Apps of Steel

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See how an entrepreneur marshalled forces of IT to realise his business vision Learn what it takes to link disparate systems in a B2B marketplace Understand how managing staff can be vital to an exchange project's success E-Steel at a glance FOUNDED: September 1998 EMPLOYEES: 130 (as of August 2000) SIZE OF IT TEAM: 60 FINANCIAL RESULTS: (Privately held) Officials say they expect to have "a positive cash flow" in 2002.

KEY TECHNOLOGIES: Exodus Communications in California hosts the e-Steel marketplace. The marketplace application server runs on a pair of eight-processor Sun Microsystems Enterprise 4500 servers. A third Sun 4500 server runs the exchange's database, which is based on Oracle8i.

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 recipient of the Stamford Yachting Club's De Coursey Faeles Trophy. Forget recreational skiing - Levin, who is 50, favours 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 two-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 specialised 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 April'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 Broken Hill Proprietary Limited's (the 19th largest steel producer worldwide) steel business 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 $US900 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 (US). "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 fuelled 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 per cent) 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 per cent 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 back seat 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 per cent 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 re-engineering 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 September 7, 1999. That's when Worthington Steel 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, 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 materialised 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 $US1 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 centres 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, Steel Dynamics and Weirton Steel 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 centre 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 people from Computer Sciences Corporation (CSC), a consulting company that built the initial site using packaged e-commerce software from BroadVision. Costello soon recognised 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 organisation 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, from Virginia, 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 US Steel Group (part of USX), 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 catalogue information to the site without data format conversions. E-Steel is also developing and rallying industry support for the Steel Mark-up Language, a set of extensions to XML that would provide a common format for sharing information among players in the steel industry.

MetalSite, e-Steel's big rival, has also recognised the need to address integration, of course. In December 1999, MetalSite completed a first-phase test of its integration capabilities with Bethlehem Steel; this allowed EDI data on the steel maker's products to be automatically transferred to MetalSite's Web catalogue without rekeying the information. While this capability is similar to e-Steel's DataJet tool, e-Steel's adding the webMethods technology takes its integration capabilities to the next level, experts say. DataJet automates the transfer of product data from a seller's system to e-Steel's catalogue, while the webMethods middleware, once installed, maps both data and business processes so that information gets passed among the disparate systems of parties involved in the exchange, automatically, in real time.

Together, these pieces give e-Steel a solid foundation for integration. "Since day one, e-Steel has had a more robust concept of what's required," notes Thomas Abrams, an equity analyst who covers the steel industry with Credit Suisse First Boston in New York City. "But to some degree, the battle has just begun." Integration with everything that's required for a transaction - from sharing inventory data among suppliers to work-in-progress reports and production data - won't happen at e-Steel or any other e-marketplace for another 12 to 18 months, Abrams says.

Laying the Groundwork

Costello would have to agree. Even with all the early groundwork, he admits e-Steel is just getting into heavy lifting as far as integration is concerned. Most of the 3500 e-Steel members are now just beginning to use the DataJet mapping tool as a way to get inventory from their back-end systems posted to the site without manually rekeying. And as a one-way pipe into the marketplace, DataJet is really only an interim solution, offering a level of integration far less than what large steel players are after. E-Steel's real differentiator, Costello says, will come with the webMethods software, and that effort - which currently requires months of integration work with consulting partners - is only beginning at a handful of sites.

US Steel in Pittsburgh, which is a minority stakeholder in e-Steel as well as a beta customer, is furthest along in integration, having used DataJet and started work with UEC as an integration partner for the webMethods software. Since February, when it made the decision to partner with e-Steel, US Steel has done limited transactions on the site, mostly with nonprime sheet products - mill-downgraded materials, secondary products or excess prime offerings. US Steel's use of e-Steel has been limited mostly because it requires a high degree of integration to do any type of volume transaction, according to Robert McClintock, commercial systems manager for US Steel.

Specifically, US Steel needs to link proprietary manufacturing resource planning systems in each of its four plants, which run on IBM mainframes in Pittsburgh, to e-Steel so that materials available for sale could get automatically posted to the exchange. "To do any volume, we need to get inventory seamlessly transferred to e-Steel - the overhead associated with manually inputting data into the site would make it not worth our while," explains Gene Trudell, US Steel's general manager of computer services.

Integration on the back end is also required once a negotiation is consummated. There, US Steel needs to be able to take the result of the deal struck on e-Steel and flow it through its back-end order entry systems built on Oracle Applications so that it can be invoiced, billed, shipped and so on, like any other transaction. Finally, to maximise efficiencies, there needs to be integration at the customer level so that US Steel's partners can seamlessly upload their purchasing requirements to the exchange.

McClintock and Trudell are confident that by working with e-Steel and UEC, they'll be able to achieve the right levels of integration. However, they know it will take time and require significant development resources on their part as well as a willingness to re-evaluate business processes. For instance, while DataJet addresses volume uploading of data to e-Steel, US Steel realised it had no easy way to present inventory data for transfer since it resided in four separate plant systems.

As a result, US Steel decided to change things on its end. With the help of UEC, it's designing a common inventory database, from which US Steel can apply business rules and let the webMethods software automatically handle the data collection and transfer to e-Steel. "You have to understand how you do business and take your understanding of that and objectively decide whether it's the right way or if you need to change," McClintock says. Some of the integration pieces were put in place last summer to do volume transactions on nonprime sheet materials, and he expects to have pilot projects under way with select prime-sheet customers by the end of 2000.

At the $US3 billion National Steel, another early e-Steel customer, full-scale integration is going to take the better part of a year. The team there is working with e-Steel and integration partner UEC on determining how to adapt its supply chain processes to make the most efficient use of the exchange, according to John Davis, National's general manager for information services and engineering in Indiana. "We're truly reformatting our business model to take advantage of this new model, and no one can do that in two or three months," he says. "There is too much cultural change - all the things no one likes to talk about." See "Culture Club".

As of August, National had conducted numerous pilot transactions with customers over e-Steel. As pilots with additional customers come online over the next few months, it will continue to refine its integration needs. "We're trying to figure out the touch points, where to hand off transactions and where it makes sense to integrate," adds Chuck Erickson, a systems engineer. Erickson says National has started to experiment with DataJet, but like US Steel, he believes the real value of integration will come with the webMethods software. At this point, National is working with UEC to create new business processes to best leverage that software.

It was e-Steel's ability to take the lead on development, including integration, via its ValueTrack program that convinced Ford Motor to strike a partnership with the exchange to Web-enable its steel supply program. The alliance, which covers the auto giant's global Tier 1 suppliers, including stampers and steel sources, is aimed at eliminating manual processes and giving the complete supply chain access to the same database of inventory, order and pricing information. "This will allow us full integration," notes Karen Kish, purchasing specialist in Ford's raw material supply program in Dearborn, Michigan. Ford and e-Steel are in the prototype phase. Ford has essentially committed to providing its business processes to e-Steel and has devoted a couple of information technology professionals and Kish, as program manager, to work on the project; however, e-Steel and its integration partners are doing the bulk of the deployment and project management work. The effort, which is slated to go live in the first quarter of 2001, is separate from Covisint, a forthcoming online exchange for the automotive industry announced as a Ford-General-Motors-DaimlerChrysler partnership.

Given the scope of work required for integration, most big e-Steel customers - including National, Ford and US Steel - don't expect to take part in additional steel exchanges unless they become a key requirement for customers. But while many place their bets on e-Steel, some experts caution that a one-horse integration strategy can be risky. "You have to play the game that the strategy could change tomorrow if the market changes - you have to be flexible so you can get in and out of marketplaces at will," warns Forrester's Yates. "It's all about risk management and not putting all your eggs in one basket."

What's risky business for some, however, is passion for e-Steel's Levin. And with companies like Ford, National and US Steel in his camp, he's ready to take on the challenge. For now, couloirs and the sailing circuit might have to wait while Levin gives B2B e-commerce his best shot.

Culture Club

Thinking of hooking up to a B2B e-marketplace?

Well, it's not just about the technical challenges of syncing up diverse back-end systems - there are also some pretty hairy cultural and organisational issues.

It all comes down to giving employees the right authority to make snap decisions that affect whether or not the selling organisation can comply with a buyer's terms to consummate a deal. At National Steel, that means coming up with an organisational structure and management style that gives employees decision-making authority, says John Davis, the company's general manager for information services and engineering.

The Indiana company empowers employees in its own departments - up the chain of command in sales, for instance - but also across functions like logistics and quality assurance, Davis says.

The idea is to give employees participating in a reverse auction on an e-marketplace like e-Steel the authority and information that will enable them to respond in real time to request for quotes so that they know for certain whether their company can meet a certain price or is able to ship merchandise in a specified time frame. "You have to develop an environment where the success of the company is shared by all departments so that you're all working on the same end point," explains Davis. As a result, National is looking at new compensation systems and measures of performance as possible solutions, he adds.

- B Stackpole