Baldwin's "Option Value"

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

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

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

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

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

• Designs need to become real.
• They become real by creating the perception of value.
• Designs act as a financial force.
• Perception of value = incentive to invest
• In making the design = "use value"
• In making the design better = "option value"
• Modular designs with option value.
• Create hurricane type forces
• Will change their economic "space"
• Unmanageable and dangerous (unless you understand them)
  

To her first point, the Draft Specification is real because people can see the value that the specification can provide. The purpose of the specification is to provide a vision of how the industry could operate using the Joint Operating Committee (JOC) as the key organizational construct of the innovative producer. Perception is reality.

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

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

The critical element of this hurricane force is the Community of Independent Service Providers. Having the Draft Specification without this community does not generate the value. As Baldwin notes on Slide 23 "Modularity in the absence of option potential is at best a breakeven, at worst an expensive waste of time". This is intuitively the case, Professor Baldwin then asks the important questions.

• What is this elusive property that gives rise to option value?
• Where does it arise?
• Can we measure it?

Answering that first question, what is the "elusive property" Baldwin notes on Slide 29:

• Option value lies in seamless, asynchronous upgrading
• Modeled in design rules.

I have been a strong proponent of asynchronous communications. People, Ideas & Objects adopted a technical vision early on in the design of the Draft Specification. Within that technical vision, a cornerstone of it is what we call Asynchronous Process Management (APM). Today I am stating that the methods that the CISP and user communities interact with the developers of People, Ideas & Objects is in this asynchronous manner. Therefore we have captured that "elusive property that gives rise to option value". The creative and iterative development of the applications and communities.

In terms of measuring option potential. I have selected the following five points from slides 29, 30 and 32 as key to the CISP.

• Successive, improving versions are evidence of option potential being realized over time - after the fact.
• Designers see option potential before the fact.
• What do they see?
• Users - new perceptions => new preferences

• Perceptions of desires emerge through use.
• Value of discovery, direct experience play.
• Unexplored potential = option potential.
• Pfister's Observation (In Baldwin's words)
  
• Recombining modules in new ways has more option value than the modules themselves.

Lastly, Professor Baldwin suggests ways in which we can gain from "option value". These past few months we have been reviewing many of the principles that were used in forming People, Ideas & Objects, Community of Independent Service Providers and the Draft Specification. Whether that is through ID's, SKIE's, BG's, or the CISP I think the value is there and this project is moving forward.

• What do option rich modular designs do to the economy?
• Answer: Attract entry with a promise of lots of $$$
  
• How do you manage something inherently unmanageable?
• At first you don't.
• Then, small footprints yield high ROIC.
• Then, lead firm M & A
  
• Will you always get a modular cluster of firms?
• Yes, almost certainly.
  

And what actions does Professor Baldwin's recommend you should do: (Recall this is a 2005 presentation.)

• Plunge in.
• Get lucky
• Watch out for Microsoft
• Get bought by HP.

Professor Baldwin's research strategy - look for;

• Stable patterns of behavior involving several actors operating within a consistent framework of ex ante incentives and ex post rewards.

My personal opinion of what is valuable today, and this ties in with this project, is ownership or access to Intellectual Property (IP). It's the only asset that provides any long term sustainable value generation. Members of the Community of Independent Service Providers have access to all of the IP that is part of People, Ideas & Objects, the ideal framework of "ex ante incentives and ex post rewards". Management of this IP at People, Ideas & Objects is noted here.

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

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Pisano Science Based Businesses Part III

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

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

VI. Applying the Lessons of Chandler

Why are we concerned about the performance of the oil and gas industry? And why does that concern center on the organizational structure of the oil and gas firm and it's associated markets? Professor Pisano answers these questions in a way that everyone could generally agree.

The fundamental lesson from Chandler is that while technological progress creates potential for economic growth, that potential can only be realized with complementary innovation in organizations, institutions, and management. This lesson has clear implications for science‐based sectors of the economy. Progress in the science bases of medicine, agriculture, advanced materials, and energy has enormous potential in coming decades. Yet, this potential will go unrealized without the design of appropriate organizational, institutional, and managerial models. One purpose of this essay was to show that, using the case of biotech as a reference point, we have not yet found an appropriate model for science‐based business. pp. 27 - 28

I agree with Professor Pisano, "we have not yet found an appropriate model for science-based business". Is the Joint Operating Committee the ideal organizational construct for the energy industry? We don't know, that is we won't know until such time as this research has been put to the test. In our research we found the science and innovation need to have certain characteristics that are inherent in the JOC. This is a direct result of the JOC being the cultural norm for global oil and gas operations. The problem is the JOC is not the ways and means of the industry from a compliance and governance point of view. Those frameworks, for whatever historical reason, have been handled by the hierarchy.

What this software development project does is move the compliance and governance of the hierarchy into alignment with the five frameworks of the JOC. To align all of these frameworks within the firm and market definitions of the Draft Specification will provide tangible benefits. And help the energy industry to better meet the markets demand for energy. But will it be the ideal organizational construct for this science based business? We don't know, and we won't know until such time that we can learn from the task at hand. I can assure you the bureaucracy is not keeping up to the demands of today, and that it is not going to in the future. But is the JOC the ideal science based business organizational construct for energy? This may be the better question we should ask ourselves in the long run. And ensure that the means to discover the ideal construct, if it isn't the JOC, will be discovered through the process of People, Ideas & Objects and the Community of Independent Service Providers.

Historical experience both before and after the emergence of biotech shows the limits of both ends of the organizational continuum: the visible hand of hierarchies and the invisible hand of markets. Hybrid organizational forms that mix elements of markets and hierarchies would therefore seem to be an attractive avenue for innovation. p. 28

The hybrid model is inherent in the People, Ideas & Objects Draft Specification. In September 24, 2007's blog post I detailed the optimal / logical boundaries of firms and markets. This was based on the review of Professor Carliss Baldwin's paper "Modularity, Transactions, and the Boundaries of Firms: A Synthesis" That table is reconstructed here.

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control (Governance)	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	s
Routine, compliance and accountability	s	P
Research	s	P
Development (the D in R&D)	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

P = Primary
s = secondary


The inclusion of the invisible hand and the visible hand are also present in the Draft Specification. I included Professor Richard N. Langlois work in the Vanishing Hand in a June 24, 2007 blog post. Professor Langlois' vanishing hand hypothesis is directly pertinent to the discussion of finding the optimal organizational construct for the science based business of oil and gas.

"The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates." p. 3

Clearly the research to determine if the JOC is the appropriate organizational construct takes into consideration the research that has been conducted to date. This research is incomplete from the point of view of determining if there could be more attributes, definitions or characteristics in which to add to the software. However, my homework has been done, and it is necessary that the industry fund these software developments before we conclude if the JOC is the right organization, and if we need to conduct any additional research. Back to Professor Pisano who discusses "Organizational Networks" a term that resonates with me.

Organizational networks offer another avenue for innovation. Chandler argued that the firm, not the transaction, was the most important unit of analysis (Chandler 1992) for understanding the boundaries of organizations and structure. Alternatively, it could be argued that in contexts that mix markets and hierarchies, the network of organizations becomes the most interesting unit of analysis (see e.g. Miles and Snow, 1986, Stuart 1998). p. 29

and

Once we move to organizations that are connected in durable networks, this notion becomes much more complicated. The value of the network and the value of individual “firms” in that network become harder to disentangle. p. 29

Call it what you will, what this post clearly reflects is this is the direction that industries must travel. To suggest that the hierarchy will survive the next 10 years is difficult to conceive. Here Pisano asks a pointed question at management itself.

In an essay in honor of Alfred Chandler, an author would be remiss not to mention “management technology” as a critical component of innovation. Chandler documented the emergence of the professional manager and the innovations in managerial techniques needed to run the organizations he studied. This raises the question of whether current “management technology’ is suited to the needs of science‐based businesses. Indeed, the very notion of “professional manager”, while seemingly quaint, indeed characterizes much of the division of labor between scientists and manager today. Consider that today, scientists receive no formal training in management and MBAs receive no training in science. This is a striking gap. The professions of management and the professions of science are still largely separate. p. 30

For what its worth, I agree that the science based business is poorly served by the current "management technology". This is an area that requires as much research as determining if the JOC is the optimal organizational construct for the science based business of oil and gas. Professor Pisano puts the value of these avenues of research in context with this closing comment.

Like railroads and large scale manufacturing enterprises 100 years ago, science based businesses will be a potent source of economic growth in the 21st century. And now, as then, these new businesses demand new organizational forms and new institutional arrangements. In short, we are once again confronted by a serious need to invent new organizational forms and new institutional arrangements to deal with a new set of economic problems. When it comes to the topic of innovation in business organization, there is no better teacher than Alfred Chandler. p. 30

March 31, 2010 is the deadline for raising our 2010 operating budget. After which a variety of consequences, such as financial penalties and a loss of one years time will occur. Our appeal should be based on the 21 compelling reasons of how better the oil and gas industry and its operations could be handled. They may not be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are.


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

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Pisano Science Based Businesses Part II

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

II. Chandler’s Core Propositions

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

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

1) The Interdependence of Technological and Organizational Innovation

It has been argued that moving the compliance and governance of the hierarchy into alignment with the JOC's cultural, legal, financial, operational decision making and communication frameworks will provide enhanced performance. When we identify and support these changes within the People, Ideas & Objects application modules. Innovation on the earth science and engineering disciplines will be facilitated and advanced. Chandler teaches us that technological innovation does not occur without organizational innovation.

A sub‐set of the innovation community, starting with the work of Nelson and Winter (1982), has long recognized that the “right” institutional arrangements play a critical role in facilitating technical advance and the diffusion of innovations. p. 5

These concepts were reinforced on this blog with recent posts from MIT Professor Wanda Orlikowski and Harvard Professor Carliss Baldwin. Orlikowski's Structurational Model of Technology was used in the Preliminary Research Report to identify technologies influence in organizations. Summarizing her work in the statement that SAP is the bureaucracy. Professor Baldwin's Mirror Hypothesis also identified similar points.

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

The Draft Specification deals with a variety of problems that exist in the industry. One of these problems is the redundant building and rebuilding of capabilities within each producer firm. The ability to resolve any and all possible issues needs to be handled by the firm, and therefore, these capabilities are created within each producer. In the integrated producers we see the same technical capabilities being built within Exxon, Shell, BP, Chevron and others. These are duplications and have reached a size and scope that they can no longer be independently developed and maintained. The underlying sciences are advancing too quickly, and the population of human resources are reaching their limits. What the Draft Specification does is pool these capabilities within the Resource Marketplace Module to enable each and every Joint Operating Committee the ability to dynamically generate the capabilities that they need.

Today, it is easy to take for granted such things as separation of ownership from management, hierarchical organizations, multi‐business corporations, capital markets, accounting and control systems, and other scaffolding of modern economies, as if they were somehow “natural.” Chandler teaches us that there is nothing natural about them. They were inventions. Indeed, virtually every aspect of the business world around us—every organizational form, every management technique, every formal and informal institutional arrangement, every principle of management, and every management function—is the product of human invention. Chandler also helps us understand that often‐but not always‐‐these inventions were made in response to very specific economic problems. pp. 6 - 7

To have this dynamic capability available to those within the industry requires the new organizational models, the JOC, and the People, Ideas & Objects software necessary to identify and support the JOC and the Resource Marketplace. Spontaneous order will not work when we are standing on the shoulders of so many generations of giants. We need to act!

3) Organizational and Institutional Innovation As an Evolutionary Process

We have many significant trends converging at the same time. The Information & Communication Technological Revolution, the transformation of the oil and gas industry to a more complex scientific footing, the boardroom power shifts, and the economic forces that are creating issues and opportunities for all concerned. The last thing we need to do is to sit back and wait for the eventual day when all these forces are correctly aligned and the world breaks out in peace. It doesn't happen that way. We have to act!

The first two points above provide a false impression that economic need and organizational / institutional innovation mesh tightly. But Chandler teaches us that such a strict functionalist interpretation is flawed. Economic needs arise, but the response of organizations is slow, uneven, and not always perfect. p. 7

I would assert that the slow industry response to People, Ideas & Objects is attributable to the fact that it is the bureaucracies that are dictating the pace of change. They know that if they don't sponsor these software developments, they won't get built. I know they know this because I told them in the Preliminary Research Report. Their interpretation is wrong, however, they don't see it that way. That is why the appeal of these software developments are focused on the ownership class of the oil and gas industry. The bureaucracy has it pretty good right now, why change.

The notion that novel institutions and organizations always arise to enhance economic efficiency does not stand the test of historical analysis. p. 8

We must act. This muddling along is heading the oil and gas industry into a situation where the energy consumer will not be able to source their energy. Energy is oxygen to advanced economies. To restrict the volume of available energy limits the potential of man kind.

There are many potential transformative forces shaping business organization in the 21st century. The one I would like to focus on in the remainder of this essay concerns science, and in particular, the way in which business participates in and shapes science. Recent decades have witnessed intensive organizational experimentation in the way science is generated, diffused, and commercialized. Advances in the sciences of life, energy, and materials offer huge promise both to drive economic growth and improve welfare. Yet, to believe that promise will be realized without organizational and institutional innovation would be to ignore the lessons of Chandler. pp. 8 - 9

March 31, 2010 is the deadline for raising our 2010 operating budget. After which a variety of consequences, such as financial penalties and a loss of one years time will occur. Our appeal should be based on the 21 compelling reasons of how better the oil and gas industry and its operations could be handled. They may not be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are.

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

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Pisano, Science Based Businesses Part I

Based on the weight of this new paper. We are including Harvard Professor Gary P. Pisano to our list of closely watched researchers. We haven't had the opportunity to add anyone to our list for many years. That's not as a result of a lack of quality content, it's that we are playing catch-up in terms of the work that has been done in the past 20 years. Look for the Pisano label to aggregate the posts that highlight his content. This first Part will highlight some of the assumptions that Professor Pisano is using, the extent of his research and reviews the Introduction of his new paper. The Evolution of Science-Based Business: Innovating How We Innovate.

For the work that we are doing here at People, Ideas & Objects, and particularly the oil and gas producers, this paper has substantial value. The Preliminary Research Report hypothesized the oil and gas industries underlying earth science and engineering disciplines were escalating. Each barrel of oil would require exponential volumes of these sciences as time passed. This underlying demand change in the sciences would lead to higher prices to offset the higher costs of exploration and production, hence rewarding the innovative oil and gas producer. This is the situation in the oil and gas marketplace today.

Professor Pisano's interests are in science based businesses. But more importantly, in the context of organizational and technological innovation.

Alfred Chandler taught us that organizational innovation and technological innovation are equal partners in the process of economic growth. Indeed, one often requires the other. In the late 19th and early 20th century, the large‐scale modern corporation both shaped and was shaped by advances in electrification, mass production, and transportation. Today, the specific technologies driving growth are, of course, quite different than they were a century ago. But, the fundamental lesson—that these technologies may require new organizational forms—is as relevant today now as it was then. p. 2

I would argue that technologies enable new organizational forms. Through our review of Harvard Professor Carliss Baldwin's research. People, Ideas & Objects have detailed a modular specification and a division between markets and firms in the Draft Specification. Information Technology (IT) defines and supports organizational constructs. And the People, Ideas & Objects software development capability provides the organizational flexibility that the producer will soon demand as necessary.

It is inherent in the Draft Specification that the market take a larger role in the science and innovation of the industry. The question is therefore asked, is the Draft Specification correct in it's assumption that research and innovation can be conducted within "markets" as opposed to in "firms"?

I argue that science‐based businesses face unique challenges as they straddle two worlds with very different time horizons, risks, expectations, and norms. Whereas once these challenges were managed inside the boundaries of corporate R&D labs—under the auspices of Chandler’s visible hand—today the invisible hand of markets increasingly governs them. An assessment of this form of governance against the requirements of science‐based businesses suggests a gap and a need for organizational innovation. The essay concludes with a discussion of what Chandler can teach us about science‐based business, and the organizational and institutional implications of science‐based business. p. 4

Elements of scientific risk are everywhere in the oil and gas industry. Outcomes are not necessarily predictable, and the lead times from idea to commercial success is substantial. The oil and gas industry qualifies as a science based business in Professor Pisano's strict interpretation.

In this paper Professor Pisano speaks about the different business models of how these science based businesses fund their research. Noting that the IBM, AT&T, 3M and Xerox research parks are reflective of an older era. If we accept Exxon's estimate that $20 trillion over 20 years is the required capital expenditure. We can ask is this demand for capital beyond the "normal" allocation mechanisms available in the marketplace? Are the capital and debt markets sophisticated enough to be able to determine which producers will be the winners and losers? I have argued throughout the Preliminary Research Report and this blog that the innovative producer will have the price mechanism reward innovative and scientific success.

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

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Two new papers for review.

A heads up that when we finish off with Professor Dosi's "On the nature of technologies: knowledge, procedures, artifacts and production inputs". Two new papers have been discovered that provide real value for the work that we're doing here.

The first is a 1986 paper from Professor Carlota Perez. Originally written in Spanish, it was translated into English by Professor Perez herself in January 2009. Reading it through provides a very clear understanding of the beginnings of her theories and ideas. The clarity is remarkable, particularly for those that are recent additions to this blogs community. The paper entitled "The New Technologies: An Integrated View" can be downloaded from here.

The second paper that we are going to review is from a new author. "The Evolution of Science Based Business: Innovating how we Innovate" by Harvard Professor Gary P. Pisano. Oil and gas is the ultimate science based business. One that is shifting in its complexity and difficulty. This paper can be downloaded from here.

There appears to be no end to the high quality academic research available on these topics. If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Baldwin Mirroring Hypothesis Part II

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

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

Scholars in a range of disciplines have argued that mirroring is either a necessary or highly desirable feature in the design of development projects, but empirical research shows that some projects deviate from strict mirroring, seemingly without harmful effects. In this paper, we formally define the mirroring hypothesis, describe its theoretical underpinnings and systematically review the empirical evidence for and against it. Our review includes 129 studies spanning three levels of organization: within a single firm, across firms, and open community-based development. Across these levels, the hypothesis was supported in 69% of the relevant cases, but not supported in 31%. It was most strongly supported within firms, less strongly across firms, and often violated in community-based development settings. p. 1

It is in the review of those 129 studies that our ability to see the Mirroring Hypothesis, or to be precise, the exception noted and developed in Professor Baldwins paper, is directly applicable to the work being done in People, Ideas & Objects. Therefore, in many ways, defining what and how the organization of users, developers and members of the Community of Independent Service Providers will operate to build this software.

The exceptions in turn were of two types: In four cases, closely collaborating teams within single firms created modular systems comprised of independent components. More surprisingly, in 28 cases, independent and dispersed contributors made highly interdependent contributions to the design of a single technical system (or sub-system). Based on a detailed analysis of the latter 28, we introduce the concept of actionable transparency as a means of achieving coordination without mirroring. Contributors achieve actionable transparency by embedding their design in a centralized system with a shared design language and near-real-time updating, where everyone with an interest in improving the design has the right and the means to act on it. We present examples from practice and then describe the more complex organizational patterns that emerge in lieu of genuine mirroring when actionable transparency allows people to “break the mirror.” p. 1

The exception to the Mirroring Hypothesis is teams comprised of independent and dispersed individuals can provide the desired interdependency that we are seeking in the innovative oil and gas producer.

1 Introduction

The authors provide a definition of what innovation consists of. A definition of innovation that reflects what will be necessary in both the innovative oil and gas firm, and the innovative systems development communities of People, Ideas & Objects.

Innovation is a process in which people define problems and then actively develop new knowledge to solve those problems (Nonaka, 1994). p. 2

Building on this definition, what will be required to ensure that the dispersed and independent contributions of People, Ideas & Objects will enable the interdependence necessary in the software. Or as Baldwin suggests that we "break the mirror".

Responding to these gaps, this study makes two key contributions to the literature. First, it defines the mirroring hypothesis, explains its theoretical roots, and then systematically and critically reviews the empirical evidence pertaining to it. Second, it synthesizes observations from a large number of cases that violate the hypothesis to explain when and how development organizations can “break the mirror.” pp. 2 - 3

and

By contrast, the second type of exception poses a deeper theoretical challenge. In traditional development organizations, people have relied on spontaneous face-to-face communication, physical collocation, and formal authority to coordinate highly interdependent design tasks. The paradigmatic form of organization for developing an interdependent design is a highly interactive team, working in close proximity, employed by a single firm (Allen, 1977; Clark and Fujimoto, 1991; Sanchez and Mahoney, 1996; Chesbrough and Teece, 1996; Baldwin and Clark, 2000). However, the large number of counter-examples revealed by our study immediately raises the question, how are interdependent design decisions and tasks coordinated in the absence of face-to-face communication, physical collocation, and formal authority? pp. 3 - 4

If we go back to our review of Professor Baldwin and von Hipple's paper in late 2009 and early 2010, "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". This paper compared various forms of innovation by producers, innovation by individual users and  open collaborative innovations. We learned that user contributions were freely given when the user understood and contributed to a design when they would receive greater value from the design then what they contributed. People, Ideas & Objects maintains the identity of users are "hidden" from the bureaucracies who do not want this project proceeding. And lastly the tools, policies and procedures of making contributions to People, Ideas & Objects maintain what the authors call "common ground". These are the components that will make the project successful.

To answer this question, in Section 5, we take a closer look at the twenty-eight exceptional cases in which independent contributors developed highly interdependent designs. We find that in all such cases (1) the contributors had compatible motivations and no severe conflicts of interest with respect to the ultimate use of the design; (2) the contributors worked in or created a framework that gave them expectations of good faith and some protection from harmful actions by other contributors; and (3) most importantly, the contributors maintained a significant shared understanding or “common ground” with respect to the design (Clark, 1996; Srikanth and Puranam, 2007). Common ground was sometimes created using analogues of traditional coordination mechanisms—e.g., electronic communication, temporary collocation, and informal, status-based authority. But we also find that independent contributors often coordinated their efforts implicitly by using development tools that made the design-in-progress both transparent to and actionable by all members of the group. p. 4

Yesterday in Part I of our review of this paper we documented the concept developed by the authors of Actionable Transparency. Actionable Transparency is the necessary ingredient to dispersed and independent developers to maintain high levels of innovative development. This ingredient is therefore not only desirable for People, Ideas & Objects, but also the innovative oil and gas producers.

The concept of actionable transparency is the main theoretical contribution of this paper and the focus of Section 6. As we define it, actionable transparency captures the extent to which everyone with an interest in improving a given design has the right and the means to act on it, i.e., to change it and see what effects the changes have. p. 4

and

In effect, anyone with access to the archives can “see” what’s going on without needing direct input or assistance from others. Actionable transparency requires not just that people can access and make sense of the archives and source materials, but also that they can contribute to the evolving design. p. 4

As the authors have noted "Actionable Transparency" has broken the mirror. Although the independent contributions develop an interdependent system. The breaking of the mirror would indicate that an innovative oil and gas producer would not be supported by these types of activities. Here the authors note that genuine mirroring is not achieved, but something more desirable, valid and valuable.

In the presence of actionable transparency, it is common for more complex relationships between system design and organizational structure to emerge in lieu of genuine mirroring. p. 4

In summary, based on three recent papers that we reviewed. [Orlikowski's paper and Structurational Model of Technology, Professor Baldwin's and von Hipple, and this paper] we are able to conclude the methods and means that People, Ideas & Objects software development methodology will successfully develop the modular Draft Specification. Which in turn will enable and support the innovative oil and gas producer to employ the interdependence inherent in the JOC. 

From this study, managers may conclude that mirroring is a common and effective way to achieve coordination, but it is not the only way. In the presence of compatible motivations and frameworks supporting expectations of good faith, there are new ways of building common ground, based on digitized designs, electronic archives, automated test suites, and instantaneous transmission of text, data and pictures. These alternative means, which support what we have called actionable transparency, can be used as complements or substitutes for mirrored forms of organization. Managers of development organizations within and across firms and in open collaborative groups, who choose or are required by circumstances to “break the mirror,” should be aware of these alternative means of achieving coordination. p. 33

and

We have shown that while mirroring is common in practice, it is not universal. Independent, dispersed individuals and firms can successfully collaborate on highly interdependent tasks if they have compatible motivations and expectations of good faith and can maintain a shared understanding of the evolving design. Actionable transparency can sustain an ongoing shared understanding of a design amongst far-flung contributors, thus is an important means of collaboration in the digital age. p. 34

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

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Professor Baldwin and von Hipple VI

To finish off the review of Professor Carliss Baldwin and Professor Eric von Hipple's paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". I feel it is appropriate to highlight just the final paragraph of the document. It speaks to all that we are working to do for the oil and gas industry.

We conclude by observing again that we believe we are in the midst of a major paradigm shift: technological trends are causing a change in the way innovation gets done in advanced market economies. As design and communication costs exogenously decline, single user and open collaborative innovation models will be viable for a steadily wider range of design. They will present an increasing challenge to the traditional paradigm of producer-based design – but, when open, they are good for social welfare and should be encouraged.

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Professor's Baldwin and von Hipple V

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

User innovators will choose to participate in an open collaborative innovation project if the increased communication cost each incurs by joining the project is more than offset by the value of designs obtained from others. To formalize this idea, assume that a large-scale innovation opportunity is perceived by a group of N communicating designers. As rational actors, each member of the group (indexed by i) will estimate the value of the large design and parse it into two subsets: (1) that part, valued at vsi, which the focal individual can complete himself at a reasonable cost (by definition, vsi > dsi); and (2) that part, valued at voi, which would be “nice to have”, but which he cannot complete at a reasonable cost given his skills and other sticky information on hand (by definition voi ≤ doi ).

Turning to the oil and gas producer, what's in it for them to support the People, Ideas & Objects developers and the associated CISP? Clearly the User innovations as Baldwin and von Hipple call them applies to the producer as well. They have access to a system that replicates any and all processes within the oil and gas industry. It's not that they need to have all those processes managed, but it is possible for them to run their firm in the most profitable manner by using People, Ideas & Objects and the CISP. The costs of the software are as little as a $1.00 per year per barrel of oil equivalent daily production. Yet they too are benefiting from these open collaborative innovations in the same manner the CISP is.

Consider finally the model of open collaborative innovation. Recall that open collaborative innovation projects involve users and others who share the work of generating a design and also reveal the outputs from their individual and collective design efforts openly for anyone to use. In such projects, some participants benefit from the design itself – directly in the case of users, indirectly in the case of suppliers or users of complements that are increased in value by that design. Each of these incurs the cost of doing some fraction of the work but obtains the value of the entire design, including additions and improvements generated by others. Other participants obtain private benefits such as learning, reputation, fun, etc that are not related to the project’s innovation outputs. For ease of exposition, we will derive the bounds of the model for user innovators first, and then consider the impact of other participants on those bounds.

Simple, but why has this not been done to date? Clearly the costs of collaboration on a large scale have dropped to minuscule levels. The Internet not only reduced the costs but also enabled these formerly disparate groups to associate with little to no costs. The only requirements to finding other groups of interested people is to Google the topics of your interest.

This is the first bound on the open collaborative innovation model. It establishes the importance of communication cost and technology for the viability of the open collaborative model of innovation. The lower the cost of communicating with the group, the lower the threshold other members’ contributions must meet to justify an attempt to collaborate. Higher communication costs affect inequality (5) in two ways: they increase the direct cost of contributing and they reduce the probability that others will reciprocate. It follows that if communication costs are high, an open collaborative project cannot get off the ground. But if communication costs are low for everyone, it is rational for each member of the group to contribute designs to the general pool and expect that others will contribute complementary designs or improve on his own design. This is in fact the pattern observed in successful open source projects and other forums of open collaborative innovation (Raymond, 1999; Franke and Shah, 2003; Baldwin et. al. 2006; Lakhani and von Hippel, 2009).

It would have been prohibitive, boring and frustrating to attempt the collaboration design of the Preliminary Specification without the Internet. Communication and design costs would have escalated to exorbitant amounts and the quality of the end product would be far less then the "open" collaboration design that Baldwin and von Hipple write about and is being employed by People, Ideas & Objects for this software development. There's more. As in this next quotation, the scope and scale of these designs can now be undertaken. The 2010 budget for the preliminary specification has been set at $10 million, yet the scope of the application is far greater then any other application designed in the oil and gas marketplace.

Note that this bound is N times greater than the bound on the design cost of the average single user innovator. Thus given low-enough costs of communication, open collaborative user innovators operating within a task-divisible and modular architecture can pursue much larger innovation opportunities than single user innovators acting alone.

The importance of this fact is how individuals should reconcile the ambition of this project to the reality of life. Building an application that uses the "industry" perspective through the JOC brings the scope to a frighteningly large level. The JOC is a generic organizational structure that is and can be populated by any number of changing numbers of producers and the people that work within the oil and gas industry. The use of the JOC in the Draft Specification is what demands open collaborative innovation design. Critical to making this an operational possibility is the ability of the Preliminary Specification to implement the Draft Specifications Military Command & Control Metaphor as a key cornerstone of the Compliance & Governance module.

But if communication costs are low enough to clear these hurdles, then the second bound [(6) and (6’)] shows that, using a modular design architecture as a means of coordinating their work, a collaborative group can develop an innovative design that is many times larger in scale than any single member of the group could manage alone.

Figure 3 in the paper shows that the Open Collaboration Innovation is able to approach a far higher level of design sophistication then the Producer Innovators. At no time before has this level of design sophistication been possible nor has the scope and scale been so (relatively) easy to approach. Producers and Users, and particularly members of the Community of Independent Service Providers stand to gain substantially from their contributions to this project. The overall design is comprehensive and ambitious. Today's technologies, and particularly the Internet, enable the type of systems design that the Draft and Preliminary Specifications involve. And although I don't think I mentioned the last two phases of the design publicly before. Now would be a good time to note that the Preliminary Specification will be used in a similar manner to the Detailed and Final Specifications. (Please note with a lag of six months the Detailed Specification can be completed concurrently to the Preliminary Specification.) The costs, which are budgeted at $10 million for the Preliminary Specification are negligible. To participate in these development as a supporting producer please follow our Funding Policies and Procedures here. And if you want to participate as a User or a member of the Community of Independent Service Providers please join us here.

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Professor's Baldwin and von Hipple IV B

In this entry I will highlight many pertinent points of Baldwin and von Hipple's research. Much of the context and content of their work is new, and as they state, not necessarily covered before.

However, to our knowledge, there has been no systematic thinking about the conditions under which each model is likely to appear, and whether each is expanding or contracting relative to the other two. To make progress on these question, it is necessaryto develop a theoretical framework that locates all three models in a more general space of attributes. That is our aim in this section.

People, Ideas & Objects is based on open collaborative innovation. Based on the modular Draft Specification as its starting point, the contributions of users is necessary to cover the scope of work undertaken in the oil and gas industry. This scope of work has never previously been undertaken due to the communication and design costs prior to the Internet were prohibitive. Only today with the Internet and the tools that are available can we seek to codify the understanding of "what" and "how" the oil and gas industry operates as. This codification is being captured here in the Preliminary Specification that will form the basis of the People, Ideas & Objects application modules. It is the technology that is enabling this to be undertaken. Use of the Joint Operating Committee was the hypothesis of this projects in the May 2004 Preliminary Research Report, and is therefore, the underlying reason that this project holds the promise of "resolving every administrative problem in oil and gas in the last fifty years." (Not my words.) It is the "aha" moment that people have when they realize the Joint Operating Committee is the key to enabling these performance and innovation based opportunities.

In the particular branch we are most concerned with, organizational forms and industry structures are taken to be endogenous and historically contingent (Chandler, 1962, 1977; Wlliamson, 1985, 1991; Nelson and Winter, 1982; Aoki, 1984, 2001; Langlois, 1986a, 2002; Baldwin and Clark 2000; Jacobies, 2005). Different forms may be selected to suit different environments and then adaptively modified. Thus organizational forms emerge in history and recede as technologies and preferences change.

I highlight the last sentence of that quotation as we are now at the point where changes can be implemented. Our economic challenges today require us to undertake these types of organizational changes. What has brought us to this point is no longer capable of carrying us further. And indeed we will fall further behind if these organizational changes are not implemented in a timely manner. For the Community of Independent Service Providers (CISP) it is important to become involved in this project as its sustainability is represented in the fact that organizational forms do not change that frequently.

We have seen the 20th Century benefit from the work done by the hierarchy. Clearly society is better off today then if we had not had the model of organization we use so systemically in business today. We have also benefited from the use of computer technologies that have enabled the reach of the hierarchy to span far greater then previously possible. This is where the oil and gas industry became too focused on the hierarchy as opposed to the Joint Operating Committee. As companies employed greater levels of Information Technology, they began to focus on internal needs of the bureaucracy and avoided the business of the business as represented in the many Joint Operating Committee's of the firm. To address those JOC's it would have required to undertake the design that is being done in its first iteration in the Preliminary Specification. Baldwin and von Hipple note that the design costs and communication costs would be too great to overcome in any time prior to the Internet. Now these costs are substantially below 1/3 of 1% of the industry. Viable by any measure.

Finally in contrast to virtually all prior work except for Chandler (1962, 1977), we take an explicitly technological approach to the question of viability. Fundamentally we assume that in a free economy, the organizational forms that survive are ones with benefits exceeding their costs (Fama and Jensen, 1983a, b). Costs in turn are determined by technology and change over time.

Costs as represented by this projects Business Model are minuscule when compared to the revenue streams of the oil and gas industry.

Adopting Chandler's logic, we should expect a particular organizational form to be prevalent when its technologically determined costs are low, and to be ascendant - i.e., growing relative to other forms - when its costs are declining relative to the costs of other forms.

Today, design costs and communication costs are declining rapidly, and modular design architectures are becoming common for many products. In the rest of this section, we argue that these largely exogenous technological trends make single user innovation and especially open collaborative innovation viable across a wider range of innovation activities than was the case before the arrival of technologies such as personal computers and the Internet. We have seen and expect to continue to see, single user innovation and open collaborative innovation growing in importance relative to producer innovation in most sectors of the economy. We do not believe that producer innovation will disappear, but we do expect it to become less pervasive and ubiquitous than was the case during most of the 20th century.

To participate in this community, please join me here. And if you are part of our targeted market, please contact me here to financially support this community.

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Professor's Baldwin and von Hipple IV A

Before the Christmas break we were reviewing a paper from Professor's Carliss Baldwin and Eric von Hipple. Our review was comprehensive as the majority of the material is pertinent to both the development of People, Ideas & Objects software and associated Community of Independent Service Providers, (CISP) and the innovative oil and gas producer. The title of the paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". To date there are three blog posts reviewing this paper here, here and here. Reintroducing this work by reviewing the three posts, re-highlighting the papers abstract, and finally adding some of the papers definitions will help refresh our memory of this very pertinent work.

In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with - and may displace – producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.

We see the value that this paper has to this community, not only in defining how this community operates, but also the validity for the CISP participants investing their careers, and how the innovative oil and gas producer can approach the scope of their organizational constraints. I expect to have the next installment of this paper completed within the next week. This involves the review of their analysis of the three different models of innovation, or section 3 "Where is each model viable."

It may also be of value to review our 2010 budget to see how the user within the CISP generates their own economic value. They are compensated for their work in designing and contributing to the development of the software. And secondly, their use of the finished software application is available to them as members of the CISP, free of charge. Their use of the software is part of the value adding services they provide to their innovative oil and gas clients. People, Ideas & Objects generates our Fees and Penalties from the producers that benefit from this software. These charges are assessed based on our business model.

Baldwin & von Hipple's Definitions

A single use innovator is a single firm or individual that creates an innovation in order to use it.

A producer innovator is a single, non-collaborating firm.

An open collaborative innovation project involves contributors who share the work of generating a design and also reveal the outputs from their individuals and collective design efforts openly for anyone to use. The defining properties of this model are twofold: (1) the participants are not rivals with respect to the innovative design (otherwise they would not collaborate) and (2) they do not individually or collectively plan to sell products or services incorporating the innovation or intellectual property rights related to it. An example of such a project is an open source software project.

A design is a set of instructions that specify how to produce a novel product or service.

A given mode of innovation is viable with respect to a particular innovation opportunity if the innovator or each participant in a group of innovators finds it worthwhile to incur the requisite costs to gain the anticipated value of the innovation. By focusing on anticipated benefits and costs we assume that potential innovators are rational actors who can forecast the likely effects of their design effort and choose whether or not to expend the effort (Simon, 1981; Langlois, 1986b; Jensen and Meckling, 1994; Scott, 2001).

Our definitions of viability is related to: the contracting view of economic organizations; to the concept of solvency in finance; and to the concept of equilibrium in institutional game theory.

In contracting literature, firms and other organizations are viewed as a "nexus of contracts,", that is, a set of voluntary agreements (Alchian and Demsetz, 1972; Jensen and Meckling, 1976; Fama and Jensen, 1983a, b; Demsetz, 1988; Hart, 1995). For the firm or organization to continue in existence, each party must perceive himself or herself to be better off with the contracting relationship than outside of it.

We define an innovation opportunity as the opportunity to create a new design. With respect to a particular innovation opportunity, each of the three models of innovation may be viable or not, depending on the benefits and costs flowing to the actors.

In terms of benefits, we define the value of an innovation, V, as the benefit that a party expects to gain from converting an innovation opportunity into a new design - the recipe - and then turning the design into a useful product, process or service.

Each innovation opportunity has four generic costs: design cost, communication cost, production cost and transaction cost.

Design cost, d, is the cost of creating the design for an innovation.

1. The cost of identifying the functional requirements (that is, what the design is supposed to do); 
2. The cost of dividing the overall problem into sub-problems, which can be solved separately;
3. The cost of solving the sub-problems;
4. the cost of recombining the sub-problems' solutions into a functioning whole.
   

Communication cost, c, is the cost of transferring design related information among participants in different organizations during the design process.

Production cost, u, is the cost of carrying out the design instructions to produce the specified good or service.

Transaction cost, t, is the cost of establishing property rights and engaging in compensated exchanges of property.

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Professor's Baldwin and von Hipple III

The third part of our review of the Baldwin and von Hipple paper focuses on the literature review. It is in this section of the paper that the issue of Intellectual Property is raised. Baldwin and von Hipple write what most people would consider to be factual in understanding how innovations are developed.

When taken together, the findings of all these empirical studies make it very clear that users have long been and are doing a lot of commercially-significant process development and product modification in many fields.

Let us first gain an understanding of what the authors define as Users. This user description is not different from what we are employing here at People, Ideas & Objects.

Users, as we define the term, are firms or individual consumers that expect to benefit from using a design, a product or a service. In contrast, producers expect to benefit from selling a design, a product, or a service. Innovation user and innovation producer are thus two general "functional" relationships between innovator and innovation. Users are unique in that they alone benefit directly from innovation. Producers must sell innovation-related products or services to users, hence the value of innovation to producers is derived from users willingness to pay. Thus, in order to profit, inventors must sell or license knowledge related to their new design, manufacture and sell goods embodying the innovations; or deliver and sell services incorporating complementing the innovations.

Users have unlimited access to the Intellectual Property that is developed by People, Ideas & Objects and the community. This IP, and all associated ideas, are a product of the User community and freely available for the user community to employ in their own service offering to their oil and gas clients. The only limitation for users is the ability to run the binary of the software is limited to People, Ideas & Objects exclusively. Also only licensed users who are active in the community will have access to the software, ideas and knowledge held within the community. Creating an exclusive service offering who's focus is to provide the oil and gas producer with the most profitable means of oil and gas operations.

The users then earn their fees in providing the services and software to oil and gas producers. Users are licensed to access this information based on their own skills and provide those services to their oil and gas producer clients at no charge for the software or the access to the underlying IP. (Users bill their clients for their services.) Clearly the involvement of a user within this community is critical to the success of the project, as we discussed yesterday. And this success provides the users with a means to pursue their career in the most effective manner that they see fit. Why do we do this.

Reexaminations of traditional economic arguments triggered by evidence of free revealing show that innovators generally freely reveal for two economically rational reasons. First, it is in practice difficult to effectively protect most innovations via secrecy or intellectual property rights. Second, significant private benefits often accrue to innovators that do freely reveal their innovations.

The Draft Specification is designed around eleven modules. Professor's Baldwin, Langlois and Williamson have defined the benefits of modularity and the importance of modular designs. Here the authors provide a good summary of how modularity fits within this project.

Modularity is important for collaboration in design because separate modules can be worked on independently and in parallel, without intense ongoing communication across modules. Designers working on different modules in a large system do not have to be colocated, but can still create a system in which the parts can be integrated and will function together as a whole. In small projects or within modules, designers can utilize “actionable transparency” rather than modularity to achieve coordination. When projects are small, each designer’s activities are “transparent” to his or her collaborators. In open collaborative projects, modularity and actionable transparency generally go hand in hand, with both factors contributing to the divisibility of tasks (Colfer, 2009).

Here in this last quotation is the real value of the CISP. The value of participating in this community is reflected in the name People, Ideas & Objects. Ideas are non-rival and therefore participation brings about the greatest attributes of ideas for all involved. Ideas are able to build on the prior knowledge and the many innovations and ideas that came before it. Having the communities ideas and innovation backed up by a user driven software development capability, only makes this more worthwhile for the members of the community and their oil and gas producer clients.

Building on arguments of Ghosh (1998), Raymond (1999), and von Hippel and von Krogh (2003), Baldwin and Clark (2006 b) showed formally that, if communication costs are low relative to design costs, then any degree of modularity suffices to cause rational innovators that do not compete with respect to the design being developed to prefer collaborative innovation over independent innovation. This result hinges on the fact that the innovative design itself is a non-rival good: each participant in a collaborative effort gets the value of the whole design, but incurs only a fraction of the design cost.

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