e-Steel Forms Solid IT Foundation

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Michael S. Levin revels in what some might call the extreme. He doesn’t just hike, he climbs mountains, including the Chugach in Alaska and ranges in Wyoming’s Jackson Hole. He doesn’t just sail, he’s a past skipper in the Admiral’s Cup and Southern Ocean Racing Circuit as well as the recipi- ent of the Stamford Yachting Club’s

De Coursey Faeles Trophy. Forget recreational skiing—Levin, who is 50, favors couloirs, the steep cliffs that are no stranger to avalanches. So what’s next for the thrill-seeking Levin? Applying his love of adventure to conquering the rough and tumble world of business-to-business e-commerce.

As chairman and CEO of e-Steel, an online marketplace for the steel industry, Levin’s certainly picked the right place to test his endurance in the face of a challenge. On one hand, the 2-year-old e-Steel (www.e-steel.com) is considered a veteran and one of the more stable players in B2B, which is expected to be the next frontier for blockbuster technology growth in e-business. Its own revenue model calls for e-Steel to receive a fee—paid by the seller—each time a transaction is complete. The company also hopes to boost revenue by building and selling specialized applications for its exchange for specific industries (like automotive) and by selling branded e-Steel applications for other marketplaces.

The fact that e-Steel has a multipronged strategy is key. With investors and pundits still reeling from last spring’s market crash and shakeout among business-to-consumer Internet sites, B2B marketplaces are under the gun to provide value-added services that go far beyond streamlining procurement if they have any hope of long-term survival. The focus now is on integration, or the process of linking an exchange to participating companies’ back-end financial, order entry, inventory and manufacturing systems. The goal: to create a highly automated, online supply chain that delivers such efficiencies as reduced transaction costs, less inventory in the pipeline and improved collaboration, forecasting and scheduling among suppliers, suppliers’ suppliers and so on.

It’s a tough game, and while Levin claims New York City-based e-Steel is certainly ahead of the curve, he admits it is far from a master of integration. "It’s been our total focus in the last few months," says Levin. "Integration is paramount in thinking through all the new developments in the company."

This relentless focus on integration is starting to pay off. In July, e-Steel inked a three-year, multimillion-dollar partnership with Australian-based Broken Hill Proprietary (BHP) Co.’s steel business—the 19th largest steel producer worldwide—to build a custom network powered by e-Steel technology. Initially, the network will be open to BHP’s Australian customers and later expand to key markets internationally.

Integration at the Core

Strategically focusing on integration is a good move for e-Steel. By many accounts, revenues from B2B e-commerce are poised to balloon to the hundreds of billions, maybe even trillions of dollars over the next few years. But experts say those rosy forecasts are predicated on making integration a core capability of B2B exchanges. "Within two years, B2B e-commerce will hit $900 billion, but that’s peanuts compared with the size of the economy," notes Tom Harwick, research director for supply chain management at Giga Information Group in Cambridge, Mass. "It’s going to grow to a much bigger figure by 2005, based on the assumption that integration happens. If it does, B2B will be the preferred way of doing business. If it doesn’t, growth will almost certainly stall."

All the hoopla surrounding B2B’s potential has fueled the perception that a lot of the integration work has been done. Not so, say the experts. According to a June 2000 report from Forrester Research, only four out of the 50 large companies surveyed that are involved in e-business have integrated their back-office applications with electronic marketplaces, although most (85 percent) have integration plans in development. Then there’s the notion that building bridges between an exchange and customers’ back-end systems will be relatively straightforward. Far from it, when you consider Forrester’s findings that 70 percent of companies plan to participate in more than one marketplace, most targeting between four and five. "Unless you talk to the people who are really in it, there’s a perception that more integration has been achieved than what has happened to date," says Giga’s Harwick.

Integration issues have taken a backseat because most of the freshly minted exchanges believe they first need to focus on building up membership and liquidity in terms of the number of transactions. And that process has just begun. Forrester’s research shows that only 36 percent of all e-marketplaces have done more than 100 transactions a month. "The real issue is that there’s not enough traffic through the sites yet, so the motivation isn’t yet there [to focus on integration] on the part of the companies that build marketplaces and the companies that join them," says Simon Yates, a Forrester analyst and author of the report, "B2B Integration Road Map."

Besides the technical issues associated with syncing up computer systems, B2B integration, if done properly, hinges on rethinking global supply chain practices and instituting massive change not far from the scale of upheaval associated with the 1980s reengineering fad. Getting companies to cast a critical eye at their existing processes and interaction with their supply chain—not to mention, to be willing to make modifications—is where most of the suffering will lie. "To get us to nirvana, the early adopters and mainstream adopters are doing the work that’s required over the next couple of years," Harwick says. "They’re bearing the pain but will reap the benefits of being early movers."

First Come, First Served

E-Steel is clearly positioning itself as one of those integration pioneers. Yet while Levin says the idea of linking the exchange to a steel company’s back-end systems was always part of the e-Steel big picture, it was not the focal point when the site was conceived in early 1998 or at the time of its inaugural transaction on Sept. 7, 1999. That’s when Worthington Steel Co. purchased several truckloads of prime hot-rolled coils from Cargill Ferrous International.

At the start, the thinking was to create a networked, global marketplace that would alleviate some of the inefficiencies in the steel industry, which was struggling with low margins and cumbersome, paper-based processes. It had been Levin’s goal for years, having started in steel at his stepfather’s company, Titan Industrial Corp., after graduating from Harvard Business School in 1974. Although no one expected him to stay in the business for any length of time, Levin saw promise in what many viewed as a stodgy, unprofitable industry. He became addicted to the global marketplace that sent him to exotic locales like Turkey and India, so much so that he eventually ended up buying Titan from his stepfather and logging over 25 years in the business. "Steel mills are the fundamental building blocks of our economy," he explains. "Steel is on a scale where everything is big. It’s everyone’s notion of what industrial power is all about."

Levin’s obsession first resulted, during the early 1990s, in something he called Steelnet, a global network where participants could communicate and transact business using satellite communications. While the idea for Steelnet stuck, the company never materialized since satellites were not robust enough at the time to deliver the real-time information required for Levin’s vision. When the Internet took off years later, Levin revisited the concept. This time, he put up about $1 million of his own money in initial seed capital and brought on financial and marketing gurus to help make refinements to what he was now calling e-Steel. They got funding in 1999 from the cream of the venture capital community, including Kleiner Perkins Caufield & Byers, Bessemer Venture Partners and Greylock, and the race to B2B e-commerce was on. "This was not greed-driven," Levin says. "In my mind, this was a culmination of a career in steel and a way to make a difference in the industry."

Like most early exchanges, Levin and crew initially believed e-Steel’s contribution would be to bring buyers and sellers together more efficiently over the Internet and to open up doors to trading partners that were otherwise out of reach. Forget the laborious and error-prone fax and phone process traditionally associated with buying and selling steel: An online exchange model lets industry players from steel mills to service centers submit requests for proposals for all types of steel products, compare pricing and packages across multiple suppliers, negotiate price and complete transactions, all from a secure, global marketplace. Unlike most of its competitors, including primary rival MetalSite (www.metalsite.com) of Pittsburgh, e-Steel took aim at negotiated transactions among known parties instead of relying on auctions for spot purchases of goods. Steel makers LTV Steel Co., Steel Dynamics and Weirton Steel Corp. were the initial investors in MetalSite when it launched in 1998 as a limited partnership.

As e-Steel began rolling out to beta customers in the summer of 1999, the thinking surrounding integration rapidly changed. Instead of appealing to companies for one-time transactions with new partners, major steel companies were looking at the e-marketplace as a venue to transact all of their business with their largest suppliers and customers. Given the scale of possible transactions, e-Steel would not be able to deliver any significant value beyond the old way of doing business via fax and phone without a solid integration strategy.

"The concept of integration was always in the back of our minds because once we built a marketplace, we knew people would want to eventually connect it to ERP [enterprise resource planning] systems," Levin explains. "But we had to put it front and center because to the extent you don’t connect, you’re left with little more than e-mail as a replacement for fax and phone."

To kick start the effort, Levin brought in Chief Technology Officer Tom Costello, a former senior vice president at CyberCash, a maker of e-commerce payment software. Costello joined last October, just a month after the first e-Steel transaction. At the time, there were only five e-Steel employees and a couple of dozen folks from Computer Sciences Corp. (CSC), a consulting company that built the initial site using packaged e-commerce software from BroadVision. Costello soon recognized that e-Steel had considerable work to do to reposition itself around integration. "When I came on board, we had nothing from an integration standpoint," Costello recalls. "We had to take control of the technology that would drive forward our vision."

Quickly, Costello went about piecing together what he refers to as a "building-block" integration strategy. First, he built up an internal IT organization so that e-Steel could work on some of its own integration technology, along with CSC. He also determined that the BroadVision e-commerce platform was not scalable enough to support a dynamic trading exchange with hooks into back-end systems. As a result, e-Steel redesigned its architecture and chose BEA Systems’ WebLogic transaction framework to replace the BroadVision software. It also sought a partnership with webMethods of Fairfax, Va., which makes hub and spoke software that delivers a secure, dynamic link between the e-Steel exchange and a company’s back-end systems—using a wide variety of standards, such as extensible markup language (XML), common delineated files and electronic data interchange (EDI). In addition to the relationship with webMethods, Costello helped ink a partnership with USX Engineers and Consultants (UEC), the Pittsburgh-based systems integration arm of the U.S. Steel Group (part of USX Corp.), to provide integration services to steel companies looking to participate in e-Steel. Through its ValueTrack service offering, e-Steel also works with companies to assess their e-business goals, and it develops and deploys an integration plan.

There are two other pieces to Costello’s building-block integration architecture. To help automate the process of loading inventory information into the marketplace, e-Steel built DataJet—a free data mapping and uploading tool. DataJet helps customers upload made-to-order, current inventory and product catalog information to the site without data format conversions. E-Steel is also developing and rallying industry support for the Steel Markup Language, a set of extensions to XML that would provide a common format for sharing information among players in the steel industry.

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