HBS Working Knowledge Forum on Stretch.

This forum is asking a critical question regarding the performance of firms and maybe more importantly, the performance of management. Click on the title of this entry to be taken to the forum. 

Can anything be achieved within a moment of time? Are quarterly and annual metrics obstructing what is possible? I know each day I struggle to move towards the goal of building the People, Ideas & Objects system. Each day I am frustrated by an inability to attain that objective. And each day I marvel at the progress we have been able to achieve in moving this software development project forward.

If I look at a moment in time, the moment that the May 2004 preliminary research report was published, as a fixed point in time. And I assume that it was a finding of substantial value for the oil and gas industry. Each day since I have risked the value of the idea by attempting to move it forward. What I have relied on is my education and experience to ensure that no risks would obstruct this community proceeding in the right direction.

As our speed increases and the challenges of blind bunny trails distract us from what is important. We must be aware of our risks to derail this train at all times. If we focus on the risks, then the train will derail for certain. No one individual, no one group will have that opportunity if we leave the future of this project in the hands of those that care the most, the users.

This post was motivated by an interesting offer from Professor James Hesketh of Harvard Business School. His offer is to debate these points in a forum until August 27, 2008.

Please, Join me here.

Technorati Tags: People's Harvard Ideas Management

Business users.

I recently commented in a number of posts how developers and users need to communicate more effectively during the software development process. I suggested that Users may want to have a look at some of the tools that are available today and highlighted a series of videos on "Eclipse day at Google". I also commented that the developers may want to consider their NetBeans tool set to include some tools for enhancing the communications with users.

Business rules, data models, UML and XML make for a very precise definition of the business. However, to the business user these are very abstract representations of the business and there is so much more to what they do in their jobs. I think the business user needs to understand the Java Language to the level where they are thinking of their problems in Java and then can relate them to the developer. I think the developer needs to understand that an innovative and change oriented business needs to have development work done on a constant basis.

Making a comment on Geertjan's blog reflected well the attitude of the developers and how difficult a task this may be. I feel this is a serious problem. Users and developers in a distributed development project, as big as this project is, are going to need as much help as possible. I would go as far as to say that bridging this gap may be one of the next frontiers in developer productivity.

Then along came Anne. Anne Botha has picked up the topic of how difficult the current environment is for the business user. A developer by trade Anne tried a few jobs in which she became the prototypical "business user". Her writing is very frank, interesting and comical about this subject. She is writing 10 articles about her undercover adventures and I think she is defining this problem very eloquently in her first two posts. If you want to subscribe to her writing it is a little difficult as I don't think she has her own blog, and is posting the series at DZone. Her first two articles are here and here. Very informative and good entertainment.

Technorati Tags: People's User Development Software Ideas

What a difference a day makes.

I have quoted on several occasions the number of words that are "consumed" in this weblog. Previously I quoted 400,000 and most recently 350,000. Either one of these numbers is impressive in terms of the expression of the idea of using the Joint Operating Committee.

Google is always making changes to the Blogger service that I use. Recently I upgraded to their "Blogger in Draft" service and was able to download the .xml file for the entire blog. To my surprise there are now over 692,000 words in the blog. That's the equivalent of seven books! So much for my previous attempts to calculate this number.

The important aspect of this is the fact that this idea has created such a rich and fertile ground for new ideas in the oil and gas industry. What will be really surprising will be the volume of ideas that the global User and Developer community generates.

Technorati Tags: People's, Ideas, User, Development, Collaboration,

The McKinsey Quarterly, Harnessing the power of informal employee networks.

McKinsey has published a new article about the power of networks under their "Strategic Organization" functional group. Recall Metcalfe's law states the power, or value, of a telecommunication's network is proportional to the square of the number of users of the system. Although I don't think that the McKinsey authors were thinking in terms of Metcalfe's law, I think it is relevant. The pertinence of the law applies to the number of people as much as it does to Ethernet connections. In this article McKinsey states that informal networks are flourishing in corporate America. This is an extension of "human nature, including mutual self-interest, leads people to share ideas and work together even when no one requires them to do so." Music to my ears and something that I suspected would begin to happen to corporations.

Although this article addresses only internal networks, in oil and gas particularly, these informal networks affect the communications between companies. Recall the discussion about the stickiness of information and how information flowed through a hierarchy much slower then through the industry itself. These are the informal networks that have been existence for as long as people were employed in corporations, what's different now is they are much larger in terms of participation and volume. The Information Technologies are making these networks the most effective way in which to get things done. I see this as the failure of the hierarchy and its second cousin the bureaucracy. The path of least resistance is going to be used by people whenever there is pressure to perform. And as McKinsey notes about companies, and particularly large companies, there are tangible benefits.

Most large corporations have dozens if not hundreds of informal networks, which go by the name of peer groups, communities of practice, or functional councils -- or have no title at all. These networks organize and reorganize themselves and extend their reach via cell phones, Blackberries, community Web sites, and other accessories of the digital age. As networks widen and deepen, they can mobilize talent and knowledge across the enterprise. They also help to explain why some intangible - rich companies, such as ExxonMobil and GE, have increased in scale and scope and boast superior performance.

I can assure my readers that the ideas expressed in this blog have been resisted by the corporations. The corporations are unwilling to address these points and have systemically refused to sponsor or develop any of these initiatives. Just outside of their purview is the growing network of readers to this blog that see the long term solutions to their problems, and the network continues to grow. Sadly the bureaucracies will not participate until it is too late.

So it's unfortunate, at a time when the ability to create value increasingly depends on the ideas and intangibles of talented workers, that corporate leaders don't do far more to harness the power of informal networks. Valuable as they are, these ad-hoc communities clearly have shortcomings: they can increase complexity and confusion, and since they typically fly under management's radar, they elude control.

And in oil and gas it doesn't need to be this way. Companies are a critical part of the community that is being built here. The ability to manage your business can be enhanced by getting behind these informal networks and enabling them with software such as I am discussing in this blog. By doing so, they would be able to harness the power of these networks and eliminate the down side risks associated with them. Downside risks that are detrimental to the firm and increasing in terms of scope and scale.

To me the most disappointing aspect of reading this article is that the Joint Operating Committee is the cultural way of the industry. Its inherent in everything that it does and yet, for purposes of the hierarchy and its compliance focused ERP system vendor, most and if not all aspects are ignored. Which leads to me to re-iterate the proposed Military Command and Control that is fundamental part of the Compliance and Governance module. In terms of organizational structures the hierarchy has had a good run for the past 100 years. However its time is up. One organizational structure that has been successful for many thousands of years and one that is proven to be successful at least 50% of the time (counting both winners and losers) is the Military Command structure. Why not use the Military Command and Control structure for these informal networks?

So there we have it, the people within organizations seek to form informal networks as the path of least resistance. And oil and gas assets are best managed through Joint Operating Committees. For the first time I think I begin to understand why management dis-likes the ideas I write about.

Technorati Tags: Genesys, People, Ideas, McKinsey, Collaboration

ASPO USA Conference

This week Houston is hosting the Association for the Study of Peak Oil & Gas - USA's (ASPO - USA) conference. Appropriately the conference is sub-titled "Energy, the First Challenge of the 21st Century". This conference may be the key turning point in the discussion of peak oil. Where talk turns to the actions needed to mitigate Peak Oil. Unfortunately I will not be there, but if I were, I would hope I could assert that one of the necessary actions would be to design and begin building the software for the industry operations.

The hierarchy is not an organizational structure that has been designed or built for the 21st Century. My question would be, what type of organization is necessary to address these problems? If we expect to approach this issue with any type of constructive speed or innovativeness we must first design that organization and build the software that supports it. The reality today is that software needs to be built first, or alternatively, choose manual systems. This organizational paradox is resolved when the software exists to support the transactions and processes of the innovative oil and gas producer.

Are we fully aware of the extent and level of dependence our actions are dictated by the IT we use? If I were to approach the "First Challenge of the 21 Century", I would start by designing the software. The organizational structure I recommend the industry use is the industry standard Joint Operating Committee (JOC). It is the legal, financial, cultural and operational decision making framework of the industry. All of the tacit knowledge of the industries operations is codified in that organizational construct. If we augment the Joint Operating Committee with today's Information Technologies, collaborative systems and a dedicated software development team, the JOC can align its frameworks with the Compliance & Governance frameworks of the environments we do business in. A system built to facilitate innovation and enable speed, everywhere and always in the earth sciences and engineering disciplines. Join me here and lets take action on our First Challenge of the 21st Century.

Technorati Tags: Genesys, Peak-Oil, Ideas, Innovation

Another perspective

The keynote address at the 2007 Influence Conference was presented by ICANN CEO Paul Twomey. ICANN (Internet Corporation for Assigned Names and Numbers) is defined on their website as;

ICANN is responsible for the global coordination of the Internet's system of unique identifiers. These include domain names (like .org, .museum and country codes like .UK), as well as the addresses used in a variety of Internet protocols. Computers use these identifiers to reach each other over the Internet. Careful management of these resources is vital to the Internet's operation, so ICANN's global stake-holders meet regularly to develop policies that ensure the Internet's ongoing security and stability.

ICANN's role is interesting due its focus of being the naming conventions and their assignment. More or less a quasi street light architect / traffic cop. A rather limited role, however, as noted in his keynote; he sought out to provide a number of answers to some important questions regarding the future of the Internet.

Here is a comprehensive summary of Twomey's comments during his keynote.

"While it’s difficult to be definitive about the future, here are some things I think we can expect:"

• Usage of the Internet will be limited only by access to electricity. As many as 3 billion people may be able to enjoy a truly global Internet.
• Many, perhaps most, will access the Internet by using mobile devices.
• We’ll see a very significant increase in broadband access (over 100 mb/sec indeed up to 1 gigabit per second). Many developing countries such as Morocco, China and Malaysia are adopting accelerated broadband distribution programs to deliver the Internet to their citizens.
• A machine-to-machine Internet will overtake today’s person-to-person Internet.
• We will see billions of Internet-enabled appliances at home, at work, in the car, and in the pocket.
• Third parties will use the Internet to monitor all sorts of activities and utilities — from washing machines to cars to electricity meters.
• Geo-location and geo-indexed systems will be much more common and emergency services will be more precisely dispatched.
• There will be significant improvement in spoken interaction with Internet-based systems.
• We will see an even wider array of delivery methods for intellectual property (movies, sound tracks, books, and so on) than is available today. VoIP will be prevalent and SIP may be the principal protocol means by which calls are set up. Voice communication will be essentially free, except perhaps for calls that terminate on traditional PSTN devices including mobiles.
• Almost no industry will be offline since most will rely on the Internet for customer interaction, customer discovery, sales, service, advertising, and similar activities.
• Group interaction and collaborative support tools — including distributed games — will be very common.
• And last but certainly not least, internationalized domain names and new gTLDs will open up the Internet to much more multilingual content.

"What will you be able to do in the future that you can’t do now? Here are a few examples:"

• Manage your appliances and home security systems through online systems.
• Use your mobile phones as remote controllers.
• Download videos, music, and books as an everyday practice. Video on demand will focus on watching previously downloaded video rather than watching streaming, real-time video. This is really just an obvious extrapolation of the iPod/TiVo paradigm.
• You will be able to talk to the Internet itself to search for information and interact with various devices — and it will respond.
• Search systems will be more precise because meta-tagging of information will have become more common. This is part of the semantic web movement.
• Maintenance histories of products that can be serviced will be keyed to radio frequency IDs or bar codes associated with the devices. This is one potential use of Internet Protocol version 6, or IPv6, which is the natural extension of the original IPv4.

"What will the technical underpinnings of the Internet look like by then?"

• Terabit per second local networking will be available as backbones for local networks.
• The domain name system will operate in multiple language scripts. Again, a result of deploying IDNs and new gTLDs.
• IPv6 will be widely deployed, once the technical and financial issues have been worked out.
• Better confidentiality and authenticity will be provided through the use of a public key crypto. This will provide more authentication all along the network.
• Much more inter-device interaction will be common, incorporating position location, sensor networks, and local radio communications.
• Spam, phishing, and various forms of denial of service attacks will continue a cold war-style arms race with defenses and better authentication techniques.
• Operating systems will continue to be troublesome sources of vulnerability.

There should be no confusion: broadband speeds required to participate in the internet in 10 years time will be measured in the 100s of megabits per second. Indeed network planners in South Korea are now moving households to 1 gigabit connections today.

Why is the appropriate approach to broadband so important? It is because the Internet will continue to represent a massive and accelerating force for the reduction of transaction costs across the global economy, and a force for unprecedented innovation in the delivery of private and public services.

Clearly we see many of these same opportunities for companies and people. The last point I have highlighted in italics is clear recognition that the direction that this blog and software development proposal are consistent with others perspective and vision. Transaction costs are best handled in markets. Markets, due to their (primarily) contractual nature, increase transaction costs. Information Technologies reduce transaction cost friction to their lowest level. People, Ideas and Objects will bring these technologies to the energy industry.

Technorati Tags: Genesys, Ideas, Vision

Professor Paul Romer on Growth

Click on the title of this entry to be taken to a podcast from www.econtalk.org. Once there you will be able to download Professor Paul Romer's paper and listen to the podcast.

Stanford Professor Paul Romer is also a Senior Fellow at the Hoover Institute and one of the many academics that I follow. He is the author of the theory and ideas contained within the "People, Ideas and Things" as the three key attributes of economic growth. Recall that this was the initial idea that I used in calling this software development "People, Ideas and Objects."

At approximately 16:10 into the podcast there is a discussion that is very pertinent to the energy industry. And that is ideas need to be discovered to maintain growth. As we learn more, knowledge becomes more important in the enabling of growth in economies. And as economies increase in size, more ideas are required more frequently. In turn economic progress has enabled more people to be engaged in the discovery process. Knowledge building on prior knowledge, and more and more people engaged in the discovery process. Professor Romer notes over time, these two factors are why we are able to attain higher rates of growth.

The oil and gas industry is of course built on ideas. The industry has achieved its current levels on the basis of the ideas that have been generated over its 140 year history. To move forward will require more ideas, and at a faster pace. So not only is it an application and development of the earth sciences and engineering disciplines, it is a never ending escalation of knowledge. Tell me how, and explain to me why we expect the current bureaucratic corporations will ever attain this acceleration in idea generation and application? These concepts also imply that if we do not re-organize the industry, we will never attain anything greater then what exists today. We are organizationally constrained.

Professor Romer is asked during the podcast about securing intellectual property. As we have learned through the writings of Professor Langlois markets are made up of individuals. I believe that the tie-in of ideas and markets is a key attribute of the energy industries future. The motivation to pursue our own ideas is monetary. Once you have secured your rights by publishing them, then and only then are they used for the greater benefit of all. This is the dual role of copyrights, that they are earned through publication and the source of value generation in the future economy.

Meta ideas or idea discovery systems are an inherent part of this systems module definition. A definition that includes both Research and Capabilities, and Knowledge and Learning modules. Only when the organizational key players (the JOC) are recognized in the legal, financial, operational decision making and cultural frameworks will the ability to generate and use ideas come about. Elements of these two system modules will include the functionality of tracking and valuing the intellectual property. Professor Romer states that ideas lead to change which leads to growth. Bureaucracies can't change fast enough for the markets growth needs.

These comments of Romer's provide a clear understanding of how the energy industry will increase or maintain its productive capacity. Ideas, and their discovery process are the life blood of the earth scientists and engineers, and more importantly the future of this industry. Oil does indeed exist in the minds of oilmen.

Technorati Tags: Genesys, Romer, Ideas, IP, Productivity

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

Peak Oil, and what I think it means to the petroleum industry.

I have scrubbed this entry please see the information in the previous entry "A Quick Summary of Where We're at".

A quick summary of where we're at.

The concept of peak oil has finally attained the attention that it should. Now is the time that we do something about it. The National Petroleum Council's report provides the undisputed evidence of the situation that the energy industry faces. I think our first order of business should be to organize the energy industry to achieve greater speed and innovativeness. A new organizational structure based on the industry standard Joint Operating Committee (JOC). An organization that is able to address the issues of peak oil and retire the structured hierarchy from its 100 year reign. But how? In my research I have found that organizations are constrained and supported by the software that is used. This has prompted me to state that "SAP is the bureaucracy." And if a firm wants to change the organizational structure, it needs to build the software to support that new organizational construct first.

For too long the energy industry has suffered with the likes of Oracle Energy and SAP as their solutions providers. Applications that were built for the manufacturing sector, not for the oil and gas industry. What producers need is an application that ties the unique, and difficult, aspects of risk mitigation and the expanding aerial extent of their properties. In other words, the need to deal with other producers who share common interests in a property. If the producer had IT systems that recognized and supported the legal, financial, operational decision making and cultural frameworks of the Joint Operating Committee. And then combine the JOC's frameworks with the Compliance and Governance structures of the hierarchy, with today's collaborative Information Technologies, the alignment would provide the organizational speed and innovativeness that is needed. Innovations are especially needed in the earth science and engineering disciplines where they will lead to new science. Asking the current bureaucracies to keep up with the future changes in the sciences is asking too much in my opinion.

Speed and innovativeness are the highlighted benefits of identifying and supporting the key frameworks of the Joint Operating Committee. Now is the time for the industry to embark on a purpose built system, which identifies and supports the Joint Operating Committee. And unleashes the resources of the industry to solve or mitigate the effects of Peak Oil. Systems that can be used by the smallest to the largest of producers. Would anyone argue the bureaucracies of today will be the solution to Peak Oil?

What would a system based on these changes look like, how would it be different, and could it make the difference?

Lets start out with some fundamental re-thinking in how the problems could be solved. The world's first economist Adam Smith and his theory of the division of labor. What Adam Smith was able to prove in his reorganization of a pin factory can be implemented and provide similar benefits in the energy business. The theory identifies that economic growth is achieved through further divisions of labor and enhanced forms of organization. Smith's application of his division of labor theory increased production 240 fold at the pin factory. The energy industry can expand its capabilities and capacities through a more precise and enhanced division of labor. The other theory of Adam Smith, "The Invisible Hand" of the market will provide the industry with what it needs, when it needs it more effectively then the silo'ed hierarchy of today. A third element of this different thinking is today's Information Technologies (IT) can enable a virtual environment that supports the transactions and interactions of the producers and people involved in the industry.

In a comprehensive review of the theory of markets and firms. I have conducted research based on Professor Richard N. Langlois' writings into the boundaries of the firm and identified a new division between the market and the firm. Through the enhanced and modern information technologies, the market will provide the best solution to the problems that we face in oil and gas. The firm will hold the Compliance and Governance, Knowledge and Learning, Access Control, and Research & Capabilities modules. Whereas the market, or in this instance, the Joint Operating Committee will provide the firm with the necessary resources contained within my module definition of Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Partnership Accounting. Modules that make sense, where the average oil and gas user will inherently understand which module they should use to achieve their work. Gone are the generic categorizations of General Ledger, Accounts Payable and Receivable. These functions remain within the module definition, only as subsystems that support the user activity.

In order that 2030 achieves all that it has to offer. I propose we build systems on the basis of the natural form of organization of the energy industry, the Joint Operating Committee. It is my opinion that the era of cheap oil has allowed our exploitation capabilities to exceed our exploration capability. We need to rebuild the industries exploration capabilities back to the level where the resources and capabilities are able to sustain the market demand. Without these exploration capabilities we will not succeed in what the market demands of us.

The earth scientist and engineers are the key resources necessary to achieve our objectives. Much has been written about the current shortage and their future retirement. At the same time the hierarchy within the corporation has constrained these resources by building similar internal capabilities within each firm. We need to address how the organizations Compliance and Governance is addressed in any new system that we build. Innovation and speed are two attributes of the information technologies current infrastructure, and the module specifications I have described below.

I propose we build systems to solve these issues. Based on the Joint Operating Committee and organized in the following modules;

Petroleum Lease Marketplace

Consider a virtual environment that provides the firms with market access to public lease data and information in a search-able and transaction supported systems. To a large extent what is currently resident as a land departments functional domain would be managed by this module. Critically this is where the majority of lease, agreement and partner variables are captured in this system. Readers interested in further exploring this module can review it here.

Resource Marketplace

How a producer could find the right employees or contractors to assist in the work of the firm. How suppliers and contractors would have agreements recognized by the systems and have the appropriate accounts payable and transaction processing be a natural fallout of work that is done. Human resource and payroll functionality will also be subsystems of this module. This module will provide the firm with a window on the marketplace resources.

Financial Marketplace

A marketplace where users, producers and suppliers within the industry can source the capital and operating needs of the industry. Where banks compete for the producers business, brokerage companies providing their services to the people and firms that are operating in the oil and gas industry.

Partnership Accounting

Or as I am wanting to call it "the algorithm from hell". This module manages the unique characteristics and transaction processing of the Joint Account and the various stakeholder interest's in a property. Consider the differences in reporting requirements between Calgary, Houston and Aberdeen. Currency valuations in both accounting for income statement and balance sheet items, production measured in metric or U.S., daily and monthly production values, nominations, penalties, casing point elections, before and after payout and other related oil and gas accounting system requirements that are handled appropriately in each company. But lets now consider how the energy industry may need to operate, at the Joint Operating Committee level.

I think the redundant duplication of capabilities built within each firm will need to be addressed in order to solve the energy problems we face. And particularly the shortage and retirement of the brain trust of the industry. Instead of each firm building up what they need to operate the properties that they are designated as operator of, the industry will need to pool the resources necessary for the individual joint accounts. Each company providing the available resources they have to each Joint Operating Committee. This brings the difficulty of managing and reporting to a higher level of complexity. Where a JOC may now receive 8 seconded employees from 8 different producers. The costs of these resources being incurred, probably not in proportion to their interests, will need to be recognized in the costing structure of the joint account. Particularly since the earth scientists and engineering efforts necessary for a property may grow in terms of labor input per barrel of oil.

These are the types of issues that are addressed and managed through the Partnership Accounting module. Please read the entire entry that I wrote about Partnership Accounting here. The other 800 pound gorilla in the room is how these people interact. Who has the authority, and what structure is recognized from these 8 different companies, with different professional backgrounds. This is solved through the Military Command & Control Structure that is the Governance element of the Compliance and Governance module noted below.

Access Control

This application will be unique in that it is a software service. The application will be accessible anytime and anywhere which brings a significant level of security requirements to conduct properly. Key to the transparency of all aspects of this system, the source code for the systems will be available to any and all users of the system for their perusal. Taking the "Given enough eyeballs, all bugs are shallow" comment of Linus Torvalds about how source code should be reviewable by as many people as possible.

Compliance and Governance

Compliance being the sole reason of the bureaucracy today, the needs of the SEC and accounting for Sarbanes Oxeley have driven the organizations into making the organization all about compliance, in my opinion. The business of the business has been lost as a result. Companies have become reporting entities that have lost sight of what the energy business is. Compliance is a necessary part of any organization and this module will allow the management to maintain their status is in compliance of the regulations. The key differential is that the compliance is a fallout of the process of doing the business. I wrote about SEC Chairman Christopher Cox's introduction and development of a system that will mirror the companies compliance. This compliance framework will be built with the Governance mentioned below, and the financial, legal, operational decision making and cultural frameworks of the JOC.

Under the Governance module we need to approach the use of the scarce human resources in a more holistic manner. All member firms of a Joint Operating Committee should provide resources that are designated to specific properties. The concept of an operator can not last if we are to independently build and duplicate capabilities within each firm. The role of the Market has to provide some elements of these capabilities. Many of the accounting and land procedures will need to be amended to achieve this pooling of resources within the member firms of the Joint Operating Committee. How does a group of people committed to a JOC participate and recognize the order and structure of the people employed there.

I have proposed a solution for this by implementing an element of Military Command & Control structure. Where people are designated at a certain level within their profession and like a Captain in the U.S. Army may find himself reporting to a British Major with a variety of other NATO forces under his command. The effective pooling of all JOC participants resources can then enable the structure to be deployed, and each individuals role and responsibilities are assigned appropriately. The costing and associated issues are part of the Partnership Accounting Module noted above. I believe this is one of the critical means of addressing the National Petroleum Council's dual problems of the shortage and retirement of the industry brain trust.

Research and Capabilities

Innovation is a critical component of the capabilities of this reorganization. It is at the Joint Operating Committee level that these innovations are expected to rise. However, my research has discovered that the risks to the firms in terms of its capabilities will fall into jeopardy. That to capitulate all of the science and innovation to the JOC would be a mistake similar to the problems diagnosed of Chrysler. The scientific advances and the implementation of the new sciences and innovations have to be managed by the firm, otherwise it will fail in its ability to provide the overall direction of where it should be heading. Research in the firm will take on a new role in this type of organizational structure. I foresee most of the engineers and earth scientists being employed by the firms and accessing the most advanced tools and research capabilities. This is what will be required to build the exploration capabilities back to what they were prior to the cheap oil era.

Knowledge and Learning

This will be the repository for the firms capabilities and research. It will also be a window to the public data that is associated with the industry. Companies will search and discover what is publicly available by other firms and seek out the information regarding what is possible.

I am throwing another paradigm in here and am asking the industry to dispatch its secretive ways and begin to use the legal means of securing their intellectual property. Copyrights are earned through publication. Patents are the most sound manner to ensure your invention and innovation hold value in the industry. The ability to submit ideas in a safe environment benefits the firm in securing its intellectual property, and allows the rest of the industry to benefit from those ideas immediately. This module is for that purpose.

User Participation

I would recommend anyone who has an interest in these topics review the archives of my blog at http://innovation-in-oil-and-gas.blogspot.com or contact me at paul dot cox at gmail dot com if you would like to participate. Without active user participation, this project will never happen, so please lets get started.

This proposed application will of course be the largest, purpose built system for the energy industry. Costs are projected on a preliminary basis in the hundreds of millions. A very costly project, but one that only has to be paid for once. If we amortize the building and maintenance of this system over the entire industry, I believe the costs to each producer will fall within the single digit percentile of what producers are currently paying SAP and Oracle.

I am also asking if any producer or investor wants to donate or sponsor this project, please push the PayPal button on the website and make a contribution so that we can begin to make 2030 real.

Finally I would like to mention that over my thirty year career in oil and gas. I have found the industries resilience and ability to address tough issues has impressed me many times. Now is the time to take that inherent capability of the industry, organize it and make 2030 a reality.

Technorati Tags: Genesys, Peak-Oil, Ideas, People, Modularity

Langlois ESNIE Slides

Continuing on with our review of the European School on New Institutional Economics conference. Professor Langlois' three ESNIE documents which I have reviewed are referenced here. There is a fourth, his slide presentation entitled "Dynamic Transaction Costs". These appear to be a subset of Lanlgois' University of Connecticut Economics 486 class slides.

On the ESNIE Personal Page Professor Langlois introduces his lecture as;

"This lecture will have two main objectives. First, it will introduce the two principle approaches to the economic organization of the firm: the transaction cost approach and the capabilities or knowledge based approach. The lecture will thus serve as an introduction to the lectures of Oliver Williamson and Sidney Winter. Second as the title suggests, the lecture will set forth the theory of dynamic transaction costs, which one can think of as an attempt to bridge the gap between transaction cost and capabilities approaches."

Firstly, I recommend downloading the file for future reference. There are many worthwhile points in the presentation. Professor Langlois starts with a simple example of a master gun maker in the 19th Century. This example shows how complex and sophisticated markets are, and accurately reflects Adam Smith's division of labor, and the extent of that division in the 19th Century.

On slide number 22 Langlois introduces two different scenarios, "The Visible Hand" of Chandler, and "The Vanishing Hand" of Langlois. Scenario 1 supports Chandlers "Visible Hand" in which "organizations" needed to approach scale. The "management" then used vertical integration to reorganize the capabilities necessary to mitigate the "Dynamic Transaction Costs". (The costs of negotiating, teaching, coordinating etc. through the market.) Slide 28 is where Langlois introduces the second scenario. A scenario that accurately replicates the situation in the energy industry.

Scenario 2

• Creative destruction of existing internal capabilities.

Although I may be the only one declaring the destruction of energy corporations existing internal capabilities, I would find it difficult for anyone to justify a 250% increase in relative activity, with an associated 17% production replacement, a success. I think calling it an "activity" accurately reflects my concern for the long term needs of the energy marketplace.

• Modularity and a high level of external capabilities.

Through my review of Langlois' "modularity" papers (here and here) I have been able to define the necessary software modules that should be built. Modules like the "Resource Marketplace", "Petroleum Lease Marketplace", and "Compliance and Governance" modules. Langlois noted one of the key benefits of modularity was the users ability to clearly see "what" and "how" they could accomplish there needs. And modules also provide interfaces for interaction between these users and other modules.

External capabilities is the primary if not the only method the energy industries acquires its capabilities. These capabilities are accessed by the firms use of contracts. Drilling a well may set in motion up to 100 different vendors operating in various capacities to drill the well for the producer. Little outside of supervision and application of the scientific theory (the key competitive advantage) is conducted by the firm. This was the only viable way in which the industry could have developed, and to facilitate this reality the industry created the Joint Operating Committee, the primary organizational focus of the "market" in this software development proposal.

• Development of institution to support market exchange.

Standards and the culture of the industry have developed as a result of the Joint Operating Committee. Agreements are culturally systemic, data models are standard, accounting and operating procedures are implemented through industry associations dedicated to the unique needs of, one more time, the Joint Operating Committee. As I have claimed and determined in my thesis, SAP is the bureaucracy, organizations are defined and supported by the software systems they use. For the energy industry to move to a more innovative footing requires that the industry make this blog's software development proposal, be made real.

On slides 31 - 34 Langlois introduces his "Vanishing Hand Hypothesis".

"The Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets. But the components of that process - technology, organization, and institutions - change at different rates."

"The managerial revolution was the result of an imbalance between the coordination needs of high throughput technologies and the abilities of contemporary markets and contemporary technologies of coordination to meet those needs."

"With further growth in the extent of the market and the development of exchange - supporting institutions, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization."

And on slide 35 Langlois notes what I think is the key to the oil and gas' future competitiveness;

"Extent of the market is about learning."

Learning about the changes in the earth sciences and engineering disciplines. Disciplines that are the key competitiveness of the future of the industry. If our knowledge of x is doubling each y years, how will the hierarchy maintain an understanding of the changes in the science. How will the firm innovate and apply these new findings, and in turn assist in the sciences further development?

Finally on the last slide Langlois provides a summary of the three phases of Smith's "Invisible Hand", Chandlers "Visible Hand" and Langlois "Vanishing Hand". Again I recommend reviewing these slide to capture the full extent and significance of these concepts. Therefore, I will not recreate the slide here and only refer to his description in "The Vanishing Hand: The Changing Dynamics of Industrial Capitalism".

"More or less arbitrarily, I have labeled 1880 as the point at which the path crosses the firm-market boundary. This is the start of the Chandlerian revolution. Equally arbitrarily, I label as 1990 the point at which the path crosses back. This is the vanishing hand. Far from being a general historical trend, the managerial revolution - in this interpretation - is a temporary episode that arose in a particular era as the result of uneven development in the Smithian process of the division of labor." p. 56

How much longer will the industry be held captive to the hierarchies management, is the only question I have. It has now been fourty six months since I first proposed these concepts! The necessity to reorganize the energy industry to approach the commodity markets demands for more is clear to me. Doing more "activity" as I have labeled the doubling of drilling activity, may become known as more of the same thing but expecting different results, and runs the risk of not being classified as a failure, but as insanity.

Technorati Tags: Genesys, Langlois, Ideas, ESNIE, Markets, Firm, Failure, Energy

Plurality should not be assumed, without necessity.

This quotation is "Occam's razor" which I used as the title of my thesis that this blog is based upon. Click on the title of this entry for the Wikipedia entry.

I've found a few comments that bring about a different perception of where we are in this technologically induced, changing world.

"If we get this wrong, it doesn't matter what else we get right."

I read that for the first time on the Singularity Institute weblog. I found it highly reflective of the times that we live in, and the critical nature of some of today's technologies influence over our future.

Another interesting point was put across by Stanford Professor Paul Romer. Instead of economies being driven by "Land, Labor and Capital," it was now "People, Ideas and Things" that mattered.

And in a critical review of Thomas Friedman's best seller "The World is Flat", Professor Edward E. Leamer states the following.

"The speed at which ideas are exchanged determines the pace of progress."

and

"If you think of humans on Earth as a single thinking organism, then until the 1980's we have been using only about 1/3 of our global brain because 2/3rds of humanity were shut in closets where they couldn't communicate with the rest of us."

And maybe, I am thinking, the future has arrived.

Technorati Tags: Genesys, Plurality, Romer, Ideas

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

Eric Schmidt, Google CEO

There is an interesting and worthwhile video on YouTube of Google's CEO at the Web 2.0 conference. Within this video Dr. Schmidt says something very interesting that applies to the work being done around this blog.

"Collaboration is the 'killer app' for how communities work."

In economics one learns fairly early on that transportation, communications and financial resources are key ingredients of economic growth. Collaboration is a key technology of communication. If the energy industry is going to be able to grow, enhanced communications will be necessary.

Technorati Tags: Genesys, Collaboration, Trends, Ideas

Copyright issues on MIT Video

MIT Video is hosting a discussion on the topic of copyright. As I have mentioned here before, intelectual property is the most valuable assets on a go forward basis. Copyright, Trademark and to a lesser extent Patents provide their owners with powerful tools to ensure their thoughts and ideas are respected and commercial. It is interesting to see the constraints that are realized by the Professor of these universities are required to consider whether they can even use their own ideas. If the professors previously published their ideas, it seems that most of the publishers had taken the rights to the copyright in consideration of the costs of publication. Now with the desire to let those ideas be heard by a larger, and electronic audience, they are unable to secure those rights from the publishers. In addition to this point regarding overall access their is many other worthwhile points. I would recommend the viewing of the video on this important topic. People need to generally understand these points of law better then they do now.

Technorati Tags: Ideas, IP, Knowledge, Genesys

Professor Langlois' Slides

I've been reviewing some of the material that I gathered when I was looking into Professor Richard N. Langlois' writings. Going slowing through the slides that he produced for his "Economics 486, The economics of organization" course reveals a number of very interesting nuggets. I can't technically recreate the slide, and I do recommend that everyone download and study this rather comprehensive and valuable information that Professor Langlois has included in the file. Slide number 21 deals with measurement costs. Recall that we are discussing the role of the firm and of markets. And the "production" costs are being handled by the market and the "transaction" costs help to define the firm. To give you a good understanding of the oil and gas application of Langlois' theories I would refer again to the table that I prepared.

Now as for slide number 21, is this just me cluing into something that is generally known or understood, or is this something more then than that? The text of the slide is as follows;

"Measurement Costs."

Here Langlois is noting that if the costs to measure and negotiate the terms of the transaction are too high, then the role of prices will be established by firms and not markets. Not a great description but I am trying to get to an obscure point here.

"Consumers seek attributes of goods, not goods themselves."

This is where the obscure point starts. If I said that I was to go grocery shopping, I would say that I was not just buying food, but I was buying high quality goods at reasonable prices that meet my discerning tastes. The key words being "high quality", "reasonable prices" and "meeting my tastes". I could go into a Safeway and buy what I want and I would be able to more then satisfy my needs using just those three specific attributes.

"Costly to measure attributes."

I can see how a grocer would need to determine his pricing. How much product does he get, Oranges are rare due to the crop freezing, the amount of wastage and spoilage incurred by the shipper and the customer, and finally what the store will cost in terms of overhead. This can't be calculated for each Orange and therefore depends on the market for the price determination. The point being that the ability to standardize the attributes would help to establish the market pricing. Note information is what the market provides the consumer, grocer, distributor and farmer, and that is the role of markets.

"Level of buyer sorting depends on variability of goods."

The buyer will have to deal with what is provided. If the quality or price is not to his liking then they will not buy it, and leave it for the next consumer. The market information being generated here by the buyer and seller is significant.

"Sellers may reduce variability to lower buyers' search costs."

If the Safeway were located in affluent neighborhoods it would be inappropriate to attempt to sell products that are of low quality or bargain pricing. The buyer may be minimally challenged by price and therefore will look to other attributes to choose. Again markets provide information, and if their costs to transact are too high, then the firm is the optimal choice. For oil and gas the important component to consider is the level of standards that support the market. These standards mitigate the costs of completing transactions.

"Net price goes down when excessive measurements reduced."

The grocer and the consumer will share their information indirectly through the pricing and purchasing of each individual Orange. This information is being communicated through the price, set by the market.

OK so we have travelled along way to state some pretty basic facts. And I will attempt to tie these points into what I am seeing.

Attributes of goods are what consumers seek, not the goods themselves. In a market where standard means and measures, glossaries of terms, default contract templates, like those in oil and gas are able to communicate, facilitate and support the markets ability to establish price and other information to the oil and gas producer purchasing / selling them. That is to say that the majority of the work that can and should be done within oil and gas ideally should be by the market. The oil and gas industry has established many of these market supporting components of standard etc. in the variety of non-profit and non-governmental organizations that make up the industry.

I am now taking a hard left turn, so try to stay with me. In databases the table is called entities, and the columns are named attributes. And that is consistent with the information that is stored in database. The "Oranges" table is made up of volume, price, grade etc (attributes). In XML (which is a key technology in discussing databases) "Elements, which are the building blocks of XML documents, are bounded by start tags and end tags that may hold content, or may consist of one empty-element tag," and, "Attributes are name-value pairs that may appear in a start-or empty-element tag." Confused, don't be. Simply XML here is being used to portray the information contained within the database, which uses standards, and for the purposes of communication of those elements to the data user.

Thanks for keeping with me to this point, I hope its been worth your while. Here is what I am thinking that may be my new epiphany, and I hope it is for most people, and not just me.

If we, as I have suggested in my table that I noted earlier, wanted to move to a market orientation, according to these facts as I have laid them out, we could establish a functional market for those areas that are under the domain and administration of the joint operating committee. There is only the need to build this according to this "theory" we have all the parts and pieces that will make the JOC function as we expected it to do.

Going back to the proposed development, and particularly the Petroleum Lease Marketplace, the critical data attributes that are available and can be queried and searched. These data elements are well developed, what is needed now is to create the virtual Petroleum Lease Marketplace I have proposed here. Imagine for a second that you were trying to secure the petroleum lease rights in an area that you believed through geological mapping and seismic to be of particular value in a zone of your specialty. By reviewing the PLM you would be able to find out what was available, with whom, for how long. Or you would then be able to post the land and prepare for a bidding based on new reserves valuations and pricing. A PLM being a virtual marketplace of Leases, partnerships, joint ventures and farm-in/out, companies that want to do business, and companies that may want to sell their interest. All within a virtual environment that is search-able and leads to the necessary transaction processing that will eventually become the producing field. And here is my epiphany, because the marketplace can be supported in this manner.

Technorati Tags: Genesys, Langlois, PLM, Market, Ideas, Development

A new tool.

Marissa Mayer of Google just announced "gapminder" for a preview look. What an unbelievable tool. The world will not be seen through the data elements, but through tools like gapminder. The address to this demo is...

http://tools.google.com/gapminder/

Technorati Tags: Genesys, Ideas, Innovation, Attention-Economy, Data

Ray Kurzweil, always a worthwhile speaker.

Ray Kurzweil is back on MIT Video. I wrote about Mr. Kurzweil on his last video performance at MIT. A very entertaining video and I highly recommend everyone go and view it.

Mr Kurzweil is the author of the Best Selling book "The Singularity is Near" as well as many others. Mr. Kurzweil debates with Professor David Gelernter of Yale the when, if, what and how of computer processing, and will it attain the level of human intelligence. A debate that provides new information regarding the capabilities and the definition of artificial intelligence.

Mr. Kurzweil suggest that the benchmark processing power of machines will emulate the human mind around 2029. He is careful not to suggest that this means a machine takes on a level of consciousness, but has attained the same level of performance of the human mind. If I understood him correctly, machines are providing an enhancement to human intelligence today, and that is what he means when he talks about artificial intelligence, an augmentation of capabilities for the human mind, with 2029 machines being produced with human like levels of performance.

Kurzweil's position is a reasonable point of view about when and how machines will achieve human like intelligence. Professor Gelernter wants the Turing test to be the ultimate test of human like performance and seems to insist on machines attaining levels of human consciousness. Something that he insists, rightly, will probably never happen.

The reference to 2029 by Kurzweil depends on the logarithmic and exponential growth in information, knowledge and processing power. He noted that knowledge was now doubling each year, with acceleration from the point where we are at now, what will be required in 2029 seems impossible, however, the acceleration is driven exponentially and logarithmically, whereas people think of the future only from the point of view of their historical experience, or as Kurzweil puts it linearly.

To me the debate is somewhat of limited value, Professor Gelernter appears not to be debating something he believes and hence his arguments fall somewhat flat.

The second video of this MIT series is very interesting particularly from the historical point of view. Professor Jack Copeland of the University of Canterbury, New Zealand. His discussion of the Turing Test and how Alan Turing solved the German Enigma machine in World War II. He continues on documenting interesting points of Turing's life and the impact that his Turing has had on the computer industry. A very worthwhile set of videos that provide very interesting views of the past and future of the computing industry.

Technorati Tags: Genesys, MIT, Video, Interests, Capabilities, Ideas

The Economics of Strategic Opportunity

Authored by;

Jereker Denrell, Institute of International Business,
Christina Fang, Department of Management The Wharton School and
Professor Sidney G. Winter, Department of Management The Wharton School.

February 2003.

Continuing on with the review of the LEM Working Paper series, Winter et al wrote "The Economics of Strategic Opportunity" to address the interesting topic of how strategic opportunities arise. This article has many worthwhile points and is available here. During July 2006 I also wrote a blog entry on a similar topic from Harvard Business School Working Knowledge series. Review of these three articles is highly recommended.

Winter et al start off their working paper by noting that the ability to earn exceptional returns is contrary to what is assumed to be the instance in business. The Efficient Market Hypothesis assumes that all knowledge is available to all. In the Abstract they write;

"As emphasized by Barney (1986), any explanation of superior profitability must account for why the resources supporting such profitability could have been acquired for a price below their rent generating capacity. Building upon the literature in economics on coordination failures and incomplete markets, we suggest a framework for analyzing such strategic factor market inefficiencies. Our point of departure is that a strategic opportunity exists whenever prices fail to reflect the value of a resource's best use. this paper examines the challenges of imputing a resource's value in the absence of explicit price guidance and suggests the likely characteristics or strategic opportunities. Our framework also suggests that the discovery of strategic opportunity is often a matter of "serendipity" and access to relevant idiosyncratic resources. This latter observation provides prescriptive advice, although the analysis also explains why more detailed guidance has to be firm specific." Abstract

In energy I have seen many people who assume their role and responsibility is to spend the money on exploration and development. The inexperienced assume that the act of doing is all that is required. These people stay in business for the approximate same period of time they have a positive cash balance. On the other hand, I have seen how individuals who are given an opportunity and struggle to lay in wait for the right time, develop sophisticated business strategies, engineering or geophysical ideas that can only be proven through a methodical and painstaking process. A process they have learned through several decades of experience and study. Needless to say, the latter groups are far more successful in any type of financial metric comparison to the former.

I have also written about the reckless acquisitions some CEO's pursue and am reminded of Carly Finorina's failed attempt to acquire PriceWaterhouse Coopers technology group for $19 billion. And the subsequent purchase of these same assets a year later by Lou Gerstner at IBM for $3 billion. Is this luck that provides these people with their enhanced returns? Anyone can spend money, and the amount of money available for any transaction is truly unlimited. Self delusion comes into play and a contagious enthusiasm for the failed theory can support any size of investment or any size bank loan. Because the banker has provided you with the resources to purchase a house, doesn't mean that you do it. How the Efficient Market Hypothesis fails is somewhat based on the discussion that Winter et al write about in this article.

1. Introduction

"Barney sets forth what might be called the "bad news" about resource valuation: in general it is difficult to purchase things for less than they are worth. The interests of both the seller and rivals should stand in the way of such an accomplishment. This paper sets forth the good news about resource valuation: our stance is that "the good news is that the bad news is wrong". (Or at least, the bad news is valid only within it proper sphere.)" pp. 1

"Whether the opportunities seen are actually seized is, however, an important question. We argue that the discovery of a valuable strategic opportunity is often a matter of "serendipity" in the strict sense - not just luck, but effort and luck joined by alertness and flexibility." pp. 1

"To appreciate these points it is necessary to break out of the equilibrium mindset that dominates so much of economic theory - including, of course, the Efficient Market Hypothesis (EMH)". pp. 1

I would also ask how much does time play in making the superior returns. If one is to compete on assets based on the EMH, with its staunch believers, one will be forced to acquire the assets they need at or near the market top. The timing, effort and finding yourself going against the grain are the keys to long term success and exceptional returns. As in my case on this project, I have kept the powder dry and the candle lit and have waited for the puck to arrive, as Wayne Gretzky would say. Now that the puck has landed on my stick, it would take a significant amount of money to purchase a similar strategic opportunity / position / asset. My costs are marginal.

2. Some Fundamentals

"Financial performance and profitability. In the strategic management literature, business success is generally equated with financial performance, and financial performance with "sustained abnormal profitability". pp. 2

And here is the key to a long term competitive financial performance. If the cost of the asset is overpriced at the time of acquisition, the amortization of the assets cost over the life of asset / business will consistently lower the returns realized. Winter et al take this concept further with the following;

"Our view is that net present value - or expected net present value, where risk is involved - is the basic measure of success in the quest for strategic opportunity. It is "basic" in the sense that it stands at the limit set by Einstein's famous dictum that "everything should be made as simple as possible, but not simpler." It is possible to employ more general or sophisticated measures that NPV, and to invoke NPV in more sophisticated ways. It is difficult to make basic economic sense with a simpler analytical apparatus than the NPV concept provides. Hence, our discussion of "strategic opportunity" relates to opportunities for positive NPV undertakings, with merit understood to be measured by the amount of NPV." pp. 3

"In this "basic" economic approach, we set aside some considerations, such as organizational survival, which might make something other than the NPV of an isolated opportunity matter to management. We also set aside more important complications associated with the long term interdependency among opportunities that arise from, and affect the development of, the same set of underlying capabilities and competences." pp. 3

The importance of this discussion is of particular interest in the energy industry. The reason is that almost all metrics of valuation of what is "real" are subjective. As I stated before the costs can be comprised and reflect only the ability to spend money. That does not find or produce oil and gas. Intellectual property is the key asset of an oil and gas firm. The producers capability and capacity to find and produce energy is the key metric. How to value something that is in the ground with many possibles and probables are unknown. What one man sees as garbage, another may see is gold. The subjective nature of the industry leaves the cost based measurements as meaningless. NPV when compared to these historical cost metrics will provide the superior returns that an effective management team provides.

"These consideration do not, of course, rule out a purely cost-based approach to valuation. With some effort it is possible to measure the investment involved in the creation of a particular complex resource, although the result is partly determined by luck. Cost data, however, clearly cannot answer by themselves the question of what the resource is worth. The demand side information is missing." pp. 4

3. Market Completeness and Strategic Search

Not to harp on the theme of the plodding along approach is the better method. The experience of the management staff that are able to "plod" along generally know that they are in a long term battle with the market. A battle for the type of results they know that they can achieve, and at less cost (and higher returns) then other methods. This model of business development is borne of a significant period of understanding and education in essentially the school of hard knocks. This struggle continues unabated irrespective of the monetary success that is achieved. These authors appear to be commenting about what the majority of successful companies have experienced.

"In summary, a realistic appraisal of market systems compels recognition that markets are incomplete, and drastically so in the domain of currently untried activities. As a result, since the value of existing activities may depend on untried activities, it cannot be guaranteed that existing activities are priced correctly. Thus when markets are incomplete, the prices prevailing in an apparent equilibrium do not preclude the existence of valuable unexploited opportunities. To exclude strategic arbitrage, a much stronger condition than market-clearing prices is necessary - we might call it "exhaustive entrepreneurship." It would have to be that for each good, traded or un-traded, there has to be someone who has considered the value of this good in all possible uses. As discussed in the next section, such a condition imposes a massively implausible information requirement on the actors in the system. Moreover, although actors can probably learn to identify the value of some of these resources, we argue that the local and decentralized character of the learning process implies that certain strategic opportunities are likely to remain. The challenges of the learning process also suggest some clues about the likely characteristics of such remaining opportunities." pp. 6

Or, in other words, irrespective of the market dynamics and the quality of the NPV, the strategic opportunities exist despite the market successes and failures. If a market participant eliminates themselves from the game before he / she even tries, then he / she will have lost for certain.

4. Valuation of Complex Resources: The Challenge of Imputation.

When I think of Google, I think of the resource that it provides me. I have 7,000 of maybe the smartest and most competent development and business people, and possibly the top 50 super computers all working actively to provide me with better processed information. A level of, essentially, artificial intelligence that has never before even been imagined. The dynamic that these Google resources provides everyone in business will allow generations of prosperous entrepreneurs. And that is maybe the point, Google's resources are available to everyone and to not use them at their optimal level eliminates you from the business environment of tomorrow.

On the other hand, how the structured hierarchy exists in this environment is of question. If individuals are provided with these opportunities in a fast pace economy, how can the structured hierarchy prosper? It would be my assertion, the longer that businesses exists under the structure of the hierarchy, the harder the change will become and the greater risk of total loss increases. These risks being the market dynamic that Winter et al are heading toward.

"To be capable of accurate calculation of this sort, an entrepreneur would require not only vast computational capacity but, more important, extensive knowledge of the transformation that are possible in the economy. Obviously, in many cases, individuals do not have immediate access to this knowledge. This raises the important question of how resources are valued in incomplete markets. In particular, when and for what types of resources can economic agents, on the basis of search and learning from experience, determine the value of resources and thus the basis of search and learning from experience, determine the value of resources and thus recognize any arbitrage opportunities? Formulated differently: when will the condition of "exhaustive entrepreneurship" be satisfied? Formally, this learning challenge is equivalent to the problems of learning to identify the value function of a large dynamic programming problem without initial knowledge of the set of possible transitions or the costs and rewards associated with each transition." pp. 8

In a nutshell the number and volume of arbitrage opportunities is incalculable. The time to be an entrepreneur and apply these principles exist as in no time in the history of mankind.

5. The Character of Strategic Opportunity.

The Architecture of Strategic Opportunities.

Staying with the way that Google does its business, if we look at this weeks announcement of Google Apps for your Domain, these products provide completely different metrics for the computer user. Microsoft Office has had its way with this market since it dispatched Lotus and Word Perfect to the scrapheap. Now they find that Google Apps will be offered at a fraction of Microsoft's prices. This is the heart and soul of Microsoft's revenues and profits. If at the same time Microsoft experiences similar difficulties on the operating system market. Say if Apple were to provide a better product for far cheaper. Microsoft would have effectively lost the lion share of their revenue and the profits will disappear in rapid fashion. Google has now effectively done this by becoming the worlds largest advertising firm. A business model that is far more resilient and valuable then Microsoft's, in my opinion.

Many might say that Google has been lucky, and there would be general agreement that it was. It is now ten years into their existence and they now have new revenue being generated through the sale of their software and services. One that strikes deeply into the competitive framework of Microsoft and provides better value to the consumer. How could someone be so bold, be so farsighted and be that smart. Well in my opinion Google is, and they got there on the basis of Winter et al's discussion here.

"Based on the above discussion of market incompleteness and the challenge of imputation, it is possible to say something about when and for what type of resources strategic opportunities may be located. As emphasized by Shleifer (2000), any systematic theory of market inefficiency, which simultaneously acknowledges the competitive forces that push markets towards efficiency, needs to answer when and why inefficiencies can occur and remain in the presence of competitive forces and the search for arbitrage opportunities." pp. 9

"The above arguments suggest that part of the answer lies in the complex, combinatorial, character of strategic opportunities. Specifically, it is unlikely that a valuable strategic opportunity can be seized simply by trading in existing resources. It is much more likely that a strategic opportunity can be found if the strategy involves trading in resources whose values are contingent upon one or several other resources being used in a new or different way, including the creation of novel types of complex resources. Unless several other actors have already recognized the opportunity and acted, resource values will not be aligned with the new uses. If these other resources are of an entirely different character or used by a completely different set of firms, identifying such an opportunity can be very challenging. Thus, there can be no presumption that this has already occurred." pp. 10

It is not to say that driving a truck through Microsoft's Office revenues and profits is something that was not considered by many. It is the foresight to see these opportunities and build, over the long term the solution that is necessary. Trading stocks based on the Efficient Market Hypothesis is a fools game, not a business. Building a business with customers and revenues and profits is a long term fight that can only be secured in the discovery of the strategic opportunities that Winter discusses here.

"This does not imply, however, that it would necessarily take a heroic effort to identify such opportunities. If a firm has preferential access to the missing piece of the puzzle, identifying the opportunity might be easy. In general, firms can be expected to differ considerably in the information they possess, even in the absence of deliberate effort to create the sorts of informational advantages that Barney referred to. Such differences in information - and differences in complementary assets - typically imply differences in positioning relative to new opportunities. Thus, in contrast to financial markets where blatant arbitrage opportunities are rare, we submit that the discovery of strategic opportunities is a normal occurrence in the product markets." pp. 10

"As emphasized above, in such situations, strategic opportunities are possible, although not guaranteed. Restated in this way, the argument of Dierickx and Cool suggests a class of resources whose values are very difficult to identify and thus could represent a strategic opportunity." pp. 10

"While such examples of accidental discovery may seem to be unlikely, we argue that the character of strategic opportunities implies that they should be expected in accounts of business success. More precisely, we argue that given that a strategic opportunity is only first discovered after some time, the discovery of this strategic opportunity is likely to have been serendipitous." pp. 11

Serendipity, as I mentioned in July of last year is a good thing. With this project coming up on it's 15th year in May, I have struggled in defining what it is I was trying to do. I started on the basis of the fresh knowledge that the Alberta Governments "Royalty Simplification" initiative would be the opportunity to provide the market place with new and better applications. I quickly promoted Oracle into following my lead and we partnered up. They decided to rename the product Oracle Energy and I was left with relatively angry shareholders. Along came PriceWaterhouse who was unhappy with their partner for Oil and Gas and we had a new deal almost right away. However, Coopers and Lybrand owned Qbyte, the market leader, and their merger with Price Waterhouse left me out of business to say the least. Stumbling as I did into what the optimal organizational structure for oil and gas was the consummate definition of serendipity.

I think that Winter et al are on to something here. I want to go back to an entry that I made late last year about Abraham Lincoln. Ralph Waldo Emerson said something in his eulogy that strikes me as incremental to what Winter et al have been able to state. The quotation is...

"The ancients believed in a serene and beautiful Genius which ruled in the affairs of nations; which, with a slow but stern justice, carried for-ward the fortunes of certain chosen houses, weeding out single offenders or offending families, and securing at last the firm prosperity of the favorites of Heaven. It was too narrow a view of the Eternal Nemesis. There is a serene Providence which rules the fate of nations, which makes little account of time, little of one generation or race, makes no account of disasters, conquers alike by what is called defeat or by what is called victory, thrusts aside enemy and obstruction, crushes everything immoral as in-human, and obtains the ultimate triumph of the best race by the sacrifice of everything which resists the moral laws of the world.' It makes its own instruments, creates the man for the time, trains him in poverty, inspires his genius, and arms him for his task. It has given every race its own talent, and ordains that only that race which combines perfectly with the virtues of all shall endure."

Words to live by. Winter et al take much of this point and clarify it and categorize it in the following:

"Rather, it is likely that the necessary subsystems were only available to or considered valuable by the firm that discovered the opportunity. There are, at least, four possible reasons for this. First, only this firm had the strategic insight into the eventual value of these subsystems. Second, by deviating from existing practice, only this firm had the complementary set of activities that made these subsystems valuable. Third, this firm is "pre-adapted"; it was endowed with the subsystems by its previous history, for reasons unrelated to their application in the new opportunity (Cattani, 2002). Fourth, this firm made a mistake and thought that these subsystems were valuable by themselves even if all reasonable firms would agree that they were not. Although all of these reasons are possible, we suggest that the complex character of the strategic opportunity makes the first reason less likely than the others. Furthermore, although mistakes are not uncommon, we would argue that the second reason and third reasons are the most important." pp. 11

"Overall, this argument suggests that strategy process leading up to the discovery of a strategic opportunity is likely to have had the following characteristics. By deviating from existing practices, perhaps by intentionally choosing an unusual strategy or by necessity due to a lack of resources required to compete in the established manner, a firm develops a set of idiosyncratic resources. Although perhaps not very valuable by themselves, these resources could be used profitably in combination with other resources. By being the only firm with access to these components the firm is thus much more likely to discover the value of this combination." pp. 12

"In a similar way, when a firm has assembled many of the necessary components, it may be able to see that these resources could be valuable if complemented with some others. As a result, the search for the last components will be intentional rather than serendipitous."

The word entrepreneur means a lot of things to a lot of people. Generally it is considered a favourable term and one that is used by most people who do not describe themselves as one. It is not something that one can pick up a book and read about how to become an entrepreneur. It is not something that a college or university can teach. It is something that drives the person to continue the pursuit, irrespective of the costs and consequences. It is a drive to complete some part of their life that is well defined in this paper of Winters. To say that Entrepreneur's are different would be an understatement.

"This characterization also suggests that there may be little to learn from examining the strategic process of successful firms. At least for firms that discovered path - breaking strategic opportunities it is likely that they deviated from established practice by necessity or mistake rather than as part of a plan. To assemble the components required for spotting a path -breaking strategic opportunity, a firm needs to have assembled several components that individually are believed to be of little value. As a result, the firm needs to engage in an unusual amount of exploration. To be motivated to do so, a firm may need to be forced to adopt some of the elements or may need to adopt them by mistake (Denrell and March 2001). If this is so, the strategic opportunities of the most successful firms are likely to have developed through a process that it would be unwise to try." pp. 12

To close out this entry, I want to say this paper really resonates with me and the life that I have lived for the past 15 years. It is a tough and difficult struggle, but one that has defined me as Emerson said. These last few paragraph's display for me that the writers clearly have captured the essence of being an entrepreneur and related it well in these final words.

"...being the first in the know may enable an entrepreneur to create limits to post competition. Thus in this sense, ex post limits to competition may be a direct outcome of ex-ante limits to competition. Several examples of such situations have been outlined in the literature, including investments in over capacity to deter entrants (Dixit 1980) and tying up favorable locations and suppliers (Porter 1980)." pp. 14

"Although this analysis implies that detailed strategic guidance is necessarily specific to the firm and its situation, the notion of serendipity does have some general prescriptive force. While good luck may befall the inert or lazy, serendipitous discovery occurs only in the course of an energetic quest - a quest in which lucky discoveries of an unanticipated kind can be recognized through alertness and then flexiblly exploited." pp. 14

"This perspective on strategy is consistent with a large and growing body of evidence on the relationship of firm attributes to their entry decisions, innovations and other strategic moves, much of it recently reviewed by Helfat and Lieverman (2002) (see also Usselman 1993, Klepper and Simons 2000) In general the evidence shows that opportunities are specific and firms that seize them are usually specifically prepared for them by their "pre-history". This mechanism is the counterpart of "pre-adaptation" in biologic evolution (Cattani 2002). Our perspective is also well aligned with the discussion by (Sarasvathy 2001) about the characteristics of the thought process used by entrepreneurs. Using verbal protocols from experienced entrepreneurs faced with a hypothetical venture problem, Sarasvathy (2001) demonstrated that the thought process of entrepreneurs is more likely to start from the givens of a situation and to proceed by investigating the possible effects and market opportunities that could be created with these means. Goal directed thinking, which a market opportunity was identified at first and the means to achieve directed thinking, in which a market opportunity was identified at first and the means to achieve this opportunity were discussed later, was much less frequent." pp. 15

"The challenge of strategy is the challenge of assessing the opportunities that open to an idiosyncratically positioned actor in a changing environment. For this, the challenge of stock picking provides a poor analogy, because in the context actor idiosyncrasy plays a much smaller role. This assessment is clearly consistent with the central tenets of the RBV, but not with the discouraging words sometimes about resource pricing." pp. 15

Photo: Getty Museum by Troels

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