Border Crossings: Cross-Border Logistics Slow to Adopt IT

The argument that we are living, or at least entering, a new economy rests on two legs: the spread of computers and the ongoing systematic organization of the world economy. While the first point gets most of the press, the latter may be almost as important. Small, locally defined markets sacrifice value by limiting both economies of scale and the growth of specialization. As markets grow globally, the resulting increases in efficiency should release a continuous stream of value into the world economy.

It seems that the hottest piece of the IT market would be where these “legs” join, with the use of computers to manage cross-border transactions. An article we ran in 1993 (“Made for Export,” Dec. 15), though narrowly focused on the migration of a single major corporation’s export management system from paper to software, seemed to catch this spirit. According to our piece, this transition had no downside to speak of: You just wrote the software, booted her up and counted the dollars.

Given this, it seems paradoxical to learn from those involved with cross-border trade that the field was one of the last corporate functions to be digitized. “You could see typewriters in offices into the late ’90s,” says Cris Arens, president of Fountainhead International, a logistics software house in Bensenville, Ill. “And they were being used too.”

Arens and other sources offer many reasons why cross-border logistics were so slow to adopt IT. Over the decades, international trade had built up a huge paper infrastructure, involving countless forms issued by public and private bureaucracies around the world (packers, inland carriers, international carriers, banks, insurers, freight forwarders, warehousers, customs and more), each with its own data and format requirements. Digitizing enough of these forms to make the transition useful would have been a huge job, and some data had to be on paper anyway, as a matter of law. For most companies, cross-border trade was essentially a revenue afterthought, which meant the resources to pay for the shift were hard to find.

Finally, there was no overwhelming reason to change. The high fixed costs of each transaction and relatively slow business cycles encouraged trade to move in small numbers of large shipments?one 10,000-unit shipment might arrive in February and then another in the fall?and typewriters could keep pace with that flow.

Through the ’90s, however, governments around the world launched a number of initiatives to lower trade barriers. It would seem common sense that freer trade would translate into a simpler process, but that is not how trade adjustments work. Trade is a highly charged process politically; changes always involve extended haggling over the finest possible details. The end result is usually a complicated stew of solicitation and qualification instruments, and refund claims tied to detailed lists of specific products and country-of-origin content documents, all linked to phase-in and phase-out schedules that themselves are constantly changing.

Larry Christensen, a vice president at Vastera, a Dulles, Va.-based software and services company that specializes in global trade management, likes to propose this quiz: “Did Nafta make it easier or harder to move goods over borders?” You know by his tone that the right answer is not the obvious one. “Harder, because now you needed a staff to prepare the documents,” he says. “People argue over whether Nafta created jobs,” says Frank Cirimele of Xporta, a company in Santa Clara, Calif., that makes software to manage cross-border supply chains. “It sure did for lawyers.”

Other categories of regulations, such as end-user restrictions, started proliferating rapidly at the same time. There are now 14,000 entries on the list of persons or entities for which American companies need special permission to do business, and more make the list every day. In short, typewriters could no longer keep up.

In 1996, the U.S. Department of Commerce had become so concerned about the costs and level of compliance with this flood of regulations that it began the first general rewrite of export procedures since 1949. The emerging system was designed from the ground up to be implemented in software. By 1999, customs had completely automated the submission of export control documents and the gathering of export statistics. A similar arrangement for import documents followed a year later.

At the same time, cross-border transactions involving U.S. companies doubled from one trillion to two trillion. Trade began to represent enough revenue to assert a serious claim on corporate IT investment budgets. Finally, by the end of the decade, companies had spent enough time and effort digitizing the required documents that the databases started to become useful.

The result is that for the first time large components of U.S. trade can be tracked and managed with software. This is potentially quite significant. Digital environments are much more flexible than paper-based IT processes. They can be reconfigured?adopting innovations and enhancements?in minutes. Today, dozens of software vendors around the world turn out software with features that seem bound to simplify and therefore accelerate trade. Fountainhead’s Arens cites as an example rate analyzers that can automatically probe prices across multiple shipper databases, kicking out detailed suggestions for the most cost-effective shipment compositions and carriers. According to Xporta’s Cirimele, last summer the United Nations agreed on a common document standard for commercial transactions. When implemented, this will allow supply chain management and resources planning software to collect, forward and integrate data seamlessly across borders. Greg Stock, a vice president at Vastera, points out that digitized services are easy to repackage for many different kinds of clients. For example, they can be distributed over the Web by third parties via an ASP-type relationship. “A company can be a global player instantly,” he says.

While it is hard to know for sure how much value gets thrown away by the current balkanization of the world economy, the prosperity of the few large trading blocs in the world (the United States and the European Community) suggest that the amount is very large. If the theory that prosperity is a function of market size turns out to be true, then the digitization of trade-related IT might turn out to be one of the more important economic stories of our time.