OCI Research & Capabilities, Part IX

 Controlling Operations Through the Job Order System

I have a few more comments to make about the coordination of markets through the “Dynamic Capabilities Interface” of the Research & Capabilities module. It might seem that we are contradicting ourselves when we criticize the bureaucracy yet put in place such extensive coordinating mechanisms to control an oil & gas field operation. The difference between bureaucracy and operational control is a matter of decision rights and authority. One of them, the bureaucracy, is redundant. I will also show the appropriate level of control implemented in the People, Ideas & Objects system is implemented through the Job Order system. 

Multilateral and multi-frac wells are large and expensive operations. For that matter drilling a conventional well is a large risk for most producers. The need for operational control is not something you want to have but necessary. The need to integrate the oil & gas and service industries to the level discussed here in the Preliminary Specification is a complex and expensive undertaking. One that fits within the Preliminary Specifications budget. And also within the scope of the People, Ideas & Objects fourteen module application in its initial commercial release. The scope of change we create when we recognize the Joint Operating Committee as the key Organizational Construct here is dramatic. To achieve integration between the oil & gas and service industries, we need to have this type of approach to make operations successful. 

It is in Professor Langlois' paper “Competition through Institutional Form: the Case of Cluster Tool Standards.” that he strikes the right approach in terms of the issue of the Preliminary Specification and these software developments. 

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions. But few have thought about the choice of business institution as a competitive weapon. p. 1.

In terms of operational control the “Dynamic Capabilities Interface” provides a means to have everyone on the team focused on the same plan. Everyone knows what the plan is and everyone knows what everyone else is doing. Now we need a means to monitor, execute and control the plan. In the “Planning & Deployment Interface” as throughout the Preliminary Specification users will have access to the “Job Order System” of the People, Ideas & Objects application. This will provide the ability for a member of the operational team, with the operational authority designated in Industrial Command & Control, to issue a Job Order. This will enable them to execute any operation. Nothing is done during the field operation without the appropriate Job Order being issued. 

This next quote is from a Berkeley study from 1989. This was a time when the Japanese and the Americans fought over dominance in microchip manufacturing industries. Apparently the two industries were configured quite differently, as Berkeley notes below. And it is the Americans that dominate the industry at Japanese capitulation. The organizational structure of these industries is interesting over thirty five years later. Professor Richard Langlois' paper "Capabilities and Vertical Disintegration in Process Technology: The Case of Semiconductor Fabrication Equipment."

In one of the few contemporary academic examinations of this industry, a study by the Berkeley Roundtable on the International Economy concluded that;

with regard to both the generation of learning in production and the appropriation of economic returns from such learning, the U.S. semiconductor equipment and device industries are structurally disadvantaged relative to the Japanese. The Japanese have evolved an industrial model that combines higher levels of concentration of both chip and equipment suppliers with quasi-integration between them. Whereas the American industry is characterized by levels of concentration that, by comparison, are too low and [by] excessive vertical disintegration (that is, an absence of mechanisms to coordinate their learning and investment processes) (Stowsky, 1989, p. 243) p. 6.

My point in highlighting this is that we rely heavily on the decentralized service industry marketplace to provide the oil & gas industry with the products and services it needs. We however, also provide the Joint Operating Committee with high levels of coordination of any operation during times it employs the service industry. This is not a contradiction. One is a market, the other is the market's operation. The oil & gas industry depends on a highly innovative service industry and this will be expected in the marketplace. It also demands precision in its field operations. Innovation will arise from both, however, not at the expense of control and coordination. In Professor Langlois’ paper “Organizing the Electronic Century.”

Thus in radio it was not the case that an integrated path of learning within a large firm gave rise to innovation; it was rather that innovation, channeled within a particular structure of property rights, contained the path of learning within a single large firm. p. 16.

Modularity in Systems and Organizations

We have discussed modularity many times in the Preliminary Specification. With fourteen modules in the specification we have relied heavily on modular principles to ensure usable systems. We will now take modularity deeper. We have discussed the unique organization created to complete a field operation. These unique organizations are derivatives of the Joint Operating Committee and include service industry members. They are authorized, controlled and operated in the People, Ideas & Objects system through the “Dynamic Capabilities Interface,” “Planning & Deployment Interface,” “Industrial Command & Control,” “AFE,” and “Job Order” systems to name a few. These make up a modular system that is part of the “modularity” benefits we are seeking to achieve in this temporary organization and the Preliminary Specification.

Looking at operations in the field through the lens of modularity can help us deal with complexity and simplify the interactions between the different situations and people. From Professor Richard Langlois' paper “Modularity in Technology and Organization.” 

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 19.

Having difficult systems interconnections is a minor issue when compared to the real problems that people will have with systems that are too complex and too “different” each time they go to use them. As Professor Sydney Winter of the Wharton School of Business in his paper “Towards a Neo-Shumpterian Theory of the Firm” notes.

Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. (p.85) p. 9.

It is therefore imperative that we apply modularity theory to the design of the temporary organizations that make up these derivative organizations. From Professor Richard Langlois' paper “Modularity in Technology and Organization.”

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 19.

Remember we span the oil & gas industry and the service industry. The marketplace and the firm. To achieve the efficiency and effectiveness of interactions between the two industries, this approach is necessary. To incorporate modularity into the systems we build we have certain design considerations to include. In terms of the temporary organizations we are creating here for these operations, I think the key focus will be on standards. 

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

• An architecture specifies what modules will be part of the system and what their function will be.
• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.
• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. pp. 22 - 23.

The Costs of Operational Efficiency

We moved on from modularity to discuss “Dynamic Transaction Costs” in the Research & Capabilities module of the Preliminary Specification. We have discussed these costs in other modules by creating an account in the chart of accounts. This account specifies these costs when and where they are incurred. They are particularly relevant to the discussion in the Research & Capabilities module as Professor Langlois describes them “Transaction Cost Economics in Real Time” as;

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-versa. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99.

Constructing a temporary operational organization derivative of the Joint Operating Committee and populated with service industry representatives. This organization is based on the capabilities established in the “Dynamic Capabilities Interface” of the Research & Capabilities module. It is possible to incur "Dynamic Transaction Costs.” We are looking for an increase in economic performance from the oil & gas industry. We expect the division of labor and specialization to be strong elements of how increased performance is achieved. Having coordination and organization built into the “Dynamic Capabilities Interface” is how the oil & gas producer will achieve these higher levels of performance. In Professor Langlois “Transaction Cost Economics in Real Time.”

It is, Marshall says, 

a general rule, to which there are not very many exceptions, that the development of the organism, whether social or physical, involves an increasing subdivision of function between its separate parts on the one hand, and on the other, a more intimate connection between them. Each part gets to be less and less self sufficient, to depend for its well being more and more on other parts... This increased subdivision of functions, or "differentiation," as it is called, manifests itself with regard to industry in such forms as the division of labor, and the development of specialized skill, knowledge and machinery: while "integration," that is, a growing intimacy and firmness of the connections between the separate parts of the industrial organism, shows itself in such forms as the increase of security of commercial credit, and of the means and habits of communication by sea and road, by railway and telegraph, by post and printing press. (Marshall, 1961, IV.viii.1 p.241). p. 101.

So in essence we have three major processes that incur dynamic transaction costs. One is the move from the firm to the Joint Operating Committee as the coordinator of operations. Secondly, the enhanced division of labor and specialization brings a further “subdivision of function between its separate parts.” And thirdly the movement to increase reliance on the marketplace. Therefore it is necessary to capture the role and responsibilities of everyone involved in the operation. This is to ensure that tasks are completed with operational objectives in mind. It will be this level of operational control that provides the Joint Operating Committee with successful operations. 

Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his 'law of increasing return,' which is distinctly not a law of increasing returns to scale: 'An increase of labor and capital leads generally to improved organization, which increases the efficiency of the work of labor and capital' (Marshall, 1961, IV. xiii,2 p. 318) p. 101.

I would argue that the lack of operational organization by the oil & gas industry in today’s marketplace results in conflict between the oil & gas companies and the service industry. Leading to cost overruns. And if Marshall is correct, as he has over a century of proof, the solution will require an advanced and culturally enhancing number of Organizational Constructs. And in oil & gas that must involve the Joint Operating Committee the legal, financial, operational decision making, communication, cultural, innovation and strategic framework of the industry.

What are Capabilities?

We continue our review of Professor Richard Langlois’ research through the Research & Capabilities module of the Preliminary Specification. It is in the “Dynamic Capabilities Interface '' that we are seeking to document the "what" and "how,” or implicit knowledge, of the earth science or engineering capability, or operation the Joint Operating Committee will undertake. It is worthwhile to note at this point that tacit knowledge cannot be documented. Tacit knowledge will be invoked through the Job Order system. The depth of “knowledge, skills and experience" and ideas documented in the “Dynamic Capabilities Interface'' includes the members of the Joint Operating Committee, their roles and responsibilities, and field operations personnel. Detailing what and how they need to do their jobs to achieve the operation objective. In a paper entitled “Transaction Cost Economics in Real Time'' Professor Langlois notes:

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

That’s an effective way to state what we're trying to achieve here. The “Dynamic Capabilities Interface” is a collection of capabilities the firm has for getting things done. 

'Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106.

In this discussion as well as in any and all oil & gas field operations. Autopilot doesn't exist for these tasks. And the implications of the next quotation are far reaching. 

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106.

It will need to be the explicit instructions contained within the “Dynamic Capabilities Interface” that guide the field operation. Conscious attention necessary to follow the program is necessary. However, this is also about innovation. Further innovation can be achieved by using the Job Order system. 

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106.

It has been a long and difficult process to describe exactly what we capture in this interface. Capabilities are difficult to quantify and qualify. Added to that difficulty is the need to keep innovation at the forefront of the producers' and Joint Operating Committees' capabilities, and the challenge ahead is clear. We continue our review of Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” with our focus centered around earth science and engineering capabilities and those from the marketplace of service industry offerings. 

One thing that can be stated for certain is that the Preliminary Specification is consistent with the industry culture. No producer firm seeks to internalize free market capabilities. The capital nature of the equipment, the geographical range of operations and the skills of the people employed would require the producer to have such extensive operations that they would lose focus on the task at hand, finding and producing oil & gas reserves. Using the service industry as a market is the only choice. The approach People, Ideas & Objects is proposed in the Research & Capabilities module. Is to control operations with military precision. 

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108.

The “Dynamic Capabilities Interface” has never been conceived as a static repository of information. On the contrary it is a dynamic interface where the capabilities are constantly being updated as a result of changes in the market, the producer firm or Joint Operating Committee. These dynamic changes are reflections of the actions taken by these participants and are populated through a variety of inputs. 

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. 

The mysteries of the trade become no mysteries; but are as it were in the air and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvement in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighborhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its materials. (Marshall, 2961, IV .x.3, p. 271) p. 120.

It is the job of the producer firm in some instances and the Joint Operating Committee in most instances to effectively and efficiently coordinate and control the operation. The marketplace must have the latest capabilities. In an Information Technology environment in which we find ourselves, that is not the issue. Having the people involved on the same page, understanding the proper command and control structure, the means to execute the operation and the appropriate objective is the issue. And that issue is handled in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. Yet at the same time, because we rely on the market, and are structured for innovation we can still rely on the benefits of both.

In this sense, the ability of a large organization to coordinate the implementation of an innovation, which is clearly an advantage in some situations, may be a disadvantage in other ways. Coordination means getting everyone on the same wavelength. But the variation that drives an evolutionary learning system depends on people being on different wavelengths - it depends, in effect, on out-breeding. This is something much more difficult to achieve in a large organization than in a disintegrated system. Indeed, as Cohen and Levinthal (1990a, p. 132) point out, an organization experiencing rapid change ought in effect to emulate a market in its ability to expose to the environment a broad range of knowledge gathering 'receptors'. p. 120.

And

"Vertical integration, I argued, might be most conducive to systemic, integrative innovation, especially those involving process improvements when demand is high and predictable. By contrast, vertical integration may be less desirable - and may be undesirable - in the case of differentiation or autonomous innovations. Such innovations require less coordination, and vertical integration in such cases may serve only to cut off alternative approaches. Moreover, disintegration might be most beneficial in situations of high uncertainty: situations in which the product is changing rapidly, the characteristics of demand are still unknown, and production is either unproblematical or production costs play a minor role in competition. In such cases the coordinating benefits of vertical integration are far outweighed by the evolutionary benefits of disintegration." pp. 120 - 121.

If running a successful oil & gas company was easy everyone would do it. We certainly are moving into a challenging time for a challenging business. Those that want to step up will need the organization defined and supported by the software the firm and Joint Operating Committee use. Software that documents the producer firm's earth science and engineering capabilities. And the service industries' market offerings. Software like People, Ideas & Objects Preliminary Specifications Research & Capabilities module.

OCI Research & Capabilities, Part VIII

 Professor Richard Langlois on Capabilities

Introduction

Research & Capabilities module controls two material processes. The first is to divide labor between research and development and the execution of the resulting capabilities. This process is separated into Research & Capabilities and Knowledge & Learning modules. The other material process is to move knowledge to the area where decision rights are held, the Joint Operating Committee. Professor Richard Langlois notes the following in his paper "Modularity in Technology and Organization." 

A notable recent exception is Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 27.

We should also point out the quote from Professor Carliss Baldwin of Harvard University. That “knowledge begets capabilities and capabilities beget action” and how this captures the objective of what we are after in the module. We need to remember to keep this focus in mind when working in the “Dynamic Capabilities Interface.” That the knowledge we bring into the interface is designed to initiate action. 

During our review of Professor Giovanni Dosi we learned about technical trade-offs. And how these trade-offs facilitate industries' innovation in the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs change and is usually abundant and available at low costs. For innovation to occur in oil & gas, People, Ideas & Objects asserts that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms that will provide companies with fundamental innovations. There are many knowledge-based and collaboration-focused interfaces in the Preliminary Specification. This makes the People, Ideas & Objects ERP system the ideal candidate for an innovative oil & gas producer.

Lastly we should note that when markets such as oil & gas are asymmetric, research & development are the ways to differentiate capabilities and build an innovative oil & gas producer. 

It was during the Preliminary Research Report that we identified two key elements that we should discuss here in the Research & Capabilities module of the Preliminary Specification. The first was that the oil & gas industry was moving away from an easy energy era where producers could provide bankable returns on investments. Moving towards a much more difficult scientific base for the business based on earth science and engineering capabilities as key competitive advantages. The other element in the Preliminary Research Report was that organizations are defined and supported by the software they use. And we coined the phrase "SAP is the bureaucracy” to reflect this fact. Therefore in order to change the organization it is necessary to change the software that defines the organization first. If we want an innovative and profitable oil & gas producer, the first step is to set out in the software the elements of what that producer will look like. 

In addition, the industry needs to improve its overall performance in order to meet the challenges it faces in the near future. We have detailed these challenges elsewhere. The division of labor and specialization have been the methods People, Ideas & Objects have used to solve these difficulties. For specialization and division of labor to work consistently, it is necessary to standardize the roles and responsibilities of individuals. Producers need to consider the effect that will occur when they employ People, Ideas & Objects, our user community and their service providers' permanent software development capability to maintain that standard across the North American producer population through the Research & Capabilities and Knowledge & Learning modules interfaces. 

Organizations That are Unique and One-off Derivatives

It is in the Research & Capabilities module that we define and support the science basis of the oil & gas business. How the firm's earth science and engineering capabilities are acquired, developed, innovated upon, tested, prepared for implementation and documented for deployment. It is with that in mind that we begin our review of Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” 

Also, focusing on capabilities brings to the fore the idea that routines and similar rule-based forms of institutionalized knowledge may be important building blocks of economic organization. As a result, the capabilities approach arguably connects more fully with the New Institutional Economics, in which rule based guides to action like norms and conventions play a fundamental role, than do approaches that take the transaction as the unit of analysis. p. abstract.

It is in the context of a scenario that we note that a producer documented the internal and external components of the capabilities needed to conduct multi-lateral and multi-frac shale gas operations. Through a series of tests and trials they have been able to secure these processes to the point where the capabilities are deployed successfully to their various Joint Operating Committees. This process documentation in the “Dynamic Capabilities Interface'' is subsequently populated in all shale zones of all the Joint Operating Committees they participate in. And is available to be deployed at the Joint Operating Committees who know they can rely on a fully tested process based on their publication in the “Dynamic Capabilities Interface.” By selecting the relevant capabilities everyone from the engineers and geologists in the Joint Operating Committee to the lease hands on the drilling rig can see their role and responsibilities in making the operation a success. It is through the Knowledge & Learning “Planning & Deployment Interface'' that the individual capabilities are accumulated and the program is designed to be executed. 

One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research p. 4.

What we have not discussed in the Research & Capabilities or Knowledge & Learning modules is a key element of the “Planning & Deployment Interface,” the AFE. It will naturally be the AFE that is a large part of how the business and operational end of the deployment is initiated. Therefore the AFE template is part of the “Planning & Deployment Interface." Budgetary control of operations is attained through the AFE. From Professor Richard Langlois' paper "Capabilities and Governance and the Rebirth of Production in the Theory of Economic Organization."

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 34.

For clarity the marketplace or service industry is the source of the capabilities, with operational coordination coming from the producer firm and Joint Operating Committee. The oil & gas business is a science. Having everyone read from the same, unique in each instance, operational plans will not only be necessary, but the only way to succeed. 

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 3.

You have a unique, one time, temporary organization which is derivative of the Joint Operating Committee. It is necessary to ensure that an organization understands everything it is working to accomplish.

Control and coordination of operations

We have noted how the information detailed in the “Dynamic Capabilities Interface” of the Research & Capabilities module would provide the “knowledge, experience, and skills” of the operation. That these details were provided to all of the members of the temporary organization put together for that specific operation. From the lease hands on the drilling rig to the engineers and geologists of the participating producers on the Joint Operating Committee. Everyone would be on the same page in terms of what and how the firms and market capabilities were being deployed. This section will discuss how the People, Ideas & Objects Preliminary Specification allows the innovative producer to successfully complete these field operations. Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labor between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).p. 17.

Let us also bring in the Industrial Command & Control (ICC) developed by People, Ideas & Objects. The ICC provides a means for these “pooled” technical resources within a Joint Operating Committee to immediately adopt a recognizable command and control structure. It is expected that this command and control structure would also extend to the field personnel from the field contractors hired for the operation being conducted. This would therefore provide a level of control to engineers and geologists that would attain the precision necessary. Such that once the engineer gave the approval to drill to a certain depth, the drilling would be accomplished at the point where the engineer expected it. 

In the next quotation Professor Langlois raises a compelling point about “incentive alignment.” But in essence he says that at a certain point it's not about incentives that motivate a team to succeed.

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination. p. 5.

Reading this next quotation shows that we have a job to do here in the “Dynamic Capabilities Interface” of the Research & Capabilities module. That is why we need to replace this critical function done by the “firm” in the previous organization. As much as we criticize the current management they are doing the job to a certain level. And to not respect that level would be a failure on our part. What we need to do is capture what the firm does now by “lowering the costs of qualitative coordination in a world of uncertainty.”

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 6.

Revisiting the incentives issue if we put in context the conflict between the service industry and the oil & gas producers. They have been disagreeing for years about the pricing of field operations services. Read this next quotation with this in mind.

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 11.

Professor Langlois is 100% correct. Producers rely on contracts such as SLA's to incentivize contractors and it's not working. What they’re effectively doing is passing the responsibility and accountability that the producer should bear onto the vendor. Better coordination is needed. And that begins with systems like the People, Ideas & Objects Research & Capabilities module that details the capabilities of producers and field staff in a manner that constructively deals with the problems of a scientific-based business.  

What could only be described as a breakthrough was how we documented the Preliminary Specifications coordination of capabilities through the “Dynamic Capabilities Interface” of the Research & Capabilities module. This eliminates the incentive problems that the oil & gas industry faces through contracting. As we learned, coordination will provide oil & gas producers with control over field operations. Coordination through the “Dynamic Capabilities Interface” provides an alternative means to ensure the oil & gas science is effectively controlled. This is as opposed to motivating the service industry through incentive clauses in contracts. We will continue with this concept of the “incentive problem” and test it further with Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only. p. 12.

It is through the producer's documentation of the capabilities in the “Dynamic Capabilities Interface” of the Research & Capabilities module that "knowledge, experience and skills” are captured. From the engineers and geologists that are part of the Joint Operating Committee to those that are in the field, each should have an understanding of what is required of them from the capability that is listed in the “Dynamic Capabilities Interface.” Everyone on the team knows what is happening and what their role and task is. That is what needs to be documented in the “Dynamic Capabilities Interface” for each of these roles, for each of the capabilities captured there. 

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. p. 14.

And that becomes obvious when we consider that the capabilities available to each Joint Operating Committee, and the Industrial Command & Control used, are unique to each situation it is applied to. Using the same team to apply the same capability repeatedly should yield the same results. Therefore, if you were running a ten well drilling operation, the consistency of the capabilities and the ICC would provide the same precision and results. 

This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization. p. 16.

And

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 16.

This is intrinsically true. The key to the successful implementation of any program is the level of documentation of the capability and the level of control during operation. Combined with the Industrial Command & Control, the Dynamic Capabilities Interface facilitates the operation of the producer firm and Joint Operating Committee. Recall that “knowledge begets capability and capability begets action.” And contrast this to the current situation where the producers throw more money at the service industry to incentivize them to succeed.

Price Maker vs. Price Taker, Part III

In today’s environment where democratic socialism hasn’t ever really been tried before, to focus the energies of the oil and gas industry on the corporate objective of maximizing shareholder value is contrary to the prevailing political minority. The best reflection of democratic socialism is reflected eloquently in this following photo.

Some in oil and gas may consider today as evidence of the failure of capitalism. However I would suggest that it reflects the movement from the third industrial revolution to the fourth. The loss and inability to read market prices and act on that information. And a persistent bureaucracy that has no accountability for what they’ve done or the future of the industry. Creative destruction is a phenomenon that has preceded many changes over the past centuries. Yet the corporate objective of maximizing producers shareholder value stands as People, Ideas & Objects, our user community and service providers focus today, and in the future, as much as it did over the past century. Why do we care about the investor so?

We need to take a look around and ask if this oil and gas industry is the one that we want for the future. Are people satisfied with the current environment and see strong opportunities where they can prosper, make a good living, raise a family, take on a mortgage and retire? Maybe throughout that career process they could also become a shareholder themselves. I don’t see anyone’s hand being raised in confirmation of these thoughts. If the producers themselves are not providing their overall objective of maximizing shareholder value then does that mean their investors money is being redistributed to others within the industry? No, clearly not, as it is today none of the profits, value or prosperous nature of the industry is being generated anywhere. If the producer bureaucrats are not fulfilling their corporate objective then they’ve cut off their desire and drive to compete and win. Whatever is good enough will do, or just muddle through, we’ve been here before and we’ll be again.

The fish stinks from the head down is a saying that fits here. When the architects of the business, the decision makers and those that provide the overall vision of where we’re heading as an industry. When the organization is defined and constrained by the software it uses, the business model doesn’t function or build any value but alternatively destroys it. What can anyone, outside of the entrenched bureaucracy that benefits from this depressed environment, do? Nothing. We all know it takes a long time to turn a supertanker around. But that’s not what we’re attempting to do here. Our supertanker is riddled with damage, is sinking and spilling oil everywhere. What are those members and participants in that industry to do when the management of the shipper doesn’t care that they’re losing and destroying so much value? When the only response anyone gets from that shipper is that they’ve seen this before and they’ll muddle through.

The investors do not desire to be part of the destruction, can see the writing on the wall and exited the situation with the ease of a telephone call or click of a mouse. In essence the stock market sending a price signal to bureaucrats, who’ve obviously ignored it. If only all of the problems could be fixed as easily. The banks also have nothing but risks and are stuck with a portfolio of companies that they’re unable to motivate to act. Therefore we see the service industry in oil and gas enter the worst of their downturns. Even Schlumberger’s CEO’s commentary when they moved 50% of their assets out of North America was indicating they weren’t coming back. The general economy that should be thriving in the areas where oil and gas is operational are all in depression era states. The producer bureaucrats just sit and blink at all that is happening and expect that something will happen to make it all better.

We could all do better than having the alleged leaders of this industry sitting around silently blinking and nodding off. What do we have to lose by ignoring them and acting to correct this mess. Would they even be aware? Nothing has changed since the fundamental collapse of natural gas prices in 2009. Other than the collapse of oil, the investors and bankers are getting out as fast as they can. Nothing has been done to remediate the damage other than generate serial excuses that have all proven to be false, or was it that they were lying all along?

During the research of the Preliminary Specification we spent some time evaluating the future organizational makeup of industries. Would they be comprised of decentralized markets or centralized bureaucracies as the current method of organization may continue. Our conclusion was that markets would come back to dominate industries primarily due to the Internet. Adam Smith introduced the concept of the invisible hand of the marketplace as the “unintended social benefits of an individual's self-interested actions.” This was believed to have been replaced by the hierarchies “visible hand” that was prevalent in large corporations. As Professor Richard N. Langlois noted in his hypothesis of “The Vanishing Hand” which he describes in his paper “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism” as.

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

And therefore the “vanishing hand” which is what we see in some of the industries that have been disintermediated, replacing the “visible hand” of management is now becoming the “vanishing hand” or “invisible hand” of markets once again. This is the strong belief of the Preliminary Specification as seen in the three marketplace modules and our price maker strategy. The ability to respond to market signals, the price of the commodities, does not exist. Bureaucrats determined long ago that they know better than what the markets are telling them. Yet the oil and gas industry has carried on for four decades in an accelerated manner of value destruction. Each year reporting specious profits that are earned from their genius, as they know not which property provided the profits. And selling investors on that genius in an industry that is impossible to discern who are the leaders and who are the laggards.

Just as markets take a premier role in the future of industries. It is understood that markets provide one, and only one thing. The price it's willing to pay the producer. If you can produce profitably at the price offered you produce. If you are unable to, you maximize shareholder value by shutting-in those properties that are not providing profitable operations. Only then will the corporation reach its maximum value for its shareholders and as we’ve noted, all those that are associated with the industry will be prosperous too. As they will be able to know that the industry will always be profitable everywhere and always. That their efforts will be rewarded and provide value to all that use their products. Looking around the greater oil and gas industry today, who is happy with the fact that shareholders are not rewarded for their efforts? Adam Smith wrote about these principles in 1759 and in 1776. Market failure is the sole responsibility of the producer bureaucrats.

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook.

Any arguments on that point are now moot, in my opinion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Stickiness and Leakiness

Within the Preliminary Specification we have an interesting dichotomy. On the one hand the capabilities of the producer firm are proprietary to the firm that develops them. Yet they are deployed to the Joint Operating Committee that the producer shares an interest in with many other producers. In today’s marketplace the operator acts on behalf of the members of the Joint Operating Committee. In the Preliminary Specification we have flipped the direction of the flow of knowledge to where the capability is generated in the Research & Capabilities Module and flows to the Knowledge & Learning Module for deployment. The concept of operator has been eliminated in the Preliminary Specification and replaced by the concept of pooling. The purpose of this is critical to the producer and Joint Operating Committee. Professor Richard Langlois provides us with the following.

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

We have therefore reversed the flow of knowledge or capabilities within the Preliminary Specification by moving the producers capabilities to where the decision rights are held. We have done this as the Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer and industry. By identifying and supporting the legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks of the Joint Operating Committee and then moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committee we achieve a speed, accountability and profitability in our organizations. The decision rights are held by the Joint Operating Committee within the operational decision making framework. Whereas today having the decision rights moved to the producer firm creates a conflict between these two organizations that is inconsistent, we believe, with performance, accountability and profitability.

We need to recall the situation that oil and gas will be in a short period of time. Where today it takes one idea to generate a dollar, it will take ten ideas to generate a dollar in the not too distant future and one hundred ideas in no time after that. The volume of knowledge is going to have to be managed in a more effective way than it is today. The need to have the right knowledge to the right people at the right time and the right place will become more difficult if there are unnecessary conflicts and obstructions to the flow of that knowledge. On the other hand we are focusing the producer firm on their distinct competitive advantages which are their earth science and engineering capabilities and their land and asset base. The key here should be having these capabilities applied in a timely manner to their land and asset base. For what other purpose would the producer be creating these capabilities. In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities. It is here that we note once again from Professor Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

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

And from a common sense point of view we have this quotation from Winston Churchill “A lie gets halfway around the world before the truth has a chance to put its pants on.” We all know this leakage of knowledge to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the knowledge they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding knowledge, will deploy the right knowledge to the right people at the right time through their use of the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Science, Innovation and Capabilities, Part III

Removal of the excess cost attributable to the surplus earth science and engineering capacity that is unused and unusable is similar to the removal of the excess overhead costs that the producer and industry incur. By reorganizing the administrative and accounting resources into service providers the costs to each of the producers in developing their own administrative and accounting capabilities, capabilities that are wholly similar to each and every other producer in the industry, capabilities that are currently unshared and unshareable, just as the earth science and engineering surplus capacity is unused and unusable. These excess costs are major contributors to the current lack of real profitability in the industry and without the Preliminary Specification in place, will be unacceptable costs in which the industry can incur. We have now identified three new classifications of excessive costs being incurred by the producer firms, the third being the burden of providing the full scope and scale of the specialized oil and gas related sciences. With People, Ideas & Objects Preliminary Specification in place the energy consumer will know that they are being provided with the lowest possible energy prices that consider a fair distribution of the value needed for the industry and all of those dependent on it to thrive and profit.

This therefore briefly defines the focus of the producers role of moving the science within the industry forward, innovating based on that science and deploying their capabilities through a defined process of development within the producer firm, and deployment to the producers Joint Operating Committees. It is within the Research & Capabilities module that we learn from McKinsey & Co in their article entitled The 21st Century Organization, what it is that will be required of organizations in the 21st century.

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

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

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

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

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

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

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

The Preliminary Specification has the Performance Evaluation Module for the Joint Operating Committee, and the Analytics & Statistics Module to provide these capabilities to the producer firm. Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion, profitably. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it.

People, Ideas & Objects have presented our value proposition of providing the oil and gas producer with the most profitable means of oil and gas operations. There is more contained within the Preliminary Specification. Innovation is one of our key areas of focus. Adding value on an incremental basis throughout the industry, the producer firm and Joint Operating Committee. These are wholly dependent on the organizational structure of the producer firm and the industry. A role that is purpose built for an ERP solutions provider.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Science, Innovation and Capabilities, Part II

Knowledge that we can source from the Internet and from books is explicit knowledge. Therefore the ability to use this knowledge, to access and verbalize it is easily done. It can be thought of as expressive knowledge or text book knowledge. Tacit knowledge is more difficult since it can’t be captured and communicated to others. It is the knowledge that is acquired through learning by doing etc. Tacit knowledge most importantly is the knowledge about production. From Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Therefore both tacit and explicit knowledge make up the knowledge of the organization, or producer firm in this instance. Now that we’ve defined what knowledge is we can state that capabilities are the skills, knowledge, experience and ideas of the producer organization. And not to diminish the role of direction and command, I would point out the technical infrastructure included in the Preliminary Specification that we call the Military Command & Control Metaphor. The need for this command and control to span multiple organizations is necessary when the Joint Operating Committee becomes the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. We also have the definition of capabilities provided by Professor Carliss Baldwin’s giving us an understanding of why capabilities are important to producers and the industry, and that is “Knowledge begets Capabilities, and Capabilities beget Action.” Starting this discussion of capabilities with a clear definition of what they are. These are some of the definitions that were published in the Research & Capabilities module and are noted here for clarity purposes. Another is from Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

Therefore to capture, document and deploy these capabilities of the producer firm to their interests within their Joint Operating Committees. Access and deploy the capabilities of their partners within the Joint Operating Committee and access and deploy those capabilities that are acquired through contract to ensure that the full scope of the earth science and engineering capabilities that are necessary are acquired and deployed efficiently and effectively. This incremental coordination at first seems like a complex and unnecessary process to be undertaken. The need to cover off the full scope of the earth sciences and engineering capabilities needed will be beyond the commercial reach of each and every producer. The convenience of having all of these in-house will soon be, we believe, well beyond the financial capacity of all producers.

Within the Preliminary Specification we speculate that specialization and division of labor are needed in order to expand the sciences from the point they’re at today. Therefore this will require additional skills and therefore resources to be required by producer firms. Currently producers are acquiring all of their capabilities they need to cover off all possible contingencies that are presented by the properties that they operate. These contingencies need to be on hand and are not necessarily highly utilized. Therefore they are creating an overall earth science and engineering surplus capacity of capabilities within the producer firm, and to the greater issue, of the oil and gas industry as a whole, that is unused and unusable. Creating an uncontrollable cost that currently diminishes the profitability of the producer and industry. An additional cost above the demand for the broad scope and scale of earth science and engineering capabilities. Which we believe these two costs when combined will explode in the near future. The Preliminary Specifications Research & Capabilities module and Knowledge & Learning module seek to eliminate the surplus capacity of earth science and engineering capabilities by fully deploying them through specializations within the producer, the Joint Operating Committee and also in markets. Using the capabilities of the industry at much higher rates of utilization and therefore reducing these otherwise high and unnecessary costs as a result of the unused and unusable surplus capacity that is maintained today. And ensuring that the cost burden of maintaining the full breadth of earth science and engineering capabilities do not expand further on each individual producer as a result of a further specialization and division of labor of the sciences.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Science, Innovation, and Capabilities, Part I

We now begin a series on the interactions between the science, innovation and capabilities that exist within the oil and gas industry and the dynamic, innovative, accountable and profitable oil and gas producer. With an overall assumption that the Preliminary Specification is implemented, and therefore all production is produced profitably, which will provide for a prosperous industry and all those associated with it. Whereas today the investors, bankers, employees, service industry representatives, royalty holders and government tax jurisdictions are all having to settle for far less than what is equitable. Which describes the current situation the industry is in, and society needs to begin to question the rationale of producing oil and gas unprofitably and how we’ll be able to justify that to future generations. Today the consumer constantly complains about the cost of energy. Even with the massive discount in the form of the producers unrecognized capital costs of past production the consumers have received over the past decades. The issue therefore becomes how will the producers ensure they’re providing consumers with the lowest cost energy production that is also profitable and equitable to those involved in the industry? The simple answer is science, innovation and capabilities.

The dynamic, innovative, accountable and profitable oil and gas producer will be actively participating in moving the sciences of geology and applied sciences of engineering forward within the oil and gas industry. As we discussed yesterday these are elements of the Preliminary Specification that establish the foundation and organizational structure necessary for innovation to become a focus of the industry and producer firm. As these sciences expand they spin off new innovations that bring about new insights which in turn further develop the sciences. With the depth and breadth of these sciences as they stand today. With the diverse demand of a producers interests in their properties. The ability and capability for each and every oil and gas producer to have developed their organization to the point where they can handle the full scope and scale of these specialized professions within their domain, and to do so commercially, is believed to be slipping away from each and every producer as we speak. The need for each producer to use specialization and the division of labor to cover off all aspects of their organizations needs will incur too heavy of a cost burden on each one of the producers if they attempt to cover off the full scope of an oil and gas producers scientific, innovation and capability needs. Therefore the need to have the capabilities provided by the producer firm in terms of its unique specialization, then acquire the other available earth science and engineering capabilities from their partners within a Joint Operating Committee and then on a contractual basis from a market that doesn’t currently exist, however is created in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification.

The Research & Capabilities and Knowledge & Learning modules create the market for geological and engineering capabilities that fill what we call the bread and butter tasks of the producer firms. Freeing up much of the basic capabilities of the industry to be provided on a sub-industry basis similar to the service providers are a sub-industry for the administrative and accounting of the industry. This will enable the producer firms to focus on the higher, more technical capabilities that are the critical value add elements of the earth science and engineering capabilities that form the key competitive advantages of their producer firm. This is how the Preliminary Specification has resolved the critical shortage of these resources that are expected in the next decades. Shortages as a result of the anticipated retirement of the braintrust in these professions and the current lack of new recruits choosing oil and gas for their university studies. The demand for greater effort and science is evident in each successive barrel of oil that is produced. How are the current producers dealing with this situation?

We’ve discussed innovation in two blog posts recently, and we can all certainly understand the scientific aspects of the industry. With the interaction between science and innovation being codependent on each other. What are producers capabilities and how are they expanded. In the Preliminary Specification, capabilities are managed in the Research & Capabilities Module for the producer firm and then the deployment of the capability is carried out in the Knowledge & Learning Module to the specific Joint Operating Committees that producer has an interest in. In tomorrow’s post we’ll begin a more detailed discussion of capabilities.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Professor Richard Langlois on Innovation

I stumbled upon this quotation from Professor Richard Langlois of the University of Connecticut. He was one of the principle sources of primary research that we used in development of the Preliminary Specification. His work focuses on innovation, transaction cost economics, the choice between firms or markets, modularity and capabilities. Aspects of the Preliminary Specification that provide real value for the dynamic, innovative, accountable and profitable oil and gas producers. His quote was made during a recent podcast, is in the area of innovation and captures a need that everyone must adopt for the 21st century.

I was talking about trying to think about how innovation works. That’s what a lot of my work has been, looking at the history of the various, especially high technology industries and thinking about what are the causes of innovation and how does the process of innovation work and I talked about that in this talk today and I talked about how it’s very important when you think about innovation, to realise that innovation doesn’t occur in isolation, that once you change one part of a system, when you innovate in one part of the system, that’s going to have effects that ramify throughout the system and if you can’t adjust the other parts of the system to go along with what you’re changing in your part of the system, then the innovation may not work.

The first two items that come to mind are that innovation is hard which maybe why our good friends the bureaucrats are mute about any aspect of their current business failures. Secondly the role that People, Ideas & Objects user community, service providers, and Oracle as our contracted software developers provide in terms of a dynamic change capability to the producer firm and industry. We noted recently that we’re reorganizing the oil and gas industry by establishing the service providers as a sub-industry and populating these independent organizations with the administrative and accounting resources of the producers. Once we have that structure in place we have the beginnings of what is necessary for innovation. Reading the Preliminary Specification shows the dynamic nature of how the producer and industry will be able to develop the sciences of geology and applied sciences of engineering in terms of the these capabilities for their producer firm. There will never be and could never be any superstar producer firms coming out of an industry that is desolate of any capability or capacity to innovate. In contrast to today, these structures, foundations and capabilities are all dynamically facilitated in the modules of the Preliminary Specification.

Where the producer firm is constrained in today’s marketplace is through concepts such as “operator,” and the collaboration of detailed proprietary technical information. A renewed focus on the producers competitive advantages of their earth science and engineering capabilities, and their land and asset base are what’s required. If they desire to lock themselves in a room with all the textbooks regarding engineering and geology and develop their own capabilities to be deployed only by themselves then they are certainly welcome to do so. It is a commercial marketplace in a free market system. Just as everyone realizes the reliance on a small handful of individuals limited understanding does not an innovative producer make. An innovative producer will only be attained when the industry is providing the resources and capabilities to facilitate innovation in every producer within that industry. Therefore the need to expand the producers earth science and engineering capabilities is the source of greatest value that the producer can attain in terms of maximizing the profitability of their land and asset base. Participation, and that means full, unconstrained participation in the industry to push the sciences forward will be the only way that the producers will be able to move their innovations forward. This can only be done by expanding and exploiting their earth science and engineering capabilities.

What Professor Langlois captures in his quotation is of course that innovation and its necessary mindset is never fixed. However in addition, the deployment of innovations are not as easy as they sound. They may not work or function in the market if there is no supporting cast to provide for the innovation. Working intimately with the service industry is part of the Preliminary Specifications Resource Marketplace and Research & Capabilities Modules for that reason. A key point of the Research & Capabilities and Knowledge & Learning Modules is that innovation is not a free-for-all either. Having the ability to experiment and develop the innovations away from the mainstream operations of the producer are critical until such time as they are proven and as such can then be deployed efficiently and effectively to the larger population of properties. Otherwise you’ll have uncontrolled chaos and nothing happens in terms of the innovations development. All of these are processes that are managed within the Preliminary Specification.

As I’ve mentioned before the process of innovations development and deployment are not happenstance. Currently the service industry develops significant product and service innovations that the producer firms ignore for a decade or more. These timelines will be inadequate for the future consumers of energy. If today’s bureaucrats feel, as we mentioned before, that they’ll stumble upon the appropriate methods of innovation throughout their producer firms and industry, as well as become spontaneously highly profitable in this the third quarter of 2018. Then they’re kidding themselves as much as they’ve been kidding themselves about their profitability these past four decades. In this technically sophisticated environment, with the complexity of the work that needs to be done in this the second most difficult and complex industry. Hoping that the millions of people that work in oil and gas and related industries will suddenly and spontaneously understand what is expected of them is obviously what are friends the bureaucrats are waiting for. I just don’t think I’ve ever seen the sense of hope and change.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Professor Richard Langlois on Capabilities Part IV

A Critique of the Bureaucracy

As I stated earlier, the culture of the industry also has an influence on the design of these modules. These cultural conditions reference the boundary of the firms and markets and determine the future changes that will be needed. Since we are dealing with the service industry, and all but the smallest number of producers practice sourcing their field operations from the market. We are consistent with the culture of the industry. Nonetheless Professor Langlois notes three factors are important. Application of this framework to the methods used in the Preliminary Specification provides an understanding of the choices that were made.

• The pattern of existing capabilities in firms and market. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 360
• The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 360
• The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 360

The service industry is robust and dynamic. What is needed is for the oil and gas producers to build the interfaces described here. Once they have their capabilities documented and deployed in such a manner the natural evolution of the service industry will continue, although at a faster pace and with more competitive offerings.

The question that we have to ask ourselves is why should we focus on capabilities in the oil and gas industry? I think it is because we have lost the ability to respond to market signals and initiate new and innovative thinking. These next two points will ask the difficult questions that should be asked in terms of “what” and “how” the industry has been operated and what should be done to correct these behaviors. The Research & Capabilities module, along with the other modules of the Preliminary Specification enable the oil and gas producer, and particularly the Joint Operating Committee, to act in their best interests.

In the Preliminary Research Report I suggested that the oil and gas industry was not fundamentally different than the former Soviet Union in terms of its ways and means. Going through the motions and determining “best practices” shows a high level of stagnation present in the industry. We see the natural gas prices that everyone watches but no one does anything about. Everyone complains about the service industry, but no one does anything about it. Its as in the former Soviet Union where there was no bread because everyone was lined up at the bakery waiting for bread. The market system hasn’t existed in the oil and gas industry for so long, no one even knows what it would look like. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

To reinstate the market and the dynamism of the market system in the oil and gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. The Research & Capabilities module is designed to enable the systemic thinking that is necessary for the earth science and engineering capabilities of the producer and Joint Operating Committees to act in dynamic, innovative and market fashion.

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Langlois’ “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

This is the one culture of the industry that we are moving against. It is also the most powerful. The bureaucracies control the budget and have exercised it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of research into oil and gas that the Preliminary Specification has, and there are none. They all get financed on relationships that maintain the status-quo with the bureaucracy. The fact that there has been no funding proves that the bureaucracy are too conflicted to do the right thing in this regard. The decision to proceed will need to be taken out of the bureaucracies hands and handed to the investors and the C class executives to fund People, Ideas & Objects. After all they have some concerns with the bureaucracy as well.

There is no denying that the management revolution has taken the oil and gas industry to a scope and scale that is impressive and productive. The question is where do we go from here? We currently stand on the shoulders of giants and have absolutely no vision, no plan and no means in which to approach the future demands of society's needs for energy. We not only have no plan for the future we run the risk of failure of the existing “management” infrastructure. We have far to fall. Bureaucracies have failed before, and when they do fail, they leave it for the bond holders and investors to clean up the mess, while they look for greener fields elsewhere.

Economic Growth Through Organizational Change

There is no question how economic growth will occur. That is from organizational change. But I think that it is intended to be as a result of constructive action not as a result of atrophy and inaction.

Institutions may be the ultimate drivers of economic growth, but organizational change is the proximate cause. As Smith tells us in the first sentence of The Wealth of Nations, what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Young 1928; Richardson 1975). p. 3

With the selection of ERP systems like SAP the bureaucracy have secured their future in a bureaucratic and stifling maze of paper. Change occurs in decades and centuries for an application that has no concept of a Joint Operating Committee or even what a partner is. In this day and age, when the organization is defined and supported by the software it uses it is critical that the organization be supported by a software development capability like that which People, Ideas & Objects proposes. Otherwise you set your organization in the proverbial SAP like concrete that only today’s bureaucracies are pleased with.

Economic growth is about the evolution of a complex structure (Langlois 2001). p. 6

It is in the Research & Capabilities module of the Preliminary Specification that the producer firm is able to exercise their opportunities for economic growth. By developing their capabilities and documenting them within the “Dynamic Capabilities Interface” they are able to populate these capabilities to the various Joint Operating Committees that they have an interest in. Reducing the costly experimentation of innovation yet opening up the assets of the firm to innovations.

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

This previous quote captures so much of what we should be concerning ourselves with. I think it also shows that by using the Joint Operating Committee, and structuring the development and deployment of capabilities in the processes of the Research & Capabilities and Knowledge & Learning modules achieves much of what is discussed.

To expand the economic performance of the oil and gas producer requires that you focus on their competitive advantages of their land and asset base, and earth science and engineering capabilities. The Research & Capabilities module focuses on the producers earth science and engineering capabilities and provides the means in which to document them, expand them, deploy them, and most importantly innovate off of them. Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27

As we have learned “knowledge beget capabilities, and capabilities beget action” and capabilities are the “knowledge, skills and experience” of the people involved. People, Ideas & Objects are working to bring these systems to the oil and gas industry. Systems that provide the computers with the work that they do best and with work that people do best, ideas. So that capabilities should be comprised of knowledge, skills, experience and ideas. The Research & Capabilities module enables the producers capabilities to be captured and deployed in innovative ways.

There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27

and

What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27

This next quotation is focused on a specific type of innovation. The type of innovation that People, Ideas & Objects is bringing to the oil and gas industry. However, the conclusion I think is universal in its application to capabilities of all types, and not just organizational capabilities. And that is “those capabilities were the result, not the cause, of the innovation.” This is the primary reason that Research was grouped together within a module with Capabilities, they have a strong interaction with one another.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

As we move to the Knowledge & Learning module we'll deal with the deployment of these capabilities in the Joint Operating Committee.

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