Innovative Management: A conversation with Gary Hamel and Lowell Bryan.

The McKinsey Quarterly has issued a new article of interest to this blog and its community of users. Subtitled "Forward-looking executives must respond to the growing need for a new managerial model." Words that tweak my attention, and when I read the first paragraph, I know fundamentally that we are on the right track in terms of where the oil and gas industry needs to move.

"Sometime over the next decade" warns renowned strategy guru Gary Hamel in his new book, "The Future of Management," your company will be challenged to change in a way for which it has no precedent." What's even more worrisome, he argues, is that decades of orthodox management decision-making practices, organizational designs, and approaches to employee relations provide no real hope that companies will be able to avoid faltering and suffering painful restructurings.

and

McKinsey partners Lowell Bryan and Claudia Joyce, in their recently published book, "Mobilizing Minds", arrive at a similar conclusion from a slightly different perspective. They find that the 20th century model of designing and managing companies, which emphasized hierarchy and the importance of labor and capital inputs, not only lags behind the need for companies today to emphasize collaboration and wealth creation by talented employees but also actually generates unnecessary complexity that works at cross-purposes the those critical goals.

To argue their points one would be required to articulate the advantages of the hierarchy and its alter ego, the bureaucracy. Since I have been critical of this form of organizational structure, I won't be capable of arguing the point. It is clear to the majority of the world that the hierarchy was established in the 20th century and did indeed die towards the end of that century. Its existence today is an impediment to society moving forward in this new era of technology, peak oil, globalization and a wide assortment of other changes. I would challenge anyone who would argue the need for the hierarchy for the next 20 or even 5 years. The sooner we realize this, the more quickly we can adapt to the challenges that face us.

In oil and gas I have discovered fierce resistance to the ideas that I write about here. The majority of this resistance originates from the official hierarchy. Yet it is a point of contradiction that I can also appeal to the individual within the hierarchy, and its most vocal supporter, and have them willingly participate in this project. I am not asking anyone to fall on their sword and sacrifice their careers and pensions. Only to participate freely in these developments so as to ensure that their individual transition between the two organizational constructs is as profitable and as smooth for the people involved. This point does not need to be marketed or sold the people are willing. As we become more organized we will be able to continue with the construction of the software as the user moves closer and closer to their gold watch. The people that I need to appeal to are the oil and gas investor. They need to be identified so that they can see these developments are the best area and means in which they should operate their oil and gas assets. Here the McKinsey article begins the associated thought process starting with the executive.

Forward-looking executives will respond to this looming challenge, these authors conclude, by bringing the same energy to innovative management that they now bring to innovative products and services.

Why? Because they will be told to by their Board of Directors, or directly from their shareholders. When is the question that I would ask? The associated costs of this application are in the range of a few hundred million dollars. The producers today will need to see the writing on the wall before they are able to fund this development. And that is why I spend none of my time attempting to win these executives over. Its a fools game and I have a willing and able critical resource, the users, who are not confused as to where their future lies. The group that I must appeal to is the disgruntled shareholder. How much of the asset securitization debacle currently brewing in the hosing market is symptomatic of the disconnect between ownership and management. How much of this issue is associated with the shareholder being the fundamental key to the hierarchy's success? And where does the investor turn in order to mitigate these risks?

The opportunity is substantial. Against the backdrop of the digital age's dramatic technological change, ongoing globalization, and the declining predictability of strategic-planning models, only new approaches to managing employees and organizing talent to maximize wealth creation will provide companies with a durable competitive advantage. It won't be easy. As companies discard decades of management orthodoxy, they will have to balance revolutionary thinking with practical experimentation to feel their way to new, innovative management models.

In response to the first interview question "What is the opportunity both of you have identified and how did you spot it?" Gary Hamel responds;

For almost 20 years I've tried to help large companies innovate. And despite a lot of successes along the way, I've often felt as if I were trying to teach a dog to walk on his hind legs. Sure, if you get the right people in the room, create the right incentives, and eliminate the distractions, you can spur a lot of innovation. But the moment you turn your back, the dog is on all fours again because it has quadrupled DNA, not biped DNA.

So over the years, it's become increasingly clear to me that organizations do not have innovation DNA. They don't have adaptability DNA. This realization inevitably led me back to a fundamental question: what problems was management invented to solve, anyway?

When you read the history of management and of early pioneers like Frederick Taylor, you realize that management was designed to solve a very specific problem -- how to do things with perfect replicability, at ever-increasing scale and steadily increasing efficiency.

Now there's a new set of challenges on the horizon. How do you build organizations that are as nimble as change itself? How do you mobilize and monetize the imagination of every employee every day? How do you create organizations that are highly engaging places to work in? And these challenges simply can't be met without reinventing our 100-year-old management model.

Bingo, Lowell Bryan responds to the same question;

I arrived at the same point from a slightly different perspective. McKinsey asked me about 12 years ago to try to understand the impact of technology and globalization on our clients. We concluded that these forces were creating a fundamental discontinuity. Or to put it differently, that technology and globalization were creating a set of opportunities that didn't exist before.

We observed that companies were struggling to take advantage of the opportunities created by digitization and globalization because their organizations were not designed for this new world.

Responding to the question "Are the thinking-intensive industries driving what Gary is talking about?" Lowell Bryan responds;

New organizational models are needed in all industries because all companies engage in thinking-intensive work. The traditional, hierarchically based 20th century model is not effective at organizing the thinking-intensive work of self-directed people who need to make subjective judgements based upon their own special knowledge. ... That's where the value is today. The winners will be those that enable their thinking-intensive employees to create more profits by putting their collective mind power to better use.

The remainder of the interview focuses on the people and the collective brain power of an organization to solve problems. This is the objective in building this software, and I will leave it to the interested readers to download the McKinsey article by clicking on the title of this entry. (Registration required) It is important to remember this software will be built to explicitly to support the Joint Operating Committee, the natural form of organization in the industry. With the information technologies that are available today, the ability to achieve what is discussed in this McKinsey interview is possible for the energy industry. I think we should get started today.

Technorati Tags: Genesys, McKinsey, Collaboration, Organization, Strategy

Internet Scale Identity, Collaboration, and Higher Education

Click on the title of this entry to be taken to Google Video for this presentation. First off a stern warning, the topic is a difficult one to discuss and the presenters do not do a very good job at it.

Firstly Bob and Ken do not adequately describe who they are or where they are from. The Internet 2 association consists of the majority of the university and other organizations, like Google, dedicated to "Providing both leading edge network capabilities and unique partnership opportunities that together facilitate the development, deployment and use of revolutionary Internet Technologies." Bob and Ken work in the "Internet 2 mid-ware initiative". Their presentation is about identity and its importance in collaboration and determining the validity of the party you are dealing with. Extending this to the type of collaborative interactions that will eventually be held in this application, and currently being specified in the People, Ideas & Objects Security Module, how are you assured that what is represented online is factual? There needs to be a method in which people can verify their identity and carry that with them through the day to day interactions discussed here in this application. The Federated Identity is described as follows.

Federated Identity

• Enterprises exchanging assertions about users.
• Often identity based but can provide scale and preserve privacy through the use of attributes.
• Real time exchanges of standardized attribute / value pairs.
• Basis for trusting the exchanged assertions via common policies, legal agreements, contracts, laws, etc.
• Federations offer a flexible and largely scalable privacy preserving identity management infrastructure.

As a user of this system it will occasionally be necessary to find a welder in the area that you have production. How do you engage and ensure that the welder has the correct certification for operating in H2S environments. Conceivably the ticket that was issued to the welder for H2S operations would be available from the granting agency. The welder's "Federated Identity" would have the certificate issuer represented in the welder's Identity and the certified issuer would have the right to revoke it if for some reason the welder no longer qualified. This certification is assured at the point of initial contact with the welder. If the Federated Identity were for an individual, a company or a Joint Operating Committee (JOC) one could easily assure that the conduct of online interactions were assured to be valid. The inability to authenticate would preclude the user, company or JOC from conducting any further online transactions.

This style of interaction is currently being done in manual systems. Based primarily on past history, the user will call the welder up that finished the last job of his and not much more is done. And there is not much more that would happen in this virtual environment that I am talking about here. What is different is that a level of automation that eliminates much of the time wasting processing that is done in the manual style of systems. If the Federated Identity has enough terms and conditions that are necessary for the firm to hire that welder, they should be able to complete the majority of the contract prior to the issuance of the purchase order, which of course would also be the next step in this automated process.

These types of systems are being developed now not only for Internet2 but also for participating firms such as Google in their Google Apps for Education. Since we use Google Apps for People, Ideas & Objects, this type of Federated Identity is being built in the Security Module Specification that I am working on. The interactions are also an element of People, Ideas & Objects Compliance & Governance Module specification noted here. With the effective pooling of the participating producers human resources, requiring the Military Command and Control Style of organizations, these identity based interactions will be able to take on a dynamic matching of skills and function. One other area in which the Federated Identity satisfies is on the need to know basis. Even though all participants are from different companies their is no unnecessary leakage of information that would not have been pre-authorized to any other participant, individual or JOC.

The authors noted an Apache open source software "Shib 2.0" is capable of these types of Federated Identity and Shib 2.0 has just moved into beta. Much of the Federated Identity's ability to do these is contained within the "Technical aspects of Federations".

• Federating Protocol
• Enterprise signing keys
• Meta-data Management
• IdP discovery service
• Enterprise Identity management practices.

Accreditation and certification are needed, and also difficult to achieve. The most difficult aspect is what is referred to as "Many to many user centric identity". The presenters were wise to point out the two methods, "multilateral" and "bilateral" means of achieving accreditation and certification. By using multilateral accreditation you achieve the Many to Many user centric identity without having to accredit every transaction, query or specification as bi-lateral, or one to one, certification requires. The presenters noting "Commonly manage which identities and which attributes can use the capabilities of the collaboration tools." And "Can offer delegation, privacy management, maybe even diagnostics."

To view some of the areas in which Federated Identity is currently operating see InCommon and the Internet 2 wiki.

Technorati Tags: Genesys, Security, Collaboration, Google

Innovation through Global Collaboration: A New Source of Competitive Advantage

August 14, 2007

Alan MacCormack, Harvard Business School

Theodore Forbath, Wipro Technologies

Peter Brooks, Wipro Technologies

Patrick Kalaher, Wipro Technologies

This software development projects purpose is to create a transaction supported collaborative environment. The first steps in building this were initiated last month with the decision to use "Google Apps for your Domain." For a small annual fee we provide the user with a comprehensive collaborative platform. Recently CapGemini has announced a deal where they provide the integration of users work environments from Microsoft products to Google's. I think, based on my understanding of collaboration, Google Apps most closely replicate the way that work gets done. I find their product fit and finish as solid as Apple's, the move to Google App's was completely painless and instantaneous.

Why is this product category so important and what is a "transaction supported collaborative environment"? The product category is important because the next level of intellectual and social interaction can be facilitated in the software. So how and who will get the work done are important, but most importantly is that the aggregate intelligence of the group be represented in the actions the software provides. In answer to the second question of what are transaction supported collaborative environments?, well they don't exist yet and that is what I want to start building here for oil and gas. This working paper is available from Harvard Business School and begins the difficult task of identifying the needs of a "transaction supported collaborative environment" and the importance in innovation.

Abstract

One of the things that I have learned since being heavily exposed to collaborative environments is they are difficult, and the approach is never the same. Just as people are different, each collaboration is. The ability to proceed with preconceived notions just doesn't work. The need to adopt a flexible framework from the beginning and throughout the discussion is mandatory. How is it that collaboration brings the wisdom of the crowds? I think the authors begin to define it in this paper, so lets jump in with a clear definition of how collaboration is beginning to be used in industry.

Instead, innovations are increasingly brought to the market by networks of firms, selected for their unique capabilities, and operating in a coordinated manner. This new model demands that firms develop different skills, in particular, the ability to collaborate with partners to achieve superior innovation performance. Yet despite this need, there is little guidance on how to develop or deploy this ability.

This comment is consistent with the vision of this development project. As I have noted here in my research; the software defines and supports the organization. Before you can make a change it has to be implemented into the software first. Recognizing the JOC as the market structure of the industry will require software to be defined in order to mitigate the detrimental effects and enhance the benefits of collaboration.

This article describes the results of a study to understand the strategies and practices used by firms that achieve greater success in their collaborative innovation effects. We found many firms mistakenly applied an "outsourcing" mindset to collaboration efforts which in turn, led to three critical errors: First, they focused solely on lower costs, failing to consider the broader strategic role of collaboration. Second, they didn't organize effectively for collaboration, believing that innovation could be managed much like production and partners treated like "suppliers." And third, they didn't invest in building collaborative capabilities, assuming that their existing people and processes were already equipped for the challenge. Successful firms, by contrast, developed an explicit strategy for collaboration and made organizational changes to aid performance in these efforts. Ultimately, these actions allowed them to identify and exploit new business opportunities. In sum, collaboration is becoming a new and important source of competitive advantage. We propose several frameworks to help firms develop and exploit this new ability.

Facing "peak oil" the energy industry has no option to dabble in this area. This has to be a concerted effort to make these changes. Success is not an option and the time to change is now.

Introduction

I have shared my concerns with how the individual companies within the energy industry do not share the sense of urgency or concern for the overall supply of oil. Theirs is a commercial operation that is operating at record profits. The decline in their reserve base and production profile are an inherent part of the business and they are doing just fine. How this system gets built is a question I face every day. Individually, people within the industry comment that the idea of using the JOC is the right thing to do, however, no company will step up and make the first move. Its the worst Mexican standoff anyone could imagine. Irrespective of the reasons regarding innovation and the need for greater speed from an operational point of view. The new technologies are beginning to finally be assembled into their final parts. The capability and comprehensive nature of the offerings are now complete in terms of the needs for a system that is built for the purposes here. And that is the point of the authors in this next section.

This new model is being driven by a series of trends forcing firms to re-think traditional approaches to innovation. First, the complexity of products is increasing, in terms of the number of technologies they include. No longer is it possible for one firm to master all these skills and locate them under one roof. Second, a supply of cheap skilled labor has emerged in developing countries, creating incentives to substitute these resources for higher-cost equivalents. Third, different regions of the world have developed unique skills and capabilities, which leading firms are now exploiting for advantage. And finally, advances in development tools and technology combined with the rise of open architectures and standards have driven down the costs of coordinating distributed work. In sum, collaboration is no longer a "nice to have." It is a competitive necessity.

If peak oil is not a compelling call to action, possibly this technological trend should be.

Collaboration is not "Outsourcing"

I have written extensively about Professor Richard Langlois' theories around the boundaries of the firm. How the natural tendency is to have either the market or the firm be determined and configured to be the means to lower "transaction costs". And how today's Information Technologies can provide for lower transaction costs in a contractual or market environment. The authors provide further justification and clarification of how these changes are strategic and not inappropriate approaches to outsourcing.

Our study revealed dramatic differences in the performance of firms collaboration efforts, driven by contrasting approaches to their management. In particular, many firms mistakenly applied a "production outsourcing" mindset to collaboration, viewing the use of partners only as a means to achieve lower costs through "wage arbitrage" - substituting a US resource with a cheaper one of equivalent skill.

By contrast, successful firms went beyond simple wage arbitrage, asking global partners to contribute knowledge and skills to projects, with a focus on improving their top-line. And they re-designed their organizations, to increase the effectiveness of these efforts.

Managing collaboration the same way a firm handles the outsourcing of production is a flawed approach. Production and innovation are fundamentally different activities - while the former seeks to replicate an existing product at low cost, the other seeks to develop something entirely new and valuable. In addition, outsourcing and collaboration have very different objectives. Outsourcing involves producing a commodity asset or resource at the cheapest prices. Collaboration, by contrast, entails accessing globally dispersed knowledge, leveraging new capability and sharing risk with partners.

Firms which managed collaboration using an "outsourcing" mindset made three critical errors, as compared to more successful organizations:

• They didn't consider the strategic role of collaboration, but saw it only as a tactic for reducing cost. As a result, their efforts were misaligned with their business strategy.
• They didn't organize effectively for collaboration. Instead, they treated partners like suppliers of parts or raw materials, and manged them using a procurement function.
• They didn't make long term investments to develop collaborative capabilities. Instead, they assumed their existing staff and processes could handle the challenge.

In combination, these errors meant firms systematically missed opportunities to use collaboration for competitive advantage. By contrast, successful firms found that attention to these critical areas generated new options to create value that competitors could not replicate. Below, we describe the principles that these latter firms employed.

Develop a Global Collaboration Strategy

A brief summary of where I foresee collaboration being used in the energy industry. The JOC may represent a property in any location, owned by companies registered in different countries and with different product knowledge and capabilities. The pooling of each producer's resources through the collaboration should be the first order of business. Having one company designated as the "operator", I think, is not desirable nor very productive. We see independent silo's representing the capability to conduct operations all around the world. And these capabilities are all duplications of one another and mutually exclusive to the needs of the various JOC's. With the shortfall of engineering and earth scientists in oil and gas, the ability to virtually pool individual resources necessary for the operation, based on the operations need is what the objectives should be. This is in line with the thinking of the authors of this Harvard document. The market of suppliers, vendors and contractors should interact with the JOC to support the operation and implement its plans for the facility or single well. This virtual environment supported and defined by the software, built for the energy industry by its users, and conducts the transaction requirements, the knowledge management and governance of the decisions made by the JOC. This is a very brief summary of this software developments proposal and I would recommend the review of the archives of this blog for further clarification of these ideas. Nonetheless, it is obvious to most that the need to have a purpose built system with a dedicated and focused software development team be deployed to make this application real.

The authors continue with the discussion of how their study reflected on two different strategies towards collaboration. I think it reflects my optimistic view of collaboration being a productive tool for management, and if the management see it as a threat or just another trend to be followed, they may miss many of the benefits.

Collaboration received little senior management attention; when it did, it was because expectations were not being met.

Leading firms, by contrast, developed an explicit strategy for collaboration, designed to support their business goals. In contrast to organizations that viewed collaboration only as a tool for reducing cost, these firms considered a variety of more strategic benefits, in particular, assessing how collaboration could improve their top line through increased product differentiation. Successful organizations achieved this in two ways: first, by leveraging a partner's superior capabilities (i.e., know-how that the firm did not possess internally); and second, by accessing a partners contextual knowledge (i.e., knowledge that the partner possessed by virtue of its local position). In combination, these benefits comprise the "3C's" of a global collaboration strategy.

The authors continue to assert the need for management buy-in. For the energy industry to succeed in this software development proposal there has to be a high level of commitment to it form management. I think the salient warning from CapGemini about these technologies affecting operations today is something management should think clearly about. Are these back door solutions to be stomped out, or should they be welcomed and supported as legitimate methods of achieving the necessary work. I also believe the time for these types of solution to be built and prospectively developed is drawing close. Management needs to get behind this with the long term perspective of developing these types of systems for the next 3 - 4 years.

Lowering R&D Costs

Leading firms however, lowered cost in a different way. Rather than swap one resource for another, they "reconfigured" their operations to optimize performance at the system level. While the decisions they made in isolation, sometimes appeared to add cost, these firms understood the need to change the way they organized to maximize the value of collaborative efforts.

Leveraging Superior Capabilities

Leading firms focused greater attention on how to leverage partner capabilities. We observed two broad types of capability in action: First, the ability to rapidly bring online large amounts of capacity, allowing firms to lower time to market and increase responsiveness, while avoiding the cost of full-time staff; and second, the ability to access unique competencies, technical know-how and / or process expertise that firms did not possess internally. Successful firms sought partners with a blend of both abilities, giving them instant access to a repertoire of skills not available in-house. As one manager recalled, "It takes us nine months to find and hire a new employee. But using our partner, we staffed up in two weeks, accessing a skill that we don't have internally."

Thinking Strategically

Thinking strategically is the point that I have tried to make. Clearly the easy oil is gone. The costs associated to produce one barrel of oil are increasing in lockstep with the costs of discovery. The amount of engineering and earth science effort per barrel of oil has probably doubled in the past 5 years. And it will continue to increase, not decrease over time. With the shortfalls in human resources today, I believe Adam Smith's division of labor theory will provide the additional resources necessary for the industry to deal with the difficult problems ahead. A reorganization around the JOC is 100% in compliance with the cultural framework of the industry. Pooled human resources, supported by markets will provide the productivity increases that Adam Smith's theories provide. A theory which has been proven correct for hundreds of years. This organizational change can not be implemented without the software defining and supporting the industry. Without the software a firm will be relegated to manual systems or loss of the opportunities I just wrote about. These are the associated choices for management today and the point of the authors.

To Illustrate, consider the strategies of two firms - A and B - depicted in Figure 2. Initially, firm B has a dominant position, with lower cost and superior differentiation. But firm A has identified opportunities to improve its position through collaboration. It can move along the horizontal to position C, achieving lower cost, or along the vertical to position D, achieving superior differentiation. Or it can move to position E, which is superior on both dimensions. In essence, collaboration has the potential to move firm A to the "frontier" of the space joining C,D, and E. Contrast this with a firm that views collaboration only as a way to lower cost; this firm sees only one position to move to. While this may be a good choice, this firm does not see that it is not the only choice.

That although I have stated the reorganization to the JOC is consistent with the culture of the industry. The culture of the industry is a very competitive one. The ability to compete and succeed in oil and gas takes a certain capability and understanding that many have stated as being second only to NASA in terms of complexity. From my 30 years experience, I agree. Changing this competitive culture to one of co-opetition or whatever buzz word that comes along will be difficult. In line with this thinking I have suggested that the land base and the companies research and development capabilities are their future competitive assets. Moving to this thinking will take time, and indeed, may never occur. I have placed my investment of time and energy in the idea that the common sense use of the JOC will ultimately prevail, with or without the support of current management. I have an undying faith that the competitive structure of the JOC will accelerate the capacity within the industry to the point where the bureaucracy would otherwise not be capable of competing. The area the authors call E in Figure 2 is where I expect to see the JOC leading the industry.

While successful firms often used different terms to those above, all had developed similar methods to align collaboration efforts to their business strategy. Collaboration received visibility at a senior level, and was an integral part of the strategic-planning process. Increasingly, the focus was not on wage arbitrage, but on using partners to increase business value. these firms grew more sophisticated in the use of collaboration over time; by contrast, poor performers remained stubbornly focused on cost.

Organize for Collaboration

Innovation in oil and gas is a difficult prospect. As I mentioned earlier in this post, the earth sciences and engineering disciplines make the industry second only in complexity to the space industry. There is another element of the complexity that needs to be considered and that is uncertainty. The ability to say unequivocally that this is factual is difficult when your talking about forces several thousand feet below. The uncertainty element invokes the commercial environment on the producer. Then to make things even more difficult the innovation has to be progressive enough to push the science. And as I noted in the plurality writings, there is a strong influence of the science in innovation, which leads to greater understanding and a further development of the science.

The need for a different model can be seen by considering the challenge of partnering along two dimensions: The degree of uncertainty over the product to be produced; and the degree of uncertainty over the process to produce it (see Figure 3). Replicating an existing product (i.e., production) involves little uncertainty while developing a new one (i.e., innovation) is far more uncertain. Similarly, some processes are routine and easily specified whereas others are idiosyncratic and rely on trial and error learning. When firms face little uncertainty on both dimensions - the arena of production outsourcing - traditional models work well, given firms can specify what they want and how it should be made. As uncertainty increases however, a more collaborative approach is needed.

It is at this point that I would also assert that the production process, which is inevitable and in constant decline, adds further uncertainty above and beyond that of the firm. This is why $79 oil seems very cheap to me. The following quotation of the authors provides a good understanding of the work that is done at the Joint Operating Committee. This is how the industry has developed and how it functions. Unfortunately all of the software development projects fail to capture this organization and its role in the day to day operations. This is the business of the business, and due to a number of forces the business of the corporations has become the oil and gas regulatory compliance, tax compliance, SEC compliance and this is where the ERP focus has lead the organizations to focus and consume their time.

Leading firms viewed partners as an extension of their own development organizations, seeking their participation in meetings and including them in internal communication. As part of this philosophy, they required greater continuity in partner staff, in contrast to a transactional model, in which people move in and out of projects. This ensured the "tacit" knowledge of a projects' context was retained, and improved communication between teams. As one manager explained, "It takes time to appreciate the skills of each team member and understand how to work together. When people leave, we have to go through that learning curve again. So we put a premium on ensuring staff continuity".

This focus on the business is where the industry has to move to. Compliance and governance has to be as a result of conducting the business of the business. As simple as that sounds the administration of oil and gas has become completely divorced from the reality of the business. This is primarily the result of the software vendors focus on ensuring the technical accounting and compliance of the firm.

The authors now approach one of the difficult areas of collaboration. Intellectual property (IP) is the source of much value in today's economy. Who owns what and where did it come from are important considerations when the partnership as represented by the Joint Operating Committee is concerned. Traditionally the Chairman of the JOC used his firms resources to operate the programs that were agreed to by the partnership. With the prospective pooling of the technical resources as proposed here, the intellectual property can become problematic. The manner in which IP is managed in this industry is consistent with the keeping of trade secrets. I have noted here before that the stickiness of knowledge moving through the organization is contrasted to the leakiness of knowledge through the various industry related disciplines. If someone discovers something new, it is generally fairly well known on the street in a few weeks. Therefore no one has the right of that property, and most importantly copyright law is designed to disseminate ideas throughout the community as quickly as possible. There needs to be some soul searching as to how firms manage their alleged secrets and the result of their research.

The final area in which firms made different organizational choices was in intellectual property (IP) management. Global partners increasingly develop their own IP - new components, technologies and processes - to improve project performance. Furthermore, collaboration often requires that partners re-use and add to a firms existing IP in the search for new solutions. Given these trends, traditional approaches to IP which assume that a firm must develop, own, protect and isolate its IP are increasingly outdated.

and

While successful firms in our study differed on the specifics of their IP policies, their actions reflected a common shift in values; towards a more open and flexible approach. these firms sought to leverage partner IP, focusing on the cost and speed advantages, which outweighed the concerns about the need for control. They developed mechanisms for partners to access their own IP, in a way that facilitated collaboration but ensured the protection of competitive assets. And they shared newly developed IP when the firm and its partners could benefit form its application, as long as the uses were not competitive.

Build Collaborative Capabilities.

Collaborative skills are hard to come by without the efforts of many who are willing to contribute and learn. These are standard fare for the process of collaboration and I apply this throughout the industry. The smartest, most educated and most recent additions to the firm are needed to adopt these perspectives. Here the authors begin to identify some of the salient points involved in good collaborative practices.

The final area separating leading firms from others was their willingness to invest in developing "collaborative capabilities." All too often, firms assumed that their existing employees, processes and infrastructure were capable of meeting the challenge of collaboration. But successful collaboration doesn't just happen - it is a skill that must be learned. Rarely do firms get it "right first time." Leading firms recognized this reality and made investments to enhance their performance over time.

and

Successful firms targeted investments in four areas: people, process, platforms and programs. We call these the "Four Pillars" of collaborative capability (see Figure 4). These investments were typically funded outside the budgets of individual projects, given few projects can justify the levels of infrastructure needed to perform well on their own. In essence, leading firms made a strategic decision to invest in collaborative capabilities, and sought to leverage these investments across projects and over time.

Developing People

My first truly collaborative environment came about in 2000 when I started my on-line MBA. The university had over 1,500 students located throughout the world and closely tied together in a Lotus Notes collaborative environment. It was fascinating to learn so many things about businesses that were in Kuwait, China and even your own province. My perspective changed over the course of three years of study. And I learned to adopt a broader point of view about the contributions that I made. Asking key questions after attempting to learn the unique perspectives of the participants and then attempt to build on the quality and quantity of knowledge held within the diverse groups, were skills that are not easy to come by. The intensity of the learning was heightened as a result of the close collaborations.

Superior performance in collaboration requires people with different skills, given team members often lie outside the boundaries of the firm, are located in far flung countries and have vastly different cultures, The "art" of management in such projects is in finding ways to exert influence over resources not under a firms control. Rather than a focus on deep technical expertise, managers therefore require a much broader skill set, associated with the need to orchestrate and coordinate the work of distributed teams.

I have not been able to specify the manner in which the process of this software development will proceed. Collaboration is a key component, as will software that defines the process and the roles of individuals and companies. The way that the Java Community Process is done is a given as far as I am concerned, however, there are other elements of how things get built that I have to research and determine before we start writing code.

Most projects we observed employed a formal product development methodology based upon a modified "stage-gate" or "waterfall" type process. These processes are increasingly popular ways to ensure greater control and consistency in the execution of projects. But these techniques, and others that share their roots, are often predicated on the assumption of single-site development. There is a need to re-think how they should operate when managing the distribution of work among a team of global partners.

Building platforms

The following in my opinion is a call to action for these types of activities to be conducted, coordinated and implemented on an industry wide basis. Decisions are being made without the input of others to ensure a timely start to these developments. Selecting the Google Apps as the platform to begin the collaboration and develop is a rather obvious choice, particularly when you consider where Google's engineering and innovation may take the product too.

Leading firms developed technology "platforms" to improve the coordination of work. These platforms comprised four main parts: First, development tools and technologies to improve the efficiency of distributed work; second, technical standards and interfaces to ensure the seamless integration of partner outputs; third, rules to govern the sharing of intellectual property among partners; and fourth, knowledge management systems to capture the firms experience on how distributed work is best performed. This collaboration "infrastructure" was leveraged across multiple projects over time. The goal was to promote a long-term view of the assets needed for effective collaboration.

For the risks and errors can be and are very large.

Consider the troubles at Airbus in developing its flagship A380 aircraft. Airbus' German and French partners chose to work with different versions of the Dassualt Systems' Catia design software. But design information in the older systems was not translated accurately into the new new one, which held the "master" version. With a physical mock-up, these problems remained hidden throughout the project. The result: 300 miles of wiring, 100,000 wires and 40,000 connectors that did not fit, leading to a 2 year production delay at a cost of $6bn. Yet the cause of Airbus's problems was not in choosing different versions; rather it lay in the lack of an effective process for dealing with the problems this created.

Managing Programs.

The energy industry has a choice. They can begin serious efforts down this road with the objective of building systems to enhance innovativeness and performance, or continue on in the manner that they currently are. At some point in time someone will realize the intellectual property that I have developed here in this blog is the constructive direction of the industry. If not then we would have the ability to modify it to make that assertion valid.

Successful firms managed their collaboration efforts as a coherent "program," in contrast to organizations which ran each project on a stand-alone basis. A program view was critical given collaboration projects rarely met expectations early on, and performance often deteriorated when the scope of efforts was increased. Leading firms did not differ from others in this respect; but they did differ in the rate at which they improved. Top performers put in place mechanisms to help improve their collaboration skills over time.

A New Source of Competitive Advantage

Firms that devoted attention to the three areas above - strategy, organization and capability development - were more successful in their collaboration efforts. For a few firms in our study however, these efforts not only lent support to their existing business strategies, but also led to new value creation opportunities. Their investments to build capabilities, in turn, created options to pursue strategies that could not be replicated by competitors; especially those that managed collaboration like outsourcing. For these firms, collaboration had become a source of competitive advantage (see Figure5).

In our view, Boeing's source of competitive advantage is shifting; it is less and less related to the possession of deep individual technical skills in hundreds of diverse disciplines. While the firm still possesses such knowledge, this is no longer what differentiates it from competitors such as Airbus, who can access similar capabilities. Rather, Boeing's unique assets and skills are increasingly tied to the way the firm orchestrates, manages and coordinates its network of hundreds of global partners. Boeing's experience is increasingly common across the industries we observed: Collaboration is becoming a new and important source of competitive advantage.

Technorati Tags: Genesys, Call-to-Action, Collaboration, Harvard, Organization

Photos Courtesy the authors.

A call to action for those in the energy industry.

I'm sensing that the time in which we start software developments is near. I took the better part of the past month to evaluate many of the technologies that we propose to use, and upgrade my skills to the current technology offerings. This started off with Sun Microsystems offerings of Java 5.0, GlassFish and NetBeans 5.5.1 Integrated Development Environment (IDE). The new "Open Source" development models and associated products are maturing, and they will have remarkably positive effects on the quality of the software built from this point forward. Many small changes that will have a revolutionary impact in the next 10 years.

I also am sensing that these tools have changed to now include an inherent addition of "the user" in many of the underlying concepts. The ability to communicate with the user is enhanced, bringing an expectation that the users will be more technically savvy then they may have been in the past. Not that the users will be the ones to write the commercial code, but are the key to software quality and effective designs. Excluding them is responsible, in my opinion, for the failure of most of the past software development projects. Open Source access can enable the user to better understand what is being done and this will demand a very strong understanding of the Java programming language.

And this is the opportunity for those with the business, engineering, and geological understanding of the energy industry. To apply their current skills to the development of their software. The developers are involved in their own science and need to focus on that, the more that we as users can understand of their information technologies, methods, processes, terminology, syntax and computer science, the better off we all will be. I would predict that in ten years the average user will be as intimately familiar with the JDK and other tools as they are today with email and Office applications. It is a software development revolution that is being facilitated through the technologies that I've mentioned and the users as its core. The next 10 years will come to be known as the golden era of software development. If I needed 1,000 developers I could easily attain those resources from the large pool of enterprise capable Java developers. And this will be easily done with the resources of the energy industry, a $2.5 trillion industry. What I will not have and will desperately need is the 8 to 1 volume of users-to-developers ratio for research, definition and overall direction of the developers.

There is a much faster pace of progress in the development of these technologies then in the very near past. I think it is that we are no longer constrained by the pace of "Windows Innovations." (An oxymoron as far as I am concerned.) Anyone with a good idea can have them easily implemented with in the technology stack for the benefit of everyone. And the ideas are coming from everywhere. The changes that I see in NetBeans over the past 18 months are truly shocking. Java as well and Glassfish was barely a concept then. There is one technology that adds a new element to all these technologies and that is Sun Microsystems Dtrace. Dtrace is a tool that can evaluate and analyse the interactions of the application's code. Taking the idea of a debugger to a level that previously would have been barely able to comprehend. Errors, bugs and other nasty side effects of the development are exposed immediately. Many of the bugs identified by Dtrace were not even known to exist 18 months ago! Dtrace brings the level of application code quality to the level of a pure science.

I have always been a fan of the three leaders in the industry today. Sun, Apple and Google are very much alike in their approach to business. They are also the ones that are primarily responsible for this golden era that I speak of. Buying their stock has always been a given to me. I am also very impressed with the fit and finish of the "Google Apps for your domain" services that I have decided to begin to use for www.people-ideas-objects.com. Having the users, developers and any others who need to access this future software service will soon begin to learn and appreciate the far-reaching vision of Google. I cannot imagine what these three companies offerings will be like in ten years from now. The capability of implementing the vision that I have articulated for this project is a given, for that I am now very certain. There is no technical risk associated with the large objectives that I have set out here in this blog.

Lastly Web Services seems to be passing as the last great technical fad. I can assure you otherwise. Web services will be the way that almost all industries, business and people interact commercially in the next ten years. Although I have no evidence of this, the technical infrastructure is in place and there is nothing to stop it from becoming "real" in the very short term. One company that I did find that holds out much of the promise of web services is David Duffield's www.workday.com offering. Mr. Duffield's previous company, PeopleSoft, provides him with a level of very high credibility. Our use of his web-services for General Ledger, Accounts Payable, Accounts Receivable, Payroll and Human Resources provides us with an api and a small fee for each transaction we process using their technology. Enabling this community to focus on the truly unique needs of the energy industry. The promise of web-services will materialize in the next 18 months. For that I am certain.

It is also interesting to me that www.workday.com have implemented "Ram Resident Databases". This method of running a database of course is not new, but provides a performance kick to the tune of 100,000 fold over disk-based databases. With the relatively low cost of a TeraByte of Ram, this is an innovation whose performance is very cost effective.

We need to get moving on these ideas and concepts today. Time is wasting and the technical revolution has begun. Peak oil is not a flawed theory. If you are someone in the oil and gas industry who knows that this is a better way for Information Technologies to interact within the industry, please write to me here, and lets get started.

Technorati Tags: Genesys, Call-to-action, development, Collaboration, Ideas, Open-Source, User

A Variety of Upgrades

Some very good news, we now have a "presence" in the three main cities that I see this software development application appealing to. Calgary, Aberdeen Scotland, and Houston in Texas.

To contact me call;

• Calgary 403-467-7971
• Aberdeen 44-122-467-6304
• Houston 713-965-6720

We also have a new domain name and it is "www.people-ideas-objects.com". This will be the domain that is used by all of the users of this proposed application. The "front end" of the application will be "Google Apps" which provides each of our users with the basic collaborative environment. This environment will include 10GB of email, collaborative "Google Doc's and Spreadsheets", calendar, contacts, chat, voice, SSO (Single Sign On), home page and hosting of each users content for information, marketing or whatever they may need or want from a web page. (Think what Intellectual Property you have today, and may have tomorrow. And then consider how your intelectual property may augment your retirement income.)

As time passes and we complete the proposed software developments, users will be able to interact with other users of this application. Software developers and other people interacting in the markets and / or firms of the industry. Google provides us with this virtual environment, and then through the Google API (Application Programming Interface), users will interface to the modules I have described here, as well as, the transaction and processing or "back end" of this business application. A virtual environment that will be available anywhere and at anytime. Readers of this blog may find these software developments maturing around the same time most are collecting their gold watch! So get involved today!

I chose this domain name for a very particular reason. To have the potential users of this application begin to think how each of us in the industry will operate in the Peak Oil era. In the "old" economy it was believed that to expand you needed one of three basic building blocks. Capital, Transportation and / or Communication. University of Stanford Professor Paul Romer coined the following comments. (See also here). In summary he has restated the basic elements of the new economy are People, Ideas and Things. My twist on this is the fact that as object oriented software developers, (including those developers that may be working in the industry now), objects are our perspective. A small play on words but I think the potential users of this system should get some good ideas what their efforts may involve after 5:00 PM local time, or for that matter, anytime.

Some select quotes of Professor Romer's.

As one of the chief architects of "New Growth Theory," Paul Romer has had a massive and profound impact on modern economic thinking and policy making. New Growth Theory shows that economic growth doesn't arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress. Along the way, it transforms economics from a "dismal science" that describes a world of scarcity and diminishing returns into a discipline that reveals a path toward constant improvement and unlimited potential. Ideas, in Romer's formulation, really do have consequences. Big ones.

and

reason (magazine): New Growth Theory divides the world into "ideas" and "things." What do you mean by that?

Romer: The paper that makes up the cup in the coffee shop is a thing. The insight that you could design small, medium, and large cups so that they all use the same size lid -- that's an idea. The critical difference is that only one person can use a given amount of paper. Ideas can be used by many people at the same time.

reason: What about human capital, the acquired skills and learned abilities that can increase productivity?

Romer: Human capital is comparable to a thing. You have skills as a writer, for example, and somebody -- reason -- can use those skills. That's not something that we can clone and replicate. The formula for an AIDS drug, that's something you could send over the Internet or put on paper, and then everybody in the world could have access to it.

This is a hard distinction for people to get used to, because there are so many tight interactions between human capital and ideas. For example, human capital is how we make ideas. It takes people, people's brains, inquisitive people, to go out and find ideas like new drugs for AIDS. Similarly, when we make human capital with kids in school, we use ideas like the Pythagorean theorem or the quadratic formula. So human capital makes ideas, and ideas help make human capital. But still, they're conceptually distinct.

reason: What do you see as the necessary preconditions for technological progress and economic growth?

Romer: One extremely important insight is that the process of technological discovery is supported by a unique set of institutions. Those are most productive when they're tightly coupled with the institutions of the market. The Soviet Union had very strong science in some fields, but it wasn't coupled with strong institutions in the market. The upshot was that the benefits of discovery were very limited for people living there. The wonder of the United States is that we've created institutions of science and institutions of the market. They're very different, but together they've generated fantastic benefits.

When we speak of institutions, economists mean more than just organizations. We mean conventions, even rules, about how things are done. The understanding which most sharply distinguishes science from the market has to do with property rights. In the market, the fundamental institution is the notion of private ownership, that an individual owns a piece of land or a body of water or a barrel of oil and that individual has almost unlimited scope to decide how that resource should be used.

In science we have a very different ethic. When somebody discovers something like the quadratic formula or the Pythagorean theorem, the convention in science is that he can't control that idea. He has to give it away. He publishes it. What's rewarded in science is dissemination of ideas. And the way we reward it is we give the most prestige and respect to those people who first publish an idea.

And lastly I have been working on a wiki that will be available to those that have registered as users of this collaborative environment. This wiki will codify much of what has been stated here in this blog, but in a more coherent format. The construction of this wiki should be completed by November 2007, and lastly if you find these ideas of interest do not hesitate to call, or preferably email me.

Technorati Tags: Genesys, Collaboration, Google, Software, Strategy, Wiki

The Next Technological Revolution:

Will the US Lead, or Fall Behind?

I stumbled upon this excellent summary of the way that innovation, research and development have changed in the new globalized economy. Noting the corporate research popularized in the 1960's and 1970's has faded from the landscape. Xerox, IBM, GE, AT&T and others were involved in large volumes of primary research in a variety of areas that may not have had a defined business for the company. Today these research dinosaurs have faded from the modern corporation. With few companies involved in research and almost no primary research being done anywhere.

The authors document how research and particularly innovation occurs today. Defining "Open Innovation" as;

"Open innovation is the new business paradigm in American industry. Under Open Innovation, a company's value chain is no longer fully contained within the company, and ideas, people, and products flow across company boundaries, to and from other companies, universities, and even countries. Innovation is now a global game characterized by both cooperation and competition between firms and between nations." p. 2

The need to collaborate on a much greater scale is necessary for open innovation. I think and firmly believe that in oil and gas, the need to cooperate, compete and collaborate is necessary for "ideas, people and products" to be able to keep up with a large amount of science moving at an ever increasing pace.

Technorati Tags: Genesys, Collaboration, Ideas, Innovation, Research

Modularity in Technology, Organization and Society

This is a follow on to the posting of Professor Langlois' recent article "Organizing the Electronic Century". This article was written in August 1999 and contains several valuable ideas. Let me point out first that the topic is something I have discussed in this blog before. Going back to 1984's Dr. Anthony Giddens Constitution of Society" ISBN 0520057287 he notes that people society and organizations move together or there is failure. And Professor Wanda Orlikowski's Model of Structuration notes that technology is part of society. To read the details of these theories in this context please see me previous post. This post may be the longest post that I have made. I would encourage you to read it in its entirety, there are many valuable points and ideas that are documented here.

Introduction
What I have proposed in this project is a system that is designed to operate an industry. Not one that is limited to operate just within a company. The Joint Operating Committee (JOC) by definition dictates this different perspective in order to operate between its member firms. This is a system in which the user is a consultant, an employee of a firm, or member of one the many service companies operating within the industry. In other words anyone who is employed in the energy industry. A tough prospect, and lets not forget a system that implements changes in the ways of life of most of these people mentioned. How could this possibly function as intended? The scope of the application notes the interactions between partners are as dynamic as the industry itself.

I have noted here a technological vision that includes Wireless, IPv6, Java and Asynchronous Process Management. These technologies not only allow the industry to achieve these overall system objectives, they guarantee it. And that is the inherent threat of ignoring these technologies. Although technical risk is part of any software development, the risks associated to this project are mitigated through many new and effective tools, like modularity. Modularity is an important component in dealing with change and complexity and the difficulties they involve.

Professor Richard N. Langlois writes about the elements of "Modularity" with the organization as the primary focus. I will take these theories, apply them to my understanding of oil and gas, and then layer the technologies and how they could be involved in mitigating these risks.

"Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections." p. 1

"What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products." p. 1

Modular design of products can lead to the modular design of organizations is highly consistent with my "SAP is the Bureaucracy" thinking. Systems support, and therefore, define organizational structures. This comment by Langlois seems to intimate the same result of the alignment of systems.

"Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market?" p. 2

And lastly Langlois asks why modularity is sometimes seen in the market, and sometimes within the firm. Since we are seeking the boundaries of the firm, we are interested in Modularity in both the market and the firm. Langlois provides an excellent example of modularity's benefits in the following watch maker analogy.

Modularity and Complexity

"Tempus and Hora both make complicated watch-systems from myriad parts, and both are interrupted frequently in their work. Tempus does not design his watches as decomposable systems, so every time he is interrupted and forced to set aside his work, the entire unfinished assembly falls to pieces. By contrast, Hora first builds stable sub-assemblies that he can then put together in hierarchic fashion into larger stable sub-assemblies. Thus, when Hora is interrupted, only the last unfinished sub-assembly falls apart, preserving most of his earlier work. In an evolutionary selection environment, such stability would be be rewarded with survival (Simon 1962 [1981, pp. 200 - 205])." p. 4

"In the end, however, what makes Tempus's unfinished watches unstable is not the sheer number of distinct parts involved. Rather, it is the interdependency among the parts in his design that cause the watches to fall apart." p. 4

"In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication." p. 5

In the system description I have proposed, I have described the Petroleum Lease Marketplace, or PLM. The PLM is a Database of the Crown and Freehold leases that are available and issued in a certain geographical region. The PLM will provide access to the leases ownership, royalty obligation and other information that is publicly available. A producer looking for a new partner, lease, or deal could engage other producers within the PLM and have their business relationships recognized in this virtual marketplace. A marketplace where like minded producers, investors and land holders meet to exchange ideas and build relationships that generate oil and gas deals and activity. From within the PLM the details of the prospect would be populated to those producers that shared some common interests. Ultimately, in time these collaborations could lead to a meeting of the minds and facilitate the inevitable agreement, operating and accounting procedures. These items that were negotiated, and the attributes would contribute to forming the initial data elements that will go on to drive other modules within the overall Genesys system.

How can modularity help in this example? Langlois states interdependency and standards are critical components of modularity. With these PLM based transactions we are able to review standard data elements, standard operating and accounting procedures, standards in how the governments issue information. We can also see how these interactions could be carried out. Each producer enters the PLM with only a desire to expand the drilling and production prospects of his firm. The flexibility and modularity of the PLM provides the producers with the system that will document and provide the support necessary to facilitate and complete the transactions as they are conceived by the disparate participants. Once there, the producers are afforded a variety of opportunities that can be codified and begin the documentation process of their deal. Ultimately in a fully operational system, these data elements would provide the necessary transaction processing I have detailed in the Partnership Accounting module.

Langlois now turns to the technology to explain how the modularity of the system can be captured and managed. His use of hardware and software provide strong analogies, and I am concerned that I may hop down a technological bunny trail if I am not careful. Therefore let me note the points that Langlois states, and point the reader to the Java Programming Language for the implementation of this modularity. It is a fundamental underlying concept of the programming language and I will write another specific post to deal with Langlois modularity theories and the technologies.

"At one point, Brooks briefly considers a "radical" alternative proposed by D.L. Parnas, whose "thesis is that the programmer is most effective if shielded from, rather than exposed to the details of construction of system parts other than his own" (Brooks 1975, p. 78). This radical alternative is in fact the strategy of seeking decomposability in the design of the development project and of the underlying software. Parnas (1972) is the inventor of the notion of information hiding, a key concept in the modern object-oriented [Java] approach to computer programming. Programmers had long understood the importance of modularity, that is, of breaking programs into manageable pieces." (Parnas 1972, p. 1056)." p. 6

"Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information consists of three parts. p. 7

• An architecture specifies what modules will be part of the system and what their function will be.

• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.

• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module." p. 7

Design Processes

Is modularity good for all types of systems and developments? How about Oil and Gas in particular, with a high level of change and in demand as quickly as possible? Is this even a worthwhile objective of systems development? Or would the industry be better off to build a highly interconnected system? Here Langlois makes note of the following;

As usual, however, there is no free lunch. It turns out that modular systems are much more difficult to design than comparable interconnected systems. The designers of modular systems must know a great deal about the inner workings of the overall product or process in order to develop the visible design rules necessary to make the modules function as a whole. they have to specify those rules in advance. And while designs at the modular level are proceeding independently, it may seem that all is going well; problems with incomplete or imperfect modularization tend to appear only when the modules come together and work poorly as an integrated whole (Baldwin and Clark 1997, p. 86)." p. 8

"Under some circumstances, the benefits of modularization may not be worth the cost. For example, a system whose environment never changes may not have to worry much about modularization: Tempus will do as well as Hora if neither is ever interrupted. Systems that develop slowly in slowly changing environments may not acquire, or require, much modularity." p. 8

Makes a lot of sense to me. If I would be as bold to suggest this is also why the majority of the ERP software applications operating in oil and gas fail. Taking the entire industry from a scope and scale basis requires significant application development. The ability of the industry to integrate disparate modules form different vendors, and have them operational in the firm is a large task and difficult to do. The ability to mash these systems into one cohesive ERP style of application have been attempted many times and in many different ways before. The interconnectedness problems originating from the inability of the vendors to standardize on the requirements, data elements and processes. What the industry truly needs is a single vendor solution that addresses the scope and scale of the industry in a modular fashion. One that adopts the industry standards, such as those established through Public Producer Data Model (PPDM), Canadian Association of Petroleum Landman (CAPL), and Petroleum Accountants Society of Canada (PASC) and others. And through a dedicated solutions provider, such as what is discussed and proposed here in this blog, and focused around the JOC. Only then can these associated issues of interconnectedness vs. modularity be addressed.

Encapsulation boundaries.

"In a world of change, modularity is generally worth the costs. The real issue is normally not whether to be modular but how to be modular." p. 11

I can't think of a better reason to employ the one vendor focus, such as is described here. The multi vendor approach to building interconnected system in oil and gas has failed, in any manner of criteria. Langlois' analogy is precisely on point.

"We would think it odd indeed to assign two interior designers each half of a room (von Hippel 1990, p. 410). It makes a good deal more sense either to give each designer a whole room or to give up encapsulation entirely and let the two designers communicate extensively." p. 11

The traditional separation of Production Accounting from Financial Accounting modules by different software vendors is as laughable as the output from the two interior designers being assigned half of a room. One vendor pointing to the other vendors is the favorite game when problems arise. With the oil and gas industry being somewhat stable in terms of change, the vendor finger pointing was tolerable. Now with a dynamic demand rewarding the most innovative, change is the order of the day. How will this vendor strategy fair in this current and future environment?

"For example, the tasks in an innovative development project cannot be partitioned in advance, since knowledge is continually changing. In such a case, the modularization of the system (the development project) has to change continually; moreover the modularization at any point has to take into account the inevitability of re-modularization as learning takes place." p. 11

Social Institutions and Modularity.
Picking up again with the works of Giddens and Orlikowski structuration theory, and a model of technological structuration. What strikes me as being particularly on target here is the discussion around adaptability. Recall also that Sun Microsystems CEO Jonathon Schwartz has written on the positive attributes of adaptability.

Dr. Wanda Orlikowski built upon the Theory of Structuration when she defined her Model of Structuration for Technology. Dr. Orlikowski's model asserts that a fundamental component of society is technology, that technology provides a duality and therefore is a constraint or facilitator to successful advancement of society, people and organizations. Giddens and Orlikowski's background information are directly in line with what Langlois states in this section. It is with great interest of mine that Langlois seems to be of a similar mindset to what has been written in these documents.

"I now want to make the discussion more concrete by considering a particular kind of system; a society. My contention is that the theory of modular systems provides a useful way to look at the theory of social organization and to recast the classic debates in that literature." p. 14

Setting the societal foundations in a modular context makes clear to me the objectives of this research, and software development are attainable and the opportunities prolific. Not just from an individual point of view, but from one that is as broad as society itself. Langlois in this discussion also notes the contribution of externalities. Or economic benefits to society from industry actions.

"The set of design rules that guide social interaction are what we can generally call social institutions (Langlois 1986). These rules determine (among other things) the extent to which, and the way in which a society is a modular system. The desirability of modular design is a theme with a long history in the theory of social institutions. Adam Smith long ago proposed a decentralization scheme based on what he called "the obvious and simple system of natural liberty," by which he meant a system of private property regulated by common law and subject to minimal central administrative intervention. On the economic level, this approach would lead, he believed, to economic growth spurred by innovation, learning, and an ever increasing division of labor." pp. 14 - 15

Not only Langlois but Hayek and Smith wrote on this topic.

"More recently, Hayek argued for similar principles in terms that draw even more explicit on the theory of complex systems. Indeed, the benefits of information hiding lie at the base of Hayek's opposition to central planning, which he viewed as a cumbersome non-decomposable system ill-adapted to change. Because of the dispersed and often tacit character of the knowledge individuals must use, he argued, it is not only costly but ineffective to try to construct society as an intertwined system." p. 15

"if we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place," he wrote, "it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its order. We must solve it by some form of decentralization" (Hayek 1945, p. 524)." p. 15

The work that we have done with Langlois has been very fruitful to date. We have been able to apply many of his theories to the determination of the boundaries of the firm and of the market, we have assigned roles within the price system of transaction costs and production costs respectively. All of which fully endorse the use of the Joint Operating Committee as the key organizational construct for the market. And there have been other benefits, now modularity provides a conceptual tie in to the technologies we use here. I believe the next quotation of Langlois puts into context the overall value of his research to the work being done through this blog and proposed software development project.

"What makes decentralization economically effective is the possibility of a standard interface that allows the modules to coordinate with one another without communicating large volumes of information. This interface is the price system. "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 and passed on only to those concerned" (Hayek 1945, pp. 526 - 527)"" pp. 15 - 16

and

"Abstract symbols and rules can provide a visible information structure that allows individuals to operate effectively on the basis of their more concrete (and hidden) information." p. 16

Langlois now introduces the effect of property rights. I have asserted in the past the energy industry needs to refocus on new forms of competitive advantage. Specifically the inventory of oil and gas leases are the private property rights that entitle the producer to earn economic rents. In addition, the ability to employ the operational necessities of finding and producing oil and gas are the attributes that are most important to the innovative producer. How those operational necessities are employed innovatively is the producers value add that is not replicable from one producer to the other. Oil and gas leases and operational efficiencies form what I would call an energy innovation strategy, and I have not seen a more compelling, nor indeed, sensible strategy for oil and gas. Outside of these specific tasks of the producer, a less constrained view of how and where they can apply their knowledge most effectively are the benefits that are evident to me.

I have proposed that the go forward revenue stream (outside of the initial development needs) of this software project is an assessment of $X / boe for access and use of the system. If the assessment were $10 / boe / year then the costs to use this system for Encana Corporation (a 700,000 boe / day producer) would total $7 million to access and use the system for all their transactions. The definition of these systems is heavily dependent on the standards making bodies, and the demands of its users providing the direction, and use, of the system. These users being compensated for their time as either employees or independent workers of the innovative producer.

"But when the sphere of property are not well modularized - when property rights are absent, ambiguous, or ill defined - the initial assignment of property rights matter to efficiency. The symptoms of imperfect modularization came to be called transaction costs." p. 17

"Imperfect modularization came to be called transaction costs." Recall that inefficient use of transaction costs support the justification for the firm. This we have learned from Langlois. We have also learned that standards are a critical part of modular architecture, and now that poor property rights affect efficiency of the market particularly, and the firm. This last point being somewhat common sensible, however, from the viewpoint of an oil and gas producer there is no threat, ambiguity, or deficiency with the property rights they hold. This reinforces and promotes the concept of modularity that is sought through these writings in the market structure of the Joint Operating Committee.

"The economic benefits of carving out a protected sphere of authority fall into two broad categories, the concentration of rewards and costs more directly on each person responsible for them," and "comparative advantage effects of specialized applications of ... knowledge in control" (Alchian 1965 [1977, p. 140, emphasis original]). We might call these the incentive benefits and the division of knowledge benefits of property rights. Both are important, even if the first has attracted a disproportionate share of the attention of economists." p. 18

The processing of a "production cost" or market transaction has no substance or value to the oil and gas producer. It is inert, it is nothing, it is based on matter of fact principles that can, and will, never provide the holder with any sustainable competitive or strategic advantage. There is no interpretation, no analysis to determine the correct process, only application of the standards as defined in the agreements and understandings of the JOC. The producer can be provided with this market and firm based transaction processing service through the development of the software described in this blog. The firms "transaction" costs are exclusive to the specific producer, yet highly dependent on the actions of the market. Processing of "transaction costs" has no monetary, tangible, competitive or strategic value either.

New rights will emerge (or old rights will be altered), he argued, whenever exogenous conditions conspire to make the costs of modularization worthwhile. p. 19

With this last comment it is clear to me that the opportunity for the energy industry to offset the production and transaction cost processing burden to the market forces is the appropriate and timely solution to the problems that they are facing. Particularly when it comes to the difficult topic of innovation. Outsourcing is a term that poorly represents these concepts.

Modularity and Organization

The mechanisms that were used to aggregate the property rights of large corporations were the justification of the hierarchy over the past 100 years. It is the 100 years of its dominant form that has made possible the hierarchy. Now IT enables the means to more ideally place the boundaries of the firm at the optimal point, one that is consistent with Langlois theories. As I have indicated here before, the JOC is comprised of like minded producers who are motivated by their financial interest in the property. Achieving consensus is surprisingly not an issue.

"In the property rights tradition, the theory of the firm is simply an application of the theory of the coalescence of property rights. Although it is seldom clearly spelled out, the starting point for analysis is typically a world of completely modular atomistic production: each stage of production consists of an individual who owns the necessary physical capital (tools) and who coordinates his or her actions with other stages of production through arms-length transaction. Why is not all production carried out this way? Coase's (1937) famous answer is that their is a transaction cost to using the price mechanism. If transaction costs are the costs of a bad modularization, what can go wrong with the atomistic modularization?" pp. 22 - 23

What follows is a quotation that deals specifically with the joint ownership represented on the JOC. That in other industries there may have been leakage of externalities, oil and gas has had to deal with these issues since its inception, and have provided the JOC with the means, and importantly the standards, to deal with it.

"This formulation focuses on the incentive aspects of property, and it takes ownership to be equivalent to a claim on residual income (Foss and Foss 1998). Another view, originating as early as Coase (1937, pp. 391 - 392), sees ownership as involving not residual income streams but residual rights of control. Oliver Hart (1989) and his coauthors have lately championed this approach in a series of formal models. Because of uncertainty, no contract can foresee all possible contingencies. Thus there must be a residual right to make decisions in situations not covered by contract. That right is ownership, and ownership should be allocated to the party whose possession of it would maximize the joint surplus of production." pp. 23 - 24

The ownership interest within a property provides many of the attributes of a modular society. Specifically the owner of a property could be completely withdrawn from the operation of his property, and may involve himself in cashing the checks each month. Or, should the need arise, the sphere of influence over his property can be exercised. Langlois notes these rights are inherent in ownership.

"Frank Knight (1921) suggested that comparative advantage might arise if one party possesses the superior faculty of judgement (Langlois and Cosgel 1993). But, ceteris paribus, genuine uncertainty - the prospect of or need for radical change - may by itself call for a consolidation of ownership. Stephen Littlechild provides one example. p. 24

"If I am quite sure what kinds of actions my neighbour contemplates, I might be indifferent between his owning the field at the bottom of my garden and my owning it but renting it out for him to graze his horse in. But once I take into account that he may discover some new use for the field that I haven't yet though of, but would find objectionable, it will be in my interest to own the field so as to put the use of it under my own control. More generally, ownership of a resource reduces exposure to unexpected event. Property rights are a means of reducing uncertainty without needing to know precisely what the source or nature of the future concern will be. (Littlechild 1986, p. 35)" pp. 24 - 25

and

"There is also a flip side. Ownership may not only insulate one from certain kinds of unforeseen change, it may also enable one to generate radical change. I have tried to suggest on a number of occasions that concentrated ownership can overcome what I call the dynamic transaction costs of significant economic reorganization (Langlois 1992b). This is a motive for vertical integration little noticed in the literature." p. 25

This discussion strikes at the heart of the reason for this blog and the proposed software development. The energy industry employs assets that are highly specific, or asset specificity in economic terms. Many participants are involved in a project and all have the property right and title managed by a JOC. These interests are easily divisible with the ability to buy, sell or trade the interests on an open market. Little can be done without the consent of the majority ownership, the percentage of which is defined by the JOC. Other rights and obligations are detailed through the establishment of the JOC and then subsequently through additional agreements, AFE's, Mail Ballots etc. From my non-technical point of view, having change hoisted on the property has been usually welcomed. The major properties are in a constant state of change in order to optimize the resources. This would normally pose a challenge to the management of the property, however, I have to say it doesn't. The JOC is systemic throughout the industry on a global basis. We have all heard of company x getting our of country y for political reasons. This is how the industry operates.

So why is the industry in need of the Joint Operating Committee to be defined as the organizational construct? Because it isn't recognized in its appropriate manner within the software applications that are in use in the industry. The perspective of the ERP vendors is that the corporation needs to file tax returns, SEC requirements, local government legislation's and other statutory and regulatory requirements. The corporation has evolved to the point where the only thing they are managing is these processes. The participation in the JOC's is an engineering and geological focus that are not directly recognized within the organizations systems and procedures. To be specific, the JOC is the legal, the financial, the operational decision making, and cultural frameworks of the industry. These are what drive the business, not the tax and royalty legislation. If we moved the accountability framework and sub frameworks over with the JOC's frameworks, the alignment of these frameworks would enable, greater organizational speed from the Information Technologies that are available today, and greater innovativeness on the earth sciences and engineering fields.

From a modularity point of view, the properties that are owned by the corporation are neatly encapsulated within their own environment. One facility does not leak out any information to another facility that it should not. The staff of the producer are able to move about these modules where and when they are required. A producer would know their access to the areas of which they operate would limit their exposure. Modularity to me is not just a concept that can be implemented in the systems we develop. It is a concept that is applied universally throughout the domains of the industry.

Langlois has these points;

"Jensen and Meckling (1992) agree that the concept of ownership must involve not only the possession of decision rights but also the right to alienate those decision rights. Granting an individual both control and alienability is clearly a more complete modularization than granting control alone, since the owner with alienability needs to engage in less explicit coordination with others to use the asset effectively under all circumstances. In economic terms, it is alienability that solves both the problem of knowledge decentralization and the problem of incentives: the asset may be placed under the control of the person whose knowledge best equips him or her to use it, and alienability disciplines the owners use of the asset by making its value (to which the owner has a residual claim) measurable on a market." pp. 26 - 27

"This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888)." p. 27

"So why don't we observe everywhere a perfectly atomistic modularization according to comparative advantage in capabilities - with no organizations of any significance, just workers wielding tools and trading in anonymous markets? We have already seem the outlines of several answers. The older property rights literature, we saw, would insist that the reason is externalities, notably the externalities of team work arising from the nature of the technology of production itself. The mainstream economics of organization is fixated on another possibility: because of highly specific assets, parties can threaten one another with pecuniary externalities ex post in a way that has real ex ante effects on efficiency (Klein, Crawford, and Alchian 1978; Williamson 1985). Richardson offers a somewhat different, and perhaps more fertile, alternative. Firms seek to specialize in activities for which their capabilities are similar: but production requires the coordination of complementary activities. Especially in a world of change, such coordination requires the transmission of information beyond what can be sent through the interface of the price system. As a consequence, qualitative coordination is necessary, and that need brings with it not only the organizational structure called the firm but also a variety of inter-firm relationships and interconnections as well." pp. 27 - 28

As I indicated in the pre-amble of this entry the theories of Giddens and Orlikowski were consistent with the theories of Langlois in this article. In my thesis I noted that SAP is the bureaucracy and that is generally agreed too. How the industry obtains these benefits being discussed here requires the industry to first develop the software to recognize the organizations that are necessary. I would also at this time note that the failure of industry to act in a prospective manner on developing software. Will leave their organizations susceptible to failure before they have alternatives in place. Whether this is a chaotic or orderly world will be left to the readers imagination.

"Whichever story one chooses, organization (in the broadest sense) arises as a non-modular response to the fact of, or the need for, interactions among the modules. Organization is always a de-modularization and repartitioning that severs the right of alienation from at least some of rights of decision. And, in all cases, the technology of production both causes and shapes the resulting no-modular interconnections." p. 28

Modularity, organization, and technology.

"Sanchez and Mahoney (1996) contend that products design organizations. In a sense, however, this is a variant on what the mainstream economics of organization has long believed: production processes design organizations. If the production process requires team production or calls for highly specific assets, a non-modular structure ("hierarchy") is in order; otherwise, a modular structure ("the market") is more appropriate." p. 28

The energy industry is a unique business. An industry that operates with the full cooperation of the other producers. Others producers are necessary to aggregate a land position, process production, or to meet regulatory requirements. As a result it has established a variety of non-profit organizations that define the operations and procedures. The JOC is the means for the industry to meet these requirements. If as Langlois and others say, "production processes design organizations" the JOC should be more involved in the day to day interactions of the producers. If we designate the scope of authority of the JOC as being the "market" and have the software developed to support this classification, it is clear in the writings of Giddens, Orlikowski and Langlois that the performance of the industry would change. For as the JOC is the legal, financial, operational decision making and cultural means of the industry.

Although I have not included much discussion regarding the technology and its role in defining modularity in the oil and gas industry. It is surprisingly close to the writings here of Langlois. Today it can generally be considered that the collaborative technologies are superior to the current methods of meetings, memo's, and snail mail. The business is the efficient discovery and production of hydrocarbons. It truly has nothing to do with the SEC, the Tax authorities or for that matter the shareholders. These are secondary to the primary role of the business. The focus should be on the primary responsibilities and let the secondary requirements flow from the actions of the former. The technology, as has been detailed here by Langlois, enables this.

I hopefully have also laid to rest the concept that the manner of this software development project does not provide any producer with a strategic advantage. The advantage is earned through the competitive and difficult process of acquiring land and establishing commercial hydrocarbons. Generic transaction processing is a requirement of the business, not a strategic or competitive advantage. It's ultimate role should be the deployment of the most efficient methods.

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