Langlois, Rise of the Corporation

We begin our review of Chapter 4 "The Rise of the Corporation" of Professor Richard Langlois' book "The Dynamics of Industrial Capitalism". This chapter deals with the history and development of the corporation over the past few centuries. Prior to our review of Professor Langlois we conducted a summary review of Alfred D. Chandler, who is renowned for his work in documenting the history of the corporation. Instead of revisiting this history, I want to add to the discussion from an Information Technology (IT) point of view. Particularly with respect to the poor use of IT in the oil and gas industry. First lets set the tone of the discussion by quoting the opening paragraph of the chapter.

Industrial structure is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. These systems jointly must solve the problem of value: how to deliver the most utility to ultimate consumers at the lowest cost. Industrial structure is an evolutionary design problem. It is also a continually changing problem, one continually posed in new ways by factors like population, real income, and the changing technology of production and transaction. It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organizations — governance structures — bring with them their own costs, which need to be taken into account. But technology clearly affects organization. This is essentially Chandler’s claim. The largescale, high-throughput technology of the nineteenth century “required” vertical integration and conscious managerial attention. In order to explicate this claim, we need to explore the nature of the evolutionary design problem that industrial structure must solve. p. 50

To talk about organizational structure we need to look at the information systems used by the firms and markets that make up the industry. One of the key break-through's of the Preliminary Research Report was that systems define and support organizations. To therefore change the organization requires that we build the systems to support the new organizational constructs. It is a deliberate act that needs to be carried out by those within the industry. Relying on Hayek's spontaneous order will not deliver the systems that are needed for an innovative oil and gas industry. Nothing will happen without the financial resources of the industry being dedicated to a software development capability.

On the surface this seems logical and reasonable. So what is the difficulty in securing the dedicated financial resources. Management of the bureaucracy will not fund what is counter to their best interests. They will fight to have their ways and means be the only alternative available to manage the industry. Their innovativeness and capability are developed as a result of the Chandlerian corporation. The hierarchy is a decidedly human invention that has been ably assisted by IT, not a type of organization that actively exploits the value of IT. If we look in the marketplace of the ERP systems vendor providing solution to oil and gas firms, we see nothing that has been developed in the last few decades. Many of the systems that are still operational in the marketplace are orphans of long-ago acquisitions or dispositions. The bureaucracy are not oriented, nor are they able to fully employ the types of technologies that are readily available to everyone in the Internet age. It is the modern equivalent of selling buggy whips.

Is this the type of situation that provides for the long term and substantial economic development that is needed in the oil and gas industry? Will this be the situation that the industry is operating under in 2020? With no one willing to fund the development of People, Ideas & Objects Draft Specification, it appears it will be the case. Is there an expectation that the current bureaucracy will soon see the light of IT and begin the development of the systems that will propel oil and gas forward? Will I still be writing to try and secure the necessary resources in 2020?

The fact of the matter is, the Chandlerian corporation had its day. The hierarchy was useful and productive to the point of providing the majority of the benefits that we enjoy today. It may still have some distance to travel before it fails completely, however, why should we wait for that fateful day when the alternatives are readily available? And by today I mean we could begin the development process today, the delivery of systems will be as a result of a significant effort on almost everyone's behalf.

Was it Henry Ford or the buggy-whip makers that developed the automobile? Why are we stuck in this mindset that what we have today is good enough? Do we really only respond when a crisis threatens us? We need to stop thinking that someone else will step up and solve this problem. We need to be proactive in approaching people who would be able to fund these developments and telling them they should do so. This action by everyone is the critical step that we need to take to move this project forward.

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

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Langlois Personal Capitalism Part II

In this second post on Chapter 2 "Personal Capitalism" of "The Dynamics of Industrial Capitalism" Professor Richard N. Langlois documents four centuries of the history of the Swiss watch making industry. I highly recommend you download the book and read Chapter 3 for an understanding of how the Swiss watch industry evolved in the face of many unseen dangers. The key break-through in this post is the role of the large organization in making People, Ideas & Objects and the Community of Independent Service Providers real. There are many contradictions in this post, none more contradictory then myself reflecting on the positive role of the bureaucracy.

This positive role that the bureaucracy can provide is based on the realization that change can be a top down decision. In this post Langlois argues there are two alternatives for change. Through charismatic authority or as a top down decision. For the bureaucracy to fall on its sword seems to be a tall order, however, other miracles have allegedly happened. Funding of this project is the step that would need to be taken in order to initiate top down change. I'm not holding my breath.

That leaves us with charismatic authority as Langlois describes it.

This is so because charismatic authority solves a coordination problem in a situation of “chaos” in which rights, roles, and responsibilities are in flux. All participants would prefer some structure or constitution; but the costs of coordination are high, as each is willing to constrain himself or herself to a new order only if many others simultaneously agree to do so. Charismatic authority cuts through these costs and establishes a structure, which then presumably evolves in a Weberian way as stability is achieved. p. 37

People, Ideas & Objects have published the Draft Specification as the structure for participants in this project. This is the beginning vision of how the energy industry could be structured to facilitate innovation and speed. The ideas contained within the vision enable people to see their potential rights, roles and responsibilities in the industry. From there they will be able to build the systems they will need to do their jobs in this new environment. If cutting down on the costs of coordination is the objective, I can see how this vision enables the people to begin working constructively towards fulfilling that vision.

I am appreciative of Langlois' point about "as each is willing to constrain himself or herself to a new order only if many others simultaneously agree to do so". It would be difficult without the Internet to organize the volume of people needed within these communities. I've always assumed that the numbers of people wanting to contribute would only do so when it was deemed safe to do so. The bureaucracies are particularly difficult towards people who are willing to be the first to step into an "unauthorized" area. Protection from the bureaucracies actions are our first priority.

By using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. We align the firms ERP systems with the legal, financial, operational decision making, cultural and communication frameworks of the global oil and gas industry. Therefore the Draft Specification resonates with the ways and means that the industry operates naturally. This natural way provides People, Ideas & Objects with an advantage in that people can see that the vision of the Draft Specification provides what Langlois calls "cognitive leadership".

The “constitution” in demand in a world of change is a cognitive one. Those who need to cooperate in such a world need to share a cognitive frame or system of interpretation in order to orient themselves toward one another’s goal’s and actions. The entrepreneur provides this orientation through what Witt calls cognitive leadership. p. 37

In addition, much of the Draft Specification provides new metaphors for how the system will integrate with the natural way of the industry. Metaphors such "marketplace" modules and the Military Command & Control Metaphor provide the users with an understanding of what is being created. These are the primary reasons that these developments should be funded.

Oil and gas is based on the partnerships that are created to manage oil and gas assets. These Joint Operating Committees are systemic the world over and are an inherent part of the nature of the business. Multiple ownership is a necessity derived from the desire to reduce risk and the aerial extent of physical assets. Operational decision making is determined based on each contracts "Operating Procedure" which is a codification in the regions culture. It is here that Langlois brings up an interesting point regarding the decision rights in incomplete contracts.

More recent economists tell a similar tale. In the work of Oliver Hart (1989), the necessary incompleteness of contracts in an uncertain world requires the existence of a residual right of control — that is, a right to make decisions in circumstances unforeseen. The ownership structure of production turns on whose possession of that right minimizes the sum of production and transaction costs. p. 39

In a separate post I noted that we will use the technologies that are available to us to make these operational decisions better and faster. Having each of the companies representatives on the JOC participate in an interactive video conference to determine the decisions that need to be made is part of the Draft Specification. Since we are providing the oil and gas industry with a much needed software development capability. These decisions being made can be documented and implemented during the conference in real time with the appropriate AFE's or work-orders being dispatched based on the voting and decisions being made. This is one of the key areas where I see the performance of the producers being able to make the decisions in the time frame in which they are expected.

I want to turn now to the last point in Chapter 3 "Personal Capitalism" and discuss the fact that innovation requires that firms take on characteristics of marketplaces. In this next quote, Langlois reflects on the impact that American watch manufacturer Waltham posed to Swiss manufacturers. Waltham was able to increase the quantity and quality of American watches to a point where they seriously challenged the Swiss manufacturers. The key point is highlighted in italics.

In the specific case of watchmaking, the fragmented Swiss industry responded quickly to the American threat. “In spite of some inevitable resistance,” Jequier (1991, p. 326) tells us, “the spirit of enterprise asserted itself”; and assemblers began building new factories and introducing the same kind of machinery as the Americans. In 1870, three quarters of the 35,000 employed in Swiss watchmaking worked at home; by 1905, only a quarter of the more than 50,000 workers did so (Jequier 1991, loc. cit.). Nonetheless, when Switzerland regained the technological and market lead toward the end of the nineteenth century, it remained far less vertically integrated than the American industry; relied far more on outwork; and comprised thousands of firms to the dozen or so in America (Landes 1983, p, 323). Meanwhile, Waltham’s highly integrated structure proved far less conducive to the routine administration of its operation than it had to bringing that operation into being, and the firm virtually collapsed under principal-agent problems (Landes 1983, pp. 329-334). Even its better-run competitors lost ground to the Swiss. Indeed, both Waltham and Elgin, Waltham’s long-time domestic rival, are now Swiss owned. p. 42

Key to the Draft Specification is the division of labor that is needed in order to increase the economic output of the oil and gas industry. The Military Command & Control Metaphor provides for a pooling of the resources from the firms represented in a JOC. Eliminating the redundancy built in each firms silo of technical capability. The eleven different modules of the specification provides for an enhanced division of labor. And finally, the division between "market" and "firm" is a further division of labor. Within this framework, the People, Ideas & Objects software development capability, and the Community of Independent Service Providers will be able to define ever greater divisions of labor for the producer firms that subscribe to this project.

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

It's this next quote that I find the variety of contradictions. The bureaucracies are all about centralization and we are talking about moving the majority of the industry into the market definition. This requires the bureaucracy to voluntarily say so long. Something that this projects history has shown, the bureaucracy won't do.

As I have argued elsewhere (Langlois 1992b), the benefit of centralization lies in the ability to bring about change, not in the ability to administer existing structures. p. 47

If the bureaucrats need further justification for their self selection, I recommend the following.

Nonetheless, innovativeness requires more than mechanistically searching for new routines. In Hamel and Prahalad, it essentially involves forcing the firm to take on more of the characteristics of a market: it must develop the kind of genetic diversity Friedrich Hayek praised. “In nature,” they write, “genetic variety comes from unexpected mutations. The corporate corollary is skunk works, intrapreneurship, spinoffs, and other forms of bottom-up innovation” (Hamel and Prahalad 1994, p. 61). In the end, however, they, like Crozier, realize that the most radical kind of change must come from the top down: it requires a Schumpeterian entrepreneurial vision. “Top management cannot abdicate its responsibility for developing, articulating, and sharing a point of view about the future. What is needed are not just skunk works and intrapreneurs, but senior managers who can escape the orthodoxies of the corporation’s current ‘concept of self’” (Hamel and Prahalad 1994, p. 87). Example? Nicolas Hayek’s “crazy” vision that the Swiss could manufacture cheap watches competitively with the Japanese (pp. 98-99). p. 49

and

Indeed, one might argue that, the farther an innovation is from the ken of existing firms, the more likely it is that the innovation will be instantiated in new organizations. p. 49

It's now 2010 and it feels like, as a result of the bureaucracy, that we will be arguing the same points in 2020. The deliberate nature of building organizations has to consider that we need to build the systems that define and support those organizations first. Without software, there is no change. Without cash, there is no software, and the bureaucracies are not going to fund these developments. And therefore, here we stand.

Whether Schumpeterian entrepreneurship operates from the top of an existing organization or in the creation of new ones, the same conclusion seems unavoidable. The charismatic authority and coherent vision of such entrepreneurship remains an inevitable part of capitalism, however modern. For reasons that have to do with the nature of cognition and with the structure of knowledge in organized society, some essential part of capitalism must always remain personal.

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

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Douglas North Chapter 1

Taking a short break from our review of Professor Langlois. I noticed that a new and interesting book has been published. The book is "Understanding the Process of Economic Change" by Nobel Prize winning economist Professor Douglass North. I took the opportunity to download the first chapter and I highly recommend the entire book, however, at this time we will only be covering this first chapter in our review.

If there is one word to summarize what People, Ideas & Objects is about, it's change. Moving from the bureaucracies that control the industry today. To a newer more innovative footing as represented in identifying and supporting the Joint Operating Committee. Brings about a significant scope of change in the oil and gas marketplace. How this change is implemented is of great concern to me. Making sure this process is focused on the new innovative footing, and not on the bureaucracies needs is a difficult dynamic to manage. Specifically we can't be concerned with the day-to-day of the industry. These day-to-day concerns are for the bureaucracy to manage for the time being. We can not be constrained by the difficulties that constrain the bureaucracy. People need to approach this project with fresh thinking that is free to be as it should be. This unfortunately makes my life infinitely more difficult, however, we are close to securing some funding. And that funding will be from the appropriate resource, the oil and gas investors and shareholders. Selling out to the bureaucrats at this point would be very destructive in terms of ensuring that we are not constrained by the bureaucrats.

We have also been mindful of how individuals approach People, Ideas & Objects. Mindful to ensure that there is a strong break from the day-to-day to ensure they don't bring their cognitive and motivational paradoxes with them from their day jobs. These paradox defined in 1998 by Carroll and Rosson were spelled out in an appendix to the Preliminary Research Report and are noted for the following.

The “motivational paradox” arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for through put. Their work is hampered by this lack of learning, and consequently productivity suffers.

The “cognitive paradox” has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions.

In the first paragraph North provides us with an understanding of where we are and the significance of the times at which we live.

UNDERSTANDING economic change including everything from the rise of the Western world to the demise of the Soviet Union requires that we cast a net much broader than purely economic change because it is a result of changes (1) in the quantity and quality of human beings; (2) in the stock of human knowledge particularly as applied to the human command over nature; and (3) in the institutional framework that defines the deliberate incentive structure of a society. A complete theory of economic change would therefore integrate theories of demographic, stock of knowledge, and institutional change. We are far from having good theories of any one of these three, much less of the three together, but we are making progress. The central focus of this study, and the key to improving economic performance, is the deliberate effort of human beings to control their environment. Therefore, priority is given here to institutional change, with the consequent incentive implications for demographic and stock of knowledge changes; but there is no implication that such an approach deals adequately with the latter two. p. 1

Clearly we have much to learn in terms of how best to approach the development of these systems. The other day I noted that we risk becoming blind sleep-walking experts in the hands of whoever wants to feed us. (Habermas) And this is reiterated by North. To "improve the economic performance" of the oil and gas industry requires that we deliberately exert effort to control our environment. I believe, if we continue in the fashion of the bureaucracy, that the world oil production will begin a serious decline in deliverability. Then we will realize, that some of the tasks that we need to occupy ourselves with are beyond those that are parsed out by managements budgets. North details the impact that existing constraints can have.

The structure we impose on our lives to reduce uncertainty is an accumulation of prescriptions and proscriptions together with the artifacts that have evolved as a part of this accumulation. The result is a complex mix of formal and informal constraints. These constraints are imbedded in language, physical artifacts, and beliefs that together define the patterns of human interaction. If our focus is narrowly on economics, then our concern is with scarcity and, hence, competition for resources. The structure of constraints we impose to order that competition shapes the way the game is played. Because various kinds of markets (political as well as economic) have different margins at which competition can be played out, the consequence of the structure we impose will be to determine whether the competitive structure induces increasing economic efficiency or stagnation. Thus well-developed property rights that encourage productivity will increase market efficiency. The evolving structure of political and economic markets is the key to explaining performance. pp. 1 - 2

If well developed property rights that encourage productivity will increase market efficiency, I think People, Ideas & Objects achieves the appropriate institution of those rights. Here I am talking about the Intellectual Property (IP) rights of the people that are associated with this project. I as the copyright holder to the ideas expressed here and in the Draft Specification license those participants in this project with unencumbered use of this IP. In turn, the derivative ideas generated in the development of the applications is essentially sold back to me, where in turn they become available to everyone in the community that has signed the license. This maintains the IP in its pristine condition and is available to all that need it. The license also provides members of the Community of Independent Service Providers with the rights to build a service based offering that is associated with the People, Ideas & Objects software applications.

North provides us with an understanding that we need to be ever vigilant in terms of these concerns.

While the uncertainty that pervades our existence may be reduced by the structure we impose, it is not eliminated. The constraints that we impose have, themselves, uncertain outcomes reflecting both our imperfect understanding of our environment and the equally imperfect nature of both the formal rules and the informal mechanisms we use to enforce those constraints. p. 2

I am unsure at this point if there will be a second post on this chapter. I have downloaded a number of Professor North's papers and we will review those for applicable content. I have also set up a "North" label so these posts can eventually be aggregated.

This book is a study about the ceaseless efforts of humans to gain greater control over their lives and in the course of that effort continually confronting new and novel problems to solve. It is a study of the perceptions that induce institutional innovation intended to reduce uncertainty or convert uncertainty into risk. It is also a study of a continually changing human landscape. This landscape poses new challenges, as a consequence of which policies emanating from “non-rational” explanations frequently play a part in the structures we create. p. 2

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

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Langlois Progressive Rationalization Part II

In Part II of our review of Professor Richard Langlois book "The Dynamics of Industrial Capitalism", Chapter I "Progressive Rationalization" we discuss the role of capabilities. In People, Ideas & Objects Draft Specification capabilities reside in both the firm and the market, however, the division of labor between the two is different then what exists today. We will also see in this chapter that the multi-unit vertically integrated firm is of diminishing value. How the hierarchical organizational construct was designed to provide control to the means of production and how today, that means of production is best met through dynamic markets.

As Chandler tells us on the first page of The Visible Hand, two characteristics set the managerial corporation apart from earlier modes: (1) it is overseen by salaried professionals rather than by owners, and (2) it comprises multiple units or stages of production each of which could in principle have stood on its own as a separate organization. The last characteristic is really the essential one. In the large corporation, management supersedes the price system as a method of coordinating stages of production. p. 8

Scratch the surface of any start-up oil and gas firm today and you will find the primary owners are the engineers and earth scientists that are running the firm. Using debt for leverage and to expand their scope, these small teams are actively developing a number of oil and gas fields over a five to ten year time frame. When the fields are fully developed, they will monetize their investments by selling the firm to one of the major independents or International Oil Companies (IOC's). This focus on building value is the future of the industry. Although the scope of the projects may not be as large as the multi-billion dollar programs of the IOC's. They are prototypical of how I see People, Ideas & Objects Draft Specification providing all members of the oil and gas industry with the means of value generation through exploration and development.

The future configuration of a producer firm will have a handful of engineers and earth scientists augmented by similar resources from the partner firms of the Joint Operating Committee. These individuals will be joined by the various resources of the dynamic field and service sectors on as required basis. The JOC will implement a comprehensive governance structure through the applications Military Command & Control Metaphor. The scientists and engineers will be leading these groups through the five to ten year development of the oil and gas reserves. Langlois notes;

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

In breaking down the way that oil and gas firms operate, People, Ideas & Objects is only providing the ERP software that identifies and supports what is desired by those in the industry. The difficulty today is that each producer firm is conflicted and constrained by their own needs. One of the conflicts is that they are focused on their own compliance needs. Focused on the compliance requirements of their tax, royalty and SEC requirements as opposed to the business of the oil and gas business. Companies are also attempting to secure the global scope of capabilities that their firm may require. As a result they may have a greater in-house capability then required at any point. Replicate this over each producer firm and we see independent and mutually exclusive capabilities silo's being built. The industry as a whole can not afford to maintain capabilities in this fashion.  

As each barrel of oil produced requires progressively more earth science and engineering resources, where will the future technical resources come from? With each producer firm attempting to secure all the capabilities they can, they quickly realize the industry wide demand for these capabilities far exceeds the resource base. The capacity to increase the capability is very limited, and therefore the alternative means of deploying a limited capability over a greater scope of projects is through re-organization. Reorganizing to the JOC as the key organizational construct; permits a pooling of the capabilities from all the producers represented in the JOC and the greater service sectors. Langlois helps to define capabilities with the following definitions.

Coase noticed that there can be costs of transacting because of limitations of knowledge and information; capabilities theory insists that limitations of knowledge and information are the key to understanding everything an organization does (Langlois and Foss 1999). Indeed, transacting is just one of the many activities an organization undertakes – one of many activities requiring capabilities (Winter 1988). p. 11

Richardson (1972, p. 888) describes capabilities as “the knowledge, experience, and skills” of the firm. p. 12

Why is there an assumption that the capacities resident in the earth science and engineering resources fixed? To train and deploy them takes the better part of ten years, and the community that exists today have a predetermined retirement date. In other words its not an assumption but a fact that the population of these technical resources will probably remain constant over the foreseeable future. Based on that fact, would it be reasonable to assume, that the industry will produce no more oil and gas over the foreseeable future? That isn't the case, this therefore becomes an economic problem and not a resource constraint.

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

Innovation in oil and gas will arise as a result of People, Ideas & Objects use of the Joint Operating Committee in the manner as described in the Draft Specification. No other alternatives, that I am aware of, have been suggested. The bureaucracy can not function in today's environment, and are certainly incapable of transforming itself to the future demands of the marketplace.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

Management are being unreasonable in expecting that theirs is the only way in which to proceed. Managerial coordination in today's marketplace is redundant. People, Ideas & Objects have received no support from the bureaucracy. As a result there is no competitive form of organization to challenge managements ways. Control of the financial resources of the industry ensures that we are reduced to blind sleep-walking experts in the hands of whoever wants to feed us. (Habermas)

Schumpeter’s account of progressive rationalization takes the form of a contrast between two modes of economic organization, modes roughly cognate to the difference between the small owner-managed firm and the large multi-unit enterprise. Characteristically, however, the issue in Schumpeter is a dynamic one: he is concerned with the respective merits of these two modes of organization not in the static allocation of existing resources but in generation of economic change and growth. The paradox of Schumpeter is that he famously defended, and has come to be associated with, both of these modes as drivers of economic growth. Schumpeter has returned to prominence today as champion of the role of bold entrepreneurs in creating new combinations and redirecting the means of production into new channels, to such an extent that he is revered as an inspiration to the present-day field of entrepreneurship studies (Shane and Venkataraman, 2000). In this (Schumpeterian) literature, the force behind economic growth comes from individuals or small groups of individuals who work mostly outside the established structure of organization rather than from within it. pp. 17 - 18

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

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McKinsey on Valuing Value

Today we have a short article from McKinsey on valuing value. Entitled "Why value value? -- defending against crisis: Companies, investors and governments must relearn the guiding principles of value creation if they are to defend against future economic crisis." The crisis in the economy is now called a debt crisis and no longer the financial crisis. The financial crisis was a liquidity driven issue and our current debt crisis is a solvency issue. Liquidity can be resolved relatively easily by governments providing cash to the markets, debt crisis' can only be solved with difficult choices and significant hardship one way or another.

An interesting perspective on the current economic situation is provided in this weeks EconTalk podcast by Professor Russ Roberts. Here Professor Roberts breaks down how things became unhinged from an investment point of view. I find the discussion around housing as an investment, Collateral Debt Obligations (CDO's), Synthetics and most of what Wall Street has been involved in as gambling. Nothing is generated out of all these machinations. No new products or services, nothing tangible or worthwhile. It seems to me that Wall Street management have provided leadership to the energy industries management. Leadership in terms of losing sight of what is real.

Discussion of the current economic situation is of importance to the development of People, Ideas & Objects. We can only institute the levels of cultural change within the oil and gas industry through an economic transition that causes the existing bureaucracies to atrophy, and the alternative, as represented in the Draft Specification, is built and grows to replace it. The debt crisis is this mechanism, and we are focused on building value throughout the oil and gas industry.

What I expect will continue to happen is the existing bureaucratic firms will have difficulty in earning "real" income from their operations. Commodity prices are high, and the expectation that they will stay high is supported through the increase in global energy demand and the difficulties in increasing reserves and production. Costs of operations will continue to escalate due to the inability of the bureaucratic culture to build the necessary scientific and engineering capabilities in the time they are required. Throwing more money at the problem will continue to be the only solution that management can provide. The point of making the changes as suggested in People, Ideas & Objects Draft Specification, is to enable the oil and gas producer to focus on generating value. It is the point of generating value that is discussed in this McKinsey paper.

In response to the economic crisis that began in 2007, several serious thinkers have argued that our ideas about market economies must change fundamentally if we are to avoid similar crises in the future. Questioning previously accepted financial theory, they promote a new model, with more explicit regulation governing what companies and investors do, as well as new economic theories. p. 1

One continuous theme that we are finding in our review of Professor Richard Langlois' papers is that markets need "market-supporting" institutions. Leaving the future to unfold as it "should" is consistent with the Lassiez Fairre form of capitalism that brought us here. Now, as represented in the Gulf of Mexico, it could be argued that the inability of BP to shut in the well is a market failure. I would argue that it is a failure of establishing the appropriate market-supporting institutions. I have also argued that software plays a key role in establishing these market-supporting institutions. Software is an enabler or inhibitor to innovation. The current bureaucracies use of SAP has cemented the hierarchies ways and means permanently.

In this next quotation the author intimates that crisis' are created as a result of a miss allocation of capital. This is accurate in the sense that the low costs of money over the past few years has created a lack of discipline in making the right investments. Do we save for the future or buy a bigger house? These types of decisions have been made by consumers and businesses and have led to the situation where everyone is now carrying large debts supported by poorly performing assets. What is the investment capital discipline in the oil and gas industry?

My view, however, is that neither regulation nor new theories will prevent future bubbles or crises. This is because past ones have occurred largely when companies, investors, and governments have forgotten how investments create value, how to measure value properly, or both. The result has been a misunderstanding about which investments are creating real value—a misunderstanding that persists until value-destroying investments have triggered a crisis. p. 1

and

The guiding principle of value creation is that companies create value by using capital they raise from investors to generate future cash flows at rates of return exceeding the cost of capital (the rate investors require as payment). The faster companies can increase their revenues and deploy more capital at attractive rates of return, the more value they create. p. 1

Oil and gas firms have been profitable, many have had record profits. And that would denote they have generated value. However, what about the long term. These record profits have been generated as a result of increased multiples of the commodity prices. These profits have not been effectively invested in expanding reserves or productive capacity. Now that costs are escalating systemically and culturally, as I argue in the review of Professor Langlois, how much longer will value as defined by McKinsey continue to build?

In the Draft Specification, strategy is set by the producer at the Joint Operating Committee level. The producers competitive advantages are structured around their unique asset base and the scientific and engineering capabilities that are made available to them. With these tools the producer firm is able to focus on increasing their reserves and deliverability. Determining the best manufacturing methods to build drill bits do not provide value, and I have suggested that their involvement in owning and operating field level innovations be limited to defining and funding these types of industry capabilities.

Companies can sustain strong growth and high returns on invested capital only if they have a well-defined competitive advantage. This is how competitive advantage, the core concept of business strategy, links to the guiding principle of value creation. p. 2

The oil and gas industry stands at a unique time and place. We recently learned through our review of Professor Alfred D. Chandler that bureaucracies essentially failed during the great depression. We see hierarchies in the global banking system have also failed. Do we need to wait until it is evident to everyone that the energy industries management are failing? High commodity prices have made these companies look like they are functioning properly. However, the excess cash flow has not increased their reserves or production? Knowing what we know about the duration of the commodity price spike, and the logarithmic decline curve, what is the future deliverability of these companies. Understanding the role that energy plays in our lives we need to act before the failures become too obvious.

These principles have stood the test of time. Economist Alfred Marshall spoke about the return on capital relative to the cost of capital in 1890. When managers, boards of directors, and investors have forgotten these simple truths, the consequences have been disastrous. The rise and fall of business conglomerates in the 1970s, hostile takeovers in the United States during the 1980s, the collapse of Japan’s bubble economy in the 1990s, the Southeast Asian crisis in 1998, the dot-com bubble in the early 2000s, and the economic crisis starting in 2007 can all, to some extent, be traced to a misunderstanding or misapplication of these principles. Using them to create value requires an understanding of both the economics of value creation (for instance, how competitive advantage enables some companies to earn higher ROIC than others) and the process of measuring value (for example, how to calculate ROIC from a company’s accounting statements). p. 2

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

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Langlois, Economic Institutions Part III

We continue with our review of Professor Richard N. Langlois July 2009 "Economic Institutions and the Boundaries of the Firm: The Case of Business Groups". Today's post will deal with similarity and complementarity as they relate to gap filling. In the example provided by Langlois, LG Groups former chairman cited how the need to have "gaps" filled launched new lines of business to fill a need "At the time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastics business". And the new lines of business were then used to expand into areas that were related "This plastics business also led us to manufacture electric fan blades and telephone cases".

It has been suggested in my recent blog posts that the capacity to "gap fill" is non-existent in the oil and gas industry. The collaborations between suppliers and oil and gas companies is best represented by BP blaming TransOcean and Halliburton for the problems in the Gulf of Mexico. To move forward based on innovation and further development of the sciences will require the oil and gas producers to begin to work together with the service sector. Blaming them and calling them greedy because the cost structures are escalating are symptomatic of the bigger issues. These all stem from the fact the oil and gas companies are only reaping what they've sowed. And I would also suggest that these costs are increasing due to the limited, if any, real innovation being conducted at each and every Joint Operating Committee. People are unwilling to offer any suggestion for fear of the repercussions. Why bother doing anything above and beyond when the status-quo will be accepted.

Management of the bureaucracies have reigned over the service sector with the grace of a Roman Emperor. Putting thumbs up or down on an innovation on the basis that they have immediate need for it or not, and expecting solutions to spontaneously exist when problems do arise. This entire process of development has devolved to the point where little is being done and ranks on par with the oil and gas companies suggesting to the service industry to "let them eat cake."

The point I am trying to make here is that the ability to change from this type of mindset is difficult if not impossible. After all where are the Romans today? The transition in cultures that will build on the gap filling similarities and complementarities is under way, in my opinion. What this process needs is to develop the market supporting infrastructure that will support these types of innovation. That means the Draft Specification is the crucial first piece of infrastructure.

Langlois notes two important points. 1) "Economic historians, especially those of what we might call the Stanford School (David 1975, 1990; Rosenberg 1976), have long stressed the importance of such complementarities for the pace and direction of technological change and economic growth". 2) "But that doesn’t explain why and when other institutional structures like markets or multidivisional firms arise to solve the same kinds of problems".

So how do we analyze this and change it...

A satisfying explanation, I argue, will have to be a contingent one, an explanation that takes into account the facts on the ground of markets and institutions. With only a little oversimplification, we can think of the these contingent facts as falling on three levels.

• The level of markets. How extensive are markets for complementary resources? How easy is to marshal the necessary complementary capabilities (or their outputs)?

The creativity and innovativeness of the oil and gas industry is clearly missing in the Gulf of Mexico. Gone is the can-do attitude that built the business. Today one is more likely to overhear the management openly discuss their pension benefits. The oil and gas industry is a bureaucratic nightmare.

• The level of market-supporting institutions. How well developed are the institutional structures that help markets function well – that reduce the costs of coordinating complementary activities through relatively anonymous exchange among legally separate entities rather than through internal coordination within an organization? Such institutions would run the gamut from technological standards (Langlois and Robertson 1992) to legal and organizational innovations like double-entry bookkeeping (Rosenberg and Birdzell 1986) or the anonymous limited-liability corporation (Hansmann and Kraakman 2000).

Here we have seen the capacity of the industry to employ up to 11,000 people working on the well and the flow of oil in the Gulf of Mexico. Yet no one seems to have an idea as to what to do! The thinking for the solutions to cap the leaks is at its most basic level. This is representative as to why the companies cost structures have gotten out of control. Throwing more money is the first and only instinct of management.

• The level of political institutions. What is the character of the state, the organization with a territorial monopoly on the use of force? How well protected are property rights? In what ways does the government intervene in the economy? What is the nature and degree of corruption? pp. 11 - 12

Politics in oil and gas are at a truly global scale. These forces will undoubtedly increase as the pressures from consumers and environmentalists escalate.

I think these three institutions (markets, market-supporting and political) accurately captures the tone of business in the industry. It is a do-nothing, cover yourself and make sure you get lots of cash type of operation. Other then building the Draft Specification, what other market-supporting institutions are necessary and how do we build them? What type of organizations and institutions do we need to build? How far will the sciences advance in the next 10 years, and how will the industry keep up?

So when would we expect the problems of coordinating complementary activities to be solved by the emergence of market-supporting institutions (and thus by markets, broadly understood) and when by vertical integration? This is a crucial — and, in my view, under-researched — question. Clearly, issues of cost matter, as in the grain example. Such issues include neoclassical economies of scale; Williamson-style transaction costs; the costs of diversifying into activities requiring capabilities dissimilar from those one already possesses; and the costs of setting up and maintaining market supporting institutions (Langlois 2006). Once again, these costs are contingent: they depend on the nature and level of capabilities and of market-supporting institutions already in place. And this suggests two related hypotheses (holding other things constant, of course). pp. 16 - 17

The first is that the processes involved are likely to be path dependent and linked to the passage of time. p. 17

The second hypothesis, which has resonances at least as far back as Gerschenkron’s famous “backwardness” thesis (Gerschenkron 1962), is that the way an economy responds to the problems of coordinating economic development depends not only on its own institutions and capabilities but also on institutions and capabilities elsewhere. It depends not only on an economy’s own history but on the history of other economies as well. The force of this observation is that an economy at the frontier of economic development (however we care to define that) is likely to respond to the coordination problem differently than an economy lagging behind that frontier. Specifically, an economy at the frontier is arguably more likely to rely on decentralized modes of coordination. This is so because uncertainty is greater at the frontier — uncertainty about technology, organizational form, market direction. p. 18

For the purposes of this post I want to exclude discussion of the first hypothesis. Since we are assuming that these bureaucratic nightmares are failing, we need not rely on them. The second hypothesis suggests that depending on the degree of "frontier of economic development" will determine the level of decentralization. The world produces 120 million barrels of oil equivalent per day. Dealing with an industry of this size on a centralized basis, as the bureaucracies are attempting to today, is foolhardy. What I am suggesting is that we not only pool the producers resources represented in the Joint Operating Committee (JOC), but include the service sectors in the definition of the market-supporting infrastructure. The solution that is being suggested is represented in the Draft Specifications Military Command & Control Metaphor, Resource Marketplace and Research & Capabilities modules.

If we go back to the Preliminary Research Report we will find the work of Professor's Wanda Orlikowski and Anthony Giddens on Structuration. We will find that structuration states the organizations, society and people move together or there will be failure. In Professor Orlikowski's Technological Model of Structuration, technology identifies and supports societies. Technology is both an enabler and an inhibitor. If society and people demand more from our organizations, which clearly they are demanding of the oil and gas industry. Then technically a failure has occurred. And particularly we can see the current situation in oil and gas being inhibited by the technologies that are employed. Therefore to change organizations and culture, structuration requires that we change the technology that identifies and supports the industry, to resemble the institutions that we desire.

To Langlois' point about the frontier. The industry is transitioning from a banking mentality of earning guaranteed returns on investments. This is born of the cheap energy era where survival was the key to financial success. Now as a scientifically based industry, the two cultures are clashing and the industry is not structured to operate on this frontier. Expectations that this transition will happen naturally is incorrect.

Langlois also notes Gerschenkron's backwardness as a precursor to the second hypothesis. In The Capitalist & the Entrepreneur (Free download available here.) by Professor Peter Klein, I find this quote that better exemplifies the current status of the energy industries efforts.

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).

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

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Langlois' Comment on Technology Revol...

Continuing on with our review of Professor Richard Langlois work. We pick up a "comment" that Langlois published sometime in 2008. His comment is in response to comments that were made by Professors' Dosi, Gambardella, Grazzi, Orsenigo and Lazonick on Langlois' 2003 "The Vanishing Hand" paper. There is a clarity in terms of how Langlois sees his vanishing hand theory evolving.

My 2003 paper and subsequent efforts (Langlois 2004, 2007) did not make the claim that Chandler’s visible hand has been fading away. Rather, I took this phenomenon as a widely agreed-upon starting point. The last few decades have witnessed a widespread “deverticalization” of production in the United States and other advanced economies. My objective was to explain the phenomenon, which I attempted to do not by rejecting Alfred Chandler’s original account of the rise of the large vertically integrated corporation in the late nineteenth century but rather by showing how Chandler’s account might be fitted into a larger framework that could admit of forces both for vertical integration and for disintegration. (I will say a bit more presently about the nature of this explanation.)

Langlois states the two issues he has with the points made by Dosi et al. For the purposes of this post we will ignore the first issue.

Thus there seem to be two issues: (1) what is the nature of the empirical evidence against the phenomenon of deverticalization? And (2) does the New Economy (however we understand that) imply less — or more — “organization” within the process of production? I will take these points in order.

I have consistently argued that oil and gas is in a transitional period in which substantial change will alter the makeup of the industry firms. The Draft Specification moves many of the operations within the industry to a greater market definition. In this post I want to describe my point of view regarding the survivability of the large oil and gas producer. Throughout corporate history firms evolve according to the changes in the marketplace. Our review of Chandler showed the one time that the hierarchy did fail was during the great depression. Professor Carlota Perez has also shown us that this is not a unique event, but one that has a consistent rhythm over the past 300 years. Professor Perez has defined these major transition periods as installment and deployment periods in which the transitional period in between them can lead to financial difficulties. We are experiencing those financial difficulties today which places us at a unique point in time in terms of economics. The changes currently taking place are 1) the financial crisis has not fully developed, and 2) we are at the very beginning of the deployment period, a time when the new technologies positively affect all industries.

The oil and gas firms that exist today are subject to the forces that are in play in the greater marketplace. People, Ideas & Objects is taking these forces and applying them to the industry in a manner that unleashes the full potential of Perez' deployment period. The oil and gas industry as represented by the large producers have chosen not to participate in People, Ideas & Objects and are therefore opting out of the deployment phase. I see this as a form or corporate self selection (suicide) by these large organizations. They have chosen not to participate and that is their decision. I believe they will be challenged by their inability to function, much like BP is in the Gulf of Mexico, and particularly when the full scope of the current debt crisis hits them. To summarize the challenges that I see them facing in the near future would include:

• Sourcing capital.
• Higher rates of interest on existing debt.
• Escalating cost structures.
• Stable commodity prices.
• Declining production.
• Greater scientific complexity.
• Negative political environments.

Langlois makes his argument.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

For the large oil and gas firms to continue to ignore the difficulties in the industry will lead to further disorganization. The expectation that the market will spontaneously provide is an extension of the ways and means of managing the industry for the past 50 years. Muddling along, as I would refer to it, is the systemic culture of the current management. This culture needs to be broken by actively planning and organizing the market, as in People, Ideas & Objects Draft Specification, or face further disorganization by the firm.

People, Ideas & Objects software development identify and support the industry standard Joint Operating Committee (JOC). The legal, financial, operational decision making, cultural and communication frameworks of the oil and gas industry. The JOC is in essence a thing that is generated as a result of an agreement between multiple producers. The JOC is what is effectively used to conduct any and all types of field operations. Most of these field operations are conducted with third party suppliers. The contract is a natural extension of the oil and gas JOC and producer. Langlois notes;

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jennejohn 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi-unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.

It is difficult to see how the current administrations within the large firms could change their culture and begin the active planning and development of Industrial Districts. I don't happen to believe that its possible. Change of that scope can only be introduced through revolutionary organizational restructuring. Such as what we propose in People, Ideas & Objects by defining and supporting the industry standard Joint Operating Committee. And the destructive forces of both the current debt crisis and management's laissez faire attitude. On Friday Nouriel Roubini made the following comment,"...the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage." reflecting the time for action will soon be at hand.

I see this transition as inevitable and one that will be orchestrated by the shareholder / investors taking action to protect their interests. Whether these are formed as small or large firms is unknown at this time, the Information Technologies enable a proliferation of smaller firms to be organized, and that seems the most reasonable way that the industry will re-organize itself. We have appealed to the investor / shareholder to support these software developments as that is the necessary precursor to any future form of the oil and gas industry.

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

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Transaction Design

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

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

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

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

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

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

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

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

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BP, Transocean and Halliburton

In the May 2004 Preliminary Research Reports Abstract I wrote:

Oil and gas is entering a phase of complexity, risk and reward particularly in:

• The mature Western Sedimentary Basin.
• The Artic, a harsh and remote area.
• Heavy oil.
• Offshore operations, Pacific and Atlantic.

The scope of operations of an oil and gas concern is geographically, politically and scientifically diverse. The hierarchy limits the detail and focus to deal with the political and technical difficulties of each facility. Expecting an organization with the constraints to innovate is foolhardy.

The hierarchy has created "information overload", which in turn has created a paralysis in decision-making, directly affecting the capacity to change and or innovate. The hierarchy's bureaucratic, complex and conflicting lines of authority have muddled accountability. The ability to identify success / failure, to share those experiences, and to learn from them has diminished and is not progressing. Calgary, as a collective group of independent producers is discovering constraints to its ability to drill wells in the prairies. How can an industry with these constraints consider the complexities of the geopolitical, technical and operational concerns in the frontier areas of oil and gas.

The identification of this problem was not the purpose of the Preliminary Research Report. There was strong general consensus that the problem was correctly identified. What the Preliminary Research Report provided was the proof that by identifying and supporting the Joint Operating Committee, as the key organizational construct of the innovative oil and gas producer, was the solution to this problem. Proving the JOC was the solution was the controversial aspect of the report, and the reason that management fought to have it eliminated from the marketplace. It conflicts with managements interests.

Management has had their turn and chose to do nothing regarding solving the identified and agreed to issues. Six years have past and they have contributed nothing to the development of these ideas. In a reasonable world one would assume at least some support. Based on our first quarter funding drive and the fact that management are now running around with their hair on fire, no funding will be forthcoming. Investors and shareholders must take this opportunity and seize the active management of the industry from the current bureaucracy. Or watch as their holdings are destroyed by the actions of BP and other producers.

Clearly they can't deal with today's complexity. And here, as reflected in this Wall Street Journal video of testimony by BP, Transocean and Halliburton, they cant even determine who's fault it is, comical.



What I wrote in 2004 was summarily rejected by management. They clearly had their own ideas. Those ideas have now failed and are on display to the rest of the world. Blaming management was what we were entitled to do then, it doesn't solve the problem and at some point managements failure will become obvious to the world. Then the shareholders and investors will be expected to have acted, therefore the time is now to fund People, Ideas & Objects.

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