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MAY 26, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 4854 words

HEADLINE: PREPARED TESTIMONY OF
MR. HARRIS N. MILLER
PRESIDENT, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA
ARLINGTON, VIRGINIA
BEFORE THE HOUSE SMALL BUSINESS COMMITTEE

BODY:

Mr. Chairman, thank you for this opportunity to testify about the impact of Electronic Commerce and the impact of the Internet on the nation's small and mid-sized companies, often called small and medium enterprises (SME). Today I would like to outline both the opportunities and the challenges that face SME's as they move their business processes into the Digital Age. But first I want to take a moment to discuss the concepts that make up the definition of Electronic Commerce and suggest that we agree on a common taxonomy when discussing the issue.
Information Technology Association of America
The Information Technology Association of America (ITAA) represents 11,000 direct and affiliate member companies--many of which are small and mid-sized companies themselves. ITAA member firms work at the forefront of computer software, systems integration, telecommunications, Internet, electronic commerce, outsourcing and more. We have long championed the cause of the information technology (IT) sector, truly the nation's engine of growth, a huge contributor of increased U.S. competitiveness, and the leader in the movement to a borderless global economy. Electronic Commerce - Background
Electronic Commerce (or Electronic Business) is a phrase that means many things to many people and agreement on a standard definition can be hard to find. It is fair to say that the vast majority of traditional business transactions can be readily adapted to electronic media.
Electronic Data Interchange (EDI) has been around for years. While many consider EDI the precursor to Electronic Commerce, it is fundamentally different in several important respects. EDI is supported by an extensive set of standards (ANSI X.12 & EDIFACT), has been practiced by trading partners with satisfactory results, and is used in both domestic and international markets. EDI, as successful as it has been, suffers from serious shortcomings. It is limited to a fixed set of transaction sets that must move through a lengthy approval process; it is not flexible. It is limited to transactions between partners which have undertaken lengthy negotiations and have signed partnership agreements; it is not spontaneous. It often requires suppliers to implement several different systems in order accommodate the proprietary systems of their major customers; it is not inexpensive. It requires the use of Value Added Networks (VAN) to serve as translators and carriers of transaction data; it is not real time.
Electronic Commerce, on the other hand, is open, spontaneous, and relatively inexpensive to implement. It is scalable and flexible. Thus it has become much more than an improved version of EDI. Because of the development of the personal computer, networking technology, the growth of the Internet and the development of HTML and the World Wide Web, a whole new set of capabilities and services have evolved in the still very early days of the Digital Age. Electronic Commerce includes, among other things, e-mail, customer service, on-line research, and interactive consumer participation in business transactions. These transactions range from the purchase of a sweater from Lands End and the purchase of a lobster from Mr. Hansen to the execution of complicated stock trades from the comfort of one's home. Let me quickly add that the term "transaction" in electronic commerce is defined more broadly than "buying and selling". By transaction we mean any electronic event. The transmission of a design drawing from Ford, USA to Ford, UK, researching a medical problem on the Web, sending an e-mail, transferring funds between two corporations, the execution of a stock trade and downloading a software program are all transactions.
Based on the infrastructure of the public switched network and the development of packet-switching technology, the Internet can truly be called an "open" medium with extremely low barriers to entry. These low entry barriers allow SME participation in Electronic Commerce activities on an unprecedented scale. However, Mr. Chairman, I hasten to add that plugging in a modem and contracting access to the Internet will not assure success. Even the smallest firms with the least complicated business models must plan their strategy carefully and recognize the potential challenges that may await them.
The growth of the Internet and with it the ability of increasing numbers of organizations to conduct business electronically rests on three pillars: technology (which includes infrastructure), business practices and processes and, finally, public policies. Failure to recognize and respect the interdependence of these pillars as crucial to the future of electronic business will lead to unfortunate consequences. At best, growth is slowed and entrepreneurial spirit is discouraged. At worst, the electronic paradigm may fail. On the other hand, paying close attention to these three pillars and maintaining the balance among them will surely lead to unprecedented successes for SME's.
The Numbers
There is no question that reports on the growth and future potential value of Electronic Commerce activities vary widely. Much of the confusion is sown by the popular press which, in most cases, reach for a bottom line number with little regard for the methodology behind the number. Predicted estimates of the value of Electronic Commerce transactions between 2000-2002 vary from a low of $23 billion to a high of $1.5 trillion. The numbers all come from respected research firms. How can they be so far apart? The firms argue that simply publishing a bottom line number while failing to explain the methodology of the study results in both confusion and a misreading of the trends of the paradigm.
My point is that the numbers can be very misleading; the simple fact is that the market is huge and growing at an ever-accelerating rate. On-line shopping during the past Christmas season exceeded even the most optimistic forecasts substantially. The simple strategy is not to be left behind. Electronic Commerce is a fact of life and companies of all sizes must play or pay. Motivated SMEs can create companies that would never have been viable 5 years ago. Amazon.com is the poster child of Internet commerce. The fact is that for the price of a share of amazon.com, a creative businessperson can become amazon.com.
Let me quote the results of a study on the extent small business adoption of Electronic Commerce. PSI Global reports that their survey of over 900 SMEs shows that:
* SMEs' use of PC Banking services increased 50% in the last 12 months - to 9%. 6% say they will use the service in the coming year. However, only 22% of those surveyed had ever even been contacted regarding the service,
* 63% of SME's use the Internet, twice the number of one year ago,
* 31% of the surveyed companies have a web site, up from 24% last year,
* 20% of those surveyed purchase materials and supplies over the Internet.
It is clear that SMEs are moving in the right direction. Later, in my testimony, I will describe some specific efforts by industry and government to include SMEs in this new paradigm.

Technology
Technology is truly moving at warp speed. The information technology sector, unregulated and solidly entrepreneurial, has delivered massive improvements and breakthroughs, both in hardware and software, at ever decreasing cost. A study released earlier this year by the World Information Technology and Services Alliance (WITSA) concluded that the Information and Communications Technology (ICT) sector is responsible for $1.8 trillion in spending in 1997, approximately 6% of the aggregate world GDP. In 1997 ICT was nearly 40% larger than in 1992. It is growing 27% faster than the overall worldwide GDP, which has grown by an average of 5.5% annually for the past 5 years. I will be happy to make a copy of the full report available to the Committee.
The one sector of ICT that is still too regulated is telecommunications, and that is where we find competition and innovation often lagging. Both in the US and internationally, telecommunications competition--including competitive access for SME's--is crucial.
Practices and Processes
Electronic Commerce activities can be classified into three readily identified and markedly different segments:
* Business to/with Business, * Business to/with Consumer, and * Intra-Business (Intranets).
While each of these sectors utilizes similar and sometimes identical technologies, they operate with markedly different practices and processes. It is important to keep these differences in mind as you examine the opportunities and challenges in Electronic Commerce.
Business to Consumer
The Business to Consumer segment has received the most attention over the past couple of years. Clearly this on-line retailing phenomenon is growing substantially and offers opportunities to many SMEs which wish to broaden their reach and find new channels of distribution for their products. We hear daily stories of entrepreneurs who have taken the leap in utilizing the Internet for advertising, selling and servicing their product lines. Many of these businesses are operating only on the Internet while others are supplementing their traditional distribution methods.
In almost all cases, the successes mask the failures. The critical mistake many practitioners make is the failure to recognize that a successful electronic commerce installation requires an examination, understanding, and willingness to change the basic business processes of the company. The consumer sees an attractive web site, which allows easy access to product information and a simple way to order merchandise. The supplier on the other hand faces a more complex challenge if he or she is going to take full advantage of the new Electronic Commerce model.
The web based ordering process must be integrated with the rest of the company operations. If the details of your sweater purchase at the Land's End web site fail to transition to the business to business model and subsequently flow to inventory control, input to manufacturing schedules, trigger reorder points and materials purchases, notify accounts payable and generate useful data that can be used for accurate forecasting of future business, the effort yields minimal improvement. If the data on the sweater sale do not go to ordering, packaging, shipping, accounts receivable; if it does not automate the payment process, debit a credit card and credit the Lands End account - again - minimal improvement. If the data fail to allow shipment tracking and facilitate a customer friendly return policy - minimal improvement. On the other hand, the SME that understands the required level of integration of Electronic Commerce into its business processes will see a fundamental transformation of the enterprise.
Business to Business
The Business to Business segment represents, by many accounts, 80% of the reported Electronic Commerce transactions worldwide. In this segment, we find companies that truly are willing to understand and adjust their business processes will reap the most rewards. It is also in this segment that the most expensive failures occur. Poorly planned strategies that fail to recognize the important steps and decisions that have to be made will guarantee marginal results, if not a complete and expensive failure. The advantages to businesses are clear: lower costs, more reliable processes, and improved customer service - - - cheaper, better, faster. Some of these benefits are quantifiable; others are not. R.A. Weber & Associates estimates that the cost of processing a single purchase order can be reduced from an average of $79 to $6 with a fully integrated electronic commerce solution. I cannot imagine any business that would be reluctant to realize that kind of quantifiable saving.
More and more large businesses expect that their suppliers will be able to conduct business on line. You hear the phrase disintermediation--eliminating the "middleman." Some observers talk about "frictionless" transactions. While I think these concepts overstate the reality, no doubt doing business on line eliminates some traditional business steps that impose costs.
As various observers have noted, the Internet alters the traditional relationship between reach and richness. In a traditional business model, the closer you are physically to your customers and your suppliers makes a tremendous amount of difference in the content of your relationship: how much you know about each other, how much you know about each other's products and services, etc. The closer you are, the richer the relationship. The farther away, the shallower the relationship.
But in cyberspace, physical proximity is not paramount. A well- constructed Web Site can tell customers everything they need to know about your products and services, whether that customer is five miles or five thousands miles away.
Electronic Commerce, unlike EDI, which was too expensive for most SME's to implement, supports the ability of major businesses to access a much larger universe of potential suppliers. An SMEs' transition to electronic commerce can increase its customer base dramatically. A good example is the Automotive Industry Action Group (AIAG), which assists lower tier automobile parts manufacturers in implementing Electronic Commerce, thus giving SMEs access to vastly increased opportunities in the automotive sector.
Reduced costs and improved business processes and more customers are only part of the benefits that Electronic Commerce can bring to the SME. Rapid communication through e-mail, twenty four hour customer service, immediate updating of product literature and price sheets are a few of the digitally enabled techniques that help a business person establish a closer and more productive relationship with customers and suppliers.
Intra-Business (Intranets)
I will only briefly mention Intranets. Effective and timely internal communications are essential to the success of any business. Intranets help tie the disparate functions and locations of a business together. Work group collaboration software, human resources information, company activities, product changes, and e-mail facilitate the ability of a corporation to act as a team. Experience has shown that even very small companies can benefit from using an Intranet. Multiple examples support this conclusion. There is increased emphasis being placed by manufacturers on a segment called Small Office/Home Office (SOHO) demonstrating that Intranets can be practical for the smallest business units.
Challenges
Achievement of the benefits of electronic commerce is not inevitable. It will require supportive public policy. In this society we are used to picturing concrete structures - roads, bridges, and buildings as the building blocks of an economic infrastructure. Yet, in the information age, we need to visualize economic infrastructure in broader terms. It is the skills of well trained employees. It is a communication infrastructure capable of using other technologies. And it a legal framework that fosters competition and thereby facilitates innovation.
The opportunity for small businesses to effectively participate in Electronic Commerce could be threatened by some ill-considered policies.

Four challenges could harm small business access to Electronic Commerce:
* Increased Federal Internet regulation, * Limited small business access to high speed telecommunications, * Lack of Digital Trust and Security, * Electronic Commerce taxation.
Regulation
Proposed legislation giving Federal agencies broad new powers to regulate how Internet commerce is conducted is a significant threat to small business electronic commerce. Small businesses should not have to hire a lawyer to review each change they make to a consumer- oriented web site.
The Clinton Administration, with bipartisan Congressional support, has espoused the theme on the Internet policy front that industry should lead. Industry has met that challenge. Yet some in Congress have suggested giving the Federal Trade Commission broad powers to regulate how web sites communicate with consumers.
Acceptance of Electronic Commerce is occurring at an unprecedented speed. The Internet as a consumer medium is only four years old, so it is natural that different consumers may require varying degrees of comfort level using it. The reluctance of some consumers to engage in Internet commerce after such a short period should not be seen as a need for regulation. As a result, Internet commerce companies have a strong incentive to address effectively consumer concerns in order to advance online commerce. All businesses, small and large, are striving to earn consumer confidence.
The success on the Online Privacy Alliance (OPA) is illustrative of the benefits of self-regulation. Within a matter of months, the leaders in the IT industry and other industries committed to promoting e-commerce have worked out common privacy principles and established privacy practices. Today, the overwhelming majority of the most heavily trafficked online sites have adopted and display privacy policies.
In addition, the wonderful openness and communications power of the Web provide strong incentives for e-commerce companies to keep their customers satisfied. A company doing business on the Web which fails to meet consumer expectations can expect the word to spread quickly, much more quickly than in more traditional vendor/customer environments. Those that live by the Internet can also die by the Internet if they fail to perform.
Free market responses, technological innovation and cultural change, rather than special government rules are the best methods to let individuals decide to shop online at their own pace.
ITAA cautions against any precipitous action to treat Internet based commerce differently regulatory. At the same time, the existing regulations should reflect the active manner in which people use the Internet. Unlike print or broadcast medium in which consumers are more passive recipients, the Internet consumer actively shapes what is seen.
We know the burden of regulation often falls disproportionately on small enterprises. Large companies are more likely to have the resources to retain lawyers to keep track of changing rules. We risk reducing the spirit of innovation that has so charged the development on of Internet by burdening smaller and new business with having to keep track of regulatory compliance.
Telecommunications
Small businesses have the strongest possible interest in seeing consumers receive access to advanced broadband services as soon as possible. Many are small companies and start-ups involved in making the promise of the information age a reality by offering products and services with ever-increasing speed and power.
As computing power doubles every 18 months, the limitations of analog, circuit-switched networks become all the more apparent. ITAA strongly believes that reliance upon competitive mechanisms -- as opposed to the incumbent-centric proposals -- will best meet this surging demand. The provisions of the Telecommunications Act of 1996 encourage incumbent carriers to open up their markets to competition, while providing essential safeguards that will deter them from using their monopoly power to impede the efforts of potential rivals.
We should be skeptical of the claim made by some large incumbents, that the pro-competitive regulatory requirements contained in the Telecommunications Act have deterred them from deploying broadband services necessary to provide high-speed access to the Internet and other information services. The real reason for the incumbent local carriers' failure to deploy advanced telecommunications services is that, in the absence of competition, they have no incentive to do so. The best means to promote the deployment of advanced services, therefore, is to promote competition in the local market.
The current debate reflects a choice between two competing views about how to best encourage investment in new telecommunications technologies. Under one view, the regulatory regime should provide assurances that incumbent carriers must be guaranteed the recovery of their investment before they deploy new services. Under the other view, regulations should facilitate a competitive market which is the best means to cure the complacency typically found in a market controlled by a single dominant provider. ITAA supports the latter view, as did the Congress when it passed the Telecommunications Act of 1996.
Small businesses have a very large stake in the creation of a more competitive telecommunications marketplace. Only through competition will small businesses be able to access many of the telecommunications resources that larger businesses enjoy. And only through competition will carriers have the necessary incentives to make advanced telecommunications services broadly available.
Digital Trust and Security
The Internet and the implementation of Electronic Commerce promise to alter the very way people function. While there are clear benefits to this paradigm, there are new challenges that must be met to assure its success. Allow me to discuss some of these because recognition of these issues is important to the success of the effort.
The core element of doing business transactions is the contract. In cyberspace mechanisms must be found to compensate for the fact that many transactions are conducted between parties that are completely unknown to each other. An appropriate level of "digital trust" must be established. The critical elements of any contract are authentication (you are who you say you are), security of data, and non-repudiation. Techniques exist and are being widely used. However, the legal framework for acceptance of, basic security mechanisms; for example, digital signatures, certificate authorities and the techniques of public key infrastructure (PKI) has been slow to be implemented.
Many states are active in passing legislation to cover these issues. The real danger is a patchwork of incompatible, non-interoperable systems, practices, and requirements that become unworkable. While ITAA supports state implementation of consistent digital signatures legislation with dispatch, this is an area where the leadership of the Federal Government is necessary and the faster these issues are resolved the faster Electronic Commerce can grow. Last year Congress took an important first step in passing the Electronic Authentication Act which, among other provisions gives an electronic signature the same legal equivalent to a handwritten signature. ITAA was proud to have taken a leadership role in the coalition that shaped and supported this legislation, and we are supportive of new legislative initiatives to foster digital trust.
Security of data is a critical element in the development of trust. The Internet utilizes the Public Switched Network (PSN) and is basically an "open system". Stories of hacking and cracking are serious enough for the President to have issued PDD 63 which recognizes the dependence of the U.S. infrastructure on information technology and the potential vulnerability of those systems to attack. PDD63 has provided the initial outline and direction for the development of a more comprehensive national infrastructure protection strategy and plan. One of the key elements in data security is the use of a robust encryption scheme. ITAA has been at the forefront of the battle to protect the domestic of strong encryption and to educate the administration on the shortsightedness of its encryption export regulations. Only the strongest encryption techniques will assure users that their data is not vulnerable to attack.
Internet Taxation
Taxation is another issue that has been at the center of a heated debate.

Last year Congress passed the Internet Tax Freedom Act that established a hiatus in new Internet taxes and established an Advisory Commission on Electronic Commerce to investigate how the patchwork of federal, state, and local taxes could be rationalized. The industry is not looking for special privileges, only fair and equitable treatment. ITAA played a significant role in this debate. ITAA advocated that all legal current taxes should be paid. Goods bought and sold over the Internet should be taxed under current regimes. ITAA opposed new taxes on the medium itself. Creative devices being used by the states such as bit taxes and double taxing of Internet Service Providers are unfair and discriminatory. These taxes would ultimately be borne by users. The unfairness and confusion, which were bound to result, would negatively impact the whole electronic community. The ITAA is excited about the work of the Advisory Commission and fully expects that the concerns of SMEs will be represented and addressed.
Implementation and Support
Small businesses have many resources available to them to become successful through Electronic Commerce, and the number is growing. These resources, both commercial and governmental, are focused on giving SMEs the help they need to succeed in moving to an Electronic Commerce model.
Large and small commercial companies alike are building large practices in helping SMEs on-line. This sector represents a huge business opportunity and it will not be under-served. There are large numbers of consultants and service companies that specialize in the process of moving a business and its processes to an electronic environment. The company must fully understand its processes and practices and there is help available for converting them to an electronic format. The company does not have to possess hardware, software, and networking skills. This element can be outsourced. They only need to know their business.
The Commercial Service of the U.S. Department of Commerce (DOC) has developed programs using digital technology to assist SMEs in reaching export markets. Utilizing their regional Export Assistance Centers (EAC), DOC has focused on Internet technology to bring U. S. sellers together with potential foreign partners and customers. The Virtual Trade Show, Video Conferencing, and Webcasts have all contributed to the ability of SMEs with limited resources to access targeted export market. The program is working and is growing. The Small Business Administration is very active in encouraging SMEs to use Electronic Commerce. Pro-Net is an electronic gateway of procurement information -- for and about small businesses. It is a search engine for contracting officers, a marketing tool for small firms, and a "link" to procurement opportunities and important information. It is designed to be a "virtual" one-stop-procurement- shop.
Pro-Net is an Internet-based database of information on more than 171,000 small, disadvantaged, 8(a) and women-owned businesses. It is free to federal and state government agencies as well as prime and other contractors seeking small business contractors, subcontractors, and/or partnership opportunities. Pro-Net is open to all small firms seeking federal, state, and private contracts. Businesses profiled on the Pro-Net system can be searched by SIC codes; key words; location; quality certifications; business type; ownership race and gender; EDI capability, etc.
The Electronic Commerce Resource Centers (ECRC) provide Electronic Commerce training to SMEs. The ECRC vision statement sums up its mission: "ECRCs serve as a catalyst for a vast network of small- and medium-sized enterprises to adopt electronic commerce. These enterprises use advanced electronic commerce technologies to provide the Department of Defense and the other federal organizations with low-cost, high-quality products, goods, and services." While focused on training SMEs to do electronic business with the government, the principles used in the commercial marketplace are the same. The courses are available at no or very low cost.
ITAA conducts seminars and workshops on Electronic Commerce business practices, often in conjunction with other vertical sector trade association. A recent Web-based educational session featured a discussion of the issues of the Construction Industry Manufacturers Association (CIMA). Attended by both members of CIMA and ITAA, the Webcast was designed to help businesses in the construction industry understand how Electronic Commerce can help their bottom lines.
In summary, Mr. Chairman, the opportunities for SMEs to participate in the Digital Revolution are excellent. Barriers to entry are low. Both government and commercial organizations are focused on this market segment. Training, outsourcing resources, web site development and hosting services, and targeted technical solutions are available. Well-planned programs succeed and deliver both financial and non- financial benefits to the SME. This Committee, by demonstrating its interest and commitment to the implementation of Electronic Commerce by the SME sector, clearly highlights the importance of this new paradigm.
END

LOAD-DATE: June 8, 1999

Document 292 of 383.


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