August 14, 2007
Alan MacCormack, Harvard Business School
Theodore Forbath, Wipro Technologies
Peter Brooks, Wipro Technologies
Patrick Kalaher, Wipro Technologies
This software development projects purpose is to create a transaction supported collaborative environment. The first steps in building this were initiated last month with the decision to use "Google Apps for your Domain." For a small annual fee we provide the user with a comprehensive collaborative platform. Recently CapGemini has announced a deal where they provide the integration of users work environments from Microsoft products to Google's. I think, based on my understanding of collaboration, Google Apps most closely replicate the way that work gets done. I find their product fit and finish as solid as Apple's, the move to Google App's was completely painless and instantaneous.
Why is this product category so important and what is a "transaction supported collaborative environment"? The product category is important because the next level of intellectual and social interaction can be facilitated in the software. So how and who will get the work done are important, but most importantly is that the aggregate intelligence of the group be represented in the actions the software provides. In answer to the second question of what are transaction supported collaborative environments?, well they don't exist yet and that is what I want to start building here for oil and gas. This working paper is available from Harvard Business School and begins the difficult task of identifying the needs of a "transaction supported collaborative environment" and the importance in innovation.
Abstract
One of the things that I have learned since being heavily exposed to collaborative environments is they are difficult, and the approach is never the same. Just as people are different, each collaboration is. The ability to proceed with preconceived notions just doesn't work. The need to adopt a flexible framework from the beginning and throughout the discussion is mandatory. How is it that collaboration brings the wisdom of the crowds? I think the authors begin to define it in this paper, so lets jump in with a clear definition of how collaboration is beginning to be used in industry.
Instead, innovations are increasingly brought to the market by networks of firms, selected for their unique capabilities, and operating in a coordinated manner. This new model demands that firms develop different skills, in particular, the ability to collaborate with partners to achieve superior innovation performance. Yet despite this need, there is little guidance on how to develop or deploy this ability.
This comment is consistent with the vision of this development project. As I have noted here in my research; the software defines and supports the organization. Before you can make a change it has to be implemented into the software first. Recognizing the JOC as the market structure of the industry will require software to be defined in order to mitigate the detrimental effects and enhance the benefits of collaboration.
This article describes the results of a study to understand the strategies and practices used by firms that achieve greater success in their collaborative innovation effects. We found many firms mistakenly applied an "outsourcing" mindset to collaboration efforts which in turn, led to three critical errors: First, they focused solely on lower costs, failing to consider the broader strategic role of collaboration. Second, they didn't organize effectively for collaboration, believing that innovation could be managed much like production and partners treated like "suppliers." And third, they didn't invest in building collaborative capabilities, assuming that their existing people and processes were already equipped for the challenge. Successful firms, by contrast, developed an explicit strategy for collaboration and made organizational changes to aid performance in these efforts. Ultimately, these actions allowed them to identify and exploit new business opportunities. In sum, collaboration is becoming a new and important source of competitive advantage. We propose several frameworks to help firms develop and exploit this new ability.
Facing "peak oil" the energy industry has no option to dabble in this area. This has to be a concerted effort to make these changes. Success is not an option and the time to change is now.
IntroductionI have shared my concerns with how the individual companies within the energy industry do not share the sense of urgency or concern for the overall supply of oil. Theirs is a commercial operation that is operating at record profits. The decline in their reserve base and production profile are an inherent part of the business and they are doing just fine. How this system gets built is a question I face every day. Individually, people within the industry comment that the idea of using the JOC is the right thing to do, however, no company will step up and make the first move. Its the worst Mexican standoff anyone could imagine. Irrespective of the reasons regarding innovation and the need for greater speed from an operational point of view. The new technologies are beginning to finally be assembled into their final parts. The capability and comprehensive nature of the offerings are now complete in terms of the needs for a system that is built for the purposes here. And that is the point of the authors in this next section.
This new model is being driven by a series of trends forcing firms to re-think traditional approaches to innovation. First, the complexity of products is increasing, in terms of the number of technologies they include. No longer is it possible for one firm to master all these skills and locate them under one roof. Second, a supply of cheap skilled labor has emerged in developing countries, creating incentives to substitute these resources for higher-cost equivalents. Third, different regions of the world have developed unique skills and capabilities, which leading firms are now exploiting for advantage. And finally, advances in development tools and technology combined with the rise of open architectures and standards have driven down the costs of coordinating distributed work. In sum, collaboration is no longer a "nice to have." It is a competitive necessity.
If peak oil is not a compelling call to action, possibly this technological trend should be.
Collaboration is not "Outsourcing"I have written extensively about
Professor Richard Langlois' theories around the boundaries of the firm. How the natural tendency is to have either the market or the firm be determined and configured to be the means to lower "transaction costs". And how today's Information Technologies can provide for lower transaction costs in a contractual or market environment. The authors provide further justification and clarification of how these changes are strategic and not inappropriate approaches to outsourcing.
Our study revealed dramatic differences in the performance of firms collaboration efforts, driven by contrasting approaches to their management. In particular, many firms mistakenly applied a "production outsourcing" mindset to collaboration, viewing the use of partners only as a means to achieve lower costs through "wage arbitrage" - substituting a US resource with a cheaper one of equivalent skill.
By contrast, successful firms went beyond simple wage arbitrage, asking global partners to contribute knowledge and skills to projects, with a focus on improving their top-line. And they re-designed their organizations, to increase the effectiveness of these efforts.
Managing collaboration the same way a firm handles the outsourcing of production is a flawed approach. Production and innovation are fundamentally different activities - while the former seeks to replicate an existing product at low cost, the other seeks to develop something entirely new and valuable. In addition, outsourcing and collaboration have very different objectives. Outsourcing involves producing a commodity asset or resource at the cheapest prices. Collaboration, by contrast, entails accessing globally dispersed knowledge, leveraging new capability and sharing risk with partners.
Firms which managed collaboration using an "outsourcing" mindset made three critical errors, as compared to more successful organizations:
- They didn't consider the strategic role of collaboration, but saw it only as a tactic for reducing cost. As a result, their efforts were misaligned with their business strategy.
- They didn't organize effectively for collaboration. Instead, they treated partners like suppliers of parts or raw materials, and manged them using a procurement function.
- They didn't make long term investments to develop collaborative capabilities. Instead, they assumed their existing staff and processes could handle the challenge.
In combination, these errors meant firms systematically missed opportunities to use collaboration for competitive advantage. By contrast, successful firms found that attention to these critical areas generated new options to create value that competitors could not replicate. Below, we describe the principles that these latter firms employed.
Develop a Global Collaboration StrategyA brief summary of where I foresee collaboration being used in the energy industry. The JOC may represent a property in any location, owned by companies registered in different countries and with different product knowledge and capabilities. The pooling of each producer's resources through the collaboration should be the first order of business. Having one company designated as the "operator", I think, is not desirable nor very productive. We see independent silo's representing the capability to conduct operations all around the world. And these capabilities are all duplications of one another and mutually exclusive to the needs of the various JOC's. With the shortfall of engineering and earth scientists in oil and gas, the ability to virtually pool individual resources necessary for the operation, based on the operations need is what the objectives should be. This is in line with the thinking of the authors of this Harvard document. The market of suppliers, vendors and contractors should interact with the JOC to support the operation and implement its plans for the facility or single well. This virtual environment supported and defined by the software, built for the energy industry by its users, and conducts the transaction requirements, the knowledge management and governance of the decisions made by the JOC. This is a very brief summary of this software developments proposal and I would recommend the review of the archives of this blog for further clarification of these ideas. Nonetheless, it is obvious to most that the need to have a purpose built system with a dedicated and focused software development team be deployed to make this application real.
The authors continue with the discussion of how their study reflected on two different strategies towards collaboration. I think it reflects my optimistic view of collaboration being a productive tool for management, and if the management see it as a threat or just another trend to be followed, they may miss many of the benefits.
Collaboration received little senior management attention; when it did, it was because expectations were not being met.
Leading firms, by contrast, developed an explicit strategy for collaboration, designed to support their business goals. In contrast to organizations that viewed collaboration only as a tool for reducing cost, these firms considered a variety of more strategic benefits, in particular, assessing how collaboration could improve their top line through increased product differentiation. Successful organizations achieved this in two ways: first, by leveraging a partner's superior capabilities (i.e., know-how that the firm did not possess internally); and second, by accessing a partners contextual knowledge (i.e., knowledge that the partner possessed by virtue of its local position). In combination, these benefits comprise the "3C's" of a global collaboration strategy.
The authors continue to assert the need for management buy-in. For the energy industry to succeed in this software development proposal there has to be a high level of commitment to it form management. I think the salient warning from CapGemini about these technologies affecting operations today is something management should think clearly about. Are these back door solutions to be stomped out, or should they be welcomed and supported as legitimate methods of achieving the necessary work. I also believe the time for these types of solution to be built and prospectively developed is drawing close. Management needs to get behind this with the long term perspective of developing these types of systems for the next 3 - 4 years.
Lowering R&D Costs
Leading firms however, lowered cost in a different way. Rather than swap one resource for another, they "reconfigured" their operations to optimize performance at the system level. While the decisions they made in isolation, sometimes appeared to add cost, these firms understood the need to change the way they organized to maximize the value of collaborative efforts.
Leveraging Superior Capabilities
Leading firms focused greater attention on how to leverage partner capabilities. We observed two broad types of capability in action: First, the ability to rapidly bring online large amounts of capacity, allowing firms to lower time to market and increase responsiveness, while avoiding the cost of full-time staff; and second, the ability to access unique competencies, technical know-how and / or process expertise that firms did not possess internally. Successful firms sought partners with a blend of both abilities, giving them instant access to a repertoire of skills not available in-house. As one manager recalled, "It takes us nine months to find and hire a new employee. But using our partner, we staffed up in two weeks, accessing a skill that we don't have internally."
Thinking Strategically
Thinking strategically is the point that I have tried to make. Clearly the easy oil is gone. The costs associated to produce one barrel of oil are increasing in lockstep with the costs of discovery. The amount of engineering and earth science effort per barrel of oil has probably doubled in the past 5 years. And it will continue to increase, not decrease over time. With the shortfalls in human resources today, I believe Adam Smith's division of labor theory will provide the additional resources necessary for the industry to deal with the difficult problems ahead. A reorganization around the JOC is 100% in compliance with the cultural framework of the industry. Pooled human resources, supported by markets will provide the productivity increases that Adam Smith's theories provide. A theory which has been proven correct for hundreds of years. This organizational change can not be implemented without the software defining and supporting the industry. Without the software a firm will be relegated to manual systems or loss of the opportunities I just wrote about. These are the associated choices for management today and the point of the authors.
To Illustrate, consider the strategies of two firms - A and B - depicted in Figure 2. Initially, firm B has a dominant position, with lower cost and superior differentiation. But firm A has identified opportunities to improve its position through collaboration. It can move along the horizontal to position C, achieving lower cost, or along the vertical to position D, achieving superior differentiation. Or it can move to position E, which is superior on both dimensions. In essence, collaboration has the potential to move firm A to the "frontier" of the space joining C,D, and E. Contrast this with a firm that views collaboration only as a way to lower cost; this firm sees only one position to move to. While this may be a good choice, this firm does not see that it is not the only choice.
That although I have stated the reorganization to the JOC is consistent with the culture of the industry. The culture of the industry is a very competitive one. The ability to compete and succeed in oil and gas takes a certain capability and understanding that many have stated as being second only to NASA in terms of complexity. From my 30 years experience, I agree. Changing this competitive culture to one of co-opetition or whatever buzz word that comes along will be difficult. In line with this thinking I have suggested that the land base and the companies research and development capabilities are their future competitive assets. Moving to this thinking will take time, and indeed, may never occur. I have placed my investment of time and energy in the idea that the common sense use of the JOC will ultimately prevail, with or without the support of current management. I have an undying faith that the competitive structure of the JOC will accelerate the capacity within the industry to the point where the bureaucracy would otherwise not be capable of competing. The area the authors call E in Figure 2 is where I expect to see the JOC leading the industry.
While successful firms often used different terms to those above, all had developed similar methods to align collaboration efforts to their business strategy. Collaboration received visibility at a senior level, and was an integral part of the strategic-planning process. Increasingly, the focus was not on wage arbitrage, but on using partners to increase business value. these firms grew more sophisticated in the use of collaboration over time; by contrast, poor performers remained stubbornly focused on cost.
Organize for CollaborationInnovation in oil and gas is a difficult prospect. As I mentioned earlier in this post, the earth sciences and engineering disciplines make the industry second only in complexity to the space industry. There is another element of the complexity that needs to be considered and that is uncertainty. The ability to say unequivocally that this is factual is difficult when your talking about forces several thousand feet below. The uncertainty element invokes the commercial environment on the producer. Then to make things even more difficult the innovation has to be progressive enough to push the science. And as I noted in the plurality writings, there is a strong influence of the science in innovation, which leads to greater understanding and a further development of the science.
The need for a different model can be seen by considering the challenge of partnering along two dimensions: The degree of uncertainty over the product to be produced; and the degree of uncertainty over the process to produce it (see Figure 3). Replicating an existing product (i.e., production) involves little uncertainty while developing a new one (i.e., innovation) is far more uncertain. Similarly, some processes are routine and easily specified whereas others are idiosyncratic and rely on trial and error learning. When firms face little uncertainty on both dimensions - the arena of production outsourcing - traditional models work well, given firms can specify what they want and how it should be made. As uncertainty increases however, a more collaborative approach is needed.
It is at this point that I would also assert that the production process, which is inevitable and in constant decline, adds further uncertainty above and beyond that of the firm. This is why $79 oil seems very cheap to me. The following quotation of the authors provides a good understanding of the work that is done at the Joint Operating Committee. This is how the industry has developed and how it functions. Unfortunately all of the software development projects fail to capture this organization and its role in the day to day operations. This is the business of the business, and due to a number of forces the business of the corporations has become the oil and gas regulatory compliance, tax compliance, SEC compliance and this is where the ERP focus has lead the organizations to focus and consume their time.
Leading firms viewed partners as an extension of their own development organizations, seeking their participation in meetings and including them in internal communication. As part of this philosophy, they required greater continuity in partner staff, in contrast to a transactional model, in which people move in and out of projects. This ensured the "tacit" knowledge of a projects' context was retained, and improved communication between teams. As one manager explained, "It takes time to appreciate the skills of each team member and understand how to work together. When people leave, we have to go through that learning curve again. So we put a premium on ensuring staff continuity".
This focus on the business is where the industry has to move to. Compliance and governance has to be as a result of conducting the business of the business. As simple as that sounds the administration of oil and gas has become completely divorced from the reality of the business. This is primarily the result of the software vendors focus on ensuring the technical accounting and compliance of the firm.
The authors now approach one of the difficult areas of collaboration. Intellectual property (IP) is the source of much value in today's economy. Who owns what and where did it come from are important considerations when the partnership as represented by the Joint Operating Committee is concerned. Traditionally the Chairman of the JOC used his firms resources to operate the programs that were agreed to by the partnership. With the prospective pooling of the technical resources as proposed here, the intellectual property can become problematic. The manner in which IP is managed in this industry is consistent with the keeping of trade secrets. I have noted here before that the stickiness of knowledge moving through the organization is contrasted to the leakiness of knowledge through the various industry related disciplines. If someone discovers something new, it is generally fairly well known on the street in a few weeks. Therefore no one has the right of that property, and most importantly copyright law is designed to disseminate ideas throughout the community as quickly as possible. There needs to be some soul searching as to how firms manage their alleged secrets and the result of their research.
The final area in which firms made different organizational choices was in intellectual property (IP) management. Global partners increasingly develop their own IP - new components, technologies and processes - to improve project performance. Furthermore, collaboration often requires that partners re-use and add to a firms existing IP in the search for new solutions. Given these trends, traditional approaches to IP which assume that a firm must develop, own, protect and isolate its IP are increasingly outdated.
and
While successful firms in our study differed on the specifics of their IP policies, their actions reflected a common shift in values; towards a more open and flexible approach. these firms sought to leverage partner IP, focusing on the cost and speed advantages, which outweighed the concerns about the need for control. They developed mechanisms for partners to access their own IP, in a way that facilitated collaboration but ensured the protection of competitive assets. And they shared newly developed IP when the firm and its partners could benefit form its application, as long as the uses were not competitive.
Build Collaborative Capabilities. Collaborative skills are hard to come by without the efforts of many who are willing to contribute and learn. These are standard fare for the process of collaboration and I apply this throughout the industry. The smartest, most educated and most recent additions to the firm are needed to adopt these perspectives. Here the authors begin to identify some of the salient points involved in good collaborative practices.
The final area separating leading firms from others was their willingness to invest in developing "collaborative capabilities." All too often, firms assumed that their existing employees, processes and infrastructure were capable of meeting the challenge of collaboration. But successful collaboration doesn't just happen - it is a skill that must be learned. Rarely do firms get it "right first time." Leading firms recognized this reality and made investments to enhance their performance over time.
and
Successful firms targeted investments in four areas: people, process, platforms and programs. We call these the "Four Pillars" of collaborative capability (see Figure 4). These investments were typically funded outside the budgets of individual projects, given few projects can justify the levels of infrastructure needed to perform well on their own. In essence, leading firms made a strategic decision to invest in collaborative capabilities, and sought to leverage these investments across projects and over time.
My first truly collaborative environment came about in 2000 when I started my on-line MBA. The university had over 1,500 students located throughout the world and closely tied together in a Lotus Notes collaborative environment. It was fascinating to learn so many things about businesses that were in Kuwait, China and even your own province. My perspective changed over the course of three years of study. And I learned to adopt a broader point of view about the contributions that I made. Asking key questions after attempting to learn the unique perspectives of the participants and then attempt to build on the quality and quantity of knowledge held within the diverse groups, were skills that are not easy to come by. The intensity of the learning was heightened as a result of the close collaborations.
Superior performance in collaboration requires people with different skills, given team members often lie outside the boundaries of the firm, are located in far flung countries and have vastly different cultures, The "art" of management in such projects is in finding ways to exert influence over resources not under a firms control. Rather than a focus on deep technical expertise, managers therefore require a much broader skill set, associated with the need to orchestrate and coordinate the work of distributed teams.
I have not been able to specify the manner in which the process of this software development will proceed. Collaboration is a key component, as will software that defines the process and the roles of individuals and companies. The way that the
Java Community Process is done is a given as far as I am concerned, however, there are other elements of how things get built that I have to research and determine before we start writing code.
Most projects we observed employed a formal product development methodology based upon a modified "stage-gate" or "waterfall" type process. These processes are increasingly popular ways to ensure greater control and consistency in the execution of projects. But these techniques, and others that share their roots, are often predicated on the assumption of single-site development. There is a need to re-think how they should operate when managing the distribution of work among a team of global partners.
Building platformsThe following in my opinion is a call to action for these types of activities to be conducted, coordinated and implemented on an industry wide basis. Decisions are being made without the input of others to ensure a timely start to these developments. Selecting the Google Apps as the platform to begin the collaboration and develop is a rather obvious choice, particularly when you consider where Google's engineering and innovation may take the product too.
Leading firms developed technology "platforms" to improve the coordination of work. These platforms comprised four main parts: First, development tools and technologies to improve the efficiency of distributed work; second, technical standards and interfaces to ensure the seamless integration of partner outputs; third, rules to govern the sharing of intellectual property among partners; and fourth, knowledge management systems to capture the firms experience on how distributed work is best performed. This collaboration "infrastructure" was leveraged across multiple projects over time. The goal was to promote a long-term view of the assets needed for effective collaboration.
For the risks and errors can be and are very large.
Consider the troubles at Airbus in developing its flagship A380 aircraft. Airbus' German and French partners chose to work with different versions of the Dassualt Systems' Catia design software. But design information in the older systems was not translated accurately into the new new one, which held the "master" version. With a physical mock-up, these problems remained hidden throughout the project. The result: 300 miles of wiring, 100,000 wires and 40,000 connectors that did not fit, leading to a 2 year production delay at a cost of $6bn. Yet the cause of Airbus's problems was not in choosing different versions; rather it lay in the lack of an effective process for dealing with the problems this created.
Managing Programs. The energy industry has a choice. They can begin serious efforts down this road with the objective of building systems to enhance innovativeness and performance, or continue on in the manner that they currently are. At some point in time someone will realize the intellectual property that I have developed here in this blog is the constructive direction of the industry. If not then we would have the ability to modify it to make that assertion valid.
Successful firms managed their collaboration efforts as a coherent "program," in contrast to organizations which ran each project on a stand-alone basis. A program view was critical given collaboration projects rarely met expectations early on, and performance often deteriorated when the scope of efforts was increased. Leading firms did not differ from others in this respect; but they did differ in the rate at which they improved. Top performers put in place mechanisms to help improve their collaboration skills over time.
A New Source of Competitive Advantage
Firms that devoted attention to the three areas above - strategy, organization and capability development - were more successful in their collaboration efforts. For a few firms in our study however, these efforts not only lent support to their existing business strategies, but also led to new value creation opportunities. Their investments to build capabilities, in turn, created options to pursue strategies that could not be replicated by competitors; especially those that managed collaboration like outsourcing. For these firms, collaboration had become a source of competitive advantage (see Figure5).
In our view, Boeing's source of competitive advantage is shifting; it is less and less related to the possession of deep individual technical skills in hundreds of diverse disciplines. While the firm still possesses such knowledge, this is no longer what differentiates it from competitors such as Airbus, who can access similar capabilities. Rather, Boeing's unique assets and skills are increasingly tied to the way the firm orchestrates, manages and coordinates its network of hundreds of global partners. Boeing's experience is increasingly common across the industries we observed: Collaboration is becoming a new and important source of competitive advantage.
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