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Just as most “business-to-business” Web sites reach the end of the line, a new “B2B” vehicle is pulling out of the station. RailMarketplace.com, a joint venture formed by American and Canadian railroads, went online in April promising to revolutionize the way the industry is managed. We know: You’ve heard this before. For a host of ex-tech executives, B2B means “back to banking.” But a second generation of these exchanges, funded by consortiums in the steel, auto, and transportation industries, is now emerging. And this old industry/new tech marriage is very good news for overlooked law firms headquartered far away from Palo Alto, Calif.’s Sand Hill Road. “That’s what’s really neat,” says Andrew Goldstein, a Chicago-based tech lawyer who worked on setting up RailMarketplace. “You marry this cutting-edge stuff with an old industrial backdrop.” RailMarketplace.com was formed last summer as a joint venture among six of the seven largest railroads in North America. The site is financed equally by Union Pacific Corporation, Burlington Northern Santa Fe Corporation, Canadian National Railway Company, Norfolk Southern Corporation, Canadian Pacific Railway Company, and CSX Transportation, Inc. It is designed for transactions between the railroads and their suppliers. The goal is to reduce costs and increase efficiency in the supply chain. The participating railroads annually purchase about $15 billion worth of goods — everything from desk furniture and paper clips to steel rails and locomotives — according to Mark Davis, interim CEO of Chicago-based RailMarketplace. In August 2000 the venture solicited bids from three law firms to handle the legal aspects of the deal: Freeborn & Peters, based in Chicago; Haynes and Boone, based in Dallas; and Covington & Burling, based in Washington, D.C. None of the three is a leading technology firm. But that wasn’t a priority, says Yolanda Brown, lead in-house lawyer for the consortium and assistant general counsel for Burlington Northern. The consortium was more interested in firms that know railroads. “Railroads have a unique culture steeped in tradition,” says Goldstein, a Freeborn partner. “You have to know their industry, even from a tech lawyer point of view.” Cost also was a factor, says Brown: “We had a hard-core budget given to us on the project, and we needed to stay under it.” The consortium ended up dividing the work. For lead corporate counsel, it picked Freeborn. The 110-lawyer firm had represented CSX and Canadian National in prior transactions and, according to Brown, had enough depth in its technology section to help create a B2B site. Antitrust issues were farmed out to 400-lawyer Haynes and Boone, which had done regulatory work for Burlington Northern and had made the initial contacts with the government when the RailMarketplace consortium was first being planned. Brown says the consortium didn’t want to muddy the waters with the government by changing lawyers. At the time RailMarketplace was being put together last spring, industry-sponsored B2B sites were controversial with federal regulators. The Federal Trade Commission had conducted a five-month investigation into Covisint, a similar e-commerce site set up by the Big Three automakers, before giving its conditional approval. “The first thing we recognized was it was a hot issue for FTC and DOJ,” says Brown. On the corporate side, Freeborn’s team was led by Michael O’Shaughnessy, a 52-year-old partner, and the 41-year-old Goldstein. Both had prior experience working for railroads on technology deals. O’Shaughnessy had represented Illinois-Central Corporation and Canadian National in a joint venture to install a network of fiber-optic cables along the railroads’ rights-of-way. Goldstein had worked for CSX in a deal with AT&T Corp. to upgrade the dedicated lines the railroad uses for its signal systems. “People don’t realize how important technology is to a railroad,” Goldstein says, “but if a signal system screws up, we’re talking about sending a train off a bridge.” In all, O’Shaughnessy says, Freeborn assigned four partners, three associates, and a paralegal to the B2B project. It used eight other partners and a senior counsel to advise on specialty issues like employment law and creditors’ rights. O’Shaughnessy declined to discuss dollars and cents, but called the venture “one of the most significant fee relationships” at Freeborn, and “one of the most complex joint ventures we’ve worked on.” As the consortium’s lead counsel, Freeborn’s position was somewhat precarious. The railroad industry had never attempted collaboration on such a scale, and the rivalries were sometimes intense. “We couldn’t be seen as supporting the U.S. against Canada; small against large; clients versus nonclients. We had to appear neutral and build consensus,” O’Shaughnessy says. It worked: The consortium held together. “If you had asked me before this started, I would have suspected a lot of angst, but it’s been much simpler than I thought it would be,” says Burlington Northern’s Brown. One of the first issues the venture confronted was whether to design and build RailMarketplace from the ground up, or to purchase existing technology. It chose the latter, forming a joint venture with General Electric Company’s Global eXchange Services (GSX), which hosts online exchanges for many top industries. The consortium also chose Atlanta-based Clarus Corporation to supply the site’s complex procurement and inventory-tracking software. Goldstein says finding a software system that was compatible with the members’ existing platforms was among the most daunting issues involved in the deal. “Some parties needed to upgrade their systems and it was tough keeping track of everything everybody needed to do,” Goldstein says. But like Brown, Goldstein says that the railroads managed to reach a consensus without too much rancor: “I thought everyone would be looking after themselves, looking to get ahead by poking the other guy in the eye, but they got along.” The final agreement creating RailMarketplace was signed at the end of April, and the site is up and running. It is currently headed by Davis, as interim CEO on loan from CSX. The consortium plans to hire a permanent CEO and 15-20 full-time employees within the next year. Davis says that right now the exchange’s main focus is getting the founding members’ purchasing departments integrated into the site. He says the site hopes to sign up 10,000 purchasers and suppliers in the next five years, each of which will pay fees based on its size and the services it wants to use on the site. If successful, the railroads hope to realize savings of 10-15 percent on their purchasing. RailMarketplace’s ultimate goal is to extend the rail supplier marketplace worldwide. “It’s not an overnight process,” says O’Shaughnessy, “it takes a while for the technology to take root.” The consortium need look no further than the auto industry for that lesson. When the Big Three launched Covisint in February 2000, big things were predicted about a one-stop shop for the $600 billion auto supply market. It hasn’t worked out that way. Suppliers have been slow to sign up, and the exchange has been plagued with technical problems and an antitrust investigation by the government. The railroads have learned from some of those mistakes, looping regulators in from the start and adopting a unified technology platform. But the online marketplace remains an unproven model. Whatever the fate of second wave B2B’s, however, they have already generated fat fees and dot-commerce expertise for their old-economy lawyers. For firms like Freeborn, the train is already in the station.

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