Wednesday, December 23, 2009

Our tradition with Ralph Waldo Emerson

It is that time again to review my favorite author and share a specifc article of his works. This also marks the fourth full year of posting on this blog.

This year I have selected Emerson's first book "Nature" as this years reading. As with all of his works I find his writing inspiring and more topical today. Nature does not disappoint. Enjoy!

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Tuesday, December 22, 2009

Professor Paul Romer, Endogenous Technical Change

We are in the middle of a comprehensive review of Professor's Carliss Baldwin and Eric von Hipple new working paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". In the last post we learned that innovation within the community of People, Ideas & Objects is considered "a non-rival good: each participant in a collaborative effort gets the value of the whole design, but incurs only a fraction of the design cost." Music to my ears and a definitive benefit when a user considers their potential involvement in this community.

In a related document, Professor Paul Romer's October 1990 "Endogenous Technical Change"  discusses the impact of these non-rival goods impact on economic growth.

Growth in this model is driven by technological change that arises from international investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input it that it is neither a conventional good nor a public good; it is a non-rival, partiallyexcludable good.
These non-rival goods are being codified in the Draft Specification and developed by this community in the Preliminary Specification. The community will also develop their value adding service offerings, to be used with the People, Ideas & Objects software applications they've developed, in providing their producer clients with the most profitable means of oil and gas operations. I'd like to see Oracle compete with that.

What I want to highlight is Professor Romer's note that mankind's progress was constrained for a long period of time. Not until we were able to rise above the grind of working for our basic needs did we move forward.
This result offers one possible way to explain the wide variation in growth rates observed among countries and the fact that in some countries growth in income percapita has been close to zero. This explanation is reminiscent of the explanation for the absence of growth in prehistoric time that is offered by some historians and anthropologists: civilization, and hence growth, could not begin until human capital could be spared from the production of goods for immediate consumption.
Taken in this context it is clear to me that the community and these software applications have the capacity to significantly increase the productivity of the oil and gas producer. Our way of economic organizations have brought us to the point where we are today. To move forward in the future we need to revisit the ways in which we conduct business. And that is my desire for the oil and gas industry with this blog, software and communities development. What Romer has to state on this point is clearly beneficial for all concerned.
The most interesting positive implication of the model is that an economy with a large stock of human capital will experience faster growth. This finding suggests that free international trade can act to speed up growth. It also suggests a way to understand what it is about developed economies in the twentieth century that permitted rates of growth of income percapita that are unprecedented in history.
We stand on the shoulders of giants and begin a process of such great potential. Please join me here in 2010.

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Monday, December 21, 2009

McKinsey, Strategy Through Turbulence

I can not reflect on the past four years on this blog without closing out the year by noting the significant contribution that McKinsey Consulting have provided us. This is the 64th article that I have written about here on this blog. And more then just the numbers, the topical nature and focus on the changing business times that we find ourselves in. They have done a great service to their clients and I think they have established themselves as the number one consulting firm for the twenty-first century.

This article is a brief eight minute video that summarizes everything that we stand for here at People, Ideas & Objects. The opportunities, turmoil and change are all themes that underlie the research and system specifications. It is of Professor Don Sull of the London Business School. Who talks clearly about the times we face. He also has a new book that I would recommend putting on your reading list as well. Enjoy!

(Embedded video may not render, please see the original McKinsey site.)

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Thursday, December 17, 2009

Data and the Military

People, Ideas & Objects have define a Technical Vision that identifies and works to mitigate a technical issue that all areas of society need to address. The issue is the ballooning of data. Noted in National Defence Magazine an article entitled "Military Swimming in Sensors and Drowing in Data" it is stated “The appetite never seems to slow down.” As the energy industry is mostly based on the science of physics, chemistry and biology, it is believed this data growth will fuel innovative use and application in the industry. Those firms that have the capacity and ability to deal with this volume of data will have competitive and financial benefits arise from this capability, but only if this software development and community are funded.

The Community of Independent Service Providers and People, Ideas & Objects - Technical Vision suggests four cornerstone technologies enable this data explosion. At the same time, these technologies provide the ability to deal with the problem / opportunity. The four technologies are;

  1. Object based technologies, and particularly Java.
  2. Asynchronous Process Management.
  3. IPv6
  4. Wireless.

Further information on the Technical Vision can be found here.

Today's blog of Richard Fernandez notes this issue is affecting the U.S. Military. And of particular concern, is today's Wall Street Journal video of how Predator Drones have been monitored by insurgents. (If that specific URL doesn't work, search WSJ's video site for Predator Drones.) This issue of the Predator Drones is also noted in Fernandez's second blog post.

Some may note "This explosion of data has occurred for the better part of the last 40 years. Computers have always presented this difficulty and the energy industry will address this problem as it has before." I hope not, because the volume of data and the ability to use that data are something that will have to be purpose built and dynamic. What can be monitored can also be controlled.

People, Ideas & Objects has listed this Technical Vision as the manner in which this community will approach the problem. By exploiting the advantages and having the commercial benefits accrue to those that have a handle on them, I think, will be the difference between success and failure in the oil and gas industry. Critical to the success of the oil and gas producer will be this change oriented and innovation supporting community and application.

The Draft Specification considers a scenario where the use of this type of data and the ability to manage it is possible in a fundamentally more profitable way. The example is the manner in which energy prices can dictate, on a pre-determined and agreed too basis, at what price level would trigger the production was scaled back. If prices were to drop a predetermined percentage, then the production would be autonomously scaled back by X%. And these decisions could be executed on an iterative basis to fully exploit the reserves of the specific Joint Operating Committee (JOC).

These are business decisions that can be made by the Joint Operating Committee as it holds the legal and operational decision making control of the reserves underlying the property in question. (And something today's bureaucracies can not even begin to consider.) If the JOC has the authority, and the legal agreements consider this opportunity, then the industry can move from a price-taker to a price-maker position. This last point should be coming more evident as a necessity in the industry. Leaving everything to produce at 100% and then watch the prices drop year after year must get a little tiring. Only a fool would continue to sell his resources at a price less then its cost. And in an escalating cost environment, we have many managers who know they do not have the tools to deal with this problem, and yet will not support this software development project and associated community.

If it is generally agreed by the producers that an additional $20 trillion will be spent on oil and gas operations in the next 20 years. I would suggest the producers attain these types of capabilities so that they can prove to their shareholders they have the capabilities to address these difficulties and profit from them. Or is it really assumed that the bureaucracies can exist in that prospective environment, and provide returns to those outside of their own management team. Please join me here.

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Monday, December 14, 2009

Professor's Baldwin and von Hipple III

The third part of our review of the Baldwin and von Hipple paper focuses on the literature review. It is in this section of the paper that the issue of Intellectual Property is raised. Baldwin and von Hipple write what most people would consider to be factual in understanding how innovations are developed.
When taken together, the findings of all these empirical studies make it very clear that users have long been and are doing a lot of commercially-significant process development and product modification in many fields.
Let us first gain an understanding of what the authors define as Users. This user description is not different from what we are employing here at People, Ideas & Objects.
Users, as we define the term, are firms or individual consumers that expect to benefit from using a design, a product or a service. In contrast, producers expect to benefit from selling a design, a product, or a service. Innovation user and innovation producer are thus two general "functional" relationships between innovator and innovation. Users are unique in that they alone benefit directly from innovation. Producers must sell innovation-related products or services to users, hence the value of innovation to producers is derived from users willingness to pay. Thus, in order to profit, inventors must sell or license knowledge related to their new design, manufacture and sell goods embodying the innovations; or deliver and sell services incorporating complementing the innovations.
Users have unlimited access to the Intellectual Property that is developed by People, Ideas & Objects and the community. This IP, and all associated ideas, are a product of the User community and freely available for the user community to employ in their own service offering to their oil and gas clients. The only limitation for users is the ability to run the binary of the software is limited to People, Ideas & Objects exclusively. Also only licensed users who are active in the community will have access to the software, ideas and knowledge held within the community. Creating an exclusive service offering who's focus is to provide the oil and gas producer with the most profitable means of oil and gas operations.

The users then earn their fees in providing the services and software to oil and gas producers. Users are licensed to access this information based on their own skills and provide those services to their oil and gas producer clients at no charge for the software or the access to the underlying IP. (Users bill their clients for their services.) Clearly the involvement of a user within this community is critical to the success of the project, as we discussed yesterday. And this success provides the users with a means to pursue their career in the most effective manner that they see fit. Why do we do this.
Reexaminations of traditional economic arguments triggered by evidence of free revealing show that innovators generally freely reveal for two economically rational reasons. First, it is in practice difficult to effectively protect most innovations via secrecy or intellectual property rights. Second, significant private benefits often accrue to innovators that do freely reveal their innovations.
The Draft Specification is designed around eleven modules. Professor's Baldwin, Langlois and Williamson have defined the benefits of modularity and the importance of modular designs. Here the authors provide a good summary of how modularity fits within this project.
Modularity is important for collaboration in design because separate modules can be worked on independently and in parallel, without intense ongoing communication across modules. Designers working on different modules in a large system do not have to be colocated, but can still create a system in which the parts can be integrated and will function together as a whole. In small projects or within modules, designers can utilize “actionable transparency” rather than modularity to achieve coordination. When projects are small, each designer’s activities are “transparent” to his or her collaborators. In open collaborative projects, modularity and actionable transparency generally go hand in hand, with both factors contributing to the divisibility of tasks (Colfer, 2009).
Here in this last quotation is the real value of the CISP. The value of participating in this community is reflected in the name People, Ideas & Objects. Ideas are non-rival and therefore participation brings about the greatest attributes of ideas for all involved. Ideas are able to build on the prior knowledge and the many innovations and ideas that came before it. Having the communities ideas and innovation backed up by a user driven software development capability, only makes this more worthwhile for the members of the community and their oil and gas producer clients.
Building on arguments of Ghosh (1998), Raymond (1999), and von Hippel and von Krogh (2003), Baldwin and Clark (2006 b) showed formally that, if communication costs are low relative to design costs, then any degree of modularity suffices to cause rational innovators that do not compete with respect to the design being developed to prefer collaborative innovation over independent innovation. This result hinges on the fact that the innovative design itself is a non-rival good: each participant in a collaborative effort gets the value of the whole design, but incurs only a fraction of the design cost.
Please join me here.

Sunday, December 13, 2009

Professor's Baldwin and von Hipple II

I want to expand on Professor's Carliss Baldwin and Eric von Hippel's paper that we recently started reviewing. I think this paper is critical in defining many of the attributes of this software development project, and will add value with new insight and information. Specifically, in applying the findings in this paper I hope to prove to the User community that this type of project is less risky from the point of view of them investing their time and efforts in participating. The pace of this paper's review will be thorough and complete. Limiting our review in this second installment to just the Introduction and Overview.

As background information, People, Ideas & Objects software applications are marrying the User groups that define their needs in the software, with the software developers. This relationship is permanent and maintains the project in a constant state of change based on the users innovations. Software is not a destination but is best considered a journey. Users of People, Ideas & Objects applications are those that use this software in combination with their own service operations. The Community of Independent Service Providers derive their revenue from both the producers that employ them for their services and from People, Ideas & Objects for the work the users do in designing, implementing and working on development of the software. Creating an environment where the users are key in every aspect and element of this community.

This change oriented and innovation based community will generate their own innovations. In addition the People, Ideas & Objects software needs to mirror the needs of the producers who are iterating on the earth science and engineering innovations involved in oil and gas. The point I want to make is the users commitment to this community involves substantial risk and a comprehensive career commitment. Of the three models of innovation People, Ideas & Objects and the Community of Independent Service Providers fall into the authors "open collaborative model".
Our analysis will lead us to conclude that innovation by individual users and also open collaborative innovation are modes of innovating that increasingly compete with and may displace producer innovation in may parts of the economy.
We will argue that when it is technologically feasible, the transition from closed producer or single user innovation to open single user or collaborative innovation is also desirable in terms of social welfare, hence worthy of support by policy-makers. This is due to the free dissemination of innovation designs associated with the open model. Open innovation generates innovation without exclusivity or monopoly, and so should improve social welfare other things equal.
This last quote is in line with why this project is called People, Ideas & Objects. It is derivative of Professor Paul Romer's new growth theory of People, Ideas & Things. Which states in the virtual world ideas can be used by many people without diminishing the value to anyone else. The important take away for me was that we are needing exponential volumes of ideas to expand our economy. How these ideas are vetted, developed and implemented is the topic of Professor Baldwin and von Hipple's paper and this software development.

Users need to understand that the success of this project is wholly dependent on their involvement. This paper provides evidence that this mode of open collaborative innovation is preferable, "should improve social welfare" and will be successful. Therefore mitigating their risks in investing their time and efforts in this community. I think this provides the user with the most sound and economic basis for their review of this project from the point of view evaluating their investment in this model. Please join me here.

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Wednesday, December 09, 2009

Williamson gets his Nobel.

Professor Oliver Williamson received his Nobel Prize in economics yesterday. I thought it would be a good time to review his work and reflect on its impact here at People, Ideas & Objects. In his December 8th 2009 address Williamson is recognized for "his analysis of economic governance, especially the boundaries of the firm." In my opinion this is a must view video.

It has been our review of Professor's Williamson's, Richard N. Langlois of the University of Connecticut and Carliss Baldwin of Harvard that we have been able to incorporate in the Draft Specification. Defining where the boundaries of the oil and gas firm and market definitions exist. It is these ideas, being applied from this body of research that is being recognized in Oliver Williamson's Nobel Prize. Professor Williamson provides an overview of his work at the beginning of his Prize Lecture;
The research program on which I and others have been working has been variously described as the "economics of governance," the "economics of organization," and "transaction cost economics." Whereas governance is the overarching concept, appeal to organization theory provides vital support, and transaction cost economics is the means by which to breathe operational content into governance and organization. For economists, organization is important if and as it is made susceptible to analysis.
Many other people have written about Williamson's Nobel Prize. Two of the best reviews I saw were from Professor Gary Becker (a Nobel Laureate himself) and Richard Posner on the Becker / Posner blog. 

Posner notes:

Or--most fundamentally--why there are firms at all--why all economic activity isn't carried on by contracts among individuals. Ronald Coase asked that question in a paper entitled "The Nature of the Firm," published in the 1930s. His answer was that a producer has a choice between contracting with independent contractors for the output of the various inputs into this production of the finished product, and contracting with individual workers--employees--not for their output but for the right to direct their work--and that the employer would choose between forms of contract--the contract with the independent producers or the employment contract--on the basis of which was more efficient, given the nature of his business.
Becker states:
One of the most compelling observations from highly competitive environments is that many different organizational structures sometimes survive in the same industry.
Both the inter country and within country evidence indicate that no single organizational form is always the most profitable even in a particular sector of the economy. Different combinations of scale economies, principle-agent problems, compensation practices, thickness of the span of control, and many other variables highlighted in the organizational literature often produce outcomes that are about equally efficient and profitable. The outcome of strong competition is the only really decisive way to determine which are the possibly quite different but about equally efficient combinations of all these different variables.
Another good summary is provided by Douglass North (another Nobel Laureate) in this YouTube video.

It's about productivity. How will the organizations and individuals interact and transact business within the oil and gas industry. In People, Ideas & Objects the Joint Operating Committee is the key organizational construct of the innovative oil and gas producer. It is the objective of both the software and its associated Community of Independent Service Providers to provide the innovative oil and gas producer with the most profitable means of oil and gas production.

In his telephone interview on October 12, 2009 Professor Williamson said the one overall point of his work was to recognize that all forms of organization are flawed. That certainly applies to the hierarchy but also to our use of the Joint Operating Committee. What we have gained in making the change to the JOC is the elimination of many of the conflicts and contradictions that exist between the producer firms and the JOC. We are also expanding the understanding of the oil and gas producer within the ERP systems.

In summary, this project competes with the likes of Oracle and SAP. Where Oracle has expended $39 billion to bring a "new" application to market. Not an oil and gas specific application, but an application that is nonetheless constrained by Oracle's loose spending ways. There exists a general consensus of those in the oil and gas industry, that there is a need to expend an additional $20 trillion over the next 20 years in exploration and production. And now, an oil and gas application that is steeped in the academic research that is today recognized as important by the Nobel Prize committee. Is it not surprising to me that the do-nothing managers in the industry are threatened by this project. Please join me here.

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Tuesday, December 08, 2009

Professor's Baldwin and von Hipple I

Professor's Carliss Baldwin of Harvard, and Eric von Hipple of MIT have jointly published a paper that is of the highest quality and topical focus. Entitled "Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation." Carliss Baldwin is someone we have followed closely on this blog. Her work has been in the area of Modularity, Transaction Costs and Thin Crossing Points and is incorporated in the Draft Specification, mostly in the Accounting Voucher module. You can find our review of her work by selecting the Baldwin Label on this blog. We have also reviewed Eric von Hipple's work here as well. A review of his book "Democratizing Innovation", (Free eBook here.) and an MIT video of his presentation. His work is mostly on innovation and we have incorporated some of his ideas in the Draft Specification. Specifically, use of his understanding of Intellectual Property (IP) and how it can be applied in communities such as People, Ideas & Objects. I will briefly discuss IP in this post and hopefully be able to write about it in greater detail in the near future. Nonetheless, these IP related thoughts are incorporated here in the way that People can join this project. Coverage of Professor von Hipple's work does not have a label to aggregate all the posts in this blog, however you can search this blog for his content.

I want to put all this material out in this post, and address more of the substance in subsequent posts. I think this paper is of the highest quality and very pertinent to the work that is being done at People, Ideas & Objects. The abstract of this paper says it all.
In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with - and may displace – producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.

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Sunday, December 06, 2009

More on the Preliminary Specification

The Draft Specification provides the overall vision of how these systems will be built and operate in the oil and gas industry. The Preliminary Specification uses the overall vision of the Draft Specification and puts much of the greater needs or details of each individual job in the oil and gas industry. Answering many of the what and how questions of the things that need to be done. This is a very large group of people that together hold the full scope of understanding of the industry. I am of the belief the Preliminary Specification will require several hundred people to develop a strong skeleton of the systems needs.

It is also this large group of people that will become the core of the Community of Independent Service Providers offerings. Providing leadership for both the Preliminary Specification and forming the core service offerings to support the producers in the future.

The role of the producers is critical at this point. Critical from the point of their specific needs. Participation helps to make the solution appropriate for their needs not only from a process and functionality point of view. But also getting involved at the beginning will help them form the service process relationships and fully integrate their firm's needs in the software. This is one of the critical areas of the quality that will eventually be reflected by this community and its software offering. Why the oil and gas companies continue to belittle the process and withhold their participation is beyond me. That however, is their problem as we can do this without the producers active involvement. They are critical for their individual needs, not the systems development.

Although I have detailed some of the technologies that are being used in this project. These technologies are not critical to the Preliminary Specification. In fact I want to eliminate any and all discussion of technology. It's not important and would be an impediment to the creative process that we are involved in. Using the Joint Operating Committee as the key organizational construct requires this blank slate approach. It has been the basis of how this design started, and as a result, will remain the key value of how this community provides the long term value to their client producers.

The deliverables from the Preliminary Specification will have a defined project scope. As a result, in subsequent phases of development we should not have any scope creep. Another key deliverable will be the development of the stories that communicate the systems needs to the developers. The last deliverable that I want to mention today will be how the CISP are able to take this design and integrate the software, through their service operation.

This sounds fairly ambitious, particularly from the point of view of the numbers of people. I would point out in my defense the name People, Ideas & Objects considers this. Also I would point out the spread of ideas to date. The Draft Specification has had over 1,500 people read Part I, and over 700 people read Part II. Think about that from the point of view of people having to spend a few hours reading this. If we draw a few hundred people out of this community, that have been reading and thinking about this system design, thinking about their involvement, bringing their ideas, and thinking how they can build a service offering to provide the producers with the most profitable means of oil and gas operation...

People are driving these changes, and their doing it from a business point of view. Trust me when I say that the developers will be able to accommodate any design that comes out of the Preliminary Specification. I guarantee it, therefore focusing on technology is a distraction. For the past 40 years it has been the technology that has driven the focus of oil and gas systems. The technologies and the compliance frameworks have made the oil and gas company about as foreign to the JOC as is possible to conceive. We are moving the focus away from technology to focus on the most profitable means of oil and gas operations.

In a world where the oil and gas producer will need to make more decisions based on ideas derived from the earth sciences and engineering basis of the business. A world where decisions are based on the legal and financial foundations of the participants of a JOC. The Community of Independent Service Providers and Users will capture this in the Preliminary Specification. Creating a system and organization that are representative of the underlying meeting of the minds of the producers involved. Please join me here.

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