Professor Giovanni Dosi on Innovation Part II

Innovations Key Factors, A Scenario

I want to take a look at Professor Giovanni Dosi’s “key factors” of innovation in the context of the scenario that we used recently during our review of the Partnership Accounting module. Recall that we had a number of producers who were joining together through the Work Order system to participate in an engineering study. This Work Order system was discussed in the Partnership Accounting module to highlight the manner in which it eliminated the logistical accounting difficulties that impede the development of these working groups. I now want to discuss how the efforts of working groups are added to the capabilities of the producer and are managed in the Research & Capabilities module of the Preliminary Specification.

Upon completion of the working group the producer firm will have a unit of knowledge that has been developed from the efforts of the group. Professor Carliss Baldwin provides us with some clarity here with her “knowledge begets capabilities, and capabilities beget action” comment. What is needed is for the producer to have a central repository for all of the knowledge of the producer that is accumulated through the various working groups and other “key factors” in which they acquire knowledge. This will be called the “Dynamic Capabilities Interface” in the Research & Capabilities module and will detail the source of the knowledge, the key factor, how it was acquired, and what it involves. This will be captured within a wiki style interface. This interface is also sorted by geological zone and other technical criteria, and will be populated to the Knowledge & Learning module for deployment to the appropriate Joint Operating Committees when required. Organizing a firms and Joint Operating Committees capabilities is the beginning of developing, deploying and effectively managing them.

Within any module of the People, Ideas & Objects application the user will be able to right click their mouse and select from a contextual menu of actions. These actions will include the ability to begin a Work Order, raise an AFE, prepare a Joint Venture Agreement etc. If the user can take action on the capabilities listed within the “Dynamic Capabilities Interface” then we have achieved the process that Professor Baldwin states is necessary. Having this information centralized for the producer, and the specific information for the Joint Operating Committee helps to concentrate the knowledge within one location within the firm. There will be little confusion as to where to find the answer to a specific question. When the user finds what they are looking for, the detail of the knowledge or capability should be specific enough as to define a process as to how it is successful implemented. Understanding that knowledge is never static, the ability to update the information with lessons learned would be part of the users responsibility. Recall updates from the Lessons Learned Interface is also done for the Joint Operating Committee in the Knowledge & Learning module.

The ability to annotate and reference the material within the “Dynamic Capabilities Interface” would make this more usable. In addition, with the tools that are available today, such as search, makes the information more valuable. What is truly valuable is the types of tools that will be available tomorrow. We are beginning to see some of these tools enter the consumer space with the iPhone’s SIRI virtual assistant. The first step however will be to acquire the knowledge and make it actionable through the ERP system of People, Ideas & Objects. Then we will be able to add these tools as they become available in the future.

If all that we were to do with the capabilities aspect of the Research & Capabilities module of the Preliminary Specification. Was to document the capabilities in the “Dynamic Capabilities Interface” then we would be wasting a lot of people’s time. The purpose in documenting the capabilities is so that we can deploy them, and that brings in the “Planning & Deployment Interface” which is the topic of discussion here.

Ideally I see the ability of a firm to deploy their capabilities as a key competitive advantage. The organization of that competitive advantage will be the focus of the management of the firm. It should also be noted that there is a similar “Planning & Deployment Interface” in the Knowledge & Learning module for the Joint Operating Committee. The analogy that I would like to use and have developed in the Preliminary Specification is directly applicable to the game of American football. Where the coach can call in a play and the team is able to execute that play based on their known capabilities, roll and skills on the team. I want to draw a direct analogy for the person who plans and calls on the capabilities of the firm or Joint Operating Committee in the “Planning & Deployment Interface.”

First we need to bring in the Military Command & Control Metaphor and understand that the role of the individual, as designated in that structure becomes a critical part of the planning and deployment of the firm or JOC’s capabilities. There can be only one Quarter Back and you need many Down Lineman. Filling the various roles in order to take the actions that are needed is as important as the capabilities themselves. The Military Command & Control Module (MCCM) imposes a chain of command across the multiple producers represented in the JOC, or firm and enables them to operate the pooled resources of these firms.

The “Planning & Deployment Interface” will take the three critical aspects of the firm / JOC and arrange them within a web like interface for the user to develop the actions they desire. The three critical aspects are the people represented in the MCCM, the capabilities and the time frame. Having selected the personnel that you want to execute the action that you have in mind, their available time becomes known to the interface from each individual's calendar. Selecting the capabilities from the Research & Capabilities, or Knowledge & Learning, module is then drawn into the interface. From there the user is able to “process” the information and based on the variables given determine when the work would be able to be completed. Then they may select additional resources to fill deficiencies in areas where the capabilities suggest they need more resources, conduct more studies to determine certain unknowns or proceed with the project.

Upon proceeding with the project the people who were selected by the user in the “Planning & Deployment Interface” are given the job to do. They are provided with an understanding of what and how and who will be involved in completing the project. Not that it should be a simple matter of execution, but they should at this time have everything provided within the “package” they receive from the “Planning & Deployment Interface.” That package should be comprehensive and detailed such that it is all that they need to be able to focus on the successful completion of the task.

The quality of the documentation of the capabilities will be the determining factor in how successful the project will be. If the detail contained in the “Dynamic Capabilities Interface” is of rich media, detailed and provides the user with a good understanding of what is required then the communication from what is expected and what is understood is not at variance. The people will be able to see clearly what it is that the project is about and how they are expected to complete the task.

The innovative and capable oil and gas producer is in need of the ability to document and deploy their capabilities in an efficient and effective manner. Here is a way in which the deployment is planned and executed with an understanding or “meeting of the minds” based on the quality of the documentation in the “Dynamic Capabilities Interface.” It being not just a repository of data that might be used someday by someone. But a living source of quality capabilities in which the producer or JOC depends on to make sure that the execution of their projects are successful.

Who ever it is that implements the project through the “Planning & Deployment Interface” will be selecting the various capabilities documents from the “Dynamic Capabilities Interface.” When they do this they will be able to ensure that the capabilities they select reflect the “final” status necessary for the project. If there is further documentation that needs to take place or more work is needed to advance the state of the capabilities that are selected, these attributes can be added. This would have the effect of keeping the documentation up to the state of the capability within the firm or the Joint Operating Committee. Recipients of the information, once the “Planning & Deployment Interface” was processed, would be able to compare the capabilities information they received with the previous version they viewed, and determine quickly how the capability has changed from that previous version. This could be done by way of differing colored text or some other means. Then they could assess what impact and consideration that change would have on their portion of the task and if they were to have any issues as a result.

Just as with the selection of the various capabilities the resource selection would have any updated information regarding the capabilities of each individual. If the completion of a course or program, the successful implementation of other capabilities etc would be available to the user who initiates the “Planning & Deployment Interface.” This information could be incredibly detailed and include the contributions that the individual made to the “Lessons Learned Interface” in both the Knowledge & Learning, and Research & Capabilities modules. Their performance reviews from previous tasks and any comments about the role they undertook in previous assignments. This information should be available for in-house staff, resources that are pooled through the various Joint Operating Committees that a firm participates with, any suppliers and vendors or contractors that the firm or JOC may have hired to work on the task.

The timing of the project and its completion are somewhat flexible based on the number of resources that are put on the project. This makes for a bit of a paradox, as if the team gets too large you lose the cohesiveness that the team needs to rely upon. Understanding that the people that are resourced into these tasks are probably assigned to multiple projects, and their participation is somewhat constrained by these limits, the time line may reach beyond what is initially the target.

Lastly the “Planning & Deployment Interface” has been about the known knowns to this point. There are a variety of known unknowns and unknown unknowns. To document these, if possible, is the role of the team members once the project interface has been processed and assigned. Recall that Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” A section of the interface should be set aside where the team can collaborate on these points and provide some innovative solutions for the producer or JOC.

It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? I think the development of the “Planning & Deployment Interface” as described here would provide the producer and Joint Operating Committee with these sought after abilities.

Focusing on the Producers Earth Science and Engineering Capabilities

People, Ideas & Objects software application modules enable the producer firms and Joint Operating Committees to focus on their core competitive advantages. These being the land & asset base, and the earth science and engineering capabilities of the innovative and profitable oil and gas producer. The Research & Capabilities module of the Preliminary Specification is the key module for the innovative producer to focus on their earth science and engineering competitive advantages. We have been discussing the “Planning & Deployment Interface” of the module and now we want to discuss how the producer maintains the pace of change in the underlying sciences and technologies.

The simple answer to this question is that the producer and particularly the Joint Operating Committee will not have the distraction of the long term acquisition of scientific and engineering research and capabilities development affect the day to day implementation of the knowledge of the firm or Joint Operating Committee. Recall at the beginning of this modules review we defined the time horizons for the Research & Capabilities module, and the Knowledge & Learning module, as the long term and short term respectively. The Research & Capabilities is about the acquisition of capabilities and their documentation, and the Knowledge & Learning is about their deployment, implementation and execution. The fact that there is a “Planning & Deployment Interface” in the Research & Capabilities module may lead to some confusion, however, it is there as there are times in which the producer firm needs to implement the capabilities that it has for experimentation and its sole benefit.

This separation of the time horizon for the Research & Capabilities to take the long term perspective, provides the appropriate mindset for the producer firm to focus on the overall development of the earth science and engineering disciplines. The ability of the producer to match the pace of change in the underlying sciences and mapping the necessary changes within the “Dynamic Capabilities Interface” will communicate the changes from the organization to the various Joint Operating Committees that need that information on those capabilities. These changes and the communication of the changes to the appropriate people in a timely fashion will provide a means of increased performance for the producer and JOC. Providing a foundation for the producer to further build and implement their competitive advantages of earth science and engineering capabilities.

Restating for clarity purposes. That is how the Research & Capabilities module enables the producers to develop, implement and integrate advanced capabilities within their organization. The research undertaken by the firm should not interrupt the day to day of the operation. However, when the research augments the firms capabilities the “Dynamic Capabilities Interface” is updated with that knowledge. These capabilities as they are listed in the“Dynamic Capabilities Interface” will be available to be selected on related criteria in the “Planning & Deployment Interface” of the Knowledge & Learning module. If the research conducted by the firm is unresolved or undetermined in its conclusion then it would not belong in the “Dynamic Capabilities Interface.” If it remained unresolved or undetermined then it would indicate that further work was required and therefore remain open in a Work Order for completion or resolution.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi On Innovation Part I

Introduction

It is through Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” that we will view the Research & Capabilities module. A couple of things that jump out at me in the module are the division of labor between computers and humans. Formulating ideas, making decisions and collaborating are the activities that are captured in this module. Leaving the mundane transaction and data management tasks to the computers. This I think an appropriate division of labor, and I wonder at times what SAP’s thinking is on this. There is also a strong division of labor and specialization in the technical resources of the producer firm. This is done to mitigate the resource shortfalls in the mid to long term. Another aspect is Professor Richard Langlois comment that we are “moving the knowledge to those with the decision rights” as being the primary process that the module captures. And lastly, that a user can right click at any time within the module and initiate any standard ERP type of action on anything in the module. This being an extension of Professor Carliss Baldwin’s research that notes “knowledge begets capabilities and capabilities beget actions.”

To the topic of innovation, Professor Giovanni Dosi’s paper discusses the role of innovation in the market economy and assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi note:

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

We discussed that the Accounting Voucher would enable the producer to charge the various joint accounts with the costs of their technical resources with the implicit assumption that they would generate a return on the investment in the firm's capabilities. We also discussed the differences between what is acceptable practice today (with overhead allowances) and the different positions that some might take on the topic. However, I think Professor Dosi’s point here has to be taken as the key criteria as to the direction the industry takes on the issue. You are “investing to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competitions.” The ability to sustain the state of the art oil and gas capabilities on the basis of what a producer earns from oil and gas production is a direct result of those capabilities, however, shouldn’t those capabilities also earn a return on investment above and beyond what the oil and gas production provides?

It’s only reasonable that the producer firm is going to approach the operation of some technically difficult task with the appropriate capabilities. Innovation requires that the capabilities of the producer be the base on which the innovations can be leveraged. What Professor Dosi has defined in his research is the key factors that innovation requires. We will discuss these key factors and how they are integrated within the Research & Capabilities and other modules of the Preliminary Specification.

One housekeeping duty is to note that there is a “Capabilities & Commitments” interface in the Petroleum Lease Marketplace module. This documents the contractual obligations that the producer is required to meet in terms of commitments to the various Joint Operating Committees that the producer is a participant in. And to leverage the working interest partners capabilities that are likewise legally committed. This interface is placed in the Petroleum Lease Marketplace module to document the legal obligations that are contractually defined. This interface should also be populated in the Research & Capabilities module.

Innovations Three Key Factors

We will now deal with the first of the three key factors of innovation, Professor Dosi notes:

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Capabilities and stimuli generated with each firm and within the industry of which they complete.

What you are capable of is wholly dependent on what has been purposely developed within your firm. These capabilities have developed over time and are able to be deployed repeatedly. As time passes further capabilities are developed and the firm becomes more capable through a variety of different means. The ability of the firm to develop these capabilities is limited by what the oil and gas service industry is capable of providing. If they have only x number of rigs available, then only so much work will be done. And if the rigs are only able to drill shallow wells then the science of the producer will be constrained by the capabilities of the service industry. Furthermore, if the producer is a state of the art earth science and engineering wonder in a sea of producers who are barely able to successfully drill shallow wells, then the state of the art producer is reduced to the same level of the others. The marketplace of the producers in terms of their technical resources and their capabilities have an enabling and constraining limit on what the producer is capable of. Innovation is leveraged from this base.

The question therefore becomes how do we broaden the base of not only the producer but the service and oil & gas industries? Recall how the Research & Capabilities module has an "Ideas Marketplace" blog like interface where members of both of the industries can post ideas of products and services that might be of interest to the producer firms. Producers may then act to support these ideas with funding and support to develop the idea into a product or service to augment their capabilities. Recall the "Supplier Collaborative Interface" in the Resource Marketplace module that enables the industry as a whole to benefit from the lessons learned by each producer. The "Gap Filling interface" where the producer can anonymously publish where they see gaps in the service industries offerings. Enabling the service providers to prepare new products and services based on a further defined division of labor and specialization. Or how the information within the Research & Capabilities interface is organized on the basis of geological zone, or other criteria, so that only those pertinent zones are populated to the individual Joint Operating Committees through the Knowledge & Learning module.

Recently in the Partnership Accounting module we discussed the accounting attributes of the Work Order system in forming working groups amongst industry participants. These could be informal working groups formed to study some geological or engineering situation among interested producers. The ability to strike these groups, participate in them and develop further capabilities as a result of these studies is a critical aspect of how the producers will develop their capabilities and innovativeness. Since the costs and the results are shared the industry as a whole advances. Leaving the producer open to further potential innovations. I see this as an area that will increase in terms of activity, if, the accounting logistics and bureaucratic nightmare that they create can be dealt with in the manner that the Partnership Accounting modules Work Order does.

The second key factor that Professor Giovanni Dosi defines as necessary is as follows.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

Again these only make sense in terms of being critical to enabling the capabilities and innovations of the producer firm. The question becomes is how does the Research & Capabilities module and the Preliminary Specification specifically deal with these key factors to enhance innovation?

The first key factor that I want to address is the “supply of technical capabilities, skills, engineers etc.” That raising the quantity and quality of the earth science and engineering technical resources of the industry is possibly one of the three top issues of the industry. How does the Research & Capabilities module specifically increase the supply of these resources? As we have stated here many times the need to rely on the standard economic tools of an enhanced division of labor and specialization are the keys to solving this problem.

The issue is that these technical resources are limited in their supply for the foreseeable future. Through retirement and new recruits the population of earth science and engineering resources are somewhat constrained. Add to that the volume of earth science and engineering effort in each barrel of oil is increasing as time passes. Using specialization and the division of labor we can achieve a higher throughput from the same resource base. That is the basis of the solution used in the Preliminary Specifications Research & Capabilities module.

If we look at the way the industry is structured today, with each producer building the capabilities needed to address every possible contingency within their organization. The overbuilding of earth science and engineering capabilities is the result and this internal surplus capacity is left unused and unusable. Each producer pursuing the same strategy leaves a large surplus capacity that is unused and unusable on an industry wide basis. The pooling concept that People, Ideas & Objects has developed within the Preliminary Specification. Where producers of a Joint Operating Committee are able to pool their technical resources to meet the properties demands. Eliminates the overbuilding of capacities in each of the producer firms, and enables the producers to deploy the formerly unused and unusable surplus capacity.

Each producer will also need to specialize in some area of the earth science and engineering disciplines. The need to cover off the global scope of technical requirements is an extensive undertaking today. The future will require further specialization and division of labor be undertaken in the technical disciplines. Without choosing to specialize and using the pooling concept, the producer firm will be faced with such an onerous task of attempting to cover the global scope of these technical requirements as to be unprofitable. The “pooling” approach we are taking here in the Research & Capabilities module is of necessity.

That’s the first element of the division of labor and specialization that is inherent in the Preliminary Specification. The second element deals directly with the ability to organize the technical resources in a manner that deals with how the “bread and butter” geology and engineering is done in the industry. With a dedicated software development capability such as that which is People, Ideas & Objects competitive offering, the ability to organize new service based offerings to meet the demands of the industry's bread and butter earth science and engineering demands would now be possible. The expansion of the division of labor and specialization will therefore increase the throughput of the industry from the same volume of resources, and also enhance the quality of the resources. As we have stated many times at People, Ideas & Objects, software will define and support this future division of labor and specialization.

Regarding the “facilities for the communication of knowledge” as a key factor of innovation. The Research & Capabilities and the Knowledge & Learning modules are collaborative information systems that are “industry-wide” in their implementation. A review of the many interfaces that are mentioned here showed that the development and sharing of knowledge, which are critical for the development of the individual producers capabilities and innovativeness, are systemic throughout this module.

Lastly we need to develop an interface in the Research & Capabilities module that allows the producer to interact with the academic and research areas of the earth science and engineering disciplines.

We now want to document the last of the key factors that Professor Giovanni Dosi states are necessary to support innovation. And then begin a discussion on these key factors and how they are implemented in the Research & Capabilities module of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

It's only logical that innovation will spring from advanced markets with labor mobility, legal protection and capital markets. It's one thing to have these facilities provided, its another to have them aligned within the organization. With People, Ideas & Objects we are aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment permits the producer firm and the Joint Operating Committee to attain greater speed, innovation, accountability and profitability as a result.

What these key factors reflect is that the innovative oil and gas producer must first of all be capable. Innovation leverages the capabilities of the service industry, the producer marketplace and the greater market makeup. For the producer to attain their highest level of capabilities is the objective of the Research & Capabilities module. Each producer will be able to attain their own specific level of capabilities, and that level will be dependent on these key factors. Not all producers are built the same. The ability therefore to achieve state of the art capabilities and highly innovative practices are not something that are at risk in terms of being “copied” by other producers. Therefore a producer's willingness to participate in the collaborative environment created in the Research & Capabilities module would not risk any proprietary competitive advantage. On the contrary, based on these key factors, non-participation would limit the competitive advantage.

This environment is the polar opposite of the manner in which the industry operates today. Certainly there are high levels of joint ventures in operation, however, those are designed to mitigate financial risk more than anything else. And I am not suggesting a different posture be taken in terms of the risk profile of the industry. Only that a more open collaborative earth science and engineering level of discussion and participation is necessary for the industry to move to the next level of performance. One that enables the key factors to interact with the highly aligned and innovative oil and gas producer. And to begin the move to that next level of performance which requires that we build the software that defines and supports the innovative and profitable oil and gas producer, the People, Ideas & Objects Preliminary Specification.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Round 1, Management vs. the Internet

We live in interesting times. The Internet has had a remarkable impact on our lives in the past fifteen years. As we look forward, that impact has only begun. When we talk about the impact that the Internet will have on the capabilities of an oil and gas producer, we need to consider some critical factors in those capabilities. This discussion deals with those critical factors and how they are implemented in the People, Ideas & Objects Research & Capabilities module of the Preliminary Specification.

The purpose of a bureaucracy in the age of the Internet not only seems wasteful, it is. The pace of everything is slowed to a cumbersome and cluttered existence that defies common sense. The Preliminary Specification considers the Internet as an inherent given. Aligns the nine frameworks of the Joint Operating Committee and producer around the Joint Operating Committee. Establishes marketplaces. Automates the work that computers do best and keeps the work that humans do, the decisions, the ideas, and the collaborations front and center in the modules. To do otherwise would be a waste of the opportunity that is afforded to us by the Internet.

One of our top two research providers, Professor Richard Langlois wrote a book a few years ago that we reviewed as part of our research. The first chapter was entitled “Progressive Rationalization” and our quotes are from that chapter. In this first quote he notes the correlation between “new economic opportunities” such as the Internet and the “organizational structure.”

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

If we look at the first critical factor, the new economic opportunity, which in our case is the Internet. According to Langlois the “problem of organization is bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities.” The “character” of the Internet is that it enables the collaboration within the Research & Capabilities module as we have discussed to date. Recall in our recent discussion we noted from Professor Carliss Baldwin that “knowledge beget capabilities and capabilities beget action.” The facilitation of knowledge and actions are the two areas where the Research & Capabilities module enable the user to interact and engage in the community, the producer firm and the industry. This will become more apparent as you read the Research & Capabilities module specification.

The second critical factor that Langlois notes “is the existing structure of relevant capabilities.” And here the People, Ideas & Objects Preliminary Specification has a distinct advantage in that we are isolating the short and long term perspectives of the producer firm between the Joint Operating Committee and the producer firm itself. By using the Joint Operating Committee in this fashion we are building on that innovation by leveraging the innovation of the Internet.

In this last quote from Professor Langlois he reflects on centuries of historical change and the manner in which that change came about.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. 

Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

The battle lines have been drawn. As the Vanishing Hand of the marketplace replaces the Visible Hand of management. It will be the market supporting capabilities of the Internet that supports the markets. Markets are the ultimate source of the producer and Joint Operating Committees capabilities. Market coordination therefore will be a competitive differentiation that is provided through the capabilities acquired through the Internet. It is the Internet vs. the bureaucracy. I have certainly tipped my hand as to who I think will win this war.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A Marketplace for Ideas

Let's review from a high level the process that is managed by the Research & Capabilities module of People, Ideas & Objects Preliminary Specification. The module has an interface that we will call the “Ideas Marketplace Blog” which is a marketplace where people, firms and service providers actively post their ideas for new products and services to help in the exploration and production of oil and gas. This marketplace provides the producer firm with the ability to explore new ideas and participate in their development with other producers. As time passes and the capabilities of the producer develops, they are able to deploy these enhanced capabilities through to their various Joint Operating Committees through interfaces in the Research & Capabilities and Knowledge & Learning modules. What we are creating in the Research & Capabilities module is a window on the marketplace of ideas.

Now what is so significant about ideas? First it's one of the few areas that computers are unable to provide any assistance in. People are the necessary ingredient in idea generation and application. The second important aspect of ideas is that we are going to need more of them. The volume of ideas that are necessary today are an order of magnitude higher than they were a generation ago. And the volume will need to be an order of magnitude higher in just a few years time. That is the nature of ideas.

If the innovative oil and gas producer is going to be iterating on the science and technology of the oil and gas industry. They will need to participate in a marketplace that is very dynamic. One that deals in every kind of idea, good, bad, brilliant, dumb or new. For if today it takes one idea to build one unit of value, tomorrow it will take two ideas to hold that value, and five ideas to build another unit of value. Such is the nature of where we are heading. If you’re not participating in the marketplace of ideas then you won't be participating in a market of value.

We are seeing the respect for ideas beginning to be reflected in the marketplace. I have been overtly critical of the manner in which the oil and gas industry has treated the service industries Intellectual Property (IP). This must change and they must begin to respect the ownership and development of IP if they are to benefit from a marketplace of ideas. There is no one who will participate in a marketplace if they see that the oil and gas producers will not respect their IP. If they risk their IP being poached by their very customers, which is the case today, then they will not participate, and therefore the marketplace for ideas will stagnate. At which time, if that stagnation were to occur, the producers could call the service industry lazy and greedy.

Seeding the promising ideas with funding will be another role the producers will have to undertake. However, since they will be respecting the IP of the owners they will only have to fund one project, not several “me too” copycats. This will allow the owner of the product or service to fully leverage the oil and gas producer marketplace for their product or service and hence, not have to rely too heavily on initial funding.

In the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification we noted that the nature of the modules would enable the users to initiate, at any time, commercial actions on the ideas and activities in these modules. This discussion deals with those actions that can be generated from those ideas and activities and the importance of this module as an ERP system module.

ERP system modules have traditionally been focused on recording transactions and reporting those transactions to the various users of the information. To do that is still required of an ERP system but if that is all that we are doing then we are missing so much of what an innovative oil and gas producer needs. In the sense of a Research & Capabilities module, the need to deal in the marketplace of ideas is where the producer needs to have a presence and understanding of what is happening in the oil and gas and service industries. Participation is mandatory for success in a world where the speed of ideas and their implementation will be weeks and months, not years or decades.

An application that fulfills the needs of a producer in this manner has to have the input and contributions of all the other producers and the service industry as well. The applications installation is multiple industry, not just within one producer. The perspective of the user in some instances will be a window on the industries that are available to them. What will be needed is the ability to have the systems that can initiate actions on those ideas and actions of interest to each of the users of the Research & Capabilities module.

We noted the ability to right click while in the Research & Capabilities and Knowledge & Learning modules any idea or action of interest. This would bring up a contextual menu of items where the user could select the ability to initiate a Work-Order, initiate an AFE with a partner in a Joint Operating Committee, etc. The point in mentioning this is from both McKinsey and Harvard Professor Carliss Baldwin. The first quote is from McKinsey.

Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need, even if it resides in their own companies and coordinating their work with others.

Once they find something of interest the user of the Research & Capabilities and Knowledge & Learning modules should have the full scope of an ERP application at their disposal. The ability to initiate any action of a commercial nature would take the idle capabilities of the producer firm or the Joint Operating Committee and put it to use. As Professor Baldwin notes.

Changing routines, competencies or capabilities based on knowledge must cause firms to have shifting knowledge boundaries. The span or scope of knowledge available to a firm will change over time as required by its changing activities. But theories based on knowledge cannot directly explain the location of transactions. First, the domain of transactions is a domain of action: goods are made; services are performed; compensation is paid and received. But actions enter the knowledge based theories only indirectly: knowledge begets capability and capability begets action. The actions themselves lie outside the scope of these theories. 

These quotes capturing the importance of embedding these two modules within the People, Ideas & Objects Preliminary Specification. Without the ability to initiate the actions within the organizations the capabilities will be trapped. In a world where the software needs to be built to identify and support the organization first, these are important considerations.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Copyright Notice

It would seem to me to be more productive to just develop the Preliminary Specification and forget about these politics and fighting with Goliath. Pretty naive eh? This is a follow on post to the one entitled “Three Times Lucky?” This copyright notice deals with the law and political facts of copyright law and the implications regarding those laws.

The Preliminary Specification, the innovation in oil and gas blog of which you are reading this, the Preliminary Research Report and other material are the Intellectual Property (IP) of Paul D. Cox. This IP has been developed at significant cost with the expressed purpose to provide the oil and gas industry with solutions to the industries issues. They are not to be used in any other form or manner other than what I deem is appropriate. All of my efforts have been to develop the marketplace for these ideas, and to help the oil and gas producer through the IP that is developed here. The laws of the countries in which we operate support these actions. Any unauthorized use of these ideas is forbidden.

I therefore place the CEO’s, CFO’s, COO’s, Officers and Directors of all of the oil and gas producers that are operating in the Canadian and United States jurisdictions on notice that any unauthorized use of my Intellectual Property is forbidden. These copyright laws are established laws, and you are lawful corporations. And yes, this notice does extend explicitly to those participants, past and present, of the Canadian Association of Petroleum Producers CIO Committee. The law applies to you as well.

Consumers of the Android operating system could care less that Google has violated Oracle's Java Developer Kit. Producers who invest millions in their ERP system will conduct significant due diligence to ensure their vendors Intellectual Property claims are valid.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Three Times Lucky?

We need to take a quick break from the Research & Capabilities module to take care of some housekeeping duties.

Goliath has made the first move! Goliath is the name that I’m going to start calling the oil and gas bureaucracy. It makes them more human and puts our battle into context. Anyway it was just a matter of time before we started mixing it up. With the Preliminary Specifications decentralized production model providing $94 billion in additional revenues and profits to the oil and gas producers. Goliath wasn't looking all that attractive. Goliath needed to do something before these ideas became too prevalent in the marketplace. So now Goliath has acted and he put another pawn in place, and its Ernst & Young. Let me be the first to welcome them and to note that they join an esteemed cohort. Previous pawns included Cambridge Energy Research Associates and McKinsey Consulting. So they should honestly consider themselves privileged.

What Goliath does is he hires these firms and has them prepare some research that replicates certain elements of the Preliminary Specification, as in the Ernst & Young case, or other research of People, Ideas & Objects. Note that their research or studies are derivative of my Intellectual Property of which I am the copyright holder. They, the pawns, then proceed to publish the material as if they have some breakthrough in terms of oil and gas understanding. But then I call. Then its not so earth shattering when we compare notes. The fact that Ernst & Young has published a study that is surprisingly similar to the decentralized production model. That they pull this miraculously out of thin air. That this is highly inconsistent with the output of a big audit firm and their past papers. Makes Ernst & Young look poorly and Goliath should be ashamed of himself. Ernst & Young, who I believe understands the Intellectual Property laws, doesn’t appear however to share Cambridge's or McKinsey moral and ethical backbone.

The first mention of the decentralized production model in this blog is in January 5, 2007. You can check for yourself. The development of the idea obviously took a few years, but then I’m not as smart as those guys at Ernst & Young. The fact that both of us have topical solutions to the industries problems, at the same time, is the point. But wait, People, Ideas & Objects are a comprehensive software and service offering, and Ernst & Young are a study! Well maybe I’m not that slow after all.

The bigger picture here is that Goliath is not that well. He is old, tired and doesn’t have that much usable life in front of him. I don’t know what his exact medical issues are but there seems to be a lot of medical people around him at all times. Its understandable that he is fighting for his life. Like other bureaucracies that are faced with their ultimate demise as a result of Information Technologies, they can’t sustain too much more of a beating. As I said $94 billion in opportunity costs for 2012 alone is a distinct value proposition that People, Ideas & Objects provides the oil and gas industry. Goliath can’t sit there and do nothing in the face of such obvious value destruction. So let Goliath fight for a few more days, the game is afoot and I feel like a few good rounds with the old boy.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Research in the Service Industry

One of the key points about the use of the Research & Capabilities module is that the oil and gas producers receive 100% of the funds from the production of oil and gas. This entitles them to be the gatekeeper on all subsequent activity with respect to how that money is expended. And that includes the “what” and “how” of service industry product and service innovations and offerings. In today’s capital markets little is tolerated for research and development that is not directly funded by customers. To expect that the service industry will divert its profits, or will raise capital to fund its research and development efforts is foolish. It is clear that there has to be a direct link between the research that is undertaken by the service industry and the customers (i.e. the producers) wallet.

At the same time producers don’t want to participate when the cash is simply thrown against the wall to see if it will stick. There has to be a clear direction and understanding given to the service industry as to the direction and need that the oil and gas industry has. For the past few years, at least in Canada, we have heard many of the independent producers calling out the service industry as greedy, lazy and taking advantage of the situation in the field. Implying that the demand for service in the field is so strong that the only means to control it is for the service companies to increase the prices they charge. I see this situation occurring as a result of a lack of investment in innovation by the service industry.

This situation in the field has led to “cost control” measures by the producers that have further constrained the communications between the service industry and the producers. To suggest that the industry should be funding service industry innovations is the last thing that producers want to hear at this time. But it is the long term solution to producer problems. Micro-managing and cost-controlling will get the job done to the satisfaction of no one. As the demands in the industry increase, the ability to increase the capacity and capabilities will be further constrained because no one is working on those capacity related problems today. When the time comes, the problems of today will be significantly larger tomorrow.

What is needed is the Research & Capabilities module of the People, Ideas & Objects application to provide the communication between the service industry, the entrepreneurs and the oil and gas producers. Communication about the needs of the producers, backed up with dollars that are willingly spent in order to develop the innovation, capacity, capabilities, services and / or products. Providing direction to the service industry certainly sounds more constructive than calling names, controlling costs or micro-managing. This functionality will be captured in the Research Budget Allocation Interface of the Research & Capabilities module.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

McKinsey, the 21st Century Organization

We went through the four points from the McKinsey article as to why we should use the Research & Capabilities module for the long term perspective of the innovative oil and gas producer. We now want to revisit these points and highlight the significance of the opportunity that is presented by separating the long term perspective into the Research & Capabilities module, and the day to day into the Knowledge & Learning and other modules. In the McKinsey article it is noted;

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key organizational construct of the innovative and profitable oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. By providing an extension of the governance structure over the partnership with the Military Command & Control Metaphor. We have isolated the Joint Operating Committee as the day to day operation of the oil and gas producer. This frees up the remaining portion of the producer to concern itself with the long term value generation of the firm.

Recall that these Joint Operating Committees are autonomous in the sense that they are focused on achieving the greatest performance. They are driven through the Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. Because they are operated by the partnership, which all the participants are motivated equally by financial gain, the producers will have faith that the “line managers will make good on a company's earnings targets.”

In addition, the producer will have the decentralized production model to rely on to ensure that “line managers will make good on company’s earnings targets.” The Preliminary Specifications decentralized production model ensures that the marginal production is shut-in so that those reserves can be saved for a time when commodity prices are higher and the reserves can be produced at a profit. So that the commodity markets are not flooded with marginal production that causes the collapse in prices we have seen time after time. And that no producer will produce a property that is marginal. This operational discipline will need to be adopted by the industry and strictly enforced. The decentralized production model is a feature of the Preliminary Specification and is contained within the Resource Marketplace module.

And in terms of the long term perspective, the Research & Capabilities module is looking at the interests the producer has in any number of Joint Operating Committees. This number may total into the thousands. To concern themselves with the operational performance of each would be a daunting and impossible task. And based on the previous discussion their involvement is limited. However, there may be systemic corporate similarities that can be applied to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the perspective of the firm, and in the long term. These are where the business value can be generated through the use of the Research & Capabilities module.

McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module is able to extract the value in the long term. By passing on new innovations or the results of experiments for the Joint Operating Committee to implement. The ability to influence any and all variables and to see any aspect of the firm and to analyze it is the domain of this application module.

If we reduce the business of the oil and gas producer down to the activities of the Joint Operating Committee. And concern ourselves only with the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else. This is the classic conflict that a business must satisfy, the struggle between the long and short term horizon of the business. How much should be sacrificed in the long term and how much should be sacrificed in the short term? It should be noted that the name of the module is Research & Capabilities, this discussion also focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? The traditional steps of the producer was to build the in-house capability. The assumption that is used in People, Ideas & Objects is that due to the resource constraints, particularly in the earth science and engineering disciplines, these do not permit the luxury of each producer building the full scope of these capabilities in house. The need to collaborate with partners to build the global scope of the Joint Operating Committees capabilities is how these needs will be met. Therefore a specialization in the earth science and engineering capabilities will be the result of the division of labor between the partnership represented in the Joint Operating Committee.

But we are talking about more than just the capabilities that each Joint Operating Committee demands when we are talking about the capabilities of the producer firm and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions by trial and error and deductive tinkering.

We have detailed that the focus of the producer firm is on its asset base and its earth science and engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day of the various Joint Operating Committees. These are the core scientists of the firm.

We discovered something very interesting in our research. When we deploy teams of people in a fashion like we are with People, Ideas & Objects use of the Joint Operating Committee. The earth science and engineering capabilities of each Joint Operating Committee will atrophy. They need to be fed a constant stream of new and innovative ideas and possibilities to remain “current” with the science. This of course has to be steered by the mother ship so as to not duplicate errors or replicate blind bunny trails unnecessarily in each and every Joint Operating Committee.

Now it may seem that I have contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't mean that they would be developed “in-house.” The Research & Capabilities module should be considered to be from an industry perspective. That although each firm will have specific people defined to support each firms needed capabilities, the service industry will take on a greater role in providing much of the innovative capabilities that are developed through the mindset employed by the producer firms.

We’ve talked about the role the producer would have in determining the long term horizon of the firm. How the Research & Capabilities module would provide a window on the various Joint Operating Committees to provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I now want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

We all know this leakage of information to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the information they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding information, will deploy the right information to the right people at the right time.

According to McKinsey the solution requires...

... a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.

These tacit interactions are what are captured in the “Research” area of the Research & Capabilities module. Interaction with the larger communities to develop the knowledge and understanding around the science of oil and gas not only expands the capabilities of the producer firm but will also expand the overall science. We learned two important points regarding innovation from Professor Giovanni Dosi in the Preliminary Research Report.

• That new science fuels new innovations, and new innovations fuel new science.
• Technical trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms.

People, Ideas & Objects research assumes that one technical trade-off in oil and gas is accurately reflected in the oil and gas commodity pricing. That these prices are providing the resources to fuel innovative and profitable oil and gas producers. Therefore the faster we iterate on the science and innovation, the more appropriate a producers strategy should be focused on a capabilities approach.

This realignment across the producer and Joint Operating Committee intuitively makes sense. From the Joint Operating Committee alignment of all the frameworks to having them focus on performance as the driving motivation, and the decentralized production model ensuring profitable operations. This also begins to make sense when we have the Joint Operating Committee pursuing the optimal short term horizon. Making the operational decisions based on the collaborative understanding of the partnership that makes up the Joint Operating Committee. And the producer firm undertaking the long term horizon of the firm by interacting with the Joint Operating Committee, the remainder of the industry and the service industry to build the needed earth science and engineering capabilities needed for the firm. However, as possibly the strongest and easiest evidence that I can provide that this is substantially correct is this quotation from Professor Richard Langlois.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

To be specific, what we are doing in the Research & Capabilities module is “moving the knowledge to those with the decision rights.” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is to “move the decision rights to those with the knowledge.” And that is where the conflict is being created. The Joint Operating Committee has the operational decision making framework and there is little that can be done to change that. The knowledge is held within the producer firm. It is therefore necessary to create a process that sees the knowledge flow from the producer firms to the Joint Operating Committee and that is what the Research & Capabilities module does.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Introduction to Research & Capabilities

We now move on to the Research & Capabilities module of the Preliminary Specification. This is a dual specification module in that it shares attributes with the Knowledge & Learning module. The difference is that the Research & Capabilities is a firm, or producer, facing module and the Knowledge & Learning module is a Joint Operating Committee module.

We will discuss how the Research & Capabilities module will be used to help build value by managing the transition from the hierarchy to the aligned producer organization under the People, Ideas & Objects software. Where the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee are aligned with the hierarchies compliance and governance. Making this transition will create opportunities for people to make changes to the work that they do in order to be more efficient and effective. The “what” and “how” of this software is best described in a McKinsey article. In a four part recommendation McKinsey sets out in broad strokes what is required.

1) Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve all of these objectives. By aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the Military Command & Control Metaphor and having the financial interests of the producers drive the management of the Joint Operating Committee we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

2) Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

3) Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects. Marketplaces are things that people will be doing more of in terms of participation in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

4) Relying on measurements of performance rather than supervision to get the most from self directed professionals.

We have already had a quick review of the Performance Evaluation and Analytics & Statistics modules. Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it.

It is clear that it is no longer the 20th century. That to manage an enterprise requires a different approach, and the first thing that is needed to manage that enterprise is the software to enable that new approach. With real shortages in the quality human resources necessary to maintain the markets demand for energy, it will be the producer that is able to maintain a high performing organization based on the criteria we are discussing here.

It was in the Preliminary Research report (2004) that we learned the influence that Information Technology (IT) had on organizations. That IT defined and supported our organizations, and that it both enabled and constrained them. The need for the innovative and profitable oil and gas producer to remove these IT constraints requires the People, Ideas & Objects software development capabilities. Then, on an ongoing basis, as further constraints are identified they can be dealt with by developing new software to deal with new opportunities.

We have also discussed the current producers capacity to deal with issues are constrained by the systems that are in use today. That we see a repetitive inability, or lack of capacity to deal with the existing issues of the industry. Highlighting just the takeaway capacity and commodity pricing as the two premier issues that we seem to be reliving from the 1990’s. There is also an inability to approach new issues that industry is faced with; such as planning for the shale based reserves development and the relationship with the service industry. I have suggested that the industry seems to be in a never ending cycle in which it is unable to exit. The systems that exist today have us operating from a day to day basis and they are unable to deal with the long term perspective.

This cycle of day to day existence is hurting the industry. The ability to deal with this issue is by adopting the Preliminary Specification and acquiring the software development capability proposed by People, Ideas & Objects. Then the innovative and profitable oil and gas producer will be able to break the cycle of systems dependence and effectively plan and execute the business of the business. Until we do this, its best to become familiar with the various elements of the scenery that we are in. And that primarily involves the losses on operations in North America.

The Research & Capabilities module provides the exit from this endless cycle. How the firm breaks away from what it has done before and develop its capabilities to enhance its business in the long term is detailed here. There are a number of things we do in this module that make that happen here in the Research & Capabilities module.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Conclusion to the Accounting Voucher

One of the basic assumptions of the People, Ideas & Objects Preliminary Specification is the pooling concept that is used to replace the “operator” designation in use today. Therefore many of the participants in the Joint Operating Committee will be actively participating in managing the property on an ongoing basis. As a result some of the Accounting Vouchers will be open to charges from multiple producers represented in the Joint Operating Committees that your producer firm is a participant in. The revenue, capital and operations of each of the Joint Operating Committees accounts are open to the direct debit and credit charges of all of the participants in the JOC.

The ability for each producer to have the just-in-time earth science and engineering capabilities available for all the properties they manage requires them to have unused and unusable surplus capabilities. These unused and unusable capabilities, on an industry wide basis, are leading to the resource shortages that we are experiencing. Specialization and the division of labor will also need to be employed by the producer in terms of their earth science and engineering capabilities. The ability to pool these critical resources from participating producers into the Joint Operating Committee releases these otherwise hoarded unused and unusable capabilities. The pooling concept also implies that some producers will provide other resources to the property in disproportionate amounts to their working interests. All producers need to contribute the skills, knowledge, experience and ideas that they have in an innovative oil and gas industry. Therefore each of these producers need to have the ability to charge for their earth science and engineering capabilities to the joint account. All charges are subject to the AFE or Work Orders budget requirements and cost control remains the domain of the Joint Operating Committees.

Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. It is People, Ideas & Objects assertion that the “different incentive structures” and “different opportunities” are facilitated or constrained by the administrative ease in which the producer operates.

This administrative ease can also be stated for the Material Balance Report. It is within the Accounting Voucher where the Material Balance Report is embedded within the Accounting Voucher itself. Inheriting the capabilities to balance the financial aspects of the voucher, but also the volumetric information. It is at that point, when the volumetric information attains the integrity of the accounting system, that the automation of the various processes based on the volumes can begin.

If the producer is confident that the deal that was conceived is accurately captured in the Accounting Voucher. And the operation is therefore also reporting a substantial profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Miscellaneous

One thing that we have not been able to discuss regarding the Accounting Voucher module of the Preliminary Specification, is the module is used for entry of all transactions for accounting purposes. Whether it is through the Material Balance Report, which is encapsulated within its own voucher, or a simple accounts payable voucher, everything that will be entered into the People, Ideas & Objects system is through an Accounting Voucher. And there will be different types of vouchers for different types of charges. Each with their own voucher series numbering. (For example all Material Balance Reports will be 200,000 series.) This also imposing somewhat of a strict Prepared By and Approved By process where everything that is entered into the system has high levels of accuracy, timeliness and authorization. This is somewhat contrary to the open and free wheeling style of data entry in Oracle Fusion Applications Financial Management Suite of modules. We will need to enhance Oracle Fusion Application methods of accepting our view of Accounting Vouchers and the way they work. This will be done through the Oracle Fusion Middleware layers Business Process Management Suite to provide us with this functionality in the Accounting Voucher. The base level General Ledger, Accounts Payable and Accounts Receivable are being used extensively here and we need to build these specific functions within the module. Business is also in many cases, repetitive. The ability to reuse any Accounting Voucher as a template for subsequent months will be a feature of the People, Ideas & Objects Preliminary Specification. This will include the use of firm wide forms such as expense accounts and petty cash. What is being intimated here is that the user interface of the Accounting Voucher needs to be user friendly. With high levels of intelligence and multiple ways of interacting with it.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Designing Transactions

One area of the Accounting Voucher that the Preliminary Specification is different is in the concept of designing transactions. We should spend some time on defining what it is that we are speaking of. What accountants will be spending their time in the future is designing transactions and leaving the processing of transactions to the computers. If you have been reading the Preliminary Specification you will have an understanding of the methods of organization of the marketplace and the producer firm. And how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transactions makeup. From Harvard Professors Carliss Baldwin and Kim Clark.

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Let's use a scenario where a group of small producers have four producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of including them in the Preliminary Specification. And we begin by analyzing the production accounting elements in the Accounting Voucher with the Production Accounting Service Provider in the area.

The Production Accounting Service Provider assesses their fees on the basis of a unit of work incurred during the production month. For example this might include reading a gas chart, meter reading, Material Balance Report etc. At each point they assess a standard fee for service. This then goes to their billing process and at the end of the month is billed to their clients based on the work output. This imputes that someone has designed their billing and work flow from a transaction design point of view. Professors Baldwin and Clark.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p.22

Again if there is no production there is no basis for the Production Accounting Service Providers automated billing. Fulfilling the decentralized production model objective. This scenario shows how the Production Accounting Service Provider had designed their transactions to produce their automated billings. Their accountants were not concerned about the processing of transactions, but the processes of billings in a fully automated manner.

Additional transactions are designed from the process of the gas production. Sales of the natural gas, royalties and payment of the processing fee are all designed into the Accounting Voucher. This is the role of the Accounting Voucher for the producer firm and Joint Operating Committee. Automation of the business processes of the innovative oil and gas industry through transaction design.

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

The Accounting Voucher has the “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process of analysis of how to break down these transactions and we will get into that as we proceed through the Preliminary Specification. It is important to recall at this point that each Accounting Voucher can be used as a template for subsequent months. So once a transaction is designed, it can be reused, and built upon through the implementation of it as an Accounting Voucher template.

The role of the Accounting Voucher in defining the source of the market or the firm as the originator of the transaction is minimal. However, it has a role in ensuring the costs of these transactions are minimal and are a source of the firms profitable operations. If there was a simple way to describe this purpose it would be as a tool to coordinate the firm or Joint Operating Committees use of the market.

This conceptually falls between transaction costs economics, capabilities and transaction design. All three are areas that Professor Richard Langlois has included within his area of research. We have also used Professor Carliss Baldwin for her work in transaction design. Professor Richard Langlois in his paper "The secret life of mundane transaction costs."

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

and

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

It is the Accounting Voucher module of the Preliminary Specification that takes the accountant away from the benign score keeper role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements to provide the greatest value add to the firm or Joint Operating Committee they are employed by. In Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

And this is maybe one of the important considerations of the work that we do here in People, Ideas & Objects. Is the realization that each producer firm and each Joint Operating Committee are going to be unique. That due to their makeup they are going to be different in material ways. Innovation will have a dramatic scale in how it is measured against each firm or JOC. The approach will be anything but cookie cutter.

Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals. p. 17

Therefore, according to the research of Professor Langlois the transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of Information Technologies. However the differentiating costs between firms and JOC’s will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm the most profitable means of oil and gas operations.

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

We have been discussing the Accounting Vouchers “Transaction Design Interface” and its purpose as a tool to coordinate the use of the market. We want to ensure that the efforts in coordinating the market are consistent with the objectives of the firm or the Joint Operating Committee and don’t conflict with the objectives of those who are initiating the work in the Research & Capabilities or Knowledge & Learning or other modules. As we can see coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transactions, not on the operational side.

The first question that most people will have is why are we concerned with the coordination of the markets in the Accounting Voucher? Here Professor Richard Langlois made the following comment in response to a question on his “Vanishing Hand” paper.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

In this day and age, with such large distances, geographic, size, language and other, between vendors and producers leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil and gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions?

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6

and

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

If we recall in the Resource Marketplace module the vendors and suppliers are maintaining their own contact data. Within that data is their key personnel that include their field staff. They should also be including their key business people for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition their billing information and banking data, as well as other critical data and information that will help the producer firm or Joint Operating Committee efficiently coordinate and process the transactions they are involved in. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.