Showing posts with label Baldwin. Show all posts
Showing posts with label Baldwin. Show all posts

Friday, May 21, 2010

Baldwin's "Option Value"

In a presentation entitled "Unmanageable Designs: What Some Designs Need from the Economy and How They Get It". Professor Carliss Baldwin provides more support for those people who are contemplating becoming a member of the Community of Independent Service Providers.

Harvard Professor Carliss Baldwin is someone that we watch closely here at People, Ideas & Objects. Review of her papers have provided clear direction in the areas of "modularity and thin crossing points", "mirroring hypothesis" and "actionable transparency". We have benefited substantially from these concepts. In this presentation Professor Baldwin brings another substantial concept to this project, "Option Value".

There is a definitive reason that the Draft Specification is eleven modules. Particularly from a software development point of view. Having everything operate as one integrated system with the size and scope of the Draft Specification is probably impossible. The ability to break down the size of the system into modules helps the developers deal with the complexity that larger systems provide. Modularity also allows users to be familiar with a smaller set of application functionality, familiarity that is consistent with their training and skills. For example a person that works in the "land" function will probably rarely leave the Petroleum Lease Marketplace Module.

Modularity is something that Professor Baldwin has spent much of her time on during the past decade. What really brings out the value of modularity is what she calls the "option value". This is particularly important as we have recently been discussing the Industrial Districts (ID), Small Knowledge Intensive Enterprises (SKIE), Business Groups (BG) and Community of Independent Service Providers (CISP). Option value is critical to the performance of this community.

In slide number two Professor Baldwin summarizes her three main points. I want to subsequently address each point in detail.

  • Designs need to become real.
    • They become real by creating the perception of value.
  • Designs act as a financial force.
    • Perception of value = incentive to invest
    • In making the design = "use value"
    • In making the design better = "option value"
  • Modular designs with option value.
    • Create hurricane type forces
    • Will change their economic "space"
    • Unmanageable and dangerous (unless you understand them)
To her first point, the Draft Specification is real because people can see the value that the specification can provide. The purpose of the specification is to provide a vision of how the industry could operate using the Joint Operating Committee (JOC) as the key organizational construct of the innovative producer. Perception is reality.

Baldwin's second point should note that members of the Community of Independent Service Providers (CISP) have a substantial business opportunity. By joining, these people have the opportunity to develop a service based offering that delivers the People, Ideas & Objects software applications to the innovative producer. They have as their overall objective; "to provide the most profitable means of oil and gas operations". To address the "use value", as we have noted before, we are moving towards the systemic culture of the oil and gas industry, the JOC. By recognizing the JOC we are indeed adopting the culture of how the industry works. Contrast this "use value" to the SAP culture of a manufacturing firm.

And lastly to address the "option value". The power of a modular specification, particularly in software that supports an industries culture, that is backed up by a dedicated software development capability, and most importantly, the producers, CISP and People, Ideas & Objects gaining the option value. This type of design becomes a "hurricane" financial force that will change the oil and gas "space". I can assure you that this hurricane is beginning. If you have an interest in becoming a member of the CISP, I would highly recommend that you begin your research phase today.

The critical element of this hurricane force is the Community of Independent Service Providers. Having the Draft Specification without this community does not generate the value. As Baldwin notes on Slide 23 "Modularity in the absence of option potential is at best a breakeven, at worst an expensive waste of time". This is intuitively the case, Professor Baldwin then asks the important questions.
  • What is this elusive property that gives rise to option value?
  • Where does it arise?
  • Can we measure it?
Answering that first question, what is the "elusive property" Baldwin notes on Slide 29:
  • Option value lies in seamless, asynchronous upgrading
    • Modeled in design rules.
I have been a strong proponent of asynchronous communications. People, Ideas & Objects adopted a technical vision early on in the design of the Draft Specification. Within that technical vision, a cornerstone of it is what we call Asynchronous Process Management (APM). Today I am stating that the methods that the CISP and user communities interact with the developers of People, Ideas & Objects is in this asynchronous manner. Therefore we have captured that "elusive property that gives rise to option value". The creative and iterative development of the applications and communities.

In terms of measuring option potential. I have selected the following five points from slides 29, 30 and 32 as key to the CISP.
  • Successive, improving versions are evidence of option potential being realized over time - after the fact.
  • Designers see option potential before the fact.
  • What do they see?
  • Users - new perceptions => new preferences
    • Perceptions of desires emerge through use.
    • Value of discovery, direct experience play.
    • Unexplored potential = option potential.
  • Pfister's Observation (In Baldwin's words)
    • Recombining modules in new ways has more option value than the modules themselves.
Lastly, Professor Baldwin suggests ways in which we can gain from "option value". These past few months we have been reviewing many of the principles that were used in forming People, Ideas & Objects, Community of Independent Service Providers and the Draft Specification. Whether that is through ID's, SKIE's, BG's, or the CISP I think the value is there and this project is moving forward.
  • What do option rich modular designs do to the economy?
    • Answer: Attract entry with a promise of lots of $$$
  • How do you manage something inherently unmanageable?
    • At first you don't.
    • Then, small footprints yield high ROIC.
    • Then, lead firm M & A
  • Will you always get a modular cluster of firms?
    • Yes, almost certainly.
And what actions does Professor Baldwin's recommend you should do: (Recall this is a 2005 presentation.)
  • Plunge in.
  • Get lucky
  • Watch out for Microsoft
  • Get bought by HP.
Professor Baldwin's research strategy - look for;
  • Stable patterns of behavior involving several actors operating within a consistent framework of ex ante incentives and ex post rewards.
My personal opinion of what is valuable today, and this ties in with this project, is ownership or access to Intellectual Property (IP). It's the only asset that provides any long term sustainable value generation. Members of the Community of Independent Service Providers have access to all of the IP that is part of People, Ideas & Objects, the ideal framework of "ex ante incentives and ex post rewards". Management of this IP at People, Ideas & Objects is noted here.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Friday, May 14, 2010

Transaction Design

The Accounting Voucher Module of the Draft Specification provides a unique and valuable way of Designing Transactions. Based on the theories put forward by Professor's Richard Langlois and Carliss Baldwin, automation of the design of transactions is the next frontier in increasing productivity. As I mentioned in Mondays post, transaction design has been undertaken in oil and gas for many years. Specifically in the determination of who will provide which services on a drilling contract. Using this example this post will deal with the elements of transaction design that are captured in the Accounting Voucher module of the Draft Specification.

Stepping back a moment to include the discussion of Transaction Cost Economics (TCE). TCE involves the determination of where, the firm or market, transactions could take place. With the move to the Joint Operating Committee and the enhanced Information Technologies, transactions are best positioned in the marketplace. Therefore we need to be concerned about the variety of costs associated with transactions and that is a matter for another post. Using the software development capability provided by a fully funded People, Ideas & Objects helps to mitigate these transaction costs and bring a level of automation not otherwise available today.

So the question becomes, how do we automate much of the transactions costs is through transaction design. Taking the example of the drilling contract, an example of which can be seen in any well-file if you have access. One of the appendixes to the contract will be a summary of which services are provided by which firm, the producer, driller or third party. This overall task of selecting who provides the service is what I mean when we discuss designing transactions. The natural extension of this is to include high levels of automation to the bidding, negotiation, execution and transaction processing.

This is the logical "next" step in making these types of contracts and other processes more efficient. The question therefore is how is this done in the Draft Specification and Accounting Voucher. Recall the User Vision of the Draft Specification includes the Project Wonderland interface that enables avatars and virtual avatars. Project Wonderland is an element of the Draft Specification and an attribute that enables synthetic and virtual interactions and processes carried out between producers and suppliers.

If your still with me you might appreciate that this interface's capabilities provide a natural way of interaction between producers and the various communities of practice that are organized as Industrial Districts. If you wanted to tender a contract for bidding, you could release the tender to the Resource Marketplace through a virtual avatar for suppliers to submit a bid. Once the bids were in, you could select the winning bidder and start the process of synthetically negotiating and executing that contract.

Assume for a moment that you are drilling a well in a semi-remote region that requires a technical capability that is above and beyond what the specifications of any current supplier provides. Review of the Resource Marketplace module shows that a group of engineers are interested in testing their development of the otherwise unavailable capability. If the capability proves to work it would enhance the reserves of the drilled well. The producers will need to sit down with these engineers, fund and build the capability deliberately. Producers earn 100% of the sales of oil and gas production. It is therefore imperative that they develop the capabilities that they want and need to enhance their reserves and production profile. Otherwise they will be left to sit and watch their production spill out into the Gulf of Mexico like BP is. The futile nature of BP's efforts show that they are reaping what they sowed, nothing. Blaming Transocean and Halliburton is only the latest act in this comedy of errors.

And none of these capabilities will exist until such time as People, Ideas & Objects is fully funded. Oil and gas needs to deliberately go about developing these types of capabilities in order to benefit from them. Before they can be deliberately built they need to be organized and that is what People, Ideas & Objects has sought to do. Once built they need to be sustained and supported through their multiple iterations. The enhanced role of Information Technology (IT) doesn't spontaneously occur. Producers need to be active members in the Industrial Districts and People, Ideas & Objects Community of Independent Service Providers.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Sunday, February 28, 2010

Pisano Science Based Businesses Part III

I have removed a large portion, Sections III and IV, of this paper. These sections discuss the "Science Based Business" in terms of its classifications and definitions. I recommend that everyone read the paper, however, I think it is strictly academic to classify the energy industry as a science based business. It is interesting reading, however preaching to the converted would be a waste of our readers time.

This last part of our review of Professor Pisano's paper "The Evolution of Science-Based Business: Innovating How We Innovate" concludes with some powerful application of the lessons from Professor Alfred D. Chandler.

VI. Applying the Lessons of Chandler

Why are we concerned about the performance of the oil and gas industry? And why does that concern center on the organizational structure of the oil and gas firm and it's associated markets? Professor Pisano answers these questions in a way that everyone could generally agree.
The fundamental lesson from Chandler is that while technological progress creates potential for economic growth, that potential can only be realized with complementary innovation in organizations, institutions, and management. This lesson has clear implications for science‐based sectors of the economy. Progress in the science bases of medicine, agriculture, advanced materials, and energy has enormous potential in coming decades. Yet, this potential will go unrealized without the design of appropriate organizational, institutional, and managerial models. One purpose of this essay was to show that, using the case of biotech as a reference point, we have not yet found an appropriate model for science‐based business. pp. 27 - 28
I agree with Professor Pisano, "we have not yet found an appropriate model for science-based business". Is the Joint Operating Committee the ideal organizational construct for the energy industry? We don't know, that is we won't know until such time as this research has been put to the test. In our research we found the science and innovation need to have certain characteristics that are inherent in the JOC. This is a direct result of the JOC being the cultural norm for global oil and gas operations. The problem is the JOC is not the ways and means of the industry from a compliance and governance point of view. Those frameworks, for whatever historical reason, have been handled by the hierarchy.

What this software development project does is move the compliance and governance of the hierarchy into alignment with the five frameworks of the JOC. To align all of these frameworks within the firm and market definitions of the Draft Specification will provide tangible benefits. And help the energy industry to better meet the markets demand for energy. But will it be the ideal organizational construct for this science based business? We don't know, and we won't know until such time that we can learn from the task at hand. I can assure you the bureaucracy is not keeping up to the demands of today, and that it is not going to in the future. But is the JOC the ideal science based business organizational construct for energy? This may be the better question we should ask ourselves in the long run. And ensure that the means to discover the ideal construct, if it isn't the JOC, will be discovered through the process of People, Ideas & Objects and the Community of Independent Service Providers.
Historical experience both before and after the emergence of biotech shows the limits of both ends of the organizational continuum: the visible hand of hierarchies and the invisible hand of markets. Hybrid organizational forms that mix elements of markets and hierarchies would therefore seem to be an attractive avenue for innovation. p. 28
The hybrid model is inherent in the People, Ideas & Objects Draft Specification. In September 24, 2007's blog post I detailed the optimal / logical boundaries of firms and markets. This was based on the review of Professor Carliss Baldwin's paper "Modularity, Transactions, and the Boundaries of Firms: A Synthesis" That table is reconstructed here.


ConstructMarketFirm
Joint Operating CommitteePs
Military Styled Command and Control (Governance)sP
Transaction CostssP
Production CostsPs
InnovationPs
Routine, compliance and accountabilitysP
ResearchsP
Development (the D in R&D)Ps
Financial FrameworkPs
Legal FrameworkPs
Cultural FrameworkPs
Operational Decision Making FrameworkPs



P = Primary
s = secondary


The inclusion of the invisible hand and the visible hand are also present in the Draft Specification. I included Professor Richard N. Langlois work in the Vanishing Hand in a June 24, 2007 blog post. Professor Langlois' vanishing hand hypothesis is directly pertinent to the discussion of finding the optimal organizational construct for the science based business of oil and gas.
"The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates." p. 3
Clearly the research to determine if the JOC is the appropriate organizational construct takes into consideration the research that has been conducted to date. This research is incomplete from the point of view of determining if there could be more attributes, definitions or characteristics in which to add to the software. However, my homework has been done, and it is necessary that the industry fund these software developments before we conclude if the JOC is the right organization, and if we need to conduct any additional research. Back to Professor Pisano who discusses "Organizational Networks" a term that resonates with me.
Organizational networks offer another avenue for innovation. Chandler argued that the firm, not the transaction, was the most important unit of analysis (Chandler 1992) for understanding the boundaries of organizations and structure. Alternatively, it could be argued that in contexts that mix markets and hierarchies, the network of organizations becomes the most interesting unit of analysis (see e.g. Miles and Snow, 1986, Stuart 1998). p. 29
and
Once we move to organizations that are connected in durable networks, this notion becomes much more complicated. The value of the network and the value of individual “firms” in that network become harder to disentangle. p. 29
Call it what you will, what this post clearly reflects is this is the direction that industries must travel. To suggest that the hierarchy will survive the next 10 years is difficult to conceive. Here Pisano asks a pointed question at management itself.
In an essay in honor of Alfred Chandler, an author would be remiss not to mention “management technology” as a critical component of innovation. Chandler documented the emergence of the professional manager and the innovations in managerial techniques needed to run the organizations he studied. This raises the question of whether current “management technology’ is suited to the needs of science‐based businesses. Indeed, the very notion of “professional manager”, while seemingly quaint, indeed characterizes much of the division of labor between scientists and manager today. Consider that today, scientists receive no formal training in management and MBAs receive no training in science. This is a striking gap. The professions of management and the professions of science are still largely separate. p. 30
For what its worth, I agree that the science based business is poorly served by the current "management technology". This is an area that requires as much research as determining if the JOC is the optimal organizational construct for the science based business of oil and gas. Professor Pisano puts the value of these avenues of research in context with this closing comment.
Like railroads and large scale manufacturing enterprises 100 years ago, science based businesses will be a potent source of economic growth in the 21st century. And now, as then, these new businesses demand new organizational forms and new institutional arrangements. In short, we are once again confronted by a serious need to invent new organizational forms and new institutional arrangements to deal with a new set of economic problems. When it comes to the topic of innovation in business organization, there is no better teacher than Alfred Chandler. p. 30
March 31, 2010 is the deadline for raising our 2010 operating budget. After which a variety of consequences, such as financial penalties and a loss of one years time will occur. Our appeal should be based on the 21 compelling reasons of how better the oil and gas industry and its operations could be handled. They may not be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are.


If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Saturday, February 27, 2010

Pisano Science Based Businesses Part II

In our first post on this paper we introduced the scope of Professor Pisano's research in Science Based Businesses. It is reasonable to assume that everyone that is familiar with the processes of exploration and production would agree that it qualifies as a science based business. In this second post we will focus on the influence of Professor Alfred D. Chandler in Professor Pisano's work.

II. Chandler’s Core Propositions

Professor Pisano reintroduces us to Professor Alfred D. Chandler and his work on organizational capabilities and what Pisano calls "Chandler's core proposition". People, Ideas & Objects needs to build the software necessary to support and identify the industry standard Joint Operating Committee. This is in order for the earth science and engineering disciplines to be the driving force in what happens in oil and gas. Innovation on these sciences will be the source of value generation in the industry. Up until recently, innovation was focused on the management discipline and the desire to conduct "best practices" and balance some score-cards. Thankfully those days are over.

Through his studies of the rise of the modern corporation and managerial capitalism in the United States, Chandler advanced three core propositions: 1) technological innovation and organizational innovation are interdependent; 2) new forms of business organization and institutional arrangements are invented to solve specific economic problems; and 3) organizational and institutional innovation is an evolutionary process—nothing guarantees “we get it right” every time. Together, these propositions constitute what might be called a “Chandlerian perspective” on the structure and organization of economic activity. p. 5
1) The Interdependence of Technological and Organizational Innovation

It has been argued that moving the compliance and governance of the hierarchy into alignment with the JOC's cultural, legal, financial, operational decision making and communication frameworks will provide enhanced performance. When we identify and support these changes within the People, Ideas & Objects application modules. Innovation on the earth science and engineering disciplines will be facilitated and advanced. Chandler teaches us that technological innovation does not occur without organizational innovation.
A sub‐set of the innovation community, starting with the work of Nelson and Winter (1982), has long recognized that the “right” institutional arrangements play a critical role in facilitating technical advance and the diffusion of innovations. p. 5
These concepts were reinforced on this blog with recent posts from MIT Professor Wanda Orlikowski and Harvard Professor Carliss Baldwin. Orlikowski's Structurational Model of Technology was used in the Preliminary Research Report to identify technologies influence in organizations. Summarizing her work in the statement that SAP is the bureaucracy. Professor Baldwin's Mirror Hypothesis also identified similar points.

2) Organizational and Institutional Innovation as the Product of Human Invention

The Draft Specification deals with a variety of problems that exist in the industry. One of these problems is the redundant building and rebuilding of capabilities within each producer firm. The ability to resolve any and all possible issues needs to be handled by the firm, and therefore, these capabilities are created within each producer. In the integrated producers we see the same technical capabilities being built within Exxon, Shell, BP, Chevron and others. These are duplications and have reached a size and scope that they can no longer be independently developed and maintained. The underlying sciences are advancing too quickly, and the population of human resources are reaching their limits. What the Draft Specification does is pool these capabilities within the Resource Marketplace Module to enable each and every Joint Operating Committee the ability to dynamically generate the capabilities that they need.
Today, it is easy to take for granted such things as separation of ownership from management, hierarchical organizations, multi‐business corporations, capital markets, accounting and control systems, and other scaffolding of modern economies, as if they were somehow “natural.” Chandler teaches us that there is nothing natural about them. They were inventions. Indeed, virtually every aspect of the business world around us—every organizational form, every management technique, every formal and informal institutional arrangement, every principle of management, and every management function—is the product of human invention. Chandler also helps us understand that often‐but not always‐‐these inventions were made in response to very specific economic problems. pp. 6 - 7
To have this dynamic capability available to those within the industry requires the new organizational models, the JOC, and the People, Ideas & Objects software necessary to identify and support the JOC and the Resource Marketplace. Spontaneous order will not work when we are standing on the shoulders of so many generations of giants. We need to act!

3) Organizational and Institutional Innovation As an Evolutionary Process

We have many significant trends converging at the same time. The Information & Communication Technological Revolution, the transformation of the oil and gas industry to a more complex scientific footing, the boardroom power shifts, and the economic forces that are creating issues and opportunities for all concerned. The last thing we need to do is to sit back and wait for the eventual day when all these forces are correctly aligned and the world breaks out in peace. It doesn't happen that way. We have to act!
The first two points above provide a false impression that economic need and organizational / institutional innovation mesh tightly. But Chandler teaches us that such a strict functionalist interpretation is flawed. Economic needs arise, but the response of organizations is slow, uneven, and not always perfect. p. 7
I would assert that the slow industry response to People, Ideas & Objects is attributable to the fact that it is the bureaucracies that are dictating the pace of change. They know that if they don't sponsor these software developments, they won't get built. I know they know this because I told them in the Preliminary Research Report. Their interpretation is wrong, however, they don't see it that way. That is why the appeal of these software developments are focused on the ownership class of the oil and gas industry. The bureaucracy has it pretty good right now, why change.
The notion that novel institutions and organizations always arise to enhance economic efficiency does not stand the test of historical analysis. p. 8
We must act. This muddling along is heading the oil and gas industry into a situation where the energy consumer will not be able to source their energy. Energy is oxygen to advanced economies. To restrict the volume of available energy limits the potential of man kind.
There are many potential transformative forces shaping business organization in the 21st century. The one I would like to focus on in the remainder of this essay concerns science, and in particular, the way in which business participates in and shapes science. Recent decades have witnessed intensive organizational experimentation in the way science is generated, diffused, and commercialized. Advances in the sciences of life, energy, and materials offer huge promise both to drive economic growth and improve welfare. Yet, to believe that promise will be realized without organizational and institutional innovation would be to ignore the lessons of Chandler. pp. 8 - 9
March 31, 2010 is the deadline for raising our 2010 operating budget. After which a variety of consequences, such as financial penalties and a loss of one years time will occur. Our appeal should be based on the 21 compelling reasons of how better the oil and gas industry and its operations could be handled. They may not be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Tuesday, February 09, 2010

Baldwin Mirroring Hypothesis Part II

People, Ideas & Objects is about innovation in oil and gas. Energy has become substantially more difficult now that the easy-energy era has passed. Innovation in the Earth Science and Engineering disciplines is where the difficulty and value reside. How do we develop an organization that facilitates and supports these sciences and innovations. The Preliminary Research Report determined that the Joint Operating Committee (JOC) is the appropriate organizational construct to enable innovation. This implying a level of interdependence between producers represented in the JOC. 

Professor Wanda Orlikowski's Model of Technological Structuration was used in the Preliminary Research Report to determine that software defines the organization. To change the organization requires the software to be built first. Using Baldwin's Mirroring Hypothesis suggests that we will also need to develop an interdependent organization within People, Ideas & Objects to develop that software.

Scholars in a range of disciplines have argued that mirroring is either a necessary or highly desirable feature in the design of development projects, but empirical research shows that some projects deviate from strict mirroring, seemingly without harmful effects. In this paper, we formally define the mirroring hypothesis, describe its theoretical underpinnings and systematically review the empirical evidence for and against it. Our review includes 129 studies spanning three levels of organization: within a single firm, across firms, and open community-based development. Across these levels, the hypothesis was supported in 69% of the relevant cases, but not supported in 31%. It was most strongly supported within firms, less strongly across firms, and often violated in community-based development settings. p. 1
It is in the review of those 129 studies that our ability to see the Mirroring Hypothesis, or to be precise, the exception noted and developed in Professor Baldwins paper, is directly applicable to the work being done in People, Ideas & Objects. Therefore, in many ways, defining what and how the organization of users, developers and members of the Community of Independent Service Providers will operate to build this software.
The exceptions in turn were of two types: In four cases, closely collaborating teams within single firms created modular systems comprised of independent components. More surprisingly, in 28 cases, independent and dispersed contributors made highly interdependent contributions to the design of a single technical system (or sub-system). Based on a detailed analysis of the latter 28, we introduce the concept of actionable transparency as a means of achieving coordination without mirroring. Contributors achieve actionable transparency by embedding their design in a centralized system with a shared design language and near-real-time updating, where everyone with an interest in improving the design has the right and the means to act on it. We present examples from practice and then describe the more complex organizational patterns that emerge in lieu of genuine mirroring when actionable transparency allows people to “break the mirror.” p. 1
The exception to the Mirroring Hypothesis is teams comprised of independent and dispersed individuals can provide the desired interdependency that we are seeking in the innovative oil and gas producer.

1 Introduction

The authors provide a definition of what innovation consists of. A definition of innovation that reflects what will be necessary in both the innovative oil and gas firm, and the innovative systems development communities of People, Ideas & Objects.
Innovation is a process in which people define problems and then actively develop new knowledge to solve those problems (Nonaka, 1994). p. 2
Building on this definition, what will be required to ensure that the dispersed and independent contributions of People, Ideas & Objects will enable the interdependence necessary in the software. Or as Baldwin suggests that we "break the mirror".
Responding to these gaps, this study makes two key contributions to the literature. First, it defines the mirroring hypothesis, explains its theoretical roots, and then systematically and critically reviews the empirical evidence pertaining to it. Second, it synthesizes observations from a large number of cases that violate the hypothesis to explain when and how development organizations can “break the mirror.” pp. 2 - 3
and
By contrast, the second type of exception poses a deeper theoretical challenge. In traditional development organizations, people have relied on spontaneous face-to-face communication, physical collocation, and formal authority to coordinate highly interdependent design tasks. The paradigmatic form of organization for developing an interdependent design is a highly interactive team, working in close proximity, employed by a single firm (Allen, 1977; Clark and Fujimoto, 1991; Sanchez and Mahoney, 1996; Chesbrough and Teece, 1996; Baldwin and Clark, 2000). However, the large number of counter-examples revealed by our study immediately raises the question, how are interdependent design decisions and tasks coordinated in the absence of face-to-face communication, physical collocation, and formal authority? pp. 3 - 4
If we go back to our review of Professor Baldwin and von Hipple's paper in late 2009 and early 2010, "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". This paper compared various forms of innovation by producers, innovation by individual users and  open collaborative innovations. We learned that user contributions were freely given when the user understood and contributed to a design when they would receive greater value from the design then what they contributed. People, Ideas & Objects maintains the identity of users are "hidden" from the bureaucracies who do not want this project proceeding. And lastly the tools, policies and procedures of making contributions to People, Ideas & Objects maintain what the authors call "common ground". These are the components that will make the project successful.
To answer this question, in Section 5, we take a closer look at the twenty-eight exceptional cases in which independent contributors developed highly interdependent designs. We find that in all such cases (1) the contributors had compatible motivations and no severe conflicts of interest with respect to the ultimate use of the design; (2) the contributors worked in or created a framework that gave them expectations of good faith and some protection from harmful actions by other contributors; and (3) most importantly, the contributors maintained a significant shared understanding or “common ground” with respect to the design (Clark, 1996; Srikanth and Puranam, 2007). Common ground was sometimes created using analogues of traditional coordination mechanisms—e.g., electronic communication, temporary collocation, and informal, status-based authority. But we also find that independent contributors often coordinated their efforts implicitly by using development tools that made the design-in-progress both transparent to and actionable by all members of the group. p. 4
Yesterday in Part I of our review of this paper we documented the concept developed by the authors of Actionable Transparency. Actionable Transparency is the necessary ingredient to dispersed and independent developers to maintain high levels of innovative development. This ingredient is therefore not only desirable for People, Ideas & Objects, but also the innovative oil and gas producers.
The concept of actionable transparency is the main theoretical contribution of this paper and the focus of Section 6. As we define it, actionable transparency captures the extent to which everyone with an interest in improving a given design has the right and the means to act on it, i.e., to change it and see what effects the changes have. p. 4
and
In effect, anyone with access to the archives can “see” what’s going on without needing direct input or assistance from others. Actionable transparency requires not just that people can access and make sense of the archives and source materials, but also that they can contribute to the evolving design. p. 4
As the authors have noted "Actionable Transparency" has broken the mirror. Although the independent contributions develop an interdependent system. The breaking of the mirror would indicate that an innovative oil and gas producer would not be supported by these types of activities. Here the authors note that genuine mirroring is not achieved, but something more desirable, valid and valuable.
In the presence of actionable transparency, it is common for more complex relationships between system design and organizational structure to emerge in lieu of genuine mirroring. p. 4
In summary, based on three recent papers that we reviewed. [Orlikowski's paper and Structurational Model of Technology, Professor Baldwin's and von Hipple, and this paper] we are able to conclude the methods and means that People, Ideas & Objects software development methodology will successfully develop the modular Draft Specification. Which in turn will enable and support the innovative oil and gas producer to employ the interdependence inherent in the JOC. 
From this study, managers may conclude that mirroring is a common and effective way to achieve coordination, but it is not the only way. In the presence of compatible motivations and frameworks supporting expectations of good faith, there are new ways of building common ground, based on digitized designs, electronic archives, automated test suites, and instantaneous transmission of text, data and pictures. These alternative means, which support what we have called actionable transparency, can be used as complements or substitutes for mirrored forms of organization. Managers of development organizations within and across firms and in open collaborative groups, who choose or are required by circumstances to “break the mirror,” should be aware of these alternative means of achieving coordination. p. 33
and
We have shown that while mirroring is common in practice, it is not universal. Independent, dispersed individuals and firms can successfully collaborate on highly interdependent tasks if they have compatible motivations and expectations of good faith and can maintain a shared understanding of the evolving design. Actionable transparency can sustain an ongoing shared understanding of a design amongst far-flung contributors, thus is an important means of collaboration in the digital age. p. 34
If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member
of the Community of Independent Service Providers, please join us here.

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Monday, February 08, 2010

Baldwin Mirroring Hypothesis Part I

A new working paper has been released by Professor Carliss Baldwin and Lyra Colfer. This paper "The Mirroring Hypothesis: Theory, Evidence and Exceptions" is something that we should have written about before, however time is an issue. What is interesting about this paper is that it is Professor Baldwin's co-author, Lyra Colfer's Doctoral Dissertation. Her Dissertation has been abbreviated into one paper that provides substantial evidence that the methods being used in the development of People, Ideas & Objects software applications. Are not just valid, but also valid for the oil and gas industry at large.

In Part I of our review of this paper, I want to introduce the hypothesis, discuss the authors definition of Open Collaboration and note how People, Ideas & Objects deviates from their definition. And lastly in this first part, talk at length about a concept called Actionable Transparency.

The authors define the mirroring hypothesis as;

The mirroring hypothesis asserts that the organizational patterns of a development project (e.g. communication links, geographic collocation, team and firm co-membership) will correspond to the technical patterns of dependency in the system under development. Thus the hypothesis predicts that developers with few or no organizational linkages will design independent system components, while developers with rich organizational linkages will co-design highly interdependent system components. (The hypothesis claims a correspondence between organizational structure and technical architecture, but allows causality to flow in either direction.) p. 1
Open collaboration as it is called in this paper is defined as:
In an open collaborative development project, product design information, such as software source code, is placed in the public domain. Independent entities including individuals and firms contribute voluntarily to the design, according to their own private needs and interests; they self-select their contributions without relying on managers or market prices to guide them (Raymond 1998, 2001; Benkler 2002; von Hippel and von Krogh, 2003; Weber 2004; Lakhani and von Hippel, 2009). The open collaborative literature extrapolates from these observations, and uses the mirroring hypothesis to predict the structural form of products created in these settings. p. 12
A clarification is necessary to reconcile People, Ideas & Objects differences to this definition. That is the source code is not placed in the public domain. The costs associated with development are too high to expect a volunteer group to be able to identify and build the necessary scope of an application of this size. Access to the code is made available, however, with the desired benefit that the direction the application takes is determined by the user groups based on their needs. I detailed the differences between People, Ideas & Objects and pure Open Source developments in a recent post.

This difference between the definition and our development do not preclude us from learning from this paper and applying its conclusion. On the contrary, I think that the difference between the theoretical and commercial world, in terms of the conclusion, is negligible, and its conclusion is precisely applicable.

6 Actionable Transparency

"Actionable Transparency" is a term that has been coined by Professor Carliss Baldwin. As we will see in Part II of our review, the authors determine that the situation that we fall within "break the mirror" and it is through the concept of Actionable Transparency that we find the results of this research interesting and applicable.
In The Age of the Smart Machine, Shoshana Zuboff (1988) observed that the increasingly information-based nature of industrial work has radically increased its “transparency.” She argued that, when auto-generated archives constitute a near-perfect surrogate for the activities that generated them, access to those archives provides “universal transparency” into what others are doing (pp. 315, 356-361). In effect, anyone with access to the archives can “see” what’s going on without the benefit of direct input or assistance from others. p. 28
Google would certainly subscribe to this theory. If everything is discoverable, then we certainly have a different approach to how we do things.
Material transparency denotes the mere disclosure of information. By comparison, conceptual transparency requires not only that contributors can access the information, but also that they can make sense of it (cf. Wenger, 1990). Finally, actionable transparency requires not just that they can make sense of it, but also that they can act on it (cf. West and O’Mahony, 2008). p. 28
We come to a problem in the development of the People, Ideas & Objects systems that the needs of one user can not necessarily be met through a generic design. I would assert that we are not seeking a generic design, but one that deals with the unique nature of the oil and gas industry as represented in the Joint Operating Committee. How this comes about is unknown, however, lets accept that we can have a multitude of different opportunities and options available to users of the system. If we make the assumption that it is possible, I think we can see in these authors work that Actionable Transparency is the solution.
Material and conceptual transparency do not imply actionability, however. Just because a potential designer understands a design doesn’t mean she can act on it. However, if she has the right and means to customize her own private copy of the design, then she has more room for action. The ideal form of actionable transparency goes even further: the designer can combine her changes with a host of others’, in near real-time, while at the same time guarding against design conflicts and catastrophes. Thus the concept of actionable transparency captures the extent to which everyone with an interest in improving the design has the right and means to act on both their own copy and the master copy of the design. pp. 28 - 29
The concept is well captured in the conceptual form of Open Source code improvements in People, Ideas & Objects. The issue of scope and scale are addressed through the ownership of the intellectual property and the means to fund these developments. Otherwise I see no difference.
What does actionable transparency achieve that conceptual transparency cannot? As indicated at the beginning of the paper, design is a process in which people define problems and then draw on their stores of knowledge and generate new knowledge to solve those problems (Simon, 1981; Alexander, 1964). Much design-relevant knowledge is tacit and initially inaccurate (Nonaka, 1994), consisting of conjectures of the form: “if I change the design this way, these things will happen.” “This way” and “these things” are generally tacit hunches, which are not well-articulated even in the mind of the designer (Bucciarelli, 1994). Yet if a conceptually transparent design is also actionable, conjectures of this type can be tested, evaluated, and new conjectures generated quickly and efficiently. There is no need to make the conjecture comprehensible to another person. There is no need to persuade someone else that a new idea is worth trying, risking failure and embarrassment. Interactions between the designer and the design (embedded in a system of archives and test suites, etc.) are all that is needed to generate a new trial and new knowledge. p. 29
In the Preliminary Research Report Professor Giovanni Dosi's work showed that innovation was messy. Many failures and wrong approaches would be taken, that it is this process of failure that helps to define the successful approaches.
Moreover, if a technical system is actionably transparent to several or many designers, experiments can go on in parallel and concurrently across many designers, who can then learn about and use each other’s changes via the system itself. (See Lakhani and von Hippel, 2009 on “optimistic concurrency” in open-source development.) This form of concurrent, recombinant experimentation creates a very rapid and powerful “generator-test” cycle. Such cycles, sometimes called “variation-selection -retention” cycles, lie at the core of all Darwinian evolutionary processes, including those found in theories of organizational change and evolutionary economics (Campbell, 1969; Simon, 1981, pp.128-130; Nelson and Winter, 1982; Anderson and Tushman, 1990; Tushman and Rosenkopf, 1992; Nelson, 1995). Thus actionable transparency can speed up the processes of design evolution, thereby increasing the rates of innovation and improvement for the system as a whole. p. 29
It is necessary to state how the unique way in which the intellectual property of People, Ideas & Objects enables "Actionable Transparency". I as author of the original Preliminary Research Report, this blog and other writings earned the copyright to the ideas that are expressed. Users, the Community of Independent Service Providers and others are monetarily compensated for their contributions. In essence I am purchasing the ideas that are generated based on the original ideas expressed in the research and blog. The aggregate copyright of all of the ideas is then licensed to the users and members of the CISP's, developers and others, such that this type of interaction, experimentation and development is possible and I would suggest encouraged. I in turn use the copyright to generate the funding from the producers.
The cost of coordinating an organization or team is sometimes equated with its communication complexity, that is, the number of messages that must be passed between members in the course of getting the work done (Brooks, 1975). Mirroring and actionable transparency in a shared system have very different implications for communication complexity. Given a team of n agents working on a fully interdependent design, the cost of coordination via mirroring is n2  n. For the same number of agents and design structure, the cost of coordination via actionable transparency falls to 2n: each agent only needs to manage his or her information exchanges with the system. p. 31
What is the effect of this conceptual model?
In the presence of actionable transparency, it is common for more complex organizational patterns to emerge in lieu of genuine mirroring. We describe these patterns below. p. 31
If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Wednesday, January 20, 2010

Professor Baldwin and von Hipple VI

To finish off the review of Professor Carliss Baldwin and Professor Eric von Hipple's paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". I feel it is appropriate to highlight just the final paragraph of the document. It speaks to all that we are working to do for the oil and gas industry.
We conclude by observing again that we believe we are in the midst of a major paradigm shift: technological trends are causing a change in the way innovation gets done in advanced market economies. As design and communication costs exogenously decline, single user and open collaborative innovation models will be viable for a steadily wider range of design. They will present an increasing challenge to the traditional paradigm of producer-based design – but, when open, they are good for social welfare and should be encouraged.
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Wednesday, January 13, 2010

Academics get on board.

A trend is forming in the academic community. There are no shortage of papers that address the types of opportunities that now exist in the technological, organizational and innovation areas of academic research. This is an extremely strong trend, one that is a follow-on to the massive effort that went into determining the causes and effects of the financial crisis. As we move away from the possibility of a meltdown, we can see the resources of the academic community moving forward in terms of where business should position itself to succeed in the future.

It started for People, Ideas & Objects with Professors Baldwin and von Hipple's paper. We took a detailed and comprehensive review of the paper due to its pertinence and value to the Community of Independent Service Providers and the producers that support People, Ideas & Objects. That review will soon be joined by one from Professor Giovanni Dosi entitled "On the nature of technologies: knowledge, procedures, artifacts and production inputs". Professor Dosi's work was the key or primary research component contained in the Preliminary Research Report. His work helped to define what an innovative oil and gas producer would need, and that the Joint Operating Committee (JOC) is indeed the means to achieve that innovativeness. This new paper resonates with the work that is being done here. I will be reviewing all these papers in this blog as soon as I can get to them.

An additional paper from Professors Wanda Orlikowski of MIT permits me to write about something that I was too reserved to write about. This paper will add a layer, or dimension, to our software developments that ties together many of the questions users have. Professor Orlikowski's work was used in the Preliminary Research Report as well. Her work had defined the Technological Model of Structuration based on Professor Anthony Giddens Structuration Theory. It was through this work we were able to define the cognitive and motivational paradox' of building these software modules. Her Model of Structuration was also used to determine that software defines the organization. Therefore to change the organization requires that we first change the software. Which led me to coin the phrase "SAP is the bureaucracy".

We also have two very good papers from Professor Carlota Perez of Cambridge University. She has been able to define for People, Ideas & Objects the economic environment we find ourselves in. Basing her theories on the research of economic events over the last 300 years. This has provided us with an understanding that the Information and Communication Technologies (ICT) are creating significant economic changes. These changes are reflected in the dot com bubble and our recent financial driven bubbles. And now that these "events" have occurred, as she predicted, we can see the context of the current ICT Revolution is ready to be exploited. Recall what Ludwig von Mises said about the industry revolution. It was the solution to the problems at that time. We find ourselves in similarly challenged times and the ICT Revolution is the solution to those problems.

All of these works from Hagel, Baldwin, von Hipple, Dosi, Orlikowski, Perez and others show the time for the oil and gas industry to undertake the types of revisions prescribed by People, Ideas & Objects is now. It is important to highlight this development in this posting. People who contribute their time and energy to the developments of People, Ideas & Objects are compensated handsomely for their contributions. It is however not enough to start these developments until we can assure the producers and users that this project will be successful. That the people behind this development are taking the steps necessary to ensure success and that the super human effort of going beyond what is expected can be undertaken by every individual who participates. The point of this post to highlight some of the areas that we can show the producers and users that this success is closer to being attained. What we have so far is as follows:

1)    There is general and widespread understanding that the oil and gas industry has entered an era where the cheap energy is gone. What remains is politically, logistically, financially and technically much more difficult. An exponentially higher level of difficulty. It has been noted by Exxon and others this will require upwards of $20 trillion additional capital over the next 20 years.

2)    Professor Oliver Williamson's Nobel Prize in Economics being awarded for Transaction Cost Economics (TCE). This was a surprise event in that this relatively obscure area of the science. TCE has now been recognized for its importance on a go forward basis. Most importantly the Draft Specification incorporates the state of the art understanding of Transaction Cost Economics.

3)    Our competition, Oracle and SAP have used and abused the oil and gas industry for too long. Neither have products that are satisfactory for the upstream oil and gas industry. Importantly Oracle has taken themselves out of the game by spending $39 in research and acquisition costs to bring Oracle Fusion to the world. This level of capital expenditure will price Oracle out of most of the markets they operate in. In addition, the oil and gas industry will need to spend at least as much in customized development costs as People, Ideas & Objects blank slate approach would.

4)    The oil and gas producers are being called to fund our budget for 2010. At $10 million this is the amount of money that I think we can physically spend. It is being applied to the Preliminary Specification based on the Draft Specification and the agile development methodology. This is not to suggest that the entire design will be complete with this budget. It would be fool hardy to suggest that this project will be undertaken on the basis of $10 million in design costs. I hope that we will be able to develop the first iteration of the Draft, Preliminary, Detailed and Final Specification's within the scope of a $100 million commitment. People, Ideas & Objects Users, Developers, Account Managers and Project Managers all need to see the oil and gas industry commit these resources for this design. Success demands this.

5)    The academic community, through independent actions of the noted leadership in their disciplines, highlight this area as a key area of value accretion to all businesses. People need to be seeing the academic community rallying around these concepts. Providing help for our users and producers to foresee how success can be attained. I would also suggest that the academic community is raising a serious warning to those producers who do not heed this call. It has been convenient for the bureaucrats to belittle People, Ideas & Objects, they may now be doing so at their own expense.

Here are the five compelling reasons that users and producers should get behind in this project. What is possible and attainable in People, Ideas & Objects has never been done before. For this reason the up-front analysis and work to ensure this project is successful is necessary. We are very close to that point, and the people want to move-on from just thinking and reading about it. If you are a producer that wants to support this project, please follow our Funding Policies & Procedures. If you are user that would like to join us, please follow this procedure.

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Tuesday, January 12, 2010

John Hagel's Institutional Innovation

This blog follows the works of John Hagel very closely. His work has provided much insight and direction from the point of view of how Information Technology affects business. In the May 2004 Preliminary Research Report John Hagel and John Seely Brown were highlighted to provide a definition of the developing "web services". Today Hagel's research fall's mostly under the category of innovation and his most recent post on "Edge Perspectives with John Hagel" raises the term "Institutional Innovation" of which I had not heard of before, and accurately reflects the type of work that is being done on Innovation in oil and gas.

Institutional Innovation is such a logical name for the type of innovation that we are seeking to develop. Hagel wrote in October 2007 about his concept and obviously I missed it. Talking about the types of innovation that were developing in the far east, Institutional Innovation is different then product or organizational innovation that are generally focused on one company. The definition that Hagel provides is;

In these very diverse industries, we saw entrepreneurs re-thinking institutional arrangements across very large numbers of enterprises, offering all participants an opportunity to learn faster and innovate more effectively by working together. While Western companies were lured into various forms of financial leverage, these entrepreneurs were developing sophisticated approaches to capability leverage in scalable business networks that could generate not just one product innovation, but an accelerating stream of product and service innovations.
Use of the Joint Operating Committee (JOC) by definition is not just one company. (Exceptions to every rule, if a firm were the only producer in the JOC they would operate the assets in the same manner as if they had partners.) The JOC is an organizational construct that the oil and gas industry established in the very beginning to deal with the risks involved in the business, and / or, the merging of interests due to the aerial extent of the assets owned. Clearly to reduce your risk you brought on partners, and when assets grew progressively larger, building gas plants and facilities every mile was impractical.

The JOC is a form of organization that is recognized in every producer. Many "fields" may have up to 100 or more partners, each with disparate assets and percentages, each pursuing their own corporate strategy and being profitable in a multitude of ways. No two may be alike. The JOC has been the culture of the industry from the beginning, it is the legal and financial framework and all producers have operational decision making and communications that recognize the management of the asset. It is these five frameworks that are being enabled in People, Ideas & Objects and it is these five frameworks that are necessary for the producer to be able to decide and implement their best strategies. The hierarchy, in oil and gas, has relegated itself to the compliance and governance of the firm. These frameworks manage the royalty obligations, the tax obligations and the security obligations. It is the royalty, tax and security frameworks that Oracle and SAP have handled to date, ask them about a JOC and they look at you with a puzzled look and wonder why you don't want to get closer to your customers. ;)

 

Our purpose at People, Ideas & Objects is to move the tax, royalty and security frameworks over to the JOC in order align them with the cultural, financial, legal, communication and operational decision making frameworks. This re-alignment does at least two really big things.

  • First it enables accountability. When compliance and governance are separated from operational decision making no one is able to be held accountable. Who made the decisions that earned the 100% increase in profits? Why does this company seem to make the same mistakes over and over? These types of questions will be easily answered when the individuals who are responsible for the wins will be recognized, and those that are going through the motions will also be identified.
  • Secondly "Institutional Innovation" is enabled and the producer can iterate on the science and innovations in the business of oil and gas. Now oil and gas only involves chemistry, physics and biology at its core, and this is why Matthew Simmons says it is the second most complex industry to the space industry. Innovation on these sciences is what needs to take place for the industry to move quicker and provide the market with oil and gas. With the state of globalization, does anyone believe we are producing enough for the future? I am sure the political and logistical difficulties will only accelerate as well. Higher commodity prices are rewarding the producers that innovate the most. I can definitely see why a bureaucracy could be failing in these tasks.

Hagle notes why Institutional Innovation would be a good term to define People, Ideas & Objects.
Institutional innovation is different - it defines new ways of working together, ways that can scale much more effectively across large numbers of very diverse enterprises. It provides ways to flexibly reconfigure capability while at the same time building long-term trust based relationships that help participants to learn faster.
Our review of Professor Baldwin and von Hipples paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaboration Innovation" shows People, Ideas & Objects form of Open Collaborative Innovation provides real value for the User communities and the producers who subscribe to these developments. Hagel is on the same page with his "Institutional Innovations" and his recently published concept of the "Shift Index".
Institutional innovation has enormous power to disrupt and drive major new forms of economic value creation and capture. Much of its power stems from its ability to blindside incumbents who hold onto traditional mindsets. As I argued in the Shift Index, new digital infrastructures and related public policy shifts are increasingly rendering obsolete the assumptions that Western executives hold about what is required to create and capture economic value.

Until and unless Western executives begin to aggressively challenge these assumptions and awaken to the potential of institutional innovation, they will remain vulnerable to attack. They must begin to recognize that the most promising forms of innovation emerging in developing economies are not at the level of individual products or services but rather at a much deeper level – novel approaches to scalable peer learning shaped by institutional innovation.
Those last two paragraphs are golden. The bureaucracy has certainly fought long and hard to ignore People, Ideas & Objects. We sit at very lofty heights in our standard of living and economy. These bureaucracies are putting in jeopardy these advanced lifestyles we have become accustomed to. Falling from here could be painful. I am concerned that the bureaucracy will never support these development and have instead directed our appeal to the investors and shareholders, the real oil and gas men and women, to fund these developments as an alternative form of organization. If you are a producer that would like to support these developments please follow our funding policies and procedures and if you are someone with oil and gas experience that knows we can do better, please join me here

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Monday, January 11, 2010

Professor's Baldwin and von Hipple V

Part V of our review of Professor Baldwin's and von Hipple's working paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaboration Innovation." Lets assume for a moment the knowledge of how the oil and gas industry could be codified by 1,000 people. Much as the people are being organized and their contributions codified in the People, Ideas & Objects Preliminary Specification. Speaking prospectively, irrespective of the fact that these people are members of the Community of Independent Service Providers (CISP) and they earn their living through the contributions they make to the software, and their oil and gas producer clients. What's in it for them. Baldwin and von Hipple make the following point clear.

User innovators will choose to participate in an open collaborative innovation project if the increased communication cost each incurs by joining the project is more than offset by the value of designs obtained from others. To formalize this idea, assume that a large-scale innovation opportunity is perceived by a group of N communicating designers. As rational actors, each member of the group (indexed by i) will estimate the value of the large design and parse it into two subsets: (1) that part, valued at vsi, which the focal individual can complete himself at a reasonable cost (by definition, vsi > dsi); and (2) that part, valued at voi, which would be “nice to have”, but which he cannot complete at a reasonable cost given his skills and other sticky information on hand (by definition voi ≤ doi ).
Turning to the oil and gas producer, what's in it for them to support the People, Ideas & Objects developers and the associated CISP? Clearly the User innovations as Baldwin and von Hipple call them applies to the producer as well. They have access to a system that replicates any and all processes within the oil and gas industry. It's not that they need to have all those processes managed, but it is possible for them to run their firm in the most profitable manner by using People, Ideas & Objects and the CISP. The costs of the software are as little as a $1.00 per year per barrel of oil equivalent daily production. Yet they too are benefiting from these open collaborative innovations in the same manner the CISP is.
Consider finally the model of open collaborative innovation. Recall that open collaborative innovation projects involve users and others who share the work of generating a design and also reveal the outputs from their individual and collective design efforts openly for anyone to use. In such projects, some participants benefit from the design itself – directly in the case of users, indirectly in the case of suppliers or users of complements that are increased in value by that design. Each of these incurs the cost of doing some fraction of the work but obtains the value of the entire design, including additions and improvements generated by others. Other participants obtain private benefits such as learning, reputation, fun, etc that are not related to the project’s innovation outputs. For ease of exposition, we will derive the bounds of the model for user innovators first, and then consider the impact of other participants on those bounds.
Simple, but why has this not been done to date? Clearly the costs of collaboration on a large scale have dropped to minuscule levels. The Internet not only reduced the costs but also enabled these formerly disparate groups to associate with little to no costs. The only requirements to finding other groups of interested people is to Google the topics of your interest.
This is the first bound on the open collaborative innovation model. It establishes the importance of communication cost and technology for the viability of the open collaborative model of innovation. The lower the cost of communicating with the group, the lower the threshold other members’ contributions must meet to justify an attempt to collaborate. Higher communication costs affect inequality (5) in two ways: they increase the direct cost of contributing and they reduce the probability that others will reciprocate. It follows that if communication costs are high, an open collaborative project cannot get off the ground. But if communication costs are low for everyone, it is rational for each member of the group to contribute designs to the general pool and expect that others will contribute complementary designs or improve on his own design. This is in fact the pattern observed in successful open source projects and other forums of open collaborative innovation (Raymond, 1999; Franke and Shah, 2003; Baldwin et. al. 2006; Lakhani and von Hippel, 2009).
It would have been prohibitive, boring and frustrating to attempt the collaboration design of the Preliminary Specification without the Internet. Communication and design costs would have escalated to exorbitant amounts and the quality of the end product would be far less then the "open" collaboration design that Baldwin and von Hipple write about and is being employed by People, Ideas & Objects for this software development. There's more. As in this next quotation, the scope and scale of these designs can now be undertaken. The 2010 budget for the preliminary specification has been set at $10 million, yet the scope of the application is far greater then any other application designed in the oil and gas marketplace.
Note that this bound is N times greater than the bound on the design cost of the average single user innovator. Thus given low-enough costs of communication, open collaborative user innovators operating within a task-divisible and modular architecture can pursue much larger innovation opportunities than single user innovators acting alone.
The importance of this fact is how individuals should reconcile the ambition of this project to the reality of life. Building an application that uses the "industry" perspective through the JOC brings the scope to a frighteningly large level. The JOC is a generic organizational structure that is and can be populated by any number of changing numbers of producers and the people that work within the oil and gas industry. The use of the JOC in the Draft Specification is what demands open collaborative innovation design. Critical to making this an operational possibility is the ability of the Preliminary Specification to implement the Draft Specifications Military Command & Control Metaphor as a key cornerstone of the Compliance & Governance module.
But if communication costs are low enough to clear these hurdles, then the second bound [(6) and (6’)] shows that, using a modular design architecture as a means of coordinating their work, a collaborative group can develop an innovative design that is many times larger in scale than any single member of the group could manage alone.
Figure 3 in the paper shows that the Open Collaboration Innovation is able to approach a far higher level of design sophistication then the Producer Innovators. At no time before has this level of design sophistication been possible nor has the scope and scale been so (relatively) easy to approach. Producers and Users, and particularly members of the Community of Independent Service Providers stand to gain substantially from their contributions to this project. The overall design is comprehensive and ambitious. Today's technologies, and particularly the Internet, enable the type of systems design that the Draft and Preliminary Specifications involve. And although I don't think I mentioned the last two phases of the design publicly before. Now would be a good time to note that the Preliminary Specification will be used in a similar manner to the Detailed and Final Specifications. (Please note with a lag of six months the Detailed Specification can be completed concurrently to the Preliminary Specification.) The costs, which are budgeted at $10 million for the Preliminary Specification are negligible. To participate in these development as a supporting producer please follow our Funding Policies and Procedures here. And if you want to participate as a User or a member of the Community of Independent Service Providers please join us here.

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