Professor Giovanni Dosi, Part XVII, a Conclusion

Our review of Professor Giovanni Dosi’s 1988 paper “Sources, Procedures, and Microeconomic Effects of Innovation” has provided us with the evidence that the Joint Operating Committee is the “innovation” framework for all oil and gas producers. Identifying the “innovation” framework as part of the Joint Operating Committee along with the legal, financial, operational decision making, cultural, communication and strategic frameworks. People, Ideas & Objects Draft and Preliminary Specifications identify and support the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. We provide this by moving the compliance and governance frameworks of the hierarchy into alignment with the seven frameworks of the Joint Operating Committee. Enabling a greater speed, accountability and innovativeness of the producer.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

Professor Giovanni Dosi, Part XVI

With this post we have completed the review of Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation”. After this post I will have some closing comments and a review of the papers highlights in future posts.

Characteristics of Innovation and Patterns of Industrial Change.

Professor Dosi states that the rate of change and observed dynamics of industrial performance can be attributed to the following components:

Innovative learning by single firms augmented by universities and government agencies. 

People, Ideas & Objects asks: what would be the effect of increasing the exposure from a single firm, to a collaboration between several firms through the Joint Operating Committee? Would this facilitate a marked increase in Joint Operating Committee knowledge? And would this knowledge therefore facilitate an increased rate of collaborations leading to an increased level of understanding and pace of innovativeness and scientific knowledge? Or as Dosi notes:

The diffusion of innovation, the knowledge of innovative products and processes. 

Professor Dosi states that his general interpretative conjectures are: (And these are an important consideration in determining the capability and capacity to innovate.)

First, the empirical variety in the patterns of industrial change is explained by different combinations of selection, learning, and diffusion and different learning mechanisms. (p. 1159)

Second the nature of each technological paradigm, with its innovative opportunities, appropriability conditions and so on help to explain the observed inter-sectoral differences in the importance of the above three processes. (p. 1159)

Each successful innovation creates an asymmetry effect, or an overall increase in competitive position of the entire industry. However, that does not necessarily increase the competitiveness of all the participants of the industry. The ability of laggard companies to improve their competitive position helps to form new positions within their industries. These laggard companies generally are able to move further and quicker through their imitation of leading companies. However, the primary differentiating component of competition based on innovation in process and product is attributable to the innovative capability of the firm.  ie. a laggard will remain a laggard without the direct and active development of innovative appropriability conditions.

Professor Dosi finds these points difficult to quantify and prove, but states these may be tacitly understood. People, Ideas & Objects asserts that that was the case in 1988 at the time this article was written, however, the laggards ability to “keep up” or even “catch up” may have progressively diminished through the application of information technology during the 2000’s.

There is a determining paradox for the ability to innovate based on imitation or strict Research and Development. Companies can copy others innovations in industries with minimal asymmetry, (where they are all the same). Whereas industries that are asymmetric (like oil and gas) or have large variances in their capabilities are best served by differentiating themselves by pursuit of Research and Development.

One can see with the difficulty of this discussion; how and where innovation and research & development are done in oil and gas. The discussion to this point is ripe with conflict and contradictions, the raw material for solutions. In the Draft Specification’s eleven modules their are two specific modules that deal with these problems. One module is the Research & Capabilities Module which is the Firm based module, the other a Joint Operating Committee module called the Knowledge & Learning Module. Please review those as to how this division of labor is determined in the People, Ideas & Objects Draft Specification.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

McKinsey, When Failure is not an Option, Part 2

McKinsey have published the second part of this highly applicable series on Joint Ventures. Our review of the first part of this McKinsey series was published in September 2010. Part 2 of this article discusses several points that are in direct support for People, Ideas & Objects. A bold statement, however, one that will be proven valid through our review of this document. Specifically the three points that are verified in this post are.

1. The need to have a third party provide the software development service that People, Ideas & Objects proposes. 
2. The Military Command & Control Metaphor, that was developed in the Draft Specification, provides an industry wide governance model that is directly supported in this article. 
3. Compliance, on an automated scale, is a necessary component of the governance and third party nature of the offering noted in 1) and 2). 

We begin with a quotation that summarizes the state of affairs in the oil and gas industry.

As we discussed in the first article of this series, the scale, complexity and risk associated with the execution of large scale projects frequently leads to joint venture constructs as a way to introduce expertise, diversify risk and gain access to capital. We also observed that, up until recently, the majority of these partnerships consisted of a dominant, operating partner that provided the bulk of the resources and leadership, paired with one or more relatively silent partners in the background. Interestingly, this trend has shifted dramatically over the last decade, and project JVs are increasingly becoming a “partnerships of equals”, with shared governance, staffing and execution responsibilities distributed among the participants.

McKinsey use the example of a large refinery to show the difficulty in managing a large Joint Venture today. They detail the four major risk factors that are evident in the case example, and I would note that these are the issues, to a greater or lesser extent, that are pre-eminent in all oil and gas ventures;

• Cross-cultural challenges associated with the introduction of sovereign nationals and international corporate employees
• Inter-company incentive and strategic misalignment between two (or more) principle investors
• Expertise, system and process friction between the various contractor and subcontractor teams, who may have alliances or other preferred relationships with one of the JV partners
• Normal” start-up risks associated with the scale-up and development of a project “new-co”, the on-boarding of new JV employees, integrating staff from the partners who have been seconded to the JV, and greenfield development of new systems and processes, among others.

There’s no denying these are the issues that all oil and gas projects are facing. McKinsey offer a four step solution that dovetails with the Draft Specification. If we ask first hand, “what if” there were standard systems and procedures that were used for all Joint Operating Committees across the oil and gas industry? Where the ability to assign a generic template of assignable roles and responsibilities. Where the compliance and governance of each jurisdiction is embedded within the third party vendors (People, Ideas & Objects) software's policies and procedures. Where the generic management of the Joint Operating Committee was handled through software provided by a third party that represented all producers. Software that managed each of the producers compliance for the various jurisdictions in which they operated, to the governance of the people that were pooled by the various firms represented in the Joint Operating Committee. This brief vision of what People, Ideas & Objects is proposing in the Draft Specification is being mirrored in this discussion of McKinsey’s four steps. We begin.

Step 1 Define and Align

Alignment is difficult to attain within the oil and gas industry for the many reasons cited in the subsequent McKinsey quote. We need to begin by aligning the compliance and governance frameworks of the hierarchy, moving these two frameworks into alignment with the legal, financial, operational decision making, communication, cultural and innovation frameworks of the Joint Operating Committee. Talk of alignment with out building the software that identifies and supports the alignment of these eight frameworks, first and foremost, is just more talk. One of the key benefits of doing this is the alignment of compliance with operational decision making. The net benefit of which is greater accountability. But by combining all eight of these frameworks we are making the Joint Operating Committee capable of dealing with the all aspects of the producer(s) needs.

McKinsey note:

...project JVs often begin by bringing together unlikely allies whose goals, cultures, operating models, risk appetites, and financial strengths are apt to vary widely. Identifying the disparate goals, models and strengths and weaving them into a single, aligned and broadly-communicated vision is critical for an effective JV to function effectively. This vision supported by a number of underlying organizational themes and parameters creates a common language for the JV, and is a reinforcing mechanism for maintaining alignment across all partners.

What I am asserting here is the need to have the generic business aligned around the Joint Operating Committee so that the vision of the JV can become the focus of those working within the project / property.

Step 2 Build

I want to limit the discussion to the governance related points. I will therefore note the following McKinsey quote and refer to the related discussion in Step 3 Execute, below.

The process of building the team should start with recruiting the best people from each participating partner. This can be quite a challenge, as top talent often see joining the JV as a career- limiting move, putting them “out of sight, out of mind”, for years. And, since the JV’s priorities differ (by necessity) somewhat from those of the parent organization, even the successful achievement of those objectives by secondees may not be viewed as credible or be given the same merit by those in the parent organization.

Step 3 Execute

The Draft Specification developed the Military Command & Control Metaphor to replace the Governance of the hierarchy with a usable model within the Joint Operating Committee. A governance model that worked similar in fashion to that which the NATO forces use. One that has the various countries military forces used to deploy troops from various countries in many different theatres of war and other technically difficult operations. Looked at from both the micro and macro level, the oil and gas producer can attain the ability to deploy and redeploy resources as required across the various JOC’s they participate in. The ability to have the partnerships pool their resources, and these resources have a deemed chain of command that is recognized on an industry wide basis, with a defined roles and responsibilities that are agreed to, can provide a strong governance model to the issues that McKinsey ably addresses in the industry.

In addition to meeting these technical deliverables, team members must also

• effectively scale the organization quickly 
• establish a culture of self performance, and 
• continuously adapt and evolve.

These are very different types of work, requiring a loose – tight governance model which provides the JV and project team with sufficient flexibility to grow while at the same time maintaining a rigid link to the parent companies’ governance and control mechanisms.

As the project team moves into execution, it must define a model for itself that allows it to be independent while continuing to deliver on parent companies’ needs. During execution, the leadership team also needs to think proactively about how to implement its newly constructed culture, processes and systems. Frequently complicated by a fragmented and globally disperse geographic footprint, the introduction of multiple new contractors and sub-contractors, and the fast pace at which the project evolves, it is easy to let the execution of these systems slip and to allow their effectiveness to wane. The JV leadership must establish a disciplined steering committee with direct accountability to the CEO to oversee successful implementation.

Step 4 Renew

I know I share with most people that have worked in oil and gas a feeling of frustration at the value that is occasionally lost in various Joint Operating Committees after phase changes or other transitions where people, teams, systems and procedures that were build up are left behind, dropped, shredded or forgotten. Very wasteful in the big scheme of things. Or how about the other situation that creates waste. That being the work done to manage the Joint Operating Committee, that was put together and was built as a one off installation of software and systems. Much of this work was done in recreating the wheel and as such it was “rebuilt” in order to address the unique characteristics of the property. McKinsey notes.

Perhaps the most overlooked success factor in constructing a successful project JV is to create clear opportunities for renewal. This renewal is both personal, for the individuals in the project team, as well as technical, for the systems and processes that we mentioned previously. While any project professional will readily acknowledge the dynamic and evolutionary nature of a project as it moves through its lifecycle, many frequently fail to recognize that people and systems need to evolve correspondingly. World class project JVs, on the other hand, establish clear breakpoints and formal evaluation steps, during which the leadership team evaluates the effectiveness of its people, tools and processes, and takes steps to inject fresh energy, capabilities and structure into the team where needed.

The purpose of People, Ideas & Objects is to provide a third party software development capability based on the Draft Specification. Using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This provides a means for all producers to mitigate these losses of value. One in which the use of a third party software vendor providing the software to run the JOC is available to all the producers of the venture. Where the software vendor is independent of each producer. Where what is learned and developed is able to be used in the future, in not just the JOC but potentially elsewhere. And what is learned elsewhere could potentially benefit the JOC.

Compliance as a potential fifth step.

Lastly I want to comment about compliance which is not directly addressed in this McKinsey article, it is a related topic that falls in with the discussion of governance. And when we are talking about compliance we are talking about the compliance of the Joint Operating Committee and its operations in whatever jurisdictions that it may be operating within. This therefore also involves the partners compliance for these operations as well.

People, Ideas & Objects as software developers could assure thousands of producers who might provide us with the financial resources to develop a software development capability that is focused on maintaining the compliance of thousands of producers with the thousands of regulatory bodies those producers have, or may have, operations in. What plans do each of these individual producers have to ensure their operations will be in compliance with these jurisdictions where the compliance requirements continue to expand? The movement of the compliance framework to the Joint Operating Committee should be seen as an opportunity to address the automation of compliance and an opportunity to integrate compliance within the other frameworks of the JOC.

To what extent can this type of automation be implemented is the question that needs to be answered. With each piece of legislation that is contemplated these days, potentially totalling several thousand pages, where the ability for people to manually keep up with the demands of the regulatory process of governments and regulators being potentially past, full automation of the compliance framework is a necessity, in my opinion.

McKinsey note toward the end of the document these possibilities exist, if only.

While JVs and projects are both uniquely challenging to execute well, there are similarities that enable world-class project managers to effectively build world-class JVs, and vice versa.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

And in return...

What do producers receive in exchange for fully subscribing to People, Ideas & Objects? The primary benefit is this project moves forward providing an alternative for producers to manage their assets.

Last week we noted the article in the Oil and Gas Journal regarding the Mackenzie Gas Project. How the participants were to decide in 2013 if they could proceed with the project based on their ability to staff the project. I believe People, Ideas & Objects is one alternative that needs to be considered and acted upon.

To offer a laundry list of other benefits that would be provided to producers for subscribing to this project seems academic at this point. It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

Professor Giovanni Dosi, Part XV

Returning to our review of Professor Giovanni Dosi’s paper “Sources, Procedures and Microeconomic Effects of Innovation” in the Journal of Economic Literature Vol. XXVI (September 1988), pp. 1120 - 1171. Recall this review of Dosi was part of our overall review of the Preliminary Research report; of which we have been aggregating all of these review posts under this blogs label “Review”. I highly recommend reviewing Professor Dosi material in detail. His 1988 paper has become one of the critical resources in the area of innovation and our use of this document was instrumental in determining the Joint Operating Committee is the key organizational construct of the innovative oil and gas producer.

Innovation and Industrial Change: Learning and Selection

A. The Innovation Process and Industrial Structures

In this post Professor Dosi asserts that the makeup of industries and companies is attributable not only to the endogenous force of competition. Innovation and imitation also make up the fundamental structure of an industry. “Market structure and technological performance are endogenously generated by three underlying sets of determinants.”

Each of these three components is evident in the marketplace of an oil and gas producer today as reflected in:

• The structure of demand.

Satisfying the insatiable demand of the global energy marketplace is critical to the advancement of all societies. American and western societies as well as Chinese and developing societies face real challenges in sourcing adequate long term sources of energy. The long term demands on the energy producer have never been so great.

• The nature and strength of opportunities for technological advancement.

The nature and opportunities for technological advancement lead one to believe mankind has never faced the level of opportunity and acceleration that is possible today. The industrial mechanization of the past 100 years combined with the prospective mechanization of intellectual pursuits combine to markedly appreciate the value of human life. The availability of energy will be a critical element of this advancement.

• The ability of firms to appropriate the returns from private investment in research and development.

The oil and gas industry is moving closer to its earth science and engineering principles. Innovation, research and development in both the producer firm and the market are and will become more commercial in nature. It is on the basis of success or failure of these factors that will determine the success or failure of the firm within the industry.

Focusing these three components through the Joint Operating Committee is what People, Ideas & Objects provides through the Draft Specification. By simply moving the compliance and governance frameworks of the hierarchy over into alignment with the legal, financial, operational decision making, cultural, communication and innovation frameworks of the Joint Operating Committee. Provides the producer with greater speed, innovativeness and accountability.  But it also enables the producer to focus on innovation, research and development.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

Organizational and Change Management Resources

Today we have two articles that focus on the topic of change management and organizational change. The first article presents the results from a survey from McKinsey and is entitled “Taking organizational redesigns from plan to practice: McKinsey Global Survey results”

Organizations often redesign themselves to unlock latent value. They typically pay a great deal of attention to the form of the new design, but in our experience, much less to actually making the plan happen—even though only a successfully implemented redesign generates value. A recent McKinsey survey examines the reasons executives cite for successful and unsuccessful implementations, and in doing so, offers one set of explanations for why organizational transformations so rarely succeed. This survey asked why organizations redesigned, what challenges they faced, what tactics they used for implementation, and how the redesign and its delivery affected employee morale and shareholder value.

The second article is from Booz & Co. Strategy + Business and is entitled “Making Change Happen, and Making It Stick”

Few organizations have escaped the need for major change in the past decade, as new technologies and global crises have reshaped entire industries. However, the fact that change has become more frequent does not make such changes any easier.

As we noted this past week, People, Ideas & Objects are not change agents but solutions providers. These documents provide industry with a hint of the organizational and change management resources that are available.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

Those Annoying Fees Are Due.

A key element of People, Ideas & Objects value proposition is that the costs associated with software development are allocated across our population of subscribing producers. The more producers we have subscribing to our development, the greater the allocation of these development costs across a larger denominator. Our cost - plus method of charging the producers the costs associated with development, and allocating these costs across a large base of producers provides a substantial value proposition in comparison to the traditional means of billing by software vendors.

Another element of our value proposition is that with a large subscriber base we quickly acquire the resources necessary to approach engineering the appropriate software solutions. When the traditional software vendors are developing one-off solutions they are usually unable to allocate the costs beyond one or two subscribing customers, therefore the costs to engineer the solutions quickly exceed what those customers can tolerate. With People, Ideas & Objects value proposition, our ability to engineer the solution to the ideal level on behalf of our entire subscribing base is easily attained as no one individual producer is asked to disproportionately incur intolerable engineering costs, and all of our subscribing producers are able to acquire highly engineered solutions.

The following is a quick summary of the fees and penalties that are due for producers subscribing to People, Ideas & Objects.

2010

Recall that 2010 was the year in which we began our policies of assessing our fees and penalties. Effective 2010 all subscribing producers, irrespective of the date in which they subscribe, are required to pay all fees and penalties from January 1, 2010 forward. 2010 was also the year in which we implemented our policy of assessing penalties on any outstanding fees after March 31 of the assessment year. These penalties are assessed at 300% of the years fees. (Please see our recent post entitled Free Riders and the Participation Bonus)

Therefore producers wishing to subscribe to People, Ideas & Objects are subject to the 2010 $1.00 fee and $3.00 penalty per barrel of oil equivalent per day of production.

2011

Fees for 2011 have been determined to be $1.00 per barrel of oil equivalent production.

Therefore to become a fully subscribed producer member of People, Ideas & Objects the producer would take their daily production volume of x boe / day x $5.00 (total fees and penalties for 2010 and 2011) = producers subscription fees.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

Solution Providers, not Change Agents

In our post yesterday we noted that change was what ultimately generated our revenues, and that is the case. However, that does not mean that People, Ideas & Objects are the change agent in the energy industry. Nothing could be further from the role that we will be assuming. For People, Ideas & Objects to be successful, we need to be the solution provider for the changes that industry implements. There is not enough energy in the universe for a third party to exercise change within the oil and gas industry and we will not be the ones to fall within the belief that we could exercise that change.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

Constraints and Opportunities

Yesterday’s post noted that the start-up software developer, as well as the established SAP and other software vendors, need to provide a comprehensive and compelling vision of how they propose to resolve the issues that producers face in the oil and gas industry. And that only People, Ideas & Objects have provided a comprehensive and compelling vision with the publication of the Draft Specification and the supporting documentation contained within this blog. People, Ideas & Objects vision is an opportunity for the oil and gas producer community to approach resolving its issues in an unconstrained manner.

We have talked about some of the constraints that are inherent in the software business on this blog before. And today I want to reiterate the two that are the greatest impediment to change in the software offering provided by the software vendor. Those two constraints are the software vendors customers and the software code itself. These are the two main causes of failure for most software companies in meeting the needs of their software users.

Simply, changes to the software code are the greatest costs to the software vendor and do not generate any unique revenue streams. Therefore changes are resisted by the software vendor; propagating any of these software changes to the population of customers and users escalates the costs of any change. Is it any wonder that these applications have remained static for all those years.

These and other forces have cemented the existing “established” software vendors offerings in concrete. An innovative oil and gas producer, as documented here in this blog, needs to have the agility in decision making processes and follow through with the appropriate processes that support innovation. These begin with the appropriate organizational structure supported by a dedicated software development capability.

By employing cloud computing and a cost plus software development model People, Ideas & Objects are structured to support the changes in the producer. We are motivated by change, designed to change, accommodate change, and change ultimately generates our revenues. Providing a change oriented software development capability is the purpose behind People, Ideas & Objects.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

The Mackenzie Gas Project is a go, sort of.

The Oil and Gas Journal reports that the Canadian government has approved the Mackenzie Gas Project.  A $16 billion 1,196 km, 1.2 BCF / day pipeline, three onshore natural gas fields and 457 km NGL pipeline. The Mackenzie Gas project extends from the Beaufort Sea to Northern Alberta, is operated by Imperial Oil and includes as partners the Mackenzie Aboriginal Pipeline LP, ConocoPhillips Canada, Shell Canada Ltd., and Exxon Mobil Canada Properties.

At the end of the article it is noted that.

Imperial filed a letter with the NEB in March stating it would not decide whether to proceed with the project until late 2013, citing administrative delays in the approval process and subsequent difficulties keeping the project adequately staffed. 

It is refreshing to see the candid nature of Imperial’s et al’s admission that they are having difficulty organizing, or staffing, this project. It has been a long held assumption of People, Ideas & Objects that the oil and gas industry is facing a fundamental change in the underlying makeup of the business. That change being the demands of the earth science and engineering effort required for each unit of energy produced is increasing, and will continue to increase, on a trajectory that requires the producer to focus on innovation. Additionally, commodity prices are reallocating the financial resources to reward the innovative producer. These are fundamental changes in the underlying oil and gas business that will reconfigure who the winners and losers within the industry are.

To address this changed environment People, Ideas & Objects provides the oil and gas producer with an overall vision of how the industry could operate in this future. This vision is captured in our Draft Specification and is based on using the Joint Operating Committee (JOC), and applying the Information Technologies of the 21st Century. It is our vision that addresses the issues that Imperial et al are facing in staffing the Mackenzie Gas Project, and the issues that all producers are facing throughout the global oil and gas industry.

This vision of how the industry could operate is based on a solid understanding of industry operations, steeped in academic research, and based on the unique idea of using the industry standard Joint Operating Committee. By building the ERP systems that identify and support the movement of the compliance and governance frameworks of the hierarchy; over to and into alignment with the legal, financial, operational decision making, cultural, communication and innovation frameworks of the JOC, the producer attains a speed, accountability and innovativeness of operations.

In establishing this vision, and by developing the use of the Joint Operating Committee, People, Ideas & Objects have now set a standard of “start-up” ERP vendors investment requirements. This would also pertain to the standard bearer SAP and other vendors to provide a comprehensive and compelling vision for how the oil and gas producer can solve the issues the industry faces. Either way, as a start-up or as a full solution vendor, the need for “custom” development to meet an oil and gas vision is a necessity to selling an ERP solution in the marketplace today. Where are the others vendors visions and solutions?

Lastly I would argue that neither Imperial, Shell, ConocoPhillips or Exxon, the producers mentioned in this article, in any combination or permutation could develop this solution. And neither could any producer who participated in any Joint Operating Committee. What is necessary is to have a solution provider that is a third party to all of the producers, that represents all of the producers needs, such as People, Ideas & Objects is configured to do. For Imperial or Shell or any combination of producers alone to provide a software solution would limit the acceptance of the solution by the other producers in the Joint Operating Committee. This acceptance limitation is not an issue with the solution provided through People, Ideas & Objects.

It is now time for producers to act. Review of our Revenue Model will inform producers with attributes of how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.