Applying Electronic Data Interchange

By Phillipus, Michael D. | Risk Management, April 1998 | Go to article overview

Applying Electronic Data Interchange


Phillipus, Michael D., Risk Management


Even though personal computers are commonplace and the millennium is fast approaching, risk managers continue to find that their service providers generally conduct business in a paper intensive environment, bypassing the tremendous opportunities provided by electronic commerce. As the manual processes that organizations use in their cash management, finance, treasury and sales functions are being replaced by more efficient electronic tools, risk managers have to be aware of this shift and its implications--not only to address the accompanying risks, but also to help their organizations reap the largely untapped benefits.

For example, risk managers can partner with their information management and other functional groups to automate transactions with brokers, insurers, reinsurers, third party administrators, captives and other service providers. Payment types can include premiums, audits, claims and fees.

And while electronic commerce includes familiar components such as e-mail, electronic forms and technical data and documents, it also encompasses the fast-growing technology known as electronic data interchange (EDI)--the exchange of business information between parties via computer-to-computer transmissions.

EDI has been adopted by more than 120,000 companies worldwide and its use is growing every day. In many industries, business opportunities will be lost if a company is not "EDI-ready." Many vendors require partners to use electronic payments, purchase orders and invoices. This technology often ties in with point-of-sale or inventory systems. In fact, it is likely that many risk managers will find their organizations using EDI and that risk management-related functions can be added to this infrastructure rather easily.

The elimination of errors that can occur in manual data entry, and the time saved by not having to reenter data, can bring significant advantages to many organizations. EDI also provides consistent formats that make it easier to spot errors or missing information. Less tangibly, business relationships can be improved by the cooperation required to implement EDI, the enhanced trust that results from shared information, the elimination of nuisance factors (such as having to convert data between incompatible systems) and the ability to exchange payments more rapidly.

Managers concerned that conducting business electronically may present undesirable security concerns may be surprised to learn that safeguards built into EDI transactions can make this approach more secure than paper-based communications. Before partners begin trading electronically, guidelines are established to confirm that an electronic invoice is from an established trading partner, and that the amount and type of the payment, along with the payment instructions, are accurate.

Most risk managers already receive some types of information, such as claims data, paid losses and loss reports, from outside providers via computer transmissions. However, most of these transactions are based on proprietary software, and data are frequently not interchangeable between organizations. EDI provides a basis for transmitting business transactions in standardized formats across various computer platforms.

Because EDI provides more timely information for making decisions, more transactions can be completed without an increase in staff. Through better use of EDI technology, risk managers can reallocate time from administrative duties to professional activities.

Some of the savings associated with EDI are small, while others, depending on the number of transactions, can be significant. For instance, one of the most common business transactions is the payment of bills--generally by check or wire transfer. An electronic funds transfer (EFT) utilizing an automated clearinghouse (ACH) payment can be much less expensive than traditional methods. Across industries, the costs associated with the issuance of a check can vary from $1. …

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