Forecast 2006: RFID

Cost and complexity continue to block enterprise use.

The IT trade press and industry analysts alike have been hailing radio frequency identification as the second coming of bar codes. But for users, most of whom have implemented only small, low-impact pilots, RFID is a long way from becoming a key part of the enterprise. In fact, respondents to a recent Computerworld survey ranked RFID second among technologies that hold promise for their companies or industries -- but first among technologies that haven't lived up to their hype.

Indeed, many organizations that have deployed RFID have done so because it was mandated by powerful business partners like Wal-Mart Stores Inc. or the U.S. Department of Defense, which can control how their suppliers do business. Other early adopters are testing the technology in their own supply chains or assembly lines, or in systems for tracking IT assets. They're the exception, however, since high-cost, complex deployment and entrenched tracking systems -- most notably bar codes -- are keeping RFID on the back burner at many organizations.

One early adopter, American Power Conversion Corp., a West Kingston, R.I.-based manufacturer of uninterruptible power supplies and other physical network infrastructure products, is ahead of the RFID curve. But even at APC, the technology remains in the pilot stage. The $1.7 billion company is about to launch a small-scale RFID rollout that includes middleware from IBM and production design and deployment services from Dulles, Va.-based Odin Technologies.

Despite being close to completing its second ROI study to determine the financial benefits of a full-scale RFID deployment, including integration with its Oracle ERP suite, IT officials at APC say they don't expect widespread deployment at their own company or other organizations this year.

Richard Morrissey, director of e-business strategy development at APC

Richard Morrissey, director of e-business strategy development at APC

Image Credit: Webb Chappell

"2006 will still be a learning year. We'll be asking, 'Are we getting financial benefits, and is this a complete solution?' " says Richard Morrissey, director of e-business strategy development at APC. "The cost of entry has come down, so for our suppliers, it's not as cost-prohibitive. But to scale globally will be a significant cost. Even though the prices are dropping and standards are being settled on, early adopters have to have deep pockets."

Cost Issues

RFID isn't new -- if your car is equipped with a transponder for paying highway tolls, chances are you're already using it. But it's just now beginning to affect corporate IT. RFID holds the promise of automatic identification and data collection without the line-of-sight and proximity limitations of bar codes. However, despite the hype, widespread adoption has been slow.

"It's still in the early-adopter phase, and cost is the main problem," says Curtis Price, an analyst at IDC in Framingham, Mass. "Among the companies we've spoken to -- and this is anecdotal -- they can expect to pay from $500,000 to $1 million. That's before any kind of expansion, not for a full-scale rollout."

Even where RFID would appear to be a good fit, high deployment costs are holding companies back. At Marquette University in Milwaukee, I managers see the technology's potential. For example, RFID could be used to track dental instrument kits in the university's dental school -- something that is currently done with bar codes -- and it could replace magnetic-stripe technology in student ID badges. But a bare-bones budget has prevented anything more than a cursory look at deployment.

"We see benefits, but they don't outweigh cost," says Dan Smith, senior director of IT services at Marquette. "Our budgets aren't up to implementing it, even in areas where it would make sense."

For example, Smith says that mag-stripe IDs cost about 40 cents per card. He estimates that RFID-based IDs would cost between $5 and $7 per card. That could equal almost $100,000 campuswide, without taking into account the cost for new RFID card readers. (The university doesn't have an estimated cost for replacing bar codes with RFID in the dental school.)

Even at the largest companies, management balks at the cost of RFID. At Bank of Tokyo-Mitsubishi Ltd., a unit of financial services giant Mitsubishi Tokyo Financial Group, bank managers say RFID could be used to keep track of transaction data stored on tapes that get transferred off-site to third-party data-storage companies. But it hasn't considered bringing in an RFID tracking system, says Marty Ross-Trevor, the bank's New York-based vice president manager.

"A major stumbling block is the cost of the tags alone," says Ross-Trevor. "A bar code costs a fraction of a penny, and tags can cost a few dollars each, and you need thousands of them, as well as the servers and everything else. It's a multimillion-dollar investment. That works for Wal-Mart, but for smaller companies, it's hard to justify the cost. It's still too early to even do ROI."

Unanswered Questions

RFID deployment is not only costly, it's also complex. There's a lot more to the technology than tags and readers. A complete RFID system with servers, middleware and integration software for legacy business systems, as well as new applications that will be based on the data, can have a profound impact on not only your own IT infrastructure, but also those of your business partners.

"[With RFID], you're taking a lot of data that gets collected at the edge of the network, and that might be the most challenging part," says IDC's Price. "Users are asking, 'How do I put business logic around it? Are reports available to check on the health of the RFID system? Can I bring it in seamlessly and integrate it with existing systems?' "

It's a major task just to figure out what to do with RFID data. The technology is at a point where the few early adopters have barely included back-end integration into their pilot rollouts, observes Christine Spivey Overby, an analyst at Forrester Research Inc. in Cambridge, Mass.

"The pilot companies are just figuring out that deployment is very complex, stretched across a variety of stores [and] large geographical areas, and it's hard to do. Then, what do you do with the data? There's not a lot of information with it," says Overby. "In the short term, with pilots, there's not as much investment in back-end technology. Many don't have robust integration to the back end."

At APC, these considerations, as well as the company's geographically far-flung distribution centers, have made RFID deployment difficult, says Morrissey. "[The technology] will require us to change some network architecture, as well as that of our partners, and it affects where we place servers," he says. "We don't want to do tagging across a wide-area network halfway around the world. So there's clearly a local impact, but also a corporate and global impact if you're that size company. This affects end users, retailers and distributors."

However, he adds, even APC customers that don't have RFID capabilities can benefit from the company's use of the technology because the business processes will be improved upstream.

"We're adding value -- not only the perceived benefits, but also the processes that improve business," he says.

What will it take to allow RFID to finally live up to the hype? Retailers will continue to strong-arm suppliers into using RFID, but so will developing standards such as passive UHF Generation 2, which is used by Wal-Mart, Target Corp. and the Defense Department, says Forrester's Overby.

Because of the high cost of deployment and the impact on existing IT infrastructures, force might be necessary to prod users to adopt RFID. "For us to implement it, it would have to be determined by regulators and become like a Sarbanes-Oxley bill," says Ross-Trevor at Bank of Tokyo-Mitsubishi.

Despite the obstacles, RFID is bound to usher bar codes and other edge-network tracking technologies out of the enterprise. In the meantime, users will have to watch how RFID's early adopters, as well as those companies forced to use it by large, influential players, can improve their bottom lines with the technology.

See the complete Forecast 2006 special report.
Webster is a freelance writer in Providence, R.I. You can contact him at

Copyright © 2006 IDG Communications, Inc.

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