mJunction services limited (A): Institutionalizing e-auction of steel

Keywords: e-Commerce, auctions, steel trade, India, start-up, entrepreneurship

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Document prepared by Profs Biswatosh Saha, Prarthan Desai and Vidyanand Jha of Indian Institute of Management Calcutta on the basis of field interviews, company documents and published secondary information. Support received from mjunction services limited in the form of a research grant and access to managers and internal documents is gratefully acknowledged. Copyright lies with authors of the document.

mJunction (A): Institutionalizing e-auction of Steel

In 2011, mJunction1 completed 10 years, with FY11 revenue of approximately INR 1 billion2 earned from online transactions worth INR 248.5 billion that were consummated on its electronic trading platforms. mJunction began as a fledgling start-up joint-venture in e-commerce in 2001, co-promoted by Tata Steel and Steel Authority of India Limited (SAIL). It began operations by selling to-be-disposed idle assets and secondary steel of its two promoters. Initial growth and stabilization of the start-up was aided by success in e-sales of secondary steel3. It is today the largest e-commerce site in India and the worlds largest e-platform for sale of steel, having achieved a CAGR of 80% over a decade. Tata Steel and SAIL now sell all their secondary steel online through metaljunction. Institutionalizing e-auctions was, however, complex. Negotiations on migration of transactions to the e-platform was organized for each existing category of products/items across the intraorganizational canvass of the client organization. Digitization involved painstaking work of redesign of client processes through development of software, and creation of surveillance and archiving systems inside mJunction on the one hand, and negotiation of new inter-firm relations in the trading ecosystem on the other. Careful negotiation, deep understanding of practices and priorities of managers in client organizations, and micro-innovations around design of the electronic trading process presents one with a picture of a crafting of growth. After a decade of growth, it was perhaps time for reflection on the path traversed. Looking back: Incorporating the start-up Late 1990s was a period of euphoria on e-commerce. In one of his trips to the USA in 1999, Dr.J.J.Irani, MD of Tata Steel, was approached by E-Steel and MetalSite the leaders in eselling of steel at that point for possible business relations. A young team comprising of a person each from technology, sales and procurement was formed in Tata Steel to pursue the opportunity on Dr. Iranis return. This team went around the world and interacted with companies operating in steel e-commerce. On their return they reported that Tata Steel should set up a venture in e-commerce in partnership with some other steel company such as SAIL instead of joining the existing e-commerce initiatives. The consultant that was engaged subsequently suggested formation of two separate companies one for selling of steel and the other for procurement of indirect goods and services; separation of selling and procurement was also the norm followed in those days in the steel e-commerce space in the West. It was around
Mjunction was incorporated as metaljunction services limited. It was renamed as mjunction services limited in January 2007 after it had diversified into e-commerce in areas beyond metals. Metaljunction became one of the divisions with its own portal at www.metaljunction.com. 2 Billing for sale transactions is a percentage commission on auction sales value, the commission rate being fixed for a period through a MOU with a client. 3 Steel plants distinguish between prime and secondary products. Prime products are produced either made-toorder for a particular customer or made-to-stock for distribution through distributor networks. Prime steel adheres to specifications of quality in terms of chemical and mechanical properties. They are also produced in standard dimensions. In some cases, because of minimum-batch-size constraints, some prime products are produced in quantities slightly exceeding the customer orders. These are called prime-over-runs. A significant amount of steel also is defective with a wide range of defects that are common. These are called defectives or secondary steel. The use of secondary steel depends on the nature and extent of defects which in turn determines the price a buyer would pay for a lot. In some cases, after some shredding or sorting, significant part of a defective lot can be used for various metal fabrication jobs. Some defective lots can be re-rolled and then used. In the worst case, defectives are used as melting scrap in steel-making process.
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this time that Mr. Viresh Oberoi, the founder CEO of metaljunction got involved with the initiative. Mr. Oberoi had just completed the implementation of SAP in Tata Steel that sought among other things to reorganize its marketing set up significantly. He had grown in Tata Steels Marketing department, where he had joined as trainee. Almost all his time he had spent in the Sales Offices of Tata Steel moving across the country. He was picked up in 1998 when he was the Chief Sales Manager (South) to re-engineer the two core customer facing processes of Order Generation and Fulfillment Process and Market Development Process with consultants Arthur D Little and IBM Global Services. The re-engineering of the processes, primarily aimed at achieving greater integration across the branch sales offices, required a new organization structure. This was done in parallel with the launch of SAP R3, Lotus Notes and other IT applications. Tata Steel went live across all their branch offices, stockyards with a fully integrated/interfaced solution in late 1999. Viresh stayed on post go-live to ensure the institutionalization of processes and stabilization of IT systems for a year. It was towards the end of 2000 that he was offered the position of CEO of the still-to-beformed metaljunction. As he set about incorporating the company, the dotcom bust occurred. This led Kalyani Steel, who was also part of the joint venture negotiations, to withdraw as one of the promoters of the joint venture. SAIL and Tata Steel had already contributed INR 40 million each and were worried about the future of the company. The venture began with initial paid up capital of just 80 million INR instead of the planned 200 million equity recommended by the consultant and approved by Boards of Tata Steel and SAIL. One of the first things that Viresh did in early 2001 was to spend three weeks flying to Houston, Pittsburg, New York, Chicago, London and Brussels where he met with the CEOs and senior executives of the failed and soon to fail Enron, E-Steel, Metal-site, Ferrous Exchange, Global Steel Exchange, Steel 24x7 and Buy for Metals. The learnings from this trip and insights gained influenced the early choices that metaljunction made. As Viresh puts it, few of the key learnings were: Creating / unlocking value is of prime importance and not getting eye balls. The deal must get consummated on the electronic platform and not offline. If value is actually being created, customers will have no problem in paying. A gain share model will work. Offering a service for free would not work. Starting small and ramping up fast is better than launching big. Identify pain points / bottlenecks in the supply chain and then design innovative solutions supported by IT and Internet to create/unlock value. Agility and scalability are of utmost importance.

These learnings led metaljunction to identify certain departures from then current practices in ecommerce space in steel: Both the sell-side (metaljunction) and the buy-side (buyjunction) were launched on a common technology platform. Even today, 10 years later, metaljunction is possibly the only company which operates on both sides of the supply chain, i.e., working with the Marketing & Sales division of the client organization to sell their products as also with the Procurement division of the same company in sourcing and procuring goods and services.

metaljunction did not invest hugely in IT as this was the prime reason for the failure of many dotcoms. metalJunction, as a matter of fact, started operations with hired software from indiamarkets.com on a per event basis. Once the proof of concept was established, it made investments in software/ hardware and in building a technology team.4

Work began initially with a team of 6 people three each from SAIL and Tata Steel on deputation. SAIL and Tata Steel became the initial clients for whom e-commerce services began to be conceived. Unlike other e-commerce initiatives in steel, which were well capitalized by the steel parent companies, metaljunction began with meager resources. So the business model had to be based on generation of revenues from very early on. Business plans requiring large upfront investments could not be pursued. A culture supporting investment frugality was built up from inception. Moreover, the shareholder agreement between SAIL and Tata Steel did not specify anything on granting business to metaljunction, quite unlike the practice with steel e-commerce ventures in the West. Generation of business had to be done deal by deal, department by department in both SAIL and Tata Steel and later with other clients. As Viresh says, this brought the organization very close to the clients. Understanding client processes and the pain points became a hallmark of getting business from them. The early formative years: Gaining client support The early years of this century was definitely not a good time for an e-commerce start-up. Internet penetration was low in India and the dotcom bust had cast a gloomy spell on the stories of e-commerce success in the West. The skepticism was shared inside client organizations by managers such as departmental heads from whom business had to be won. Incorporating with a low initial capitalization did not help matters much. As Vinaya Varma, currently Vice President Buy and Coaljunction and one of the members of Vireshs Tata Steel Re-engineering and SAP implementation team said: The focus was on identifying areas where we could very quickly demonstrate value addition to the client. We started business operation in November, 2001. One of our first transactions was a buy for Tata Steel huge quantity of industrial paints. Most of the industrial paint manufacturers in India participated in the online reverse auction and Tata Steel got a price that was below their expectation. Our second major project with Tata Steel was on trade financing. Tata Steel had a requirement to reduce credit on sales to its distributors. Credit sales had expanded in 1990s, as a sales push initiative, especially during the recession years. We talked with banks and it took a lot of convincing before we could get a tri-partite agreement between us, the bank and Tata Steel, where Tata Steel provided a comfort letter to the
There were three main options, when mJunction was evaluating which technology platform to use a) to develop it in-house, b) to purchase a platform outright, c) to get tools, frameworks that the internal team can use to develop the auction technology. It chose the second option and got a platform from CommerceOne. (See http://www.fool.com/duelingfools/2000/duelingfools00112201.htm for some details on CommerceOne vs Ariba technology strategy on e-commerce) About a year later it got into a tie-up with IBM for IBM-Websphere that provided the tools to the internal technology development team (60 people now) to incrementally develop features and functionalities around the auction, providing scalability both with regard to expansion in transaction volumes and with regard to addition of new features/functionalities in the platform. All auctions were migrated to IBM Websphere platform by 2012. (See http://www-01.ibm.com/software/websphere/# for IBM Websphere details)
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bank committing to cut off supplies to distributors that would default. We stood as third party authenticators, who would manage the information processes. We created a web based platform where a distributor would request for finance and it would be routed through Tata Steel for the bank to provide credit to the distributor. We convinced two distributors to accept this offer, they were known to me from my days as branch manager 0.32 million INR was financed. We met Mr. Muthuraman, Tata Steel MD one of those days and he was asking what we were doing in channel finance we said we have financed 0.32 million INR he said that is a pittance we want you to do thousands of millions. Today more than 100 distributors of Tata Steel are online and more than INR 1 billion of distributor-finance flows as unsecured, non-recourse credit from participating banks every month. This business has matured into a separate junction called finance-junction today. This was the real first project that got us some mileage in Tata Steel This initial project was executed on Tata Steel sales systems. Most of 2002-03 went in what Viresh calls concept selling. There were several rounds of meetings with SAIL and Tata Steel officials, where mjunction team would try showing how e-auctions could change the clients processes and help them sell or buy better. A deep understanding of the processes of the client and personal relations with senior managers who had to take the call on moving the sales/procurement of an item to the on-line platform helped immensely. As Ujjal Bhattacharya, currently VP, Mjunction, also a member of Vireshs SAP implementation team: We started with Tata Steel first since we thought that they may be amenable to change more easily. Because I came from Tata Steel I was dealing with my earlier bosses they gave the first materials for which we got the mandate to do on-line auctions. Old relationships came in very handy. For Tata Steel, we got the first mandate for sale of some flat products from Chief of Marketing and Sales even in flat products they have items that are not to order but are prime otherwise it is a headache for the Marketing and Sales team to dispose this off those are migrated to our platform firstnow that becomes a prime product for me it was not important for them On the sell-side, for both Tata Steel and SAIL, mjunctions efforts were concentrated on what are called secondary products. Secondary steel is non-standard (see footnote 2 on page 1). While primary steel is sold in India on the basis of listed price set by the steel producers, secondary steel pricing often involved an auction process. The value of secondary steel would depend on the use a customer can put it into. Information lying with customers influences the value one can put on secondary steel. Both prime-over-runs and secondary steel were sold through processes that often differed across Tata Steel and SAIL plants. As Vinaya says: In Tata Steel we started selling prime overruns first. We got to sell defectives much later as they had a secondary products division that organized physical auctions for secondary steel. In SAIL this was plant specific. In one plant secondary steel was auctioned in a physical auction, while in another it was open sales at fixed price, with a complex quota system linked to small-scale industries.. every month they would come out with a fixed price for different categories. In another plant there were some other mechanism.. A proposal to shift an item to on-line auctions had to grapple with the details of the existing process the client followed. Negotiating on the process change to enable the digitization often

brought in questions of conflict in roles and powers of managers in different positions in the organization. As one of the senior managers said: Migrating to online required process changes to be made. Exposure to the Tata Steel BPR project helped me understand how to look at process changes. In one of our clients for selling some kinds of defectives they would post the expected volume of defectives in the next month - every branch office used to have tenders on a common date for the defectives next month and get the H1 in each branch this used to go to the national sales and marketing office (this used to take 7-15 days) country H1, H2 was arrived at for each category and then material in that category used to move to different stockyards orders were booked before the generation/production and at end of month the requirement to keep zero inventory of defectives was met..Invariably it took time and material actually reached stockyard at end of month so the pressure to give credit increased to ensure quick lifting of the material so that month-end inventory was low another anomaly was that material would move to say Chennai if its H1 was next to Kolkata even if H2 in Kolkata was higher..when we took the process online this internal process change had to be negotiated through we had a single national auction ex-plant with pre-announced fixed extra amount added if bidder wants delivery at any of the stockyards spread across the country..when we did the auction a few times it was soon apparent that material moved only in a particular region where the realization for the company was the highest..Prime billets also were sold in the same way they had region-wise quota since they thought that it would protect the regional prices..price finalization was similar branch based..same thing used to happen.. so the client engaged a marketing agent who used to guarantee payments from customers they used to take some money from the client and some from customers for this guarantee so all buyers could not also come in without getting vetted from this marketing agent..there were also some nexus.. that was the scenario we pushed for this the marketing agent was also threatening us he had political influence - we said that let price decide what goes where national auction, no credit, no marketing agent no quota by 4th of a month the e-auction was over..when we moved into the market we realized that new buyers who came in said that they did not want to buy from the client (who was anyway smaller than competitors in billets) because they were forced to go through the marketing agent..on the first auction we got a straight jump in price of Rs. 600/- per tonne.. In SAIL, mjunction faced a different set of issues. They began initially with the Central Marketing Office of SAIL but several secondary products were actually sold by the respective plants of SAIL. The key person to whom the concept needed to be sold was the plant MD. Historically, secondary products sales had provided the plants with financial liquidity to meet several cash expenses. Different plants had evolved different processes for selling secondary steel. The MD of Rourkela Steel Plant (RSP) was most receptive to the idea and the Materials Management Group was made the designated point for interacting with mjunction team. It took almost 7 months before any auction could begin at Rourkela. RSP sold secondary steel through 2 routes 50% was sold at listed price and the rest was allocated to the SSI units through an ancillary quota RSP used to decide and allocate this quota based on the open sale price or the listed price..there were then two channels and depending on whether material was moving or not prices were changed

by RSP. Orissa Small Industries Corporation suggested 35-40 ancillaries that were to be given specific material along with quantities..so the quotas were fixed customer-wise annually prices were set by RSP. If price of prime of HR is X and depending on differential between prime and the defectives RSP would fix a price and then it would be offered in the market if the material did not move then they will have a system by which they will reduce listed price by 5%, 10% and so on till the material moved the quota price was similar to open sale price..We proposed a forward auction in July 2003 we did 2 in August we did 4 auctions-- then they started from September announcing a regular auction at a pre-announced date.. All plants were not equally receptive. In one case, as a senior manager says: _ plant was not giving us anything for auctioning. We could convince the MD to give us some secondary material for trial. Corruption in secondary product sales was rampant. The senior manager in charge made us run around for a month After we gave the first auction report he found 100 faults in it I was parked there for 10 days clearing all confusions and complaints then he gave the first approval..Certain products could not be migrated to on-line at all we were also threatened that we should not ask for certain materials..in the secondary auctions of that plant, only local traders participated and units from Delhi, Kanpur would all buy from them. The local traders would but at a very low price.. Getting bidders on-line: Negotiating the transition The success of migration of a sale/procurement process online from the clients viewpoint also depended crucially on how the other side of the transaction participated in the transactions on the platform. In case of secondary steel sales, the bidder groups were usually traders who were unfamiliar with computer/internet-based trading systems. The initial task of market-making was to get this bidder group on-line. Managers in steel producing companies were unfamiliar with the steel trading milieu. Few of them would have ventured into Lohapatti in Burrabazar (Kolkata) a steel trading hub. The steel trading community, for many, was synonymous with the traders who visited the marketing offices of the steel producers. While producers sold bulk of their output to large customers directly, steel demand of smaller customers was met through the trade system. Traders stocked steel, often reprocessed them, and fed it to metal fabricators, most of them small-scale industries. Traditional bania families dominated this trade. Material flowed along with circulation of credit and information along long-standing business and trade relationships. Practices, customs, business norms and ethics of this community were not familiar to managers in the corporate world. For the managers, tasked with market-making, visit to steel mandis was venturing into unfamiliar territory. As Kaushik who was part of this initial marketmaking effort says: We were not given an office to sit in initially we were asked to be in office in first half and in the field in the second half..we went and met these steel traders I and another colleague visited all the steel mandis no one in the company even today has that experience..traders are very very rude and many a times very unscrupulous also.. Hum Metal Junction se aye hain most would say mental-Junction.Internet mein auction hoga dibbe mein yeh sab kam nahin hoga app ka dukaan bandh ho jayega

This was what one typically encountered. It continued for almost a year..in an internet auction the bidders are anonymous one cannot see the other party so trust of the auctioneer is very important we got this through very painstaking work over a few years no amount of verbal assurances would suffice we realized.. Mjunction also organized extensive training of traders. Most bidders were not familiar with computer usage..we had to train lots and lots of people we used to be in office till 10 in the evening..I remember one fellow came with a standard 8th kid saying yeh mere liye bidding karega the father was not familiar with computer and the kid had just learnt maybe booting the computer and using a word processor or something like that. Much of the initial reluctance of the traders stemmed from their apprehension that this initiative would not last like several such attempts from public and corporate bodies, it would peter off after the project financing exhausted.. The initial effort of market-making was mostly concentrated on shifting existing bidders/buyers for secondary products of a plant to the on-line mode. Establishment of trust on the auction platform was a slow process. Credibility was established slowly bidders have to know sunani hain there must be a point where their grievances are heard and that was done.. but what established the credibility was when they realized that there are no fake bids the lots that went at a higher price than what they expected was finally being picked up from the yards. A bidder questions a bid when the price has gone well beyond his expectation and they start questioning the bid - they cannot find who has quoted from the online platform the auction will close but they will note the lot and find out who was lifting that lot..When again and again they see that material is actually lifted then they understand that there is no fake bids in this platform. Stabilization of the e-auction process While the initial work that focused on getting both the client and the buyer/bidder on the online platform brought in the business, it hardly ensured a stable embedding both inside the client organization as well as in the trading ecosystem. To the extent that e-auctions changed the balance of power, and restructured relations both inside and outside client organizations, it remained contested. As one manager put it quite plainly: People on the buy and sell side consider this a zero sum game price is a power game the reverse auction brings in a lot of convenience but in was sold on the premise that the buyer gets a lot of power over the supplier community even more than they had earlier..same story is on the sell side my auction would succeed only when transaction is between unequals if suppliers have a high bargaining power they will simply say they will not participate in the auction at all..it is a power game clearly..every event is a power game between the buyer and the seller. Contests by the bidder group often took the form of attempted disruption of the process and attacks on the credibility of on-line auctions. Complaints on the process create problems for the client as well. A stream of complaints would be the last thing that a client manager would be interested in handling after having outsourced the sale/auction process.

..then we had a zero problem bidder comes and says that he forgot to put in a zero so we had a system that no auction gets below 50% of our estimate on the buy side that was the cut-off limit - then made the cut-off dynamic depending on the current rate as rate comes down the cut-off limit also comes down..So zero problem was annihilated..Now customers would come and say mere se galti ho gayi galat bid daal diya many of these bidders are very strong we had to also go to Steel Ministry sometimes there were complaints so issues were raised about the reliability of the platform now we have a system where if a bid is placed that is 10% below the market price we put in this system that throws up a warning if the bid is 10% less than market rate one has to press OK to put in the bid there were wrong bids coming still we had no LOGS of OKs when we started we did not think a log would be needed why will people bypass it we thought a warning was enough but till we created a LOG and used it to dispose off complaints the problem kept coming in so problems keep coming up and design of our system improves.. Another manager provided an account of the problems faced during stabilization of the first auction at one of the plants where e-auction was started: After the first few auctions there were letters from customers saying they wanted to bid 500 rupees more but the system did not allow power problem was there or internet got disconnected we used to get fired GM or ED of the plant would call us at 8.00 am in the morning and we would be fired we said that these are mischiefs but then we were told to prove that this is a mischief..; we developed the login report at what time the customer had logged in and what time they left or logged out by designing it into our system in the next encounters the complainants were confronted with this data aap kitna baje logout kiya and their words were matched with the log report..The auction was accepted inspite of all these customer complaints but this was after a lot of efforts on our part to redesign the system and generate the data that would make the decision makers in plant comfortable..there was a court case also. During the initial days several technology glitches also caused inconvenience in the auction process. Mjunction could resolve several of those through incremental development of tools and micro-technologies that created a smoother auction experience. Nowhere in the world is secondary steel sold to so many buyers. In some auctions you could have several hundred bidders. The technology platforms we bought were designed for procurement and worked fine with 5-10 bidders that is all right on buy side; but not for the sell side in steel..We had to solve these problems...the auction engine did not have an automatic refresh facility for the user screen as well the user had to press F5 manually and this was a big problem..we had to call them up and say F5 dabaiye - we circumvented this problem..it was very challenging it was great fun.. Clients do not formally reveal the lot-wise reserve price to the auction service provider so after the auction closes, MJ would send the highest bidder information to the client who would either confirm or reject the sale, based on whether the closing price is higher than the reserve price or notMJ can only then declare the auction result..In physical auction, the sealed file with the reserve price information was usually kept in the auction room itself and results were declared immediately..

This problem was overcome in about a year by having first a designated client person who would be called immediately on closure of auction of a lot and over telephone the confirmation would be obtained..later a system was designed to enable an observation login to a client person so that the price in the auction is visible to the client (with all other information being blinded) so that upon closure the client can send the confirmation through the IT system itself.. During those initial days, when the credibility of the e-auction process was yet to be firmly established, all the senior people used to get involved in the auctions. On the client side, as well, senior managers would carefully monitor auction processes. Resistances were faced in several forms. When e-auctions for Tata Steel secondary products started, close to fifty traders came and demonstrated before the Chief of Secondary Products Marketing of Tata Steel at Tata Centre in Kolkata. Client support was crucial for mjunction. Both Tata Steel and SAIL ensured through its own rules/procedures that when a certain category of item is shifted to the on-line process, it is not taken off-line very easily. This created pressures for unwilling buyers to also slowly shift to the online mode. While online sales had the possibility of throwing open the information on particular auctions to anyone across a vast geographical area, outside participation by non-local buyers was not so common. Traditionally secondary and prime overruns were sold to buyers groups that were largely plant-specific and hence local. There were very few common buyers across several plants. Part of the problem arises because of the nature of the products and the fact that local backward linkages with user industries (usually small scale) supported a traders auction participation. When mjunction launched e-auctions in a plant, for the first few auctions only the existing buyer group was allowed to participate to ensure a smooth auction. As a manager put it: When we approached new group of bidders to migrate them online, we made it a point to emphasize that only the price-discovery was being shifted online.. All other aspects remain the same so relationships that a trader has to ensure a smooth trading interface continues to be valuable. However, the very premise of the e-auction mode is based on possibilities of enlargement of the buyer group. New bidders were therefore essential for the migration to the online mode to be deemed as a success. There were however several hurdles that came in. While e-auctions digitized the price discovery process, preserving the anonymity of the bidder, the post-auction physical delivery and lifting of the material continued to rely on old processes and arrangements. Participation in bidding also required pre-bidding inspection for the bidder to get a fair idea about the auction lot. The time allowed for pre-auction inspection was usually quite short too. New buyers who often disrupted existing arrangements amongst an entrenched buyer group would face bottlenecks in the lifting process for which they had to depend on local lifters. For the benefit of outside buyers, Mjunction began providing lifting and transport (or logistics) service, 5 and uploading pre-auction inspection reports on the portal through agreements with transporters and local lifters. But this arrangement did not work out and it was very quickly

In FY07 the Logistics operations did transport material worth around INR 1.75billion. It began transport from Durgapur Steel Plant of SAIL. Over the next year plans were there to extend it to other plants. (Annual Report, FY07)

discontinued. While lifters who were providing information on auction lots lost interest,6 in logistics the company was faced with serious problems of material pilferage while on transit. In cases where outside bidders faced major problems, mjunction tried addressing it through the administration of client organization. When the client starts paying you they start evaluating you in review meetings one issue that comes up is that there are all these same bidders, new bidders are not coming in7 then we gave these presentations describing the processes and why new bidders are not coming in highlighting the threats that new bidders faced..then they start taking some steps if these issues are controlled then one or two bidders (new) come one or two new bidder is enough to break the cartel; then when threatened they would run off and not participate in next auctions prices would come down again; and this would be highlighted to the client..so the client takes steps again unless it is a politician controlled mafia they can control it..then many of the mafia groups registered as companies and started participating in the auction. The e-auction model stabilized gradually and got legitimated within the clients organizational control systems (including compliance requirements such as vigilance and audit) and within wider discourses in the trading ecosystem. The business matured by 2006. In 2010-11, metaljunction sold 2.1 million tonnes of material (of which close to 50% was steel) with a transaction value of INR 38 billion. Although SAIL and Tata Steel continues to be the major clients, it has expanded its base to 25 clients. It had a registered bidder base of over 11,500 in 2011. E-selling of secondary steel was an institutional change. As one senior manager of metaljunction commented: The MD of XYZ steel plant once told me that the biggest contribution of mJunction is that it has taken away the headache my greatest headache was when the MLA/MP would send letters recommending someone to be given some secondary material I pass it on to Marketing and it is passed on to mJunctionFor us it is easy we just tell them to participate in the online auction..that pressure on the MD is gone. In the early years when the main task was establishing the legitimacy of the e-auction process, a small team managed almost everything at metaljunction. As Kaushik, one of the members of the small initial team says we were all multi-tasking. But there were three different types of activities that were being done even then a) client acquisition, which primarily involved continuous negotiation with the clients who would give the mandate for conducting auctions either on buy or sell side, b) market-making, involving getting bidders on the electronic platform,

Lifters are small/micro-enterprises usually attached to specific stockyards. They arrange for transport from transport agencies, lifting of the material and handling some of the office work related to delivery. A typical stockyard would have several lifters and each lifter would work for several buyers. Lifters also provided business information to buyers and this information provisioning often cemented buyer-lifter relations. 7 Number of bidders in an auction is also a parameter that is monitored by a client. In the initial days, when eauction existed with the earlier process of secondary steel sales, price realization comparisons were easier. With complete migration to e-auctions, the number of bidders in an auction, as well as number of new bidders has become important parameters of negotiation with clients. As a manager says: We would call an auction good, if 4 or more bidders participate in it. 60% of the auctions in steel would satisfy this criterion. In case of Tata Steel, 80% of auctions have at least 4 bidders. Bringing in new clients is also difficult, since the bidder pool is finite. Moreover, only around 10-15% of bidders participate in auctions at multiple plants.

c) conducting the auction itself. Once, e-auctions got established as a routine process, the volume of auctions and transactions started rising fast requiring specialization and partitioning of tasks. Metaljunction: Organization of the auction process Metaljunction today is one of the most matured division/portal of mjunction with stable revenues. Every day 35-40 auction events occur on its platform. While most are sale of small lots of 100-200 tonnes of steel, a few of the lots can be quite large - over 10,000 tonnes in some cases. The auction room process that was at the center of attention of senior managers earlier has been routinized. It was also on the details of auction room process that the contests over credibility of e-auction often hinged. Standard operating procedures have now been developed for running of auctions. Most auctions in metaljunction are of English no-ties type.8 Auction room work is a staff function today. As senior managers narrated: We facilitate selling do not take ownership of any products 4 distinct type of activity can be recognized in metaljunction a) new client acquisition leading to a bilateral MOU, which is referred to as new business development, b) account management or getting mandates from a client who is signed on to sell products on our platform, migrate more and more products to the online mode; account managers generally being co-located at client manufacturing site, c) operations, which consist of pre-auction activities (mostly would be market-making with the bidding community), conduct of auction (in auction room) and post-auction activity9. Auction process is managed by Auction Controller who usually sits inside a closeted space where all conversations and telephone talks are recorded10 there are around 7-9 of them for Account Management we have in each plant (or manufacturing site) a Customer Relationship Manager. We have a pre-auction team that is located in Kolkata that works on developing the lot information that is broadcast to bidders,11 monitoring bidder activity and talking with dormant bidders who have not put in bids over the last 3 months and we also have a field force of 13-14 people to get new clients, do initial documentation for registering on the portal, train them if needed..New Business Development is a very small team of 2-3 people we intend to give more emphasis on
The highest bidder wins a lot. Bidding customers can see the highest bid at each point in time in the screen, but the bidder identity is not disclosed. The auction controller can see all the bids, and the list of bidders who have put in a bid. The auction remains open for a specified period of time. If, however, any bids come in at the last few minutes, the time is automatically extended to provide a chance to bid to others participating in the auction. In keenly contested auctions, the auction time can get extended several times like this. 9 In FY11 the post-auction team restructured Tata Steels EMD refund (of either Earnest Money Deposit for bidders who fail to win in the auction or refund due to shortages post material lifting) process reducing cycle time from 53 to 15 days. In the initial days the trust on the auction process was dependent on the personal relation and reputation of integrity that the managers in the mjunction team had, carrying from their past experience in the steel trade. Now no bidder knows the staff running the auctions. Surveillance and traceability of all activity during conduct of auctions is now a crucial component of the trust generation mechanism. Standard processes have been put in place operators of auction now seldom call clients or bidders (except when bids do not come in!) they rather take phonecalls to provide information on when particular auctions would start, sometimes to put in bids on behalf of customers when connectivity failures occur. The pre-auction team now interacts with customers trying to understand the dynamics in the market. Automatic broadcast of lot information to the bidder pool provided information, but it also shielded managers in client (selling) firms from audit and vigilance enquiries.
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this activity going ahead. Over the last few years relative emphasis has also shifted to Account Management and away from pre-auction market-making activity with bidders. The standardization of work in metaljunction occurred over a period as the senior team initially managing auctions was redeployed. The auction design was stable by then in terms of technology, in terms of clients process alignment and in terms of the diffusion amongst the bidder community. Similar items keep coming up for auction, so one does not encounter new material. The focus of operations has now shifted to managing a stable throughput of work, ensuring smooth conduct of an expanding volume of transaction. After metaljunction managed to migrate most of secondary steel items of its major clients to the online platform it reached a growth plateau in this segment. Attempts to develop business with second tier steel producers did not take off well. Relationship with a few clients whom metaljunction had signed on in this segment turned sour. There were several cases where such firms were unprepared to commit to the auction rules, initiating post-auction negotiations with buyers or suppliers. This was damaging to the reputation of the auction platform. Promoter companies SAIL and Tata Steel also shied away from developing online selling models for their primary products that moved through distributors.12 As a press report on Metaljunction says: While Metaljunction has been selling secondary steel through the e-auction route, primary steel, according to its managing director, would be sold at prices suggested by its owner-clients (Tata Steel and Steel Authority of India). Tata Steel too is also likely to move over to selling 'primary steel' this way, although the Tata Steel managing director, B Muthuraman, in his inaugural address today, appeared not very convinced about doing so. I have always held a view that prime steel is something we must hold on to, before it becomes commoditized, said Muthuraman, adding that at a recent IISI meeting it was briefly discussed that steel companies must "somehow prevent futures coming into steel.13 In FY07, metaljunction moved into trade of other non-metal products (mineral and metallic), primarily iron-ore fines and lumps signing on all the five important producers as clients. It soon got 100% share of iron ore auctioned by OMDC. It has also moved into e-sales of manganese ore, coal chemicals, slime etc. In FY11, these new products made up almost half of the total transaction tonnage on metaljunction.com. Within a few years mjunction organized its involvement in other B-B e-commerce such as Asset Sales, Procurement, e-sale of automobiles (which combined B-B and B-C) and B-C e-commerce in separate divisions/portals. Operations related to e-sales of coal through coaljunction began from 2005. In FY12, the promoters contributed around 40% of total business. Such diversification was driven by extension of the core processes and abilities developed in e-sales of steel. Looking ahead: At the end of FY11, as mjunction prepared to celebrate completion of its 10th year in commercial operations, it appeared to be on course to meet its target for FY13 that it had set
mJunction also tried on-line selling of steel on a B-C mode, but managing the logistics of small lot delivery became too cumbersome and the initiative was discontinued. Around 2000-2001, Tata Steel was also newly developing its distribution channels, with a focus of exclusive distributorship, marked retail pricing, advertising and branding in few segments, such as light structurals like TMT rods that are sold to dispersed small retail consumers. 13 Metaljunction to get into primary steel, The Financial Express, August 13, 2006, New Delhi
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around 5 years back in terms of revenues, profits and share of sales from non-promoter clients. If one recalls the skepticism surrounding its founding moment, the significance of the journey of the last decade stands out even more clearly. Mjunction, in contrast to initiatives such as indiamarkets that tried to create a market-place, worked in close integration with the client (large firm) either on the buy or sell side This has been much more successful than the marketplace strategy. Client organizations seem to have served the crucial function of coordination required to drive changes in entrenched practices within a business ecosystem, enabling the digitization of transactions. Mjunction has managed successfully the dyadic coordination with the client organization through close client relationship. Auction service provisioning, as a business, has been under pressures of competition. As MSTC, the diversified public-sector trading company (FY10 turnover of INR 43.81 billion) that has recently moved into e-commerce notes in its Annual Report, FY10: Although there are other small competitors in the market, which are pushing down the rate of service charge, the scope of increasing business volume is enormous. however, the service charge in this business is very low. (p.24) Mjunction itself has been feeling the pressures of competition in provisioning of auction services. As a senior manager remarked: We have not always been able to differentiate ourselves as an auction service provider from other small players it brings in pressure on margins. We do much more than auction service provisioning; market-making is an important part of what we do but clients often do not appreciate this.14 Bulk of mjunction business right now is based on e-auctions that unbundles the process of price discovery from other trading processes. This unbundling, to the extent that it is achieved on the ground, along with the reach afforded by internet based technologies allow a more intense competitive market to spring up around the auctions. Can one look back at the experience of steel e-sales? mJunction could digitize the existing physical tendering processes, but its reach of digitization did not embrace the whole steel trade ecosystem. As steel moves to the trading circuits, a complex web of traders, brokers, financiers move it to final consumers. Except for a few who buy steel from SAIL or Tata Steel, mJunction initiative has not touched the bulk of the trade sector. Digitization offered by mJunction has not also been successful in embracing the primary steel sales of its promoter steel firms or that of the large number of smaller steel producers who today control close to half of the domestic steel market in India. Does it make sense to think of e-commerce models beyond auctions, based on, for instance, online negotiations, online e-financing and market-making? Digitization generates traceability of transactions, fast recovery from archives and mining from large datasets. It also provides automation that can provide the basis of trust in transactions. In online distributor financing, mJunction has already moved along that direction, achieving a triadic co-ordination with clients, buyers and bank/NBFC. Viresh believes that such complex coordination across the ecosystem will drive future business growth and he thinks it will happen in procurement first. The entrepreneurial search for new transaction modes thus continues.

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mJunction has, over the last 6 years, managed to maintain an average net profitability of around 30% on revenues

Exhibit 1: Growth of mjunction over the last decade