Table of Contents

ABSTRACT

1. INTRODUCTION

3. DEFINITIONS AND CONCEPTS

 

The extraordinary growth of the Internet is changing the way we communicate, seek and access information purchase goods, and interact. The successful integration of information, communications, and computer technology opens new purchasing channels to consumers and provides firms with the opportunity to fundamentally change the way they conduct their business. Electronic business (e-business) is growing very rapidly and will likely cause as much change in the structure and performance of the American economy as the introduction of the computer, yet currently there are no official measures of e-business activity and little understanding of how it is effecting existing measures of economic activity. The growing demand by policy makers and industry for reliable measures of e-business activity present a useful case study of how a statistical agency responded to an important emerging data need.

Key Words: E-commerce, definitions, surveys

 

1. INTRODUCTION

The growth, integration, and sophistication of information technology and communications is changing our society and economy. Today, computers and other electronic devices increasingly communicate and interact directly with other devices over a variety of networks, such as the Internet. Consumers and businesses have been particularly quick to recognize the potential and realize the benefits of adopting new computer-enabled networks. Consumers now routinely use computer networks to identify sellers, evaluate products and services, compare prices, and exert market leverage. Businesses use networks even more extensively to conduct and re-engineer production processes, streamline procurement processes, reach new customers, and manage internal operations. This electronic revolution in our economy is spurring additional investments in facilities, hardware, software, services, and human capital. Ultimately, it may change the structure and performance of the American economy as much as the introduction of the computer a generation ago. While the burgeoning use of electronic devices in our economy is widely acknowledged and discussed, it remains largely undefined and unrecognized in official economic statistics. This paper describes the U.S. Bureau of the Census e-business definitions, measurement complexities and strategy, and data collection plans. The fact that electronic business is in its infancy, yet growing and changing rapidly, poses special problems and a summary of the lessons we have learned over the first year of this initiative will be summarized at the end of the paper.

2. ELECTRONIC ECONOMY IN PERSPECTIVE

When considering the electronic revolution taking place in our economy, we must recognize that these changes take place in a larger economic context. For example, global competition, interest rates, laws and regulations, social concerns, industry traditions, and consumer preferences are all part of the broader  environment which can affect all business activities. Similarly, electronic and non-electronic businesses share an infrastructure of available economic resources, including natural resources, utilities, structures, equipment, telecommunication and other services, employees, and workforce skills. While keeping this larger economic context in mind, the emphasis in this paper is to describe and encourage understanding of the  electronic portion of our overall economy.

This paper reports the general results of research undertaken by the Census Bureau staff. It has undergone a more limited review than official Census Bureau publications. This report is released to inform parties of research and to encourage discussion.

It is useful to think of the electronic economy as having three primary components--supporting infrastructure, electronic business processes (how business is conducted), and electronic commerce transactions (buying and selling). These components are defined and discussed in the following section. In addition, it is important to note that a common feature of both electronic business processes and electronic commerce transactions is reliance on the use of computer-mediated networks. It is reliance on the use of computer networks, and the benefits this can provide, that is the  bottom line difference between electronic and other kinds of business. This important shared feature is also defined and discussed in next section.

 

3. DEFINITIONS AND CONCEPTS

One of our first challenges was defining what we wanted to measure. Early on it became clear that policymakers, industry, and the media used a variety of terms to describe electronic economic activity. Moreover, we found that these terms often were used interchangeably and with no common understanding of their scope or relationships. Consequently, we determined that establishing specific terms that clearly and consistently describe our growing and dynamic networked economy was a critical first step in developing useful statistics about it. During the Summer 1999, the Census Bureau developed definitions and concepts to describe the electronic revolution taking place in our economy. Our starting point was a thorough review of related work undertaken by other National statistical agencies and we borrowed heavily from work done by Statistics Canada and others. We also have been sharing and discussing our definitions with an OECD task force charged with developing electronic commerce definitions.

The three primary components of our electronic economy, and the feature shared by two of them, are defined below. Each definition includes examples of its scope and content, both to clarify and elicit reactions . The definitions are intentionally broad to provide an inclusive framework for planning statistical measures, and to allow flexibility to incorporate continuing changes in the electronic economy.

E-business infrastructure is the share of total economic infrastructure used to support electronic business processes and conduct electronic commerce transactions. It includes hardware, software, telecommunication networks, support services, and human capital used in electronic business and commerce. Examples of e-business infrastructure are:

Ï% Computers, routers, and other hardware

Ï% Satellite, wire, and optical communications and network channels

Ï% System and applications software

Ï% Support services, such as web site development and hosting, consulting, electronic payment, and certification services.

Ï% Human capital, such as programmers.

Electronic business (e-business) is any process that a business organization conducts over a computer-mediated network channels. Business organizations include any for-profit, governmental, or nonprofit entity. Examples of major electronic business processes categories include online purchasing, selling, production management, logistics, as well as internal communication and support services. Within each major category one can identify more specific processes. For example, online purchasing includes the following online processes: access to vendors products/catalogs, ordering from vendors, electronic payment to vendors, vendor managed inventory, use of electronic marketplaces and online auctions. Internal processes email capabilities, automated employee services, training, information sharing, video conferencing, and recruiting.

Electronic commerce (e-commerce) is any transaction conducted over computer-mediated network channels that transfers ownership of, or rights to use goods or services. A transaction is an event occurring within selected e-business processes (e.g., buying and selling process). An e-commerce transaction is  completed when agreement is reached between the buyer and seller online to transfer the ownership or rights to use goods or services. This electronic agreement is the trigger for determining an e-commerce transaction, not the payment. Only priced transactions will be measured, downloads of free software, for example, will not be measured.. Examples of both e-commerce and non e-commerce transactions are provided in Section 3.1.

Computer-mediated networks are electronically linked devices that communicate interactively over network channels. Generally, both electronic devices will be computer-enabled, but at a minimum at least one device must be computer-enabled as in the case of a typical telephone linking with an computer-enabled interactive telephone system. Typically, the interactive link involves minimal human intervention though someone activates the electronic devices, accesses the network, and may even assist with the process or transaction. For example, many e-commerce businesses are providing shoppers with the on-line capability of  chatting with customer support representatives or even speaking with them through the use of Internet telephony software. Examples of devices and networks are:

Ï% Linked electronic devices such as computers, personal digital assistants, webTV, Internet-enabled cellular phones, and telephones linked with interactive telephone systems.

Ï% Networks such as the Internet, Intranets, Extranets, Electronic Data Interchange (EDI) networks, and telecommunication networks. Networks may be either open or closed.

3.1 E-commerce examples

In order to generate discussion about and reactions to the definitions from policymakers, industry, academia and others, we developed specific examples of e-commerce transactions:

Ï% An individual purchases a book on the Internet.

Ï% A government employee reserves a hotel room over the Internet.

Ï% A business calls a toll free number and orders a computer using the seller s interactive telephone system.

Ï% A business buys office supplies on-line or through an electronic auction.

Ï% A retailer orders merchandise using an EDI network or a supplier s Extranet.

Ï% A manufacturing plant orders electronic components from another plant within the company using the company s Intranet.

Identifying e-commerce transactions often is not as straight forward as the previous examples may make it appear. Some additional examples that demonstrate the complexity of implementing the proposed definition are provided below.

Ï% A consumer visits a bookstore and inquires about the availability of an out-of-stock book. A bookstore employee downloads a digital copy of the book and prints it along with cover. This is not an e-commerce retail transaction since agreement to purchase did not occur over an electronic network. However, the right to access the digital archived copy is an e-commerce service transaction.

Ï% A consumer uses the Internet to research the purchase of a computer, but calls a toll free number and places the order with an operator. This is not an e-commerce transaction because the agreement to transfer ownership did not occur over computer-mediated network; neither telephone was computer-enabled.

Ï% An individual visits a retail store and purchases merchandise not currently in stock from a computer-enabled kiosk located inside the shop. This is an e-commerce transaction since agreement occurred over a computer-mediated networks. In contrast, the purchase of a pre-packaged music CD from a computerized kiosk would not be considered an e-commerce transaction. If the kiosk was network linked, the digital music was downloaded, and the CD was mastered within the kiosk this would be an e-commerce transaction.

4. MEASUREMENT COMPLEXITIES

Identifying and measuring e-commerce transactions is new for statistical agencies and it can be complicated. The simple example of an on-line retail book purchase illustrates some of these complexities and points out other measurement challenges that remain to be addressed.

Ï% Example--John Doe logs onto his computer, accesses the  Bigbook.com Internet site, identifies a rather obscure title, and purchases it for $20 plus a $4 delivery charge. John pays with his credit card and is told his book will be delivered in 3-5 days.

This simple example involves Bigbook s use of several additional e-business processes, assuming they are conducted over computer-mediated networks. These processes include electronic marketing to reach John, an electronic search to find the obscure title, electronic procurement and payment to obtain the book from a wholesaler or another dealer, electronic authentication of John s credit card information, electronic processing to obtain payment from a financial institution, electronic shipping arrangements for delivery of the book, and electronic customer support to e-mail John an acknowledgment, order number and expected delivery date. Understanding the effects of these processes on Bigbook s business operations and costs, its supplier and customer relationships, and its competitive industry position are a significant measurement challenge.

This example not only covers many business processes, these processes also involve multiple e-commerce transactions. These transactions include John Doe s purchase of the book from Bigbook and Bigbook s separate transactions with third parties to obtain order fulfillment services, acquire the book for resale, secure credit authentication services, provide payment processing services, and arrange for delivery of the book to John. As in any measurement program, we must decide what information to collect and from whom to collect it. Just as in the brick and mortar world answers to these determinations will depend on the characteristics of the transaction and the parties involved. For example, there is no question that we want to collect the value of the books sold by Bigbooks. However, for e-commerce purposes we also may want to collect information about shipping costs which often represent a significant portion of the total cost paid by the purchaser of the book. This shipping information will be useful in understanding e-commerce activity even though our existing retail trade survey does not collect shipping costs for catalog stores, another business where shipping costs can be significant. To measure electronic payment services we would not collect information on the total value of the transaction, but rather focus on the fee paid by Bigbooks for the payment service, probably a small percent of the total value. In terms of from whom to collect the information, we have two options just as in the physical world, buyer or seller. While we certainly could survey households regarding e-commerce purchases of books, the need to develop industry estimates makes surveys of the selling entities more attractive and generally, less expensive.

Understanding the industry classification system and its implications for e-commerce and e-business measures is a must for all prospective data users. The value of e-commerce transactions, like their brick and mortar counterparts, are aggregated and presented by the industry of the business entity selling the goods or services and any classification system will impose additional measurement constraints. For example, Bigbook would be classified in North American Industry Classification System(NAICS) retail industry 454110, Electronic Shopping and Mail-Order Houses along with traditional catalog stores. Data on employment, total sales, or e-commerce sales would be provided for the industry as whole; typically information would not be broken out between electronic shopping and mail order houses and certainly not by merchandise lines such as books. Similarly, e-commerce related services such as credit card authentication or electronic payment processing will be found in NAICS industry 522320, Financial Transactions Processing, Reserve, and Clearinghouse Activities, along with check clearing services and various other processing activities. These examples are only meant to point out that the industry classification system may not satisfy all the data demands of an e-commerce analyst and survey managers will have to look for additional ways to supplement industry data. Finally, classifying emerging and rapidly evolving businesses engaged in e-commerce and e-business activities will remain a challenge for statistical agencies as many of these activities are truly new and do not fit cleanly into our existing industry  pigeon-holes .

The above example also points out that any given business-to-consumer transaction will involve a larger number of related business-to-business transactions. This transactions multiplier effect is not unique to e-business; however, its expected growth and continued change will add to the challenge of measuring e-business and e-commerce. Growth in transactions is expected because as e-commerce expands, related business-to-business transactions will become more fragmented; participants will concentrate on performing their highest valued-activities and rely increasingly on third parties for lower-value added activities. The measurement challenges of this growth include accounting for the increased volumes, identifying the new e-business players, maintaining up-to-date information for the known players, and avoiding double counting the value of related transactions.

Change in the scope and nature of e-commerce transactions is expected because electronic business methods permit the players to change their roles relatively easily and they increasingly will do so. Examples of changes in roles are today seen in manufacturers and wholesalers who now sell directly to consumers, and in the  virtual integration of firms through informal alliances that link firms electronically. These new arrangements impose additional measurement challenges including identifying the new players and their roles, maintaining up-to-date information on them and how their roles are changing, and updating data collection methods (such as including a direct-sale  manufacturers in an appropriate  retail sales survey frame).

 

5. MEASUREMENT STRATEGY

Our measurement strategy is multi-faceted, yet purposeful and is tempered by reductions in our FY 2000 budget (October 1999-September 2000). The key characteristics of our e-business measurement strategy are described below.

Ï% Achieve and exploit first mover status. We thought it imperative to begin measuring and understanding the electronic economy sooner rather than later. By adding e-commerce inquiries to existing surveys we were able to begin collecting additional data at relatively low marginal cost in FY 2000. We hope that by providing the first official e-commerce measures this year and having a number of other surveys underway, our first mover status will help secure support for a FY 2001 e-business budget initiative that funds a comprehensive measurement program.

Ï% Leverage our core competencies. We have extensive experience and expertise collecting data on the value of business transactions; we have little experience in process measurement and its associated supporting infrastructure. Consequently, we identified e-commerce as our initial measurement priority, e-business process measurement next, and infrastructure measures as are final priority.

Ï% Measures should complement and improve our existing economic statistics. We want our e-business measures to extend and improve our existing economic statistics. Consequently, our initial e-commerce and e-business process measures will use existing survey frames so e-commerce and e-business process measures are conceptually consistent and comparable with broader survey measures of economic activity. Similarly, our e-business research activities will focus on improving and extending our existing statistical programs.

Ï% Partner with government, business, and academia. Our goal is to develop an e-business measurement program in collaboration with government, business, and academia. Definitions and underlying e-business measurement took into account work undertaken by other National statistical agencies, private sector analysts, and the research community. Likewise, we have contracted with private sector experts to help us better understand e-business process effects and implications.

Ï% Employ e-business processes in business data collections. The Census Bureau, like successful e-businesses, must itself exploit e-business processes and adopt more effective methods of operation.

 

6. CENSUS BUREAU MEASUREMENT PLANS

In the Fall 1999, the Census Bureau began testing these definitions and concepts with businesses as we initiated an incremental program to begin providing official measures of e-commerce activities as well as providing some limited information on e-business process usage. A more ambitious measurement program focusing on understanding and measuring e-business process effects, prioritizing and possibly quantifying e-business infrastructure, and significantly expanding the Census Bureau s use of e-business methods depends on additional funding being appropriated in the FY 2001 budget.

 

6.1 Produce first official measures of e-commerce

In FY 2000 we introduced e-commerce measures in a number of current economic surveys and initiated two research contracts. Our compressed time schedule and limited resources did not permit us to conduct a thorough record keeping practices study and we fully expect during these first collections to encounter unanticipated reporting problems and to identify additional measurement issues and complexities. Specific FY 2000 activities are described below.

Ï% Began collecting monthly e-commerce retail sales. In August we mailed a screener to almost 8,000 retail firms in the monthly retail survey sample and asked if they currently sold online or had plans to start by the end of the year. Those that responded affirmatively, were mailed a form with e-commerce questions in October. We continue to collect the data monthly and publish quarterly estimates. The first official retail e-commerce estimates were released on March 2, 2000, covering the fourth quarter 1999. E-commerce sales totaled $5.3 billion and represented 0.6% of total retail sales. First quarter 2000 estimates were released on May 31, 2000.

Ï% E-commerce inquiries added to several annual surveys. We added e-commerce sales questions to annual surveys covering retail trade, wholesale trade, accommodations and food services, and the rest of the NAICS services sectors. Firms were asked to report their e-commerce sales for both 1999 and 1998. Retailers and wholesalers were also asked if they were purchasing goods, supplies, or services over computer-mediated networks. For nonstore retailers (catalog and electronic shopping sites), and all computer, software, and office supply firms we collected additional information: total sales and e-commerce by 11 commodity categories (books, CDs, computers, software, apparel, etc); e-commerce sales by class of customer (individuals, businesses, government), and total foreign e-commerce sales (percent ranges of total e-commerce sales). Report forms covering reference year 1999 were mailed in March-April 2000. Data review and dissemination will occur in FY 2001 with data available in early calendar year 2001.

Ï% 1999 Annual Survey of Manufactures Supplement. A special supplement has been developed that will collect data from some 60,000 manufacturing plants on:

• E-commerce sales and purchases
• Types of information (design specifications, product descriptions, demand projections, orders, inventory, production schedules, and so on) manufacturers are sharing online with suppliers and customers
• E-business processes use (present and planned). Over 25 specific e-business processes are identified.

The supplement will be sent to the plant manager in June 2000 and results will be available next year.

Ï% E-business Research Studies. We have two research studies underway. We have contracted with Pembroke Consulting (Dr. Adam Fein) to study changing supply chain industries and organizations. Deliverables for this summer include a description of the changing supply chain, implications for Census Bureau measurement programs, and specific recommendations regarding how to better capture and describe supply chain activities in the 2002 Economic Census and in our current economic statistics. A second contract is with IBM Global Services. In phase 1, IBM and Dr. Jeff Sampler are focusing on the information technology drivers of e-business, will describe how these drivers are affecting the value-chain, identify the implications for Census measurement programs, and make specific program recommendations. The second research component being led by Dr. Hal Varian is assessing how well NAICS captures e-business activities and will make specific recommendations how we can supplement the NAICS industry classifications to better describe e-business activities and support new 2002 Economic Census data aggregations.

6.2 FY 2001 E-business Budget Initiative ($8.5 million).

The FY 2001 budget initiative will fund the implementation of the ambitious e-business measurement program we started this year. Specific activities include:

Provide e-commerce measures for most economic sectors and their associated industries. While it was relatively inexpensive to add inquiries to existing surveys in FY 2000, additional funds are needed to process, review, and prepare data products covering manufacturing, wholesale, retail, food services and accommodations, and service industries. For next year, we also are considering adding an e-commerce inquiry to the monthly wholesale trade survey to provide more frequent measures of e-commerce activity for this important sector.

Deliver first official baseline measures of e-business process usage by manufacturing industries. In addition, data from the ASM supplement will be linked to the full ASM data set permitting us to assess the effect of e-business processes on individual plants, firms, and industries. Baseline measures also will extended to other economic sectors.

Include coverage of electronic marketplaces and other important distribution channels in the annual wholesale trade survey. A new survey of supply chain organizations is being considered to help us understand changing functions and activities.

Develop e-business infrastructure measures. Key activities will include identification of priority measures, assessment of data availability and record keeping practices, and initiation of data collection. We have invited suggestions on key measures that should be considered for collection.

Employ e-business processes in business data collections. Our goals are to ease reporting burden and increase efficiency in data collection programs. Deliverables include an Internet reporting capability for all 5 million businesses included in the 2002 Economic Census; establishment of a Customer Relationship Management staff to coordinate and improve communication with the largest companies and facilitate their responses to information requests from separate Census Bureau data programs; and development of an Internet-based customer support system for the 2002 Economic Census to provide on-line information and technical assistance to census respondents.

7.0 LESSONS LEARNED

This past year has been exciting and challenging. The Census Bureau has embarked on an ambitious e-business measurement program and the response to our initial efforts has been encouraging and supportive. Nonetheless, we fully recognize that e-business is in its infancy, is changing rapidly and that the most difficult measurement challenges lay ahead of us. Nonetheless, implementing an aggressive measurement program has provided us with some valuable lessons .

Ï% Definitions and concepts are important. We spent almost six months developing definitions and a framework for measuring e-business and this was time well spent. We found that it has been essential to use precise terms to discuss e-business transactions, processes, and the underlying infrastructure. These definitions supplemented with specific examples have been especially useful in discussing measurement plans and priorities with policymakers, business, and other statistical agencies.

While during our deliberations we agonized over specific words and examples, we decided for collection purposes to keep the instructions simple and straight forward. Consequently, we have avoided overly technical definitions of communication protocols and such and have tried to craft questions in language that accountants would understand. In our instructions we also provide clarifying examples to better communicate with respondents, such as descriptions of computers and electronic devices that communicate interactively over various types of networks.

We began field testing our e-commerce definition in October 1999 with the monthly retail survey and in March-April 2000 with our non manufacturing annual surveys. The initial results have been encouraging; the vast majority of businesses understand our definitions and instructions and we have had very few questions. The manufacturing e-business supplement will be our first test of our e-business processes definitions. We are targeting the manufacturing plant manager, not the accounting department so we expect a high degree of familiarity with existing processes and the degree of integration with vendors and customers. However, this is our first experience with processes so the proof will be in the reporting. To help us identify possible problems and confusing terms and questions, the Internet version of the report form will invite specific feedback regarding definitions, terms and instructions.

Ï% Start small, leverage your existing resources. Constrained budget resources in FY 2001 prohibited us from considering stand-alone e-business surveys or programs. By adding questions to our existing surveys we were able to mobilize quickly, minimize data collection costs, and provide e-commerce baseline measures which can be related to broader measures of economic activity. Taking advantage of our transaction expertise, we first focused on e-commerce measures. As our understanding of e-business processes increased we developed the manufacturing supplement. This approach has served us well and we expect the results from these initial collections will not only provide useful summary statistics but also will further our staff s understanding of e-business. Our focus on e-business within the context of our existing programs also has had an unanticipated benefit in that it has forced us to address a long list of measurement issues related to coverage, classification, valuation, and so on. These issues are not new or associated only with e-business, but a new e-business perspective has caused us to take a fresh look at them.

Ï% Understanding E-business processes is a priority. While we are quite proud of the e-commerce measures that we have implemented, after 18 months of effort I am convinced that understanding e-business processes must be a top priority for statistical agencies. The exploding use of e-business processes over inexpensive networks is changing the face of business and will face statistical agencies with numerous new challenges. For example, realtime sharing of information between manufacturers, vendors and customers is changing the supply chain. These e-business processes also are changing transaction costs, facilitating outsourcing of specific activities, blurring industry and often sector distinctions, and creating new virtual organizations. Yet statistical agencies have little information that documents or explains these changes or assess their impact on existing measures of economic activity. Understanding and quantifying e-business process effects is going to be difficult and will likely require innovative and nontraditional methods and we welcome any and all suggestions.

Ï% Do not expect much help in establishing e-business measurement priorities. One of our measurement strategies was to partner with government, business, and academia in developing an e-business measurement program. We have done a good job of keeping these constituencies informed of our definitions, measurement strategies and survey plans and have invited feedback on all of these items. The Census Bureau web site has served as an excellent vehicle for communicating our definitions and measurement plans to broad audience. The inclusion of specific examples of e-commerce transactions and e-business processes has generated many useful comments and suggestions. We have no success in eliciting suggestions about needed measures or priority data variables. We have invited analysts, policymakers, and researchers to specify the questions they would like our e-commerce, e-business processes, or e-business infrastructure measures to answer, but have received very few suggestions. We have been much more successful in developing a draft questionnaire and then asking different parties to comment. This has worked quite successfully with the manufacturing e-business supplement. We expect to take the same approach as we begin developing our first e-business infrastructure measures.

8.0 Conclusion

Measuring the electronic economy poses new challenges to the Census Bureau and other statistical agencies. We are excited about what we have accomplished, but realize much more remains to be done. We invite feedback on our definitions, measurement strategy and plans. Please forward your comments and suggestions to Thomas L. Mesenbourg at tmesenbo@census.gov .