-
and logical division between user-oriented ap- signed specifically to allow users to easily
plication programs that are run at the client browse various documents and data sources
level (i.e., user level) and the shared data that available on the Internet. The advent of this
must be available through the server (i.e., a sep- easy-to-use software has rippled through or-
arate computer that handles centrally shared ganizations and caused a rethinking of how
activities—such as databases and printing companies can set up their own internal net-
queues—between multiple users). The enabling works to be more accessible to decision makers.
networks underlying client server technologies The result has been the growing development of
are local area networks (LANs) and wide area intranets, which are essentially mini-internal
networks (WANs). LANs are communication equivalents to the Internet that link an organi-
networks that link several different local user zation’s internal documents and databases into
machines with printers, databases, and other a system that is accessible through Web
shared devices. WANs are communication net- browsers or, increasingly, through internally de-
works that link distributed users and local net- veloped software designed to maximize the ben-
works into an integrated communications net- efits from utilization of organizational informa-
work. Such systems have traditionally been the tion resources.
backbone of enterprise systems technology, but By combining the benefits of the Internet
recent advances in communications technology and intranets, many organizations have begun
are rapidly changing the underlying infrastruc- to allow customers, vendors, and other mem-
ture models. bers of their value system access to the com-
These emerging network technologies are pany’s intranet. This type of intranet, which has
driving the future of e-Business. These tech- been extended to limited external access, is re-
nologies allow for more simplified user interac- ferred to as an extranet.
tion with networks and empower users to ac- The by-product of the expansion in in-
cess broad arrays of data for supplementing tranets, extranets, and the Internet is a rich
management decision making as well as open- medium for e-Business. These networks provide
ing new avenues for direct commerce linkages. the foundation for what likely will be exponen-
The leading technology in this arena is the Inter- tial growth in e-Business—both at the resale
net. The Internet is a massive interconnection level and in supplier-buyer relationships.
ch03-g05 5/24/04 7:57 PM Page 82
METHODS FOR CONDUCTING E-BUSINESS

To this point the discussion has focused on the modes of business event data processing
and related communication technologies that underlie the ability of organizations to
enter into e-Business. In this segment of the chapter, we redirect the discussion to spe-
cific methods for conducting e-Business and how these methods utilize alternative modes
of business event data processing and available electronic communication technologies.
The four methods of e-Business that we will discuss are fairly diverse. First, we pro-
vide an overview of the role of electronic mail (e-mail) in e-Business—a lesser-used, but
more directed approach. Second, we discuss electronic document management (EDM).
Many would not include EDM as part of e-Business since the majority of such applica-
tions support non-e-Business events. We chose to include it in this section because of
the integral role it has in supporting the last two stages. Electronic data interchange
(EDI) is the third area we discuss. It currently represents the predominant form of e-
Business. The fourth method is Internet commerce, which represents the fastest-growing
segment of e-Business. Concurrent with the development of Internet businesses that sell
physical products, new organizations have surfaced existing solely to provide data
through the Internet. Technology Summary 3.2 describes some businesses focused on
Internet commerce, providing information in the form of public databases.
Commerce Through E-Mail

Electronic mail (e-mail) is the electronic transmission of non-standardized messages
between two individuals who are linked via a communications network (usually an in-
tranet or the Internet). E-mail represents a weak form for e-Business because of the
non-standardized format by which messages are transmitted. Before exploring the use
of e-mail as a mode for e-Business, let’s briefly examine the limitations of using a non-
standardized format.
If you think back to our earlier discussions in this chapter related to various technolo-
gies that can be used to automate the data entry process, all the technologies relied on
a standardized format for the data (e.g., a bar code or a printed response such as amount
paid written on the transmittal document). This is almost the antithesis of e-mail. E-
mail tends to be a very free-form mode of expression and, for the most part, a fairly ca-
sual and informal mode of communication. This unstructured nature of the communi-
cation mode makes data capturing more difficult and generally requires human
translation and entry of the data. This increases the likelihood of error and requires
more stringent data control procedures to be in place. The e-mail essentially becomes a
source document for use in the business event data processing. Organizations using e-
mail as source documents also must have in place a mechanism to deal with unsolicited,
non-document mail (SPAM).
Despite the limitations, e-mail does have several characteristics that make it tolerable
for some e-Business events. From a sales standpoint, a targeted market can often be
identified by locating an appropriate e-mail list. Much like their mailing list counterparts
that are used for postal delivery, lists of e-mail addresses for individuals that are likely to
be interested in a given product can be useful. Generally, if the marketing medium is e-
mail, then the purchase request also will be transmitted in this manner.
As a means of getting around the unstructured nature of e-mail transmissions, mar-
keters will frequently provide an electronic order form that adds structure to the infor-
mation content of the message. However, even with the electronic order form, entry of
the data into the system generally requires some keying by data entry personnel. Thus,
ch03-g05 5/24/04 7:57 PM Page 83
Public Databases
A public database service can be called by and to assist in rendering management advisory
many names, including online database service, and computer consulting services. Other data-
electronic reference service, electronic retrieval service, bases can range in content from profiles of per-
and third-party electronic databases. Through your sons seeking the “love connection” (computer-
personal computer, you already may have expe- assisted dating arranged from your living room)
rienced working with such reference services to stock quotations, to business and economic
(e.g., CompuServe®, America Online®, or the news, to travel and leisure directories, to just
like). Common to most such services is that they about anything. Two factors that electronic ref-
allow subscribers, for a fee, to access and erence services have in common, however, are
search an external database, usually through that they are big business, and they are growing.
the Internet or a direct telephone line connec- One recently developed Internet-based serv-
tion. Fees typically include set-up charges, ice is EDGAR Online at http://www.edgar-
monthly subscription charges, and occasionally online.com. This subscription-based service
fees for actual online connect time. takes regulatory filings of public companies and
The difference among services generally lies puts them in a database for easy access. The
in the kinds of data stored in the available data- service provides users the ability to research the
base. For instance, much of the research for this financial statements, footnotes, and auditors’
book involved doing computer searches of peri- reports and other filings of publicly traded
odical literature databases using an online companies for each of several years. Imagine hav-
search service available through our college li- ing hard copies of all those annual reports at
brary. Public accounting firms commonly ac- your disposal. What a wealth of valuable infor-
cess electronic databases to obtain information mation! But where would you store it, and how
on client industries, corporate files, ratio analy- would you even begin to search it for the infor-
sis, tax laws and regulations, and authoritative mation you need? The database facilitates doc-
accounting pronouncements—through services ument retrieval by providing subscribers several
such as Total On-Line Tax and Accounting Li- tools to confine their searches to the specific
brary (TOTAL) or LEXIS/NEXIS and other mate- topics desired.
rials—to help manage their accounting practices
the general objectives of e-Business—to avoid the need for a salesperson to make the
contact and to avoid the business event recording activities during business event data
processing—are not achieved.
Electronic Document Management

Electronic document management (EDM) is the capturing, storage, management,
and control of electronic document images for the purpose of supporting management
decision making and facilitating business event data processing. The capturing and stor-
age of document images typically relies on the digital image processing approaches (see
Chapter 10). The added dimensions of management and control are critical to maintain-
ing the physical security of the documents while at the same time assuring timely distri-
bution to users requiring the information. Technology Application 3.1 (page 84) dis-
cusses some general uses of EDM.
In general, business applications of EDM fall into two categories:
1. Document storage and retrieval. For example, mortgages, deeds, and liens are
archived and made available to the public for such uses as title searches. Other
documents in this category include birth certificates, death certificates, marriage
ch03-g05 5/24/04 7:57 PM Page 84
T e c h n o l o g y A p p l i c a t i o n 3 . 1
General Uses of Electronic Document Management Systems

Case 1 paper checks in the check clearing and settle-
The need to organize client files for quick access ment process. The legislation is expected to
and processing leads many accounting firms to save the banking industry billions of dollars. Al-
adopt document management systems. One though the law calls for “electronic replacement
such system was developed by Integrated Com- documents” to be in use within a year, industry
puter Management (ICM). The Electronic Com- experts caution that it will take years for the
pliance File (ECF) created for Ernst & Young LLP clearance process to include the entire financial
lets thousands of tax professionals in 100 cities industry. One of the main issues that will deter-
manage their documents and images in one mine the success of the electronic processes is
structured folder. In addition to eliminating the the attitude of consumers. Consumers willing
loss of critical paper-based information, the to accept copies, rather than their original
folder provides secure, distributed, online ac- checks, will be one determining factor for the
cess, regardless of a staff member’s location. success of the implementation of the new
The program reduced shipping costs, cut pa- processes. The success of technology, such as
perwork, and increased overall efficiency. document processing, is heavily dependent on
the acceptance those receiving outputs.
Case 2
A new law, Check 21 was recently enacted to
allow banks to substitute electronic images for
Sources: “Microsoft Names Solution Provider Award Winners,” Microsoft press release, http://www.microsoft.com/presspass, May
5, 1997; Lucas Mearian, “Check 21 Becomes Law: Allows Speedier Electronic Settlements,” Computerworld Online (November 3,
2003).
licenses, banking-account signature cards, user manuals, price lists, and catalogs.
An EDM system stores the images (e.g., pdf files) of these items and displays or
prints a copy of them upon request. Document storage and retrieval also could be
implemented using micrographic-based image processing systems (i.e., microfilm).
2. Business event data processing. For example, loan and insurance applications must
pass through several stages, such as origination, underwriting, and closing. The
EDM system can manage the workflow and route the documents to the appropri-
ate people—even if these people are geographically dispersed. Electronic-based
image processing systems must be used for this type of application. An organiza-
tion’s communications networks also must be interconnected in a manner that fa-
cilitates access and transmission of document images.
EDM systems provide a relatively inexpensive alternative to paper documentation. Al-
though computer storage and processing requirements are much greater than for key-
entered documents, the ability to access and manipulate real images of business docu-
ments offers great opportunities for improving the efficiency and effectiveness of many
business applications and can create significant competitive advantages for an organiza-
tion. For instance, fast access to imaged documents often translates into faster and bet-
ter customer service and results in increased customer loyalty—themes we explore in
some depth in Chapter 10. The typical benefits include:
• Reduced cost of handling and storing paper.
• Improved staff productivity.
• Superior customer service.
ch03-g05 5/24/04 7:57 PM Page 85
• Enhanced management of operational workflow.

• Faster processing.
However, as with any technology, the applications selected for EDM should be cho-
sen wisely. Applications with a high chance of success might be those in which:
• A large amount of paper is produced and stored. We know of an organization that
adopted EDM because they had no more room to store paper within their exist-
ing office space. In fact, the engineers told them that the floor could not support
another file cabinet! Imaging systems also can produce economies in situations
where paper documents are not abandoned altogether, but are moved from stor-
age in expensive office locations to cheaper off-site warehouse storage.
• Data, such as signatures, must be scanned. For example, banks use image process- CONTROLS
ing for signature verification cards.
• Frequent access to the stored data from geographically dispersed locations is
needed. For example, clerks at every branch of a bank must be able to view signa-
ture verification cards.
• Processing of the stored data are extensive and complex and takes place from mul-
tiple locations, as in the case of loan and insurance applications that must be
processed, reviewed, and approved by many people.
EDM also is becoming an increasingly important component of electronic data inter-
change (EDI). In many cases, organizations are requiring document and image support
for EDI data. Most notable are manufacturing- and engineering-related event data
where specifications may need to be more clearly defined with computer-aided design/
computer-aided manufacturing drawings.
Electronic Data Interchange

Computer and communications technology have been successfully applied by organiza-
tions to improve accuracy and control and to eliminate paper within their information
systems applications. However, direct, paperless, business communication between or-
ganizations has been slowed by the lack of transmission and presentation standards.
What this often means is that an organization uses its computer technology to prepare
a purchase order (PO), for example, completely without paper and human interven-
tion—efficient, fast, and accurate process. But the PO must then be printed and mailed
to the vendor. Then, at the vendor, the PO must be sorted from other mail in the mail-
room, routed to the appropriate clerk, and entered in the vendor’s computer. The effi-
ciency, timeliness, and accuracy gained by the automated purchasing process at the orig-
inating organization are lost through the mailing and reentry of the data at the vendor.
One technology that has had a significant impact on streamlining data communica-
tion among organizations is that of electronic data interchange (EDI). Electronic data
interchange (EDI) is the computer-to-computer exchange of business data (i.e., docu-
ments) in structured formats that allow direct processing of those electronic documents
by the receiving computer system. Figure 3.5 (page 86) depicts the typical EDI compo-
nents. Follow along with us as we describe those components; the numbers in circles are
cross-references to corresponding locations in the narrative description.
Application Software (Circles 1 and 7)

An originating application prepares an electronic business document, such as a purchase
order (PO). At the destination organization, an application processes the business data.
For example, the originating application’s PO would be processed as a customer order
by the destination organization’s order entry/sales (OE/S) process.
ch03-g05 5/24/04 7:57 PM Page 86
Figure 3.5 Electronic Data Interchange Components
1 2 3
Application software Translation software Communications

network
Originating application – Translates electronic
(e.g., purchasing) document to EDI
prepares electronic transaction set format, Routes EDI message
document (e.g., PO) using a particular EDI (i.e., "envelope") to
standard VAN "mailbox"
– Creates an EDI
envelope, comprising
headers/trailers and
transaction set
– Performs administrative,
audit, and control
functions
Originating
party's VAN
4
mailbox
Value-added network (VAN) service
– Logs the message

– Translates message to required
communication standard (if necessary)
– Translates message to required EDI
standard (if necessary)
– Encrypts and authenticates message
(if necessary)
– Checks for message integrity (e.g.,
completeness and authorization)
– Routes to appropriate mailbox
Destination
party's VAN
mailbox
5 6 7
Communications Translation software Application software

network
– Translates electronic Destination application
messages from a (e.g., order entry)
Picks up EDI messages particular EDI standard processes incoming
from VAN "mailbox" – Performs administrative, document (e.g.,
audit, and control customer order)
functions
Translation Software (Circles 2 and 6)

An application’s electronic business document must be translated to the structured EDI
format that will be recognized by the receiving computer. Presently, two major, nonpro-
prietary, public translation standards exist:
1. In the United States and Canada, the American National Standards Institute
(ANSI) X12 standard has been used.
ch03-g05 5/24/04 7:57 PM Page 87
2. EDIFACT (EDI for Administration, Commerce, and Transport) is the predomi-

nant standard for international EDI transactions. Actively promoted by the United
Nations for member nations, this standard includes some aspects of ANSI X12 and
permits global communication between trading partners.
In addition, several standards are specific to particular industries, such as the Auto-
motive Industry Action Group (AIAG), Transportation Data Coordinating Committee
(TDCC), and Chemical Industry Data eXchange (CIDX). Some of these industry stan-
dards are compatible with the public, interindustry standards (e.g., ANSI X12); some
are not compatible.
Translation standards include formats and codes for each transmission type, called a
transaction set, as well as standards for combining several transaction sets for transmission.
For example, under the ANSI X12 standard, a purchase order (PO) is a transaction set
“850,” a shipping notice is a transaction set “856,” an invoice is a transaction set
“810,”and so forth. The ANSI data dictionary for transaction set 850 defines the length,
type, and acceptable coding for each data element in an EDI purchase order. For exam-
ple, ANSI X12 describes the format and location within the message of the customer
name and address, the part numbers and quantities ordered, the unit of measure of the
items ordered (e.g., each, dozen, ton), and so on. Figure 3.6 (page 88) depicts the trans-
lation process. The figure shows a sample PO as it might appear as a conventional paper
document and then illustrates how the PO is transformed into EDI transaction set 850.
Besides purchase orders, other typical EDI transaction sets include (the ANSI X12
transaction set number appears in parentheses):
• Purchase order acknowledgment (855).
• Advance shipping notice (ASN) (856). From supplier to customer, advising that
the goods are on the way.
• Receiving advice (861). From customer to supplier to report late, incomplete, or
incorrect shipments.
• Invoice (810).
• Payment order/remittance advice (820). From customer to supplier for payment.
• Functional acknowledgment (FA) (997). A message is sent from receiver to sender
to acknowledge receipt of each and every one of the previous transaction sets. For
instance, when the seller receives a purchase order (850) from the buyer, the seller
sends back an FA (997) to indicate the message was received. Then, when the
buyer receives a purchase order acknowledgment (855), the buyer acknowledges
that the message was received by sending the seller an FA (997).
Translation software translates outgoing messages so that they are in the standard mes-
sage format (e.g., ANSI X12) and translates the incoming messages from the standard
message format into the form understood by the application system. This intermediate
translation to/from the EDI format precludes the need for an organization to reprogram
its application so that it can communicate with each trading partner’s application.
The translation software also performs administrative, audit, and control functions. CONTROLS
For example, the software inserts identification and control information in front of
(header) and after (trailer):
• Each transaction set, such as one purchase order.
• Each functional group (e.g., a group of purchase orders, a group of receiving ad-
vices, and so forth) so that several groups may be sent in one transmission.
• All components comprising one transmission.
ch03-g05
88
Figure 3.6 Electronic Data Interchange Transaction Set
5/24/04
PURCHASE 850 Purchase Order Transaction Set Explanation

ORDER EDI
DOCUMENT TRANSACTION Heading Area
PART 1
SET
7:57 PM
ST*850*73561 N/L Start transaction set (ST), identify purchase order

(850), and provide sender-assigned control number
(73561)
BEG*00*SA*BL2-1563 Begin (BEG) transaction set for a new (00) stand-

***950901 N/L alone (SA) PO, number (BL2-1563) of
Page 88
September 1, 2007 (950901)

Purchase Order
To: Compu Supply 82645 Date: 09/01/07
N1*SE*Compu Supply**82645 N/L Identify (N1) the seller (SE), Compu Supply, vendor
986 Silicon Drive Order No.: BL2-1563
number (82645)
Napa Valley, CA 97624
N1*BY*Delta Fabricating**29327 N/L Identify (N1) the buyer (BY), Delta Fabricating,
From: Delta Fabricating 29327 whose customer number to Compu Supply is (29327)
2901 Second Ave.
Van Nuys, CA 95862 ITD*01*03*2**10*N30 N/L Specify terms of sale (ITD): basic sale (01), 2% (2)
discount if paid within 10 days (10) of invoice date
Freight Terms Ship Date Due Date (03), net invoice due in 30 days (N30)
Prepaid 2/10; n/30 09/04/07 09/07/07
SHH*SD*010*950904 N/L Specify (SHH) ship date (SD) requested (010) of
Line Your Our Item Unit Unit September 4, 2007 (950904)
No. Item Item Description Price Quantity of
No. No. Meas. SHH*DD*002*950907 N/L Specify (SHH) delivery date (DD) requested (002) of
September 7, 2007 (950907)
Understanding Information Systems
1 86240 A235 4-meg DRAM 29.60 140 CA

50 mhz FOB*PP N/L FOB information (FOB): freight prepaid (PP)
2 15965 1936 486 CPU 269.95 25 EA Detail Area
32 bit
PO1*01*140*CA*29.6*QT*IN*A235* Order line item data (PO1): line no. (01), 140 (140)
*VN*86240 N/L cases (CA) ordered, quoted (QT) unit selling price
of $29.60 (29.6), with buyer's ID (IN) number of
(A235) and seller's ID (VN) of (86240)
PO1*02*25*EA*269.95*QT*IN*1936* Order line item data (PO1): line no. (02), 25 (25)
*VN*15965 N/L units (each) (EA) ordered, quoted (QT) unit price of
$269.95 (269.95), with buyer's ID (IN) number
(1936) and seller's ID (VN) of (15965)
Summary Area
CTT*2*165 N/L Control totals (CTT): number of PO lines (2) and
total of the number of units ordered (140 + 25) = (165)
SE*12*73561 N/L End the transaction set (SE), give the number of
segments included (12) and the control number
from the header (73561)
NOTES: The asterisk (*) character designates a field separator. Consecutive field separators (***)
signify omitted data. N/L denotes a new line (e.g., a carriage return).
Source: Adapted with permission from A. Faye Borthick and Harold P. Roth, “EDI for Reengineering Business Processes,” Management Accounting (October 1993): 35–36.
ch03-g05 5/24/04 7:57 PM Page 89
In EDI lingo, the data sets and the headers/trailers are called “envelopes.” In addi-
tion to assembling and disassembling the EDI envelopes, the translation software may
log incoming and outgoing messages and route the messages from and to the proper
application.
Communications Network (Circles 3 and 5)

The two trading partners must have a method of communicating the electronic mes-
sages to each other. One procedure is for the originating organization to put its mes-
sages on a computer disk or CD and deliver the disk/CD to the receiving organization.
But this approach offsets some of the time and cost benefits that an organization can ac-
crue by adopting EDI.
A second method is to establish a direct computer-to-computer link between the
origination computer and one or more destination computers. This interface is accom-
plished through a leased or dedicated communication line with each trading partner, or
through a communications network in which one of the partners—let’s say a large man-
ufacturer—serves as the “hub” of the network, and its suppliers and other trading part-
ners are the network “spokes.” The modem and communications software in your PC
exemplifies such a communications system. However, communications system incom-
patibilities may require that one partner or the other purchase communications hard-
ware or software, making this a costly option. Further, agreeing on such details as what
time of day to send and receive data from trading partners makes this option difficult to
manage.
To overcome some of the shortcomings of these direct connections, organizations
may use either EDI service bureaus or the Internet. The EDI service bureau is an organ-
ization that acts as an intermediary between a large hub company and its suppliers. The
EDI service bureau generally works with smaller suppliers that are reluctant to acquire
in-house translation and communications software. In such a case, the translation soft-
ware and communications software reside on the service bureau’s computer system. For
a fee, the service bureau takes EDI messages from the hub, translates the messages into
formats that are usable by the suppliers’ computer applications, and forwards them to
the suppliers. In the other direction, the bureau translates suppliers’ paper documents—
such as shipping notices or invoices—into EDI format and sends the electronic docu-
ments to the hub. The Internet provides organizations with a modern network infra-
structure to accomplish direct communications and has increasingly become the
communication method of choice for EDI transmissions. (We discuss Internet connec-
tions later in this chapter.)
Value-Added Network (VAN) Service (Circle 4)

Rather than connecting to each trading partner, an organization can connect to a value-
added network (VAN) service. A VAN service acts as the EDI “postman.” An organi-
zation can connect to the VAN when it wants, leave its outgoing messages and, at the
same time, pick up incoming messages from its “mailbox.” A VAN is a packet-switched
network service that provides communications capabilities for organizations not wishing
to obtain their own packet-switched or dedicated communications links.
As shown in Figure 3.5 (page 86), one of the several functions that the VAN will
perform is to translate the message from one communications protocol to another, if
necessary. Presently, two protocols are used for much of the EDI traffic: the ITU
Telecommunication Standardization Sector (formerly the Consultative Committee for
International Telegraph and Telephone, or CCITT) X.400 and the X25 protocols.
X.400 is generally the preferred method as it can accommodate multiple message
ch03-g05 5/24/04 7:57 PM Page 90
formats in a single transmission. For example, an EDI document and an e-mail mes-
sage or an electronic document image could all be sent in the same “envelope.”
Technology Summary 3.3 presents some management, operational, and control is-
sues associated with EDI, and Technology Application 3.2 (page 92) describes some
general uses of EDI.
EDI Management, Operational, and Control Considerations
Benefits of EDI include the following: • Mailroom and other document prepa-
ration and handling costs are elimi-
• Many organizations have survived by
being “forced” to implement EDI if they
nated. For example, in the automobile
industry, it is estimated that $200 of the
wished to continue doing business with cost of each car is incurred because of
certain customers. For instance, Wal- the amount of paper shuffling that has
Mart Stores and Kmart Corporation to be done.
have told all their suppliers to establish
EDI capability by a specified deadline if
• By providing timely and accurate data,
forecasting and analysis and cash flow
they wished to continue doing business are improved, and the occurrence of
with these retail giants. stock-outs is reduced.
• Responsiveness to customers’ needs
has improved. In many cases, trading
• In the course of implementing EDI, an
organization has the chance to rethink
partners have discovered that the co- and redesign existing processes and
operation engendered by EDI has re- controls.
duced conflicts between them, im-
proved communication, and fostered Costs of EDI include:
trust. In some cases, EDI has led to
what are known as “quick response” re- • Modifying trading relationships and ne-
gotiating contracts.
plenishment systems. In such systems,
a large customer—Sears Roebuck, for • Buying
ware.
or leasing hardware and soft-
instance—gives its suppliers access
(through EDI communication links) to • Establishing relationships with VANs
and negotiating contracts.
real-time, point of sale (POS) information
about what is and is not selling at its • Training employees.
various retail outlets. With that infor- • Reengineering affected applications.
mation available, the suppliers can • Implementing security, audit, and con-
trol procedures.
forecast customer demand more accu-
rately, fine-tune their production Control considerations:
schedules accordingly, and meet that
demand in a highly responsive manner.
This is discussed further in Chapter 12.
• Since signatures will no longer evidence
authorizations, controls must ensure
• By not reentering data at the receiving
organization, processing costs are re-
proper authorization. And, at some
point during the process, we must au-
duced and accuracy is improved. To thenticate that the message is sent to—
better appreciate the potential impact and received from—the party intended
of this benefit, consider the fact that, and is authorized by someone having
according to one estimate, 70 percent the proper authority.
of the data processed by a typical com-
pany’s mainframe computer had been
• Without external, visual review, some
business event data can be significantly
output by another computer system. in error. For example, a payment could
ch03-g05 5/24/04 7:57 PM Page 91
be off by one decimal point! Therefore, line count and a hash total of the num-
controls must prevent rather than detect ber of units ordered. The last line in-
such errors. cludes a control total of the number of
• Given that the computer will initiate
and authenticate messages, controls
segments comprising the transaction
set (12) and a control number (73561)
over the computer programs and that should agree with the correspon-
data—program change controls and physical ding number from the header on line
security (see Chapter 8)—become even one of the table. Functional acknowl-
more important than in non-EDI sys- edgments (FAs) also help to ensure the
tems. integrity of EDI messages (i.e., that
• If a VAN is used for communicating be-
tween partners, security procedures
data have not been lost or garbled in
transmission).
must prevent compromise of sensitive
data, and controls must ensure correct
• Expert systems (see Chapter 5) may be
used to determine that incoming mes-
translation and routing of messages. sages are reasonable—consistent with
normal message patterns—to authenti-
Therefore, controls must be in place to ensure cate the source and authorization for
that: the message.
• Access to EDI applications may require
• All transaction sets are received from
the trading partners.
a biometric security system, a smartcard, or
a physical key as well as a password (see
• All transaction sets are received by the Chapter 8).
trading partners. • Data encryption (see Chapter 9) may be
• All recorded business event data are
recorded once and only once.
employed to protect data during trans-
mission.
• Data are accurately received (sent). • Digital signatures (see Chapter 9) may be
• Data are
Data are accurately translated. used. Much like a password or other
• applicationaccurately passed through the
interface (EDI translator).
access code, the digital signature
uniquely identifies who approved a
• Business event data are received from
authorized senders.
business event and also helps to ensure
that the EDI message was not altered
• Senders are authorized to send the during transmission.
transaction type. • “Continuous auditing” may be imple-
• Messages are not intercepted or altered
during transmission.
mented through the use of integrated test
facilities (ITF) or imbedded audit modules.
• The log of business event data is pro-
tected.
An ITF creates dummy corporations or
branches in the system data and
• Unauthorized
from being sent.
messages are prevented processes test data for these dummy
entities at the same time that live data
are being processed for real entities. An
To attain these control goals, organizations imbedded audit module acts like an
have implemented the following control plans, audit “alarm” that is programmed to
among others: alert the auditor—by printing an audit
log—to suspect data (e.g., business
• Some control plans are inherent in the
very nature of the way that EDI is imple-
event data of an unusually high dollar
amount) or to unauthorized attempts
mented. As we noted, the EDI headers to access the system.
and trailers accompanying transaction
sets contain important control data. Finally, contracts between trading partners and
For example, the next to last line in Fig- with the VANs must specify responsibility for
ure 3.6 (page 88) contains an item/ controls and for erroneous transmissions. For
(continued)
ch03-g05 5/24/04 7:57 PM Page 92
example, who is responsible for authenticating tions are important in establishing the
the source and destination of messages? If a point at which an agreement, such as a
message is garbled by the VAN, who is respon- purchase, legally exists between trading
sible for any resulting financial loss—the sender, partners. Resolving such questions also
the receiver, or the VAN? Contracts might ad- is critical in situations where the mes-
dress the following issues: sage is a bid with a time deadline.
• Who is responsible for data integrity,
• When is a message considered received: audit trails, security, and so on?
When it is sent, when it is transmitted,
when it gets to the mailbox, or when it
• What are the penalties for failing to
perform as required?
is picked up? The answers to such ques-
General Uses of Electronic Data Interchange

Case 1 Wal-Mart announced that it would move its
The cost of processing a purchase order can EDI purchases from VANs to the Internet. The
reach $150, due to manual processes and pa- use of the Internet for EDI is a sign of confi-
perwork. Saks Department Store Group pur- dence in the stability of the environment. The
chases over $900 million of product per year, use of the Internet is relatively free of transac-
from over 5,000 vendors. Such a volume of pur- tion cost, providing significant cost savings over
chases executed in a manual environment can the old VAN processes for Wal-Mart and its
lead to a costly and inefficient process. In addi- vendors. Until recently, to implement EDI over
tion to experiencing significant savings on pur- the Internet, software on each side of the trans-
chases, management is able to identify and action had to be provided from the same ven-
monitor purchasing and spending patterns dor. This lack of standardization meant that
across stores, regions, and nationally, uncover- frequently, companies had to purchase and
ing opportunities for additional savings or pur- support several different EDI software packages
chase consolidation. The system also facilitates to deal with multiple customers/vendors.
the procurement cycle, speeding up the process Today, using the Electronic Data Interchange
and reducing the risk of running out of items or Internet Integration Applicability Statement 2
requiring expensive, last-minute shipments. protocol (AS2) standard, interoperability of
EDI software is becoming a reality.
Case 2
Perhaps the biggest change in EDI in recent
years is being driven by the Internet. Recently,
Sources: IBM Case Studies, “Saks Incorporated,” http://www-5.ibm.com/services/uk/ondemand/saks.html (November 2003);

Robert Scheier, “Internet EDI Grows Up,” Computerworld (January 20, 2003).
EDI and Business Event Data Processing

If we consider the implications of EDI to business event data processing, one of the
main advantages is the significant reduction in need for interaction between purchasers
and salespeople, coupled with the standard implementation of online transaction entry
(OLTE). You should recall from our earlier discussion in this chapter that OLTE elim-
inates the redundancy between source document capture of business event data and sub-
sequent keying in of the source document. With EDI, both activities are eliminated for
ch03-g05 5/24/04 7:57 PM Page 93
the selling organization as OLTE activities are initiated and completed by the linking
purchaser. This eliminates any risk of erroneous data entry from within the selling or-
ganization. As we go forward, you should keep in mind that EDI may be completed
through traditional modes using dedicated communications lines, but EDI is increas-
ingly moving to the Internet as was demonstrated in Technology Application 3.2.
You should be careful, however, not to draw any assumptions as to the mode of busi-
ness event data processing. You will recall from our earlier discussion that OLTE can be
used with both periodic and immediate modes of processing. The same holds true for
the core business processing activities in an EDI environment. The business event data
are frequently processed using an online real-time system, but many organizations also
choose to do the bulk of the processing steps using periodic mode as well—particularly
with batching of business event data for more efficient processing. It is worth noting
also that particularly when batch processing is being used, the need may exist to use on-
line transaction processing (OLTP) approaches to handle order and payment confirma-
tion activities during acceptance of the externally generated OLTE transmission—in
other words, the customer may need an immediate confirmation that the order has been
accepted and that the business event will be completed by the vendor.
Let us offer one additional comment before we move on. When trading partners
communicate with each other electronically, they also discover that they have to com-
municate internally in new ways to achieve the full benefit of EDI. That is, EDI forces
an organization to assume that all information flows—both internally and externally—
are instantaneous. Accordingly, for many, EDI—along with other enabling technologies
such as electronic document management—has been the catalyst for change in a firm’s
basic business processes. In other words, EDI has been the forerunner to business process
reengineering (BPR) for those companies.
Internet Commerce
To date, EDI has clearly been the dominant domain in e-Business. In fact, a mere decade
or so ago, e-Business was basically EDI. The Internet is radically changing the nature of
e-Business to the point that in the not-too-distant future, the Internet will become the
dominant platform for not only e-Business, but EDI as well. Does this mean EDI is
dying? Well, not exactly. Many experts believe EDI is here to stay and currently EDI vol-
ume continues to grow at a rate of about 15 percent per year. Still, the Internet shows
far more potential growth—primarily from the potential seen in the emerging replace-
ment language for HTML on the Web, XML (eXtensible Markup Language).8
Internet commerce is the computer-to-computer exchange of business event data in
structured or semi-structured formats via Internet communication that allows the initi-
ation and consummation of business events. In many cases, the goods or services that
are contracted for through the Internet are immediately (or soon thereafter) forwarded
back to the consumer via the Internet as well (i.e., when the goods or services can be
provided in electronic format, such as the case with software and music). Internet com-
merce radically simplifies e-Business by allowing the organization that is receiving and
processing business event data to project template formats across the Internet to busi-
ness partners for easy data entry and data transmission. For instance, if you connect
across the Internet with Lands’ End (a direct merchandiser of clothing) it has what it
refers to as the “catalog quick order” form. With this form, you are provided an entry
8
Carol Sliwa, “Firms Wait on XML, Increase Use of EDI,” Computerworld Online (May 1, 2000).
ch03-g05 5/24/04 7:57 PM Page 94
box to key the product number for the item you want to order. The Web page automat-
ically takes the number and identifies what additional information is needed (e.g., for
most clothing, it will be size, color, and quantity). The additional information is pre-
sented in menu form for you to select from the options that are available (e.g., for color,
the menu might show red, navy, black, white, and green). As you enter the responses on
your computer, the data are automatically captured and recorded on the Lands’ End
computer. Technology Summary 3.4 provides some management, operational, and con-
trol issues associated with Internet commerce, while Technology Application 3.3 (page
96) provides some examples of ventures into Internet commerce.
Two primary categories of e-Business exist over the Web: (1) business to consumer,
or B2C (e.g., Lands’ End), and (2) business to business (B2B). Internet commerce has
traditionally referred to the first category, business to consumer linkage although re-
cently more B2B commerce is taking place over the Internet. Figure 3.7 (page 97) de-
picts a typical secure Internet commerce arrangement. Follow along with us as we de-
scribe the components in the commerce relationship. Note that the numbers in the
circles are cross-references to corresponding locations in the narrative description.
Client-Server Relationship (Circles 1 and 7)

The connection created between the customer and the vendor is an extended form of
client-server applications. The customer (circle 1) is the client node—dictating that dur-
ing connection, the customer computer environment should be secure and essentially
nonaccessible via the network. The vendor (circle 7) is the server node and therefore
must have the capability to receive the customer’s transmission and translate that trans-
mission into processable data for use in the vendor’s application programs. This transla-
tion is made through common gateway interface (CGI) software. The vendor, acting as
the server part of the relationship, then provides the necessary correspondence back to
the customer (client) in an understandable format (i.e., Internet-based language). To
use the Lands’ End example again, this means that when you place your order, your
computer should be nonaccessible (i.e., secure) over the Internet, and the type of com-
puter and software you are using will be unknown on the system. The Lands’ End com-
puter will receive your order and use CGI to translate your message into a form its pro-
gram can understand and process. Similar to EDI environments, once the business event
data have been collected by the vendor, the applications can be completed through any
of the modes of business event data processing. For instance, Lands’ End uses a perpet-
ual mode approach to process sales events immediately upon receipt.9
Network Providers (Circles 2 and 5)

Much like the examples discussed with EDI, to participate in Internet commerce both
parties to the business event must have the capability to communicate. For Internet com-
merce, this means being connected to the Internet. For many companies and organiza-
tions (as well as some individuals), this access will be obtained through a direct connec-
tion between the entity’s computer networks (or a single server) and the Internet. For
other companies and organizations, as well as the vast majority of individuals, it will be
more desirable to gain access through a network provider.
Network providers are companies that provide a link to the Internet by making their
directly connected networks available for access by fee-paying customers. From the cus-
tomer side, this connection is made in Figure 3.7 by using a modem to dial in over
9
Lands’ End, “Security on the Lands’ End Web Site,” http://www.landsend.com, November 2003.
ch03-g05 5/24/04 7:57 PM Page 95
Internet Commerce Management and Operations Considerations
Benefits of Internet commerce include the fol- Costs of Internet commerce include:
lowing:
• Organizational change to a completely
• Many organizations have survived by different way of doing business.
being “forced” to implement Internet
commerce to compete in the changing
• Buying equipment and maintaining
connection to the Internet (or leasing
nature of their industry. If they wish to through a network provider).
remain competitive with other industry
companies that may be taking advan-
• Establishing connections with a new set
of customers.
tage of the cost savings accruing from
use of the Internet for commerce, they
• Staffing and training employees to
work in a technology-driven environ-
may need to venture to the Web. ment.
• Responsiveness to customers’ needs
has improved. Increasingly, customers
• Reengineering application systems to
process data acquired through the In-
are expecting immediate feedback and ternet.
easy availability of information and
help. The Internet can be a useful tool
• Maintaining security of the Internet
site.
for servicing customer and client
needs—forming the communications
Risks of Internet commerce include:
medium for distributing information
and support services.
• Many organizations have achieved • Hackers attempting to access sensitive
information such as customer lists or
global penetration. The Internet is gen-
customer credit card information.
erally the easiest and least expensive
way to reach global customers that an • Denial of service attacks. Denial of serv-
ice attacks are expected to escalate over
organization may never have been able
the next few years as individuals or or-
to reach before. The Internet commerce
ganizations attempt to knock out Web
marketplace is truly global.
sites by overloading them with site vis-
• By not reentering data at the organiza-
tion receiving the electronic transmis-
its and preventing customers or other
users from gaining access. These at-
sion, processing costs are reduced and
tacks may occur simply for the chal-
accuracy is improved. Customers now
lenge or frequently due to a political or
provide most of the data entry them-
other difference with the organization
selves, removing the need for the selling
that hosts the site.
organization to key most of the busi-
ness event data. • Trust. Increasingly, the success of B2B
Internet commerce relationships neces-
• Mailroom and other document prepa-
ration and handling costs are elimi-
sitate the identification of business
partners that are allowed to gain access
nated. The business event data process-
to sensitive internal information. Trust
ing side of a business can operate with
must be placed with these business
virtually no human intervention until it
partners, but certainly a breakdown of
is time to prepare and deliver goods.
that trust can have grave consequences
• In the course of implementing Internet
commerce, an organization has the op-
to the organization making its informa-
tion available.
portunity to rethink and redesign exist-
ing business processes and controls.
ch03-g05 5/24/04 7:57 PM Page 96
General Uses of Internet Commerce

Case 1 called Internet cottage industry whereby new
One type of business that is particularly com- businesses are springing up on the net to pro-
patible with Internet commerce is one where vide unique services.
the goods or services can be delivered across Case 2
the Internet instantaneously, much the same as Wal-Mart is one of many retailers setting up
the payment is provided by the customer. electronic store fronts on the Internet to sell its
TheStreet.com is one company that has imple- goods directly to customers. Wal-Mart takes
mented such a business plan. TheStreet.com is the customer’s order and credit card number
in the business of providing financial informa- over the Internet, electronically processes the
tion that is valuable, unique, and timely. The business event, and sends the order directly to
company philosophy is that if it fails in any of the manufacturer, who ships the product to the
these three attributes for the information it de- customer. Hence, the company’s Web site be-
livers, customers will stop coming. The only ap- comes little more than a for-fee electronic inter-
propriate medium for delivery was the Internet, face between the customer and the manufac-
and that is where the company set up shop. De- turer. In an effort to broaden the scope of
spite the many business publications on the products offered via the Web site, Wal-Mart
market, TheStreet.com has quickly risen as a shut down its site during the fall of 2000 to
leading provider of financial information by completely overhaul it. Wal-Mart re-opened the
being both cheaper and more timely. It is one of site on October 31, 2000, in hopes of enlarging
the few information providers that have been its share of online Christmas season sales.
able to provide subscription service solely
through the Internet. This is one form of the so-
Sources: Linda Rosencrance, “TheStreet.com Looks for Road to Profitability,” Computerworld Online (November 16, 2000); Todd R.
Weiss, “Walmart.com Site Back Online After 28-day Overhaul,” Computerworld Online (October 31, 2000).
phone lines and connect with the network provider’s network (examples of phone con-
nection providers include AOL, MSN, Earthlink, as well as many local phone compa-
nies). A variety of alternatives to phone line connections are available for linking with
network providers. While phone linkage is the most common contemporary approach,
access using high-speed phone connections (DSL) as well as service over cable television
lines is quickly overtaking traditional phone connections. Service is also available using
mini-satellite dishes (similar to those used for satellite television!), and cellular technolo-
gies are also eating into the phone-based market share. Some companies and other or-
ganizations are also using high-speed direct lines (referred to as “Trunk Level 1” or T1
lines) to maintain continuous access.
Most network providers bring a host of other benefits along with Internet access.
Common benefits include e-mail access, electronic mail boxes, space allocation for per-
sonal Web pages, and remote connection to other computer sites (e.g., telnet and FTP
connection). Many organizations also will use network providers to run their Internet
servers for them, thus hosting their Web presence. In Figure 3.7, circle 5 denotes a net-
work provider that is providing server management services for the CPA or CA firm de-
noted by circle 6. Hence, when the business event is being completed between the cus-
tomer and the vendor, information from the accounting firm would be acquired from a
server operated by the firm’s network provider.
ch03-g05 5/24/04 7:57 PM Page 97
Figure 3.7 Typical Electronic Communications Connection for Internet Commerce
1 2 4
Customer VeriSign
Network
Uses Web browser provider Providing Internet access WebTrust
to access vendor's Phone seal
Web page line
Internet
Public network-based
infrastructure
6 5 7
Network Vendor server

CPA or CA
provider • Application program
firm
Server • Server
• Gateway interface
Assurance Providers (Circles 4 and 6)

A major concern with participating in Internet commerce for most organizations and in-
dividuals has been Internet security. This is the single most critical factor that has ham-
pered the growth of Internet commerce to date. One early survey showed that 90 per-
cent of Internet users felt increased security was necessary before they should transmit
personal information (e.g., credit card information) across the Internet.10 As security
technology has increased, so has the public’s willingness to participate in Internet com-
merce. A recent survey indicates 52 percent of Internet users feel comfortable provid-
ing their credit card numbers to a secure Web site.11 Many stories exist about credit card
numbers being stolen from Internet computers, including one incident involving the
unauthorized access to 8 million accounts!12 Additionally, the Internet has spawned a
whole array of cottage industries that have no physical store fronts, but rather are oper-
ated completely from Internet server-supported Web pages. Many Internet users are
rightfully concerned about the possibility that a company may be fictitious, with the
electronic store front merely being a means by which to gather credit card and debit
10
J. Walker Smith, “Who Are the New, Interactive Consumers?” Commerce in Cyberspace: A Conference Re-
port (The Conference Board, New York, 1996): 13–15.
11
The 2002 Privacy Values Survey, http://www.theprivacyplace.org, April 2003.
12
“Root of massive credit card theft found,” http://www.cnn.com, February 20, 2003.
ch03-g05 5/24/04 7:57 PM Page 98
card information for illicit use. In Chapter 9, you will be introduced to technologies
such as encryption and SSL that provide organizations and their customers a protected
environment in which to transact business.
Concerns over security have spurred the development of a new line of business—In-
ternet assurance services. Internet assurance is a service provided for a fee to vendors
in order to provide limited assurance to users of the vendor’s Web site that the site is in
fact reliable and event data security is reasonable. Technology Application 3.4 provides
a more detailed discussion of Internet certification programs and assurance services.
Internet Security Certification

Case 1: WebTrust Certification • Processing integrity. System processing is
complete, accurate, timely, and author-
WebTrust Seal of Assurance is the product of a
joint venture between the American Institute of ized.
Certified Public Accountants (AICPA) and the • Online privacy. Personal information ob-
tained as a result of e-Business is col-
Canadian Institute of Chartered Accountants
(CICA). It is designed to provide comfort and lected, used, disclosed, and retained as
assurance that a Web site is reasonably safe for committed or agreed.
users participating in business-to-consumer In- • Confidentiality. Information designated
as confidential is protected as commit-
ternet commerce. Upon receiving an unquali-
fied opinion from an accounting practitioner, a ted or agreed.
seal is placed on the client’s Web page. A user Case 2: TruSecure Certification
of the Web page can click on the seal to receive As the AICPA/CICA has moved forward on rec-
verification of the rights for the symbol to be ommendations for alternative areas beyond fi-
displayed on the given Web page. If a user se- nancial statement audits for which CPAs/CAs
lects the link provided with the seal, he or she could provide assurance services, they have
can view the practitioners’ actual report on the often noted that these other areas would not be
client’s Web site. The WebTrust seal provides protected from competition by non-CPA organ-
assurances that a CA or CPA has evaluated the izations. Web certification is certainly one of
business practices and controls of the given these areas where non-CPA competition already
client to determine whether its Web page is in exists. TruSecure Certification is designed to
accordance with WebTrust criteria. Once a site provide reduced risk to both the customer and
receives WebTrust certification, it should be re- the vendor by providing, verifying, and improv-
viewed periodically by the practitioner to assure ing the use of appropriate security standards.
adequate standards have remained in place and The TruSecure standards revolve around six pri-
the site remains reasonably secure. Basically, a mary concerns: electronic threats and vulnera-
Web site must meet the following principles: bilities, malicious code, privacy, human factors,
physical environment, and downtime, stan-
• Security.
against
The system is protected
unauthorized access (both
dards that overlap with the goals and objectives
to the WebTrust certification. Similar to Web-
physical and logical). Trust, TruSecure certification is also displayed
• Availability. The system is available for
operation and use as committed or
through a seal, the TruSecure Certified Seal,
placed on the client’s Web page.
agreed.
Sources: AICPA/CICA, “CPA/CA WebTrustSM Version 2.0,” http://www.cica.ca, August 2000; AICPA/CICA, “Suitable
Trust Services Criteria and Illustrations for Security, Availability, Processing Integrity, Online Privacy, and Confidentiality
(Including WebTrust® and SysTrust®),” http://www.aicpa.org/download/trust_services/final-Trust-Services.pdf, November
2003; TruSecure, “Security Certification,” http://www.trusecure.com, November 2003.
ch03-g05 5/24/04 7:57 PM Page 99
In Figure 3.7 (page 97) we demonstrate how one common type of assurance provider
operates using the WebTrust program as discussed in Technology Application 3.4. The
vendor (circle 7) will display the WebTrust certification seal and a reference to the as-
surance provider on its server Web page. When the customer accesses the vendor’s Web
page, he or she can click on the WebTrust symbol to determine that it continues to be
applicable. Clicking on the WebTrust symbol executes a link to the VeriSign server (cir-
cle 4) for verification of the authorized use of the symbol. VeriSign, which simply oper-
ates as a verification company, will verify the symbol’s appropriate use by sending a mes-
sage to the customer (circle 1). The customer also can get a report on the level of
assurance provided with the certification by clicking on the Web link (contained on the
vendor’s Web page) for the accounting firm. Clicking on this link will connect the cus-
tomer with the accounting firm’s (circle 6) server—provided by its network provider in
this case (circle 5)—and the auditor’s Internet assurance report for the vendor will be
displayed on the customer’s computer (circle 1).
In addition to concerns regarding event data, many customers have apprehensions
over the protection and use of their personal information. To address this issue, the
AICPA/CICA Privacy Framework has recently been issued.13 The framework includes
the AICPA/CICA Trust Services Privacy Principle and Criteria to be used in all assur-
ance engagements.
Internet Connection (Circle 3)

We briefly note here how the Internet connection is provided between two or more en-
tities. The network diagram displayed at circle 3 pictorially presents a representation of
how the Internet operates. First, you must have a link to one of the network providers
that are connected to the Internet (as discussed earlier). The client machine provides an
Internet address indicating the Internet site with which the client wants to connect. A
connection is then made between the client and the desired site—the server. This con-
nection is made by working a path between the network provider (circle 2) and the server
connection (circle 7). The path chosen will differ from one time to the next based on
what links in the Internet may not be working at a given time and based on how busy
the “traffic” is on various network connections between the client and the server. The
amount of “traffic” also influences the speed of connection and is the reason why the
Internet is slower than at other times.
A couple of other issues related to the organization of the Internet and its impact on
such commerce should be noted. First, by the nature of the Internet being a “public
network-based infrastructure,” it has greatly leveled the field in e-Business. With tradi-
tional EDI, only fairly large businesses could afford the communications hardware and
software to effectively use e-Business as a competitive weapon. The creation of a public
network and the subsequent creation of relatively inexpensive (or even free) software for
using the network have brought the costs of e-Business within the threshold of eco-
nomic feasibility for most small- and medium-sized entities. This change in cost struc-
ture and ease of use are the two forces driving the strong growth in Internet commerce.
The other phenomenon that has arisen from the new economic feasibility of e-Busi-
ness is an explosion in cottage industries and electronic store fronts. These cottage in-
dustries that have sprung up to support Internet commerce include companies that pro-
vide one or more of the following: Internet access, Web page development, interface
software for linking between Web pages and application programs, e-mail, and related
goods and services. Electronic store fronts represent the creation of Internet-located
13
Available for download at http://www.aicpa.org.
ch03-g05 5/24/04 7:57 PM Page 100
resources for displaying goods and services for sale and for conducting related sales
events. For many emerging small companies, these electronic store fronts are the only
store fronts and no sales staff or physical store fronts need to be maintained. Even bet-
ter, you can run your operation from that ski chalet in Vermont or the beach condo-
minium in Florida regardless of where your potential customers live. Further, the world
is now your marketplace!
Other Internet Uses for E-Business

Before leaving this chapter on e-Business, we should discuss other ways in which the In-
ternet is being used to support commerce. While we have focused in this chapter on the
most common forms of Internet commerce and the direct linkages between customer
and vendor, a number of intermediaries are evolving that promise to reduce costs for or-
ganizations. The two forms that seem most likely to have long-term success are auction
markets and market exchanges. These are explained in greater detail in Technology Sum-
maries 3.5 and 3.6.
ENTERPRISE The Internet is not only a place for completing sales, but is also an environment for
SYSTEMS improving customer support for non-Internet-based commerce. Probably the biggest
use for the Internet at this point in time is to support the providing of goods and serv-
ices for customers. In its simplest form, a Web page may simply be one more venue in
which to advertise and market an organization’s goods and services. At the next level, it
may be an arena for providing ongoing customer support. For instance, Symantec is one
of many companies that provide software upgrades over the Internet—in this case, pro-
viding monthly updates for their anti-virus software. For many courier companies (such
as Federal Express), the Internet has become a means for allowing customers to instantly
access information to track their packages at any given point and to know when they
have reached their destination. These latter examples of customer support have become
a huge new market for major software vendors. These systems fall under the broader cat-
egory of customer relationship management (CRM) and customer self-service (CSS) sys-
tems, both introduced in Chapter 2. These systems provide customer self-service capa-
bilities (i.e., let the customer inspect his or her account or get product help through a
Web interface rather than through interaction with a support person), electronic cata-
logues, and shipment update information. They aid the salesperson by storing an ana-
Internet Auction Markets
Internet auction markets provide an Internet company may put specifications for a product
base for companies to place products up for bid out on the marketplace as a request for propos-
or for buyers to put proposed purchases up for als (RFPs). Participating organizations in the
bid. In the first case, a scenario common to the market can then bid on the sales by providing a
eBay exchange, a market participant puts an proposal that includes details on product speci-
item up for bid, sets a minimum bid price, and fications, costs, availability (i.e., timing of deliv-
awaits completion of the bidding process. While ery), and logistics. The buying organization can
this market is fairly successful for business-to- then select the proposal that seems most desir-
consumer Internet commerce, it is not so effec- able for meeting the organization’s needs at a
tive for business-to-business Internet commerce. minimal cost and risk.
For business-to-business Internet commerce, a
ch03-g05 5/24/04 7:57 PM Page 101
Internet Market Exchanges
Internet market exchanges bring together a va- at an assembly line within an hour of when the
riety of suppliers in a given industry with one or goods will be needed for production. This part
more buyers in the same industry to provide In- can be quite tricky and the exchange must be
ternet commerce through organized markets. set up carefully.
Suppliers can put their products online, gener- Internet market exchanges can be either private
ally feeding into electronic catalogs that allow or public. Private exchanges restrict the buyers
the buyer(s) to sort through alternatives from and suppliers that can participate in the mar-
different suppliers and electronically place an ket. Public exchanges bring together suppliers
order. Often, only one supplier will carry a cer- and buyers and allow essentially any organiza-
tain item, but efficiencies are still gained by tion to participate, subject sometimes to credit
avoiding the purchase order process (described approval and background checks. Private ex-
in detail in Chapter 12) and executing an order changes that have been planned or are currently
through selection from a Web catalog. In some operating outnumber such public exchanges
cases, buyers make their needs known on the 30,000 to 600.a However, private exchanges
marketplace and suppliers review the needs and have drawn the watchful eye of the Federal
determine whether to fill the orders. The key is Trade Commission (FTC), which maintains
to make sure the market is efficient enough to concerns over fair trade practices and potential
assure that the buyer will get the product pur- anti-competitive practices that evolve from re-
chased on a timely basis for when it is needed— stricting participation in the market exchange.
often meaning that the purchased goods arrive
a
Steve Ulfelder, “Members Only Exchanges,” Computerworld Online (October 23, 2000).
lyzable history of the customer and the customer’s past business interactions. One of the
bigger challenges has been to get the CRM systems to interact with the ERP system to
share data between the two systems and enhance the power and capability. In an effort
to improve the integration, all the major software firms are involved in initiatives to fur-
ther empower CRM extensions to their ERP systems.
SUMMARY
The future of e-Business will see an increased merging of technologies as the lines be-
tween EDI and Internet commerce become less defined. The major impediment to
most organizations (and individuals) conducting business over the Internet is the con-
cern about security. However, advances in Internet security have been significant in the
past few years, with the potential major benefactors of Internet commerce pushing the
charge. For instance, software companies such as Microsoft and Netscape along with fi-
nancial providers MasterCard and Visa have been on the forefront of development ef-
forts to assure safe use of the Internet in commerce.
The evolution of EDI practices toward the Internet will initially be facilitated by in-
creased use of corporate extranets. Moving EDI applications to an extranet environment
can help simplify the processing while maintaining higher levels of control and security.
These extranets will be open to business partners using programs that limit access to se-
lected business partners—hence the corporate networks will not be accessible by unin-
tended Internet users. As Internet security increases, extranets will lose their appeal and
ch03-g05 5/24/04 7:57 PM Page 102
the Internet will increasingly become a viable alternative as the communication infra-
structure of choice.
These same increases in security will help fuel the growth of Internet commerce. As
Internet commerce becomes an increasingly acceptable way of doing business, companies
will experience newfound opportunities for reaching customers; for many companies, a
new globalization of their customer base will occur. On the other hand, new competition
also will arise from distant companies that now have access to the same customers.
Entering the e-Business domain is not simply a matter of switching on the connec-
tion. E-Business is nothing less than a fundamental change in the way organizations do
business and, as such, is a driver of organizational change. To succeed in an e-Business
environment, an organization must recognize the need to embrace change and must ef-
fectively plan and manage change. Management must take a proactive stance and lead
the change.
It is thought to be an ancient curse to wish upon someone “may you live in interest-
ing times.” We are certainly not wishing this upon you, but the reality is that we are all
living in interesting times. Success will rely heavily on your understanding of how to
manage and control change. In Chapters 7 through 9 you will learn about ways in which
to implement and maintain effective organizational and information systems control
structures. While these are interesting times, they are also exciting times.
REVIEW QUESTIONS
RQ 3-1 Briefly define e-Business.
RQ 3-2 Explain the relationship between the periodic mode and batch processing.
RQ 3-3 List and describe the four basic subprocesses completed in processing busi-
ness event data using batch processing.
RQ 3-4 Explain how the use of online transaction entry (OLTE) can increase effi-
ciency when using batch processing.
RQ 3-5 Explain the relationship between online real-time (OLRT) and immediate
mode processing.
RQ 3-6 List and describe the three basic subprocesses completed in processing busi-
ness event data using online real-time processing.
RQ 3-7 How does the use of online transaction processing (OLTP) improve the
timeliness of online real-time processing?
RQ 3-8 Describe how technology has supported Amazon.com’s growth.
RQ 3-9 Explain the concept of Internet assurance services.
RQ 3-10 Explain the difference between wide area networks and local area networks.
RQ 3-11 How can e-mail be adapted to a more structured form to aid in capturing
business event data?
RQ 3-12 Explain the advantages of using electronic document management rather
than traditional paper-based document systems.
RQ 3-13 Explain how electronic data interchange is used to link two companies’ busi-
ness processes together.
RQ 3-14 Explain how value-added networks (VANs) are used to simplify electronic
data interchange between two or more companies.
ch03-g05 5/24/04 7:57 PM Page 103
RQ 3-15 How does Internet commerce simplify the world of e-Business?

RQ 3-16 What role do network providers play in the Internet commerce environ-
ment?
RQ 3-17 What types of assurances are provided by Internet assurance services?
DISCUSSION QUESTIONS
DQ 3-1 The business environment is increasingly demanding the use of online real-
time systems for more up-to-date information. Identify one business
process, and the environment in which it would be used, as an example of
why immediate mode processing is so critical. Be prepared to explain your
answer to the class.
DQ 3-2 Consider your favorite fast food chain restaurant. How do you think this
restaurant might use online transaction entry to improve its business event
data processing activities? Explain.
DQ 3-3 We noted during the chapter discussion that banks are one of the earliest
adopters of online transaction processing systems. Discuss why OLTP
would be desirable for use in ATM systems.
DQ 3-4 How could (and/or is) your university bookstore use technology to im-
prove customer interactions with students, faculty, and staff?
DQ 3-5 What do you perceive to be the advantages and disadvantages of conduct-
ing business on the Internet? Be prepared to explain your answer.
DQ 3-6 Why has the Internet caused such an explosion in e-Business when elec-
tronic data interchange has been available for decades?
DQ 3-7 One of Amazon.com’s marketing strengths is the ability to collect and ana-
lyze customer purchase data. How does this add value to the company?
From the customer’s perspective, is value added?
DQ 3-8 Some potential e-Business customers have security concerns regarding on-
line purchases. How do Internet security certifications attempt to address
these concerns?
PROBLEMS
P 3-1 Find a merchandising business on the Internet (other than the Lands’ End
or Amazon.com examples used in this chapter). Explore its Web page and
how the order processing system works.
a. Is there any information provided on how secure the Web page is? What
level of comfort do you feel with its security? Explain.
b. Does the business provide information regarding delivery time/stock-
outs on purchases?
c. What methods of payment does it accept?
d. Analyze the design of the Web page in terms of usability and complete-
ness of information content. Write a brief critique of your company’s
page.
ch03-g05 5/24/04 7:57 PM Page 104
P 3-2 Think about a business you might want to start on the Internet using e-mail
to communicate with customers and capture business data. Explain why e-
mail would be a good approach for your business. Draft a brief business plan
evaluating the advantages and disadvantages of e-mail-based commerce in
your business, and how you plan to get your business rolling (your profes-
sor will tell you how long the report should be).
P 3-3 Identify a business venture that you believe could be successful using only
Internet commerce. Explain how you would design your Web page, how
you would capture business event data, and the mode of processing you
would use. Provide a report detailing support for your design decisions
(your professor will tell you how long the report should be).
P 3-4 Develop a research paper on the emerging use of the Internet to support
electronic data interchange (EDI) between companies. Your paper should
consider how companies set up communications over the Internet to main-
tain the same security and standardization that are achieved using value-
added networks for non-Internet EDI (your professor will tell you how long
the paper should be).
P 3-5 Explain how electronic document management could be used in your ac-
counting information systems class to eliminate all paper flow between the
students and professor. Include in your explanation what technologies
would be necessary to facilitate your plan (your professor will tell you how
long the paper should be).
P 3-6 Using the Internet, find and describe an Internet market exchange or Inter-
net auction market. Your discussion should include the products and/or
services available and the type buyers and sellers you expect to participate.
If you choose a private market, also identify the owner/sponsor of the ex-
change.
P 3-7 Use the Internet to locate http://www.cia.gov and http://www.
Amazon.com. Find the privacy and security policies for each. Compare and
contrast the use of privacy statements, encryption, SSL, and cookie policies.
KEY TERMS
electronic business client server technology electronic data interchange
(e-Business) local area networks (EDI)
periodic mode (LANs) value-added network
batch processing wide area networks (VAN)
offline (WANs) Internet commerce
online transaction entry Internet network providers
(OLTE) Web browsers Internet assurance
online extranet electronic store fronts
online real-time (OLRT) electronic mail (e-mail) Internet auction markets
systems public database service Internet market exchanges
immediate mode electronic document
online transaction management (EDM)
processing (OLTP)

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CHAPTER 3 Electronic Business (E-Business) Systems 69

70 PART 1 Understanding Information Systems

CHAPTER 3 Electronic Business (E-Business) Systems 71

APPLYING E-BUSINESS TO THE VALUE CHAIN

72 PART 1 Understanding Information Systems

THE CHANGING WORLD OF BUSINESS PROCESSING

CHAPTER 3 Electronic Business (E-Business) Systems 73

Automating Manual Systems

74 PART 1 Understanding Information Systems

Figure 3.1 Automated Equivalent to a Manual System

Sales event Old inventory

Sales data New inventory

CHAPTER 3 Electronic Business (E-Business) Systems 75

Online Transaction Entry (OLTE)

76 PART 1 Understanding Information Systems

Figure 3.2 Online Transaction Entry (Batch Processing Environment)

Central Old inventory

Customer Sales event

CHAPTER 3 Electronic Business (E-Business) Systems 77

Online Real-Time (OLRT) Processing

78 PART 1 Understanding Information Systems

Figure 3.3 Online Real-Time Processing

Sales event data

CHAPTER 3 Electronic Business (E-Business) Systems 79

Online Transaction Processing (OLTP)

80 PART 1 Understanding Information Systems

Figure 3.4 Alternative Approaches to Real-Time Processing

CHAPTER 3 Electronic Business (E-Business) Systems 81

82 PART 1 Understanding Information Systems

METHODS FOR CONDUCTING E-BUSINESS

Commerce Through E-Mail

CHAPTER 3 Electronic Business (E-Business) Systems 83

Electronic Document Management

84 PART 1 Understanding Information Systems

General Uses of Electronic Document Management Systems

CHAPTER 3 Electronic Business (E-Business) Systems 85

• Enhanced management of operational workflow.

Electronic Data Interchange

Application Software (Circles 1 and 7)

86 PART 1 Understanding Information Systems

Figure 3.5 Electronic Data Interchange Components

Application software Translation software Communications

– Logs the message

Communications Translation software Application software

Translation Software (Circles 2 and 6)

CHAPTER 3 Electronic Business (E-Business) Systems 87

2. EDIFACT (EDI for Administration, Commerce, and Transport) is the predomi-

PURCHASE 850 Purchase Order Transaction Set Explanation

ST*850*73561 N/L Start transaction set (ST), identify purchase order

BEG*00*SA*BL2-1563 Begin (BEG) transaction set for a new (00) stand-

September 1, 2007 (950901)

1 86240 A235 4-meg DRAM 29.60 140 CA

CHAPTER 3 Electronic Business (E-Business) Systems 89

Communications Network (Circles 3 and 5)

Value-Added Network (VAN) Service (Circle 4)

90 PART 1 Understanding Information Systems

CHAPTER 3 Electronic Business (E-Business) Systems 91

92 PART 1 Understanding Information Systems

ST85073561 N/L Start transaction set (ST), identify purchase order

BEG00SA*BL2-1563 Begin (BEG) transaction set for a new (00) stand-