Showing posts with label McAfee. Show all posts
Showing posts with label McAfee. Show all posts

Tuesday, November 24, 2009

McKinsey on Enterprise 2.0

We have an interesting video of Professor Andrew McAfee talking about technologies under the label of Enterprise 2.0. This will be the fourth time that I have highlighted McAfee's work and the sixty third McKinsey article. All I can say is I'm glad this body of work is behind me. I still have many McKinsey articles that I want to write about, just not enough time in the day.

Professor Andrew McAfee coined the phrase and defined what "Enterprise 2.0" is and means. Particularly from the point of view of how organizations will be affected by these technologies. Like the recent discussion of Google CEO Eric Schmidt, McAfee is not talking about the technologies for the sake of the technologies but the massive impact that the Information Technology revolution is having on business.

Last time I highlighted the work of Professor McAfee and his Enterprise 2.0 concepts he was at Harvard. He seems to have escaped and moved closer to the river by joining MIT and is now the principal research scientist at the "Center for Digital Business" at the MIT Sloan School of Management. He also has a book coming out called "Enterprise 2.0: New Collaborative Tools for your Organization’s Toughest Challenges". Lastly the McKinsey article has this video presentation of this paper. (Video is available here.)

McKinsey ask a number of pertinent questions. McAfee's answers provide real value for this community in terms of what and how "Enterprise 2.0" and People, Ideas & Objects application modules will affect today's work place. The following is how I see it for oil and gas.

McKinsey: How is Enterprise 2.0 changing the way we work?

McAfee's answer to this question is in line with the collaborative developments of WikiPedia. How the initial start attempted to control the contributions of people, and only after scrapping the process and leaving it to self organized teams did the value, quality and quantity increase.

I see a much larger change. The 7 / 24 clock will be the time people are available to work. Asynchronous Process Management, a cornerstone of the People, Ideas & Objects Technical Vision will permit people to work when and where they want. The office will not be used even half as much as they are today, and the quality of life will be substantially higher. When the computer screen looks the same at home or in the coffee shop as it does at the office, an office will become a place to go to concentrate. The rest of the day will be interspersed with personal and work related activities completed as required.

McKinsey: How do you get this started in an organization?

McAfee comments;
There’s a lot of debate about that question right now. And the debate is typically between people who advocate [a top-down approach and those who advocate] almost a purely bottom-up approach—in other words, deploy the tools, stop worrying about what’s going to happen, and get out of the way as the management of the company and let it percolate up from down below. Or, if you hear about a grassroots effort, encourage it, support it financially, but, again, get out of the way, let the bottom-up energy happen.
People, Ideas & Objects has chosen the bottom-up grassroots method of solving these problems and building the software based on the Draft Specification. I like McAfee's comment that if you hear of a grassroots effort, encourage it, support it financially. Music to my ears so start spreading the news.

This software development can not be a sustained and quality effort unless the users are compensated financially for their time. This is a big part of our budget and defines why our approach is different from the rest of the marketplace. As McAfee states in this document, developing the community takes time and effort.

McKinsey: What else can undermine adoption?

McAfee notes the unreasonable time frames put on by management. People, Ideas & Object software developments, or any collaborative project, will not be zipping along before the end of the quarter. Such expectations are how the hierarchy greases the wheels with the consumption of human energy and spirit.
Another failure mode is to be too concerned about the possible risks and the downsides. If we get wrapped up in those, we’re not going to take the plunge and actually deploy any of these new tools and turn them on and encourage people to go ahead.
I don't see the downside here. Collaboration brings many risks to the bureaucracy. However their risks are the result of the collaboration out performing the bureaucracy. I can live with those risks, and I think that McAfeee's audience is different to those of this blog. He is preaching to the unconverted and as such has to hedge his comments while he moves the Trojan horse into place.

McKinsey: What is the CIO’s role in encouraging Enterprise 2.0 and managing the risk?

McAfee notes;
A lot of them see their roles as essentially conservative, though. In other words, “My job is to not increase the risk profile of this organization before everything else.” That’s a legitimate concern, it’s a legitimate job for the CIO, but all my experience so far tells me that Enterprise 2.0 doesn’t increase the risk profile of an organization.
This is probably why I get in so much difficulty with companies. I ask sarcastically what's a CIO? I don't see them surviving in the long run. Much like secretaries and draftsmen these positions may disappear rather quickly. These types of comments should be directed to the CEO or the CFO as they have the proper authority and responsibility to make the decision.

In my presentations to the industry I noticed something that I had never learned or considered before. When I talk to CEO's or CFO's I feel there desire to pick up People, Ideas & Objects software developments. Why they haven't is that they would do serious damage to their firms by changing direction to quickly, without the urgent need and support for the change. They therefore pass on the opportunity until such time as we proceed to a point where they can make the change.

McKinsey: What does this mean for middle managers?

McAfee notes;
If you’re a middle manager who essentially views your job as one of gate keeping or refereeing information flows, you should be pretty frightened by these technologies, because they’re going to greatly reduce your ability to do that. They’re going to reduce your ability to filter what goes up in the organization and what comes down in the organization. And they’re going to greatly reduce your ability to curtail who your people can interact with, talk with, and receive information from. So if you’re inherently a gatekeeper, this is a real problem for you.
In my presentations to the industry it is this group of people that feel challenged by these technologies and the People, Ideas & Objects application. The class of workers known as middle managers career and position are toast. I don't foresee many of these people continuing to be effective in the very near future. If this is news to anyone in middle management, good morning.

McKinsey: How should companies measure the success of Enterprise 2.0?

McAfee notes;
Again, you see a lot of energy, you see a lot of people very willing to take a few seconds to answer a colleague’s question—even if it’s a colleague they don’t know. So when I see successful companies tackling this tool kit, I see them doing a little bit of thinking upfront about what problem or opportunity they’re trying to address, then deploying an appropriate technology in response to that. They then measure progress: How much uptake are we getting? What’s the traffic look like on this? Which is very different than measuring ROI, I think.
In the Preliminary Research Report I suggested that companies use the revenue per employee as a measure of an oil and gas firms performance. Revenue per employee can vary significantly from company to company based on the unique attributes of its asset base. It has direct application between producers and is an accurate measure of the firms current and future capabilities. This is particularly the case as those producers with low revenue per employee will have difficulty increasing the revenue factor without having to address a possible over staffing issue.

The purpose, or competitive advantage, for the Community of Independent Service Providers and People, Ideas & Objects software applications. Is to provide the innovative producer with the most effective and profitable means of oil and gas operations. Revenue per employee will be a critical method of how the community advances the science of management and business for the oil and gas clients using this software and community. Please join us here.

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Sunday, March 04, 2007

Electronic Hierarchies and Electronic Heterarchies: Relationship-Specific Assets and the Governance of Inter-firm IT.

This article provides a brief description of the particular research area of each professor.

Professor Andrew McAfee
"His research investigates how information technologies from ERP systems to prediction market facilitate structured and unstructured multi party interactions, and the roles that general managers play in extracting the maximum value from their firms' IT investments.

Professor Marco Bettiol
"His research is focused on innovation processes and on the role of information and communication technologies in sustaining the competitiveness of small and medium enterprises.

Professor Maria Chiarvesio
"Her interest is to investigate how industrial districts SME's and local development systems are taking advantage of network technologies to face the challenges of internationalization and innovation in the new global competitive scenario.

January 2007

I had a lot of difficulty getting this specific post out, the only reason I can think of is the quality of the material. I think there is a lot of material here to build upon. My apologies for the length of this post, but reviewing it will help to understand the future of the energy industry and its Information Technology. It was in an attempt to be brief that I removed much of the analytical work around the three hypothesis of the authors. These did not necessarily fit in a clear and concise way, therefore, for brevity I removed those sections. Review of the actual document may be of value to all readers.

Abstract

This paper is directly in line with our discussion regarding the oil and gas industry. The use of the Military Styled Command and Control, as I have termed it, is necessary to offset the decline of the hierarchy. An organization requires structure to organize its resources. To eliminate the hierarchy, and not replace the command and control structures with something else would be highly and immediately destructive. McAfee et al state the following in their abstract;
"This argument introduces a contingency into the "electronic markets hypothesis, "which holds that greater use of IT is uni-directionally associated with reduced use of hierarchies."
and
"The paper therefore argues that when enterprise IT is required, so is an electronic hierarchy: a collaboration in which one member has all required decision rights over jointly used IT." pp. Abstract
Introduction
Recall our recent discussions on Winter's et al and Langlois' et al work regarding the boundaries of the firm, the division between markets and firms. How the capabilities and governance of a firm was being revised to optimize the technologies. To summarize that discussion I wrote this summary.

In this document, this conversation is being carried on and extended by McAfee et al with a predominant IT focus.
"Another important stream of research has focused on the boundary of the firm, analyzing whether greater diffusion of IT makes it more or less attractive to distribute economic activity across markets rather than within a hierarchy."
and
"This latter stream of work has largely converged to the conclusion that "By reducing the costs of coordination, IT will lead to an overall shift toward proportionately more use of markets - rather than hierarchies - to coordinate economic activity." (Malone, Yates et al. 1987). This has come to be known as the electronic markets hypothesis (EMH), and is broadly accepted; one review (Sampson 2003) found only a single conference proceeding that "queried the myth of diminishing firms." Variants of the EMH were articulated both before and after the explosion in business use of the Internet." pp. 1
"This paper aims neither to reinforce the EMH nor to refute it, but instead to introduce a contingency into consideration of IT's impact on the organization of work. (pp. 2) The appropriate governance mechanism for an IT facilitated collaboration, we argue, is contingent on the type of IT being deployed; when an enterprise technology is required, so is an electronic hierarchy". pp. 2
"So as enterprise IT becomes important, electronic hierarchies become the norm. This paper uses the term electronic hierarchy rather than simply hierarchy to convey that collaborators in such an arrangement do not surrender all (or even most) of their decision rights to a central authority. Instead, they surrender only a small subset, namely decisions about the configuration of jointly used enterprise information technologies. And to emphasize that this paper concentrates on governance rather than price-setting, electronic hierarchies are contrasted not with electronic markets but with electronic heterarchies, which are collaborations in which decision rights over jointly used technologies are not vested with any single party." pp. 3
I am going to continue using the Military Styled Command and Control Structure metaphor in this blog. The "Electronic Hierarchy" as McAfee calls it does not provide that much of a visual or rich environment for the future user of this software. The MSCC.

The precursor to this software's development is the success of SAP in most industries outside of the energy industry. SAP provides that "electronic" hierarchy, and command and control, such that SAP is the bureaucracy." (Cox, 2004). The validity of the McAfee et al argument is the difference between success or failure. A system built on the Joint Operating Committee without the hierarchy being recognized and built into the system would not provide the energy producer with the command and control necessary to operate. It is therefore important at this point that we quickly re-introduce the Military Styled Command and Control (MSCC) structure that is an inherent part of this software solution. With a collective industry wide ability to recognize and adhere to the command and control structure offered to us by the MSCC, this application provides the underlying speed and innovation of the producer in a controlled manner.

The Electronic Markets Hypothesis

Not to be confused with the Efficient Market Hypothesis, McAfee et al define the EMH as
"By reducing the costs of coordination, IT will lead to an overall shift toward proportionately more use of markets - rather that hierarchies - to coordinate economic activity." (Malone, Yates et al, 1987).
This definition resonates with this projects purpose and builds support for the use of the MSCC. In the table provided, the segregation of items between the market and the firm helps to understand why and how the future oil and gas producer will operate and function. Here, in this comprehensive quote, McAfee states that markets provide better opportunities for enhanced economic activity.

  • "IT reduces coordination costs"
"Malone, Yates et al. 1987, however, maintain that "An overall reduction in the "unit costs" of coordination would reduce the importance of the coordination cost dimension (on which markets are weak) and thus lead to markets becoming more desirable in some situations where hierarchies were previously favored. In other words, the result of reducing coordination costs without changing anything else should be an increase in the proportion of economic activity coordinated by markets". pp. 4
  • "IT assets have low relationship specificity."
"In contrast, the circumstances under which IT favors hierarchies over markets, as articulated by previous research, seem comparatively limited. They include situations where. Network externalities exist and monitoring is available."
"However, the increase in monitoring capabilities brought by IT is an improvement along a dimension where hierarchies are comparatively weak. All other things being equal, then, this improvement thus makes hierarchies comparatively more attractive. Baker and Hubbard 2004 found that US trucking firms became more likely to own trucks and employ drivers, as opposed to contracting with individual truck owners, after improved driver monitoring technologies became available." pp. 5
I need to list this as a direct call to action. The future is uncertain, however, the manner in which the future unfolds needs to be defined in appropriate organizational structures. The Joint Operating Committee is that coordinating structure, McAfee et al state that it needs to be explicitly recognized in the information systems used by the producer. Enabling these coordinating capabilities within the software will allow improvements in economic performance.

The "Move to the Middle Hypothesis".

Not satisfied with the first part of this document, McAfee et al take on some more with this move to the middle hypothesis of theirs. Operational Decision Making in oil and gas on a global basis is on the participants represented by the Joint Operating Committee. This is a global culturally induced fact. The inherent nature of the risk profiles of companies and the areal extent of oil and gas operations are the primary reasons that most oil and gas wells, gathering systems and facilities are jointly owned and represented by the JOC.
...other considerations intervene and lead to organizational forms that are less fluid than spot markets. pp. 5
The "move to the middle" hypothesis concerns the size and stability of IT based multi firm collaborations, and does not address their governance. This paper meanwhile, focuses on governance, in particular the allocation of decision rights within IT enable multi firm collaborations. This focus appears to be unique in the literature on inter organizational IT. pp. 5
I have imputed before that the oil and gas industry has a distinct advantage in moving towards the JOC. The advantage is the JOC exists and is culturally, financially, legally and the source of operational decision making. This is also the reason that the SAP, Oracle and IBM styled solutions have failed to provide the systems that producers need. Those systems are not even aware of the JOC.

"Empirical support for the EMH"

McAfee then draws an explicit and relevant example to support the EMH.
The emergence of the Linux operating system is perhaps the clearest example that complex and economically significant products no longer need to be developed within single firms or traditional industrial alliances. The can instead result fro the collaborative, voluntary, and minimally directed efforts of individuals around the world who use IT both to execute their work and to discuss it. pp. 7
Today the Windows Operating Systems has been one of the largest software development ventures every undertaken. Billion of dollars have been invested and as this video shows, failed. Yet Linux and Mac OS X, a derivative of the Berkeley Development Systems Unix are more robust, cheaper, and safer. Yet these two competing operating systems are developed by users that have a passion and a drive to get what "they" need from an OS. The oil and gas industry producer needs a comparable capability to develop the software that it needs.

"Empirical anomalies"

Looking to define the EMH can also be derived from other situations and experiences. McAfee et al do this effectively with the two examples that they cite.

  • "Of the 1500 B2B exchanges founded, the great majority no longer exist. This hypothesis, however, does not explain the paucity of some kinds of electronic link between customer firms and their small, stable supply networks." pp. 8
    • "The failure of public eMarketplaces could be interpreted as support for the move to the middle hypothesis. pp. 9
  • Finally, a dedicated empirical evaluation of the EMH yielded equivocal results. Hess and Kemerer 1994 studied the impact of computerized loan origination systems and concluded that "despite a decade of experience with these systems... the industry has not been fundamentally change"and conclude that "the [electronic markets] hypothesis will require augmentation in order to fully explain [our] results..." pp. 9

The implications of relationship specificity

McAfee et al, to my possibly biased opinion, I think have highlighted an appropriate success of the EMH in the operating systems available today. The B2B exchanges and markets should have worked, as there is really no new technology that was since available to the developers of the B2B exchange. But with all things technology, this time it's different. The use of XML as the appropriate means to integrate the hierarchy and structure of a transaction was not well used or implemented in the late 1990's. McAfee points to the type of relationship that B2B exchanges were attempting to conduct. And, if I understand him correctly, the transactions needed to be built within the exchange "and" the (in this instance) the producer.
This paper argues that the mitigating phenomenon is the relationship specificity of some types of inter-firm information technology. While certain technologies are easily redirect-able from one use to another, others are not. The relationship specificity of information technologies is an important consideration, and is proposed here as the required augmentation of the EMH, because it appears to be impossible to write complete contracts of IT.
The authors continue on with the logical argument that IT based transactions are attempting to emulate complex human environments. This ability I would argue is now possible and is one of the clear reasons that I am pursuing these possibilities.
High rates of innovation among IT producers and high levels IT investment among rivals combine to create a complex, dynamic, and uncertain environment. pp. 10
...but it can be done, and should be done in my opinion. This next quotation (verbatim) gives one of the reasons why.
If a shared asset is not redirect-able, however, the theory of the firm holds incomplete contracting to be a critical consideration, and has a clear prescription. As Hart 1989 says "one thinking I can be sure of is it ...assets are sufficiently complementary, and initial contracts sufficiently incomplete, the two sets of assets should be under common control." Asset complementarity and asset specificity are, for the present purposes, equivalent concepts. An EDI connection between two firms, for example, is a relationship - specific asset. Equivalently, the configured hardware and software requires at each end of the are complementary assets. The link as a whole, in other words, it a specific asset; the endpoint are complementary assets. pp. 11
Recall the works of Winter's and Langlois' and the table above. The complexity of interactions becomes the problem in that transactions can not be defined to the level necessary to conduct all of the possible permutations and combinations of them. This is where the JOC, which "IS" the legal and operational decision making frameworks of the energy industry, succeeds in providing value to the IT enabled producer. The codification of these explicit ways and means of operation are dependent upon those key attributes defined within the JOC. The Penalty clauses, the Overhead Allowances, the Decision making frameworks have all been defined by the industry over its history. The ignorance of these points by my competitors SAP and Oracle is they are essentially trying to retrofit a transaction within the firm, when the transaction should be made by the market.
The prescription articulated by Hart is widely accepted (see, for example, Williamson 1985, Grossman and Hart 1986, Hart 1988, Hart and Moore 1990, and Klein, Crawfor et al. 1978) because scholars have identified failing in both the formation and the adaptation of non-hierarchical organizational forms when both asset specificity and incomplete contracting apply. pp. 11
The failing that is being spoken of in this quotation points to the difficulty in this area. Hart points out the failure in industry in general, and with respect to the energy industry which has asset specificity and incomplete contracting represented in the JOC, the failure that has occurred in oil and gas is the inability of the systems vendors to explicitly recognize the JOC as the key industry construct. Or in other words the failure for the producer occurs not because of the difficulties of asset specificity and incomplete contracting but the lack of recognition of the JOC.

Formation
To provide some further support for what I have just indicated in the previous section. McAfee et al note the following;
"Initial scholarship on the theory of the firm (Coase 1937) highlighted that complex transactions among peers in a market were characterized by high levels of haggling and learning. When negotiating about a relationship-specific asset peers might attempt to define a complete contract even when one is not possible, or might engage in extra-contractual "side bargaining". Extensive haggling and learning delay the point at which a shared asset is put to productive use." pp. 12
Those with direct experience in oil and gas will now completely understand my point of view on this difficult topic. The JOC, because of its asset specificity and incomplete contracting, have defined contracts to this level. Pick up a CAODC "Drilling Contract and one can see the codification of the entire efforts of the industry over its lifetime. This codification inherently identifies the assets specificity, its deficiencies regarding incomplete contracting and implicitly the JOC. The IT systems recognition of these critical points does not exist, and that is why I call SAP and Oracle's solutions failures in the market.

Adaptation
If a group of peers overcomes the obstacles to forming a collaboration that makes use of a shared IT asset, they face another set of challenges as they attempt to adapt over time to disturbances in the environment. Williamson 1991 segments such disturbances into two categories: those for which prices serve as sufficient statistics, and those that "...require coordinated responses lest the individual parts operate at Cross - purposes or other wise sub-optimize." pp. 12
According to Williamson, hierarchies are better at adaptations where price is not a sufficient statistic: "As compared with the market, the use of formal organization to orchestrate coordinated adaptation to unanticipated disturbances. pp. 13
The unambiguous prescription from the theory of the firm is that if an inter-group information technology is a relationship - specific asset over which complete contracts cannot be written, it should be governed by a hierarchy with a single decision-making authority. pp. 13
A priori the JOC and the price system of markets.

A Technology Categorization

So which inter-group information technologies, if any, are relationship specific? Email, instant messaging, and Web browsers seem to their users to be almost infinitely redirect-able - which technologies aren't? pp. 13
The same is not true for the technologies listed at levels 2 and 3 in Table 1. They require complete and precise ex ante agreements about the data that will be exchanged and , if a multi-step process is to be executed, the "flowchart" of the tasks, sequence, and possible branches and termination points of the process. These complete agreements are required because the technologies at levels 2 and 3, which are referred to here as enterprise information technologies (EITs), involve the exchange of data between information system or modules. As the mythologist Joseph Camble remarked, "Computers are like Old Testament Gods: all rules and no mercy." pp. 14
implementations required an average of 21 months ( Configuring an EDI or XML link means determining the family of transmission that will be sent across the link and the exact syntax and structure of each. Configuring ERP involves defining the data the system will contain and the business processes it will facilitate, then "populating" the system to reflect these choices. Configuration is detailed and time - consuming work. A study found that ERP Hitt, Wu et al. 2002), and a case study revealed that 19 months were required to establish a single XML link between a large manufacturer and its distributors. (McAfee 2004) pp. 15
This is because the two car-makers are virtually guaranteed to have very different internal information systems and data structures, a phenomenon referred to as the "corporate household" problem (Hansen, Madnick et al. 2002, Chen Funk et al. 2001. Some scholarship on technologies such as EDI appears to assume that the definition and promulgation of level 2 standards by industry-level and inter-industry bodies will eliminate or at least reduce the household problems, thereby allowing redirect-ability. Detailed investigation of how EDI is actually implemented, however, reveal high levels of standards fragmentation and idiosyncratic configuration (Swatman, Swatman et al, 1991, McAfee 2003) and the exercise of power to force compliance with a convenient, rather that a universal, standard (McNurlin 1987). pp. 16
Not to highlight my competitors SAP and Oracle, (oops Oracle is listed as just joined) but note the Public Petroleum Data Model that is summarily ignored by ERP vendors. This latter point of Oracle now being a member of PPDM. 

Electronic Hierarchies and Electronic Heterarchies

Table 1 provides a basis for defining an electronic hierarchy:
"An Electronic Hierarchy is a groups of participants desiring collaboration, one of which has enforceable level 2 and or level 3 decision rights." pp. 38
In this work the term "market" appears to have two meanings: a forum in which buyers and sellers come together and the forces of supply and demand affect prices (the primary meaning of the word in many dictionaries) and demand affect prices (the primary meaning of the word in many dictionaries) and a group of peers without any controlling authority.
Which is consistent with the point of view of this software development.
An Electronic Heterarchy is a group of participants desiring collaboration in which level 2 and level 3 are not vested with any single party." pp. 18.
A pretty clear definition, I think, of the differences between operator and non-operator in oil and gas, and of how using the JOC would mitigate many of the administrative issues within the oil and gas community.
A groups of peer firms transacting on a spot basis, or the set of firms that make up an industry, on the other hand, constitute an electronic heterarchy. pp. 19
and
It is important to stress that these definitions for electronic heterarchy and electronic hierarchy concern only decision rights over level 2 and level 3 IT. pp. 20
Standards Bodies

I have spoken of the PPDM organization and I should mention the numerous other organizations that provide standards within the oil and gas industry. In Canada the, Petroleum Accountants Society of Canada (PASC), The Canadian Association of Petroleum Landman (CAPL), Association of Professional Petroleum Engineers, Geologists, Geophysicists of Alberta (APEGGA) and many other organizations provide standards for use in the oil and gas industry. These standards make up a large portion of the culture of the industry, and due to the unique nature of the industry, as noted in this entry, these provide substantial value to a system integrator such as this project. However McAfee et al also point out one of the possible pitfalls.;
A number of standards bodies, some governmental and some industry-financed propose level 2 and or level 3 standards. If such as standard were to be widely accepted with 100% fidelity, that at least some enterprise technologies could move from relationship-specific to redirect-able. Two factors, however, mitigate against this vision. First, standards bodies are themselves fragmented, overlapping, and proliferating (Chari and Seshadri 2004) so a single pure standard is unlikely to emerge. Second, firms in practice appear to take work of standards bodies as a starting point for their integration work, modifying proposed standards as required to suit their idiosyncratic needs (for a case study of this, see McAfee 2004). As long as this is the case, configured enterprise technologies will continue to be relationship-specific investments. pp. 34
Conclusion
This paper presents a continent theory of the impact of IT on the organization of economic activity. In contrast to the EMH, the theory hold that in some circumstances electronic hierarchies will predominate. The theory, however, is silent about when enterprise IT (EIT) is required. It is not yet clear when, if ever, electronic heterarchies using network IT (NIT) alone are at a competitive disadvantage vis-a-vis electronic hierarchies using both NIT and EIT. pp. 35
The two categories of electronic hierarchy and electronic market clearly do not capture all of the existing modes of governing IT-based collaborations. pp.36
This paper was recently published by the Harvard Business School. Recently means February 13, 2007. It is a very topical and timely discussion of the many things that were being actively discussed in this blog. Markets and firms, Production and Transaction costs, Capabilities and Governance to mention only a few. If the energy industry is to glean any value from this body of research work, it will occur forthwith and immediately as a result of my efforts over the past 15 years. Recall that serendipity and luck are two attributes that I am grateful for. However, should industry pass on the proposal I have submitted regarding this software development proposal, then I would be hard pressed to determine a more appropriate time and opportunity then now to provide to the CEO's and CFO's of the major oil and gas producers. Since the deadline for the subscription deposit has passed, I would think that a reasonable period of time be provided in terms of grace, and then I will have to make another more comprehensive proposal to those that have signed their lives away through Sarbane's Oxeley.

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Photos Courtesy Troels Myrup

Sunday, February 25, 2007

Scale without Mass: Business Process Replication and Industry Dynamics.

Written by;

Erik Brynjolfsson, MIT Sloan School

Andrew McAfee, Harvard Business School

Micheal Sorell, Harvard Business School

Feng Zhu, Harvard Business School

August 29, 2006

This is the first of two articles I noted earlier, that Professor Andrew McAfee co-authored. As I also indicated he writes a blog that provides some value to the entire Enterprise 2.0 term that he originally coined. I find the title they have chosen here resonates with the work we are doing here. However the title makes it is difficult to discern what they are talking about. The idea that software can be reused to replicate successful business processes across industries without the mass that would generally be involved in populating the industry with the new idea. Simply software Scales without Mass.

Application of Enterprise 2.0 principles indicates the use of Web Services. I tend to think that Web Services encompasses all the transaction processing and social network systems used within a commercial enterprise. The scope of the application that we are building is this, with the upstream energy industry as its focus the separation of the transaction processing from the content management components is not desired or functional. The two need to be available simultaneously, such that the users decisions, actions and directions are followed through on the transaction processing side of the system. I would hesitate to guess that I would be in disagreement with the authors in that I would suggest the scope of an Enterprise 2.0 application consists of more then their definition.

The authors start off with a number of case studies that they use in this research working paper. This is where I digress from their Enterprise 2.0 classification. My suggestion would be that there doesn't currently exist an Enterprise 2.0 platform operational today. The wiki's and blogs that are part of both of our definitions are possibly the limit of their case research. Nonetheless this has substantial value for review and comment in this blog. Starting off they indicate;

In a series of case studies, we find firms to more rapidly replicate improved business processes throughout an organization, thereby not only increasing productivity but also market share and market value. pp. 1

We find that a positive relationship has existed since the mid - 1990's between an industry's IT intensity and its levels of turbulence and concentration growth. We hypothesis that this is the case because IT has become a means of embedding business innovation, then replicating them across an increasingly large intra-firm "footprint". Today, managers can scale up their process innovations rapidly via technology without the degree of inertia historically associated with larger firms. In other words, they can achieve scale without mass." pp. 2
I have asserted on many occasions that the upstream oil and gas industry has a high level of IT intensity. Since it is now competing on the basis of the earth sciences and engineering, this intensity will increase with the continuation of Moore's Law, and higher volumes of processors being manufactured. Denoting a golden era of abundance of processing at continually cheaper rates. Irrespective of the future processing capabilities the oil and gas firms. The industry has spent heavily in these science areas and will continue to do so. The golden era of processing power will also provide the commercial side of the energy business with new opportunities and activities that McAfee et al are discussing in this paper. If an industry's "IT intensity leads to turbulence and concentration growth" as the authors suggest then those that are able to acquire these resources and skills have secured new and expanding competitive advantages. These competitive advantages are the purpose of this development project discussed here. The faster the processes are developed, the quicker they can be rolled out to those that are able to use them. McAfee's point here is that software can scale quickly without the mass and inertia that many have grown accustomed too over the past twenty years.
When a software engineer improves a sorting algorithm in an database management program, a digital copy of that improved process can be instantly copied and included in thousands or even millions of copies of the next release of that program. pp. 4
"It is easy to see the power of replication in these purely digital domains. But economic impacts also derive from business process changes that involve technology, people and physical products. pp. 4
IT can also assist with the propagation of other types of innovation; technologies such as email, instant messaging, groupware, information portals, blogs and wikis let employees share information and ideas widely and, in many cases generate them collaboratively. Like Enterprise Information Technology (EIT), these technologies are also tools for replicating valuable business innovation, albeit ones that are less formal or structured than entire processes. pp. 6
and
It is important to note that business process replication is perfectly consistent with decentralized decision rights, and with local innovation. In many cases, the myriad small innovations and improvements generated by line employees are collectively more important that any centrally conceived business process changes. pp. 7
Even with EIT, process replication can be difficult. Commercial EIT and the Internet have lowered many technical barriers, but other impediments exist. Business process design and deployment is organizationally challenging, as is the imposition of greater monitoring.
and
Across these investigations, a consensus emerges that the observed failures have organizational root causes, not technical or budgetary ones. As one review of the literature concluded, "...extant empirical research supports the assertion that economic and technical considerations are unlikely to feature prominently when IT fails to deliver." (McDonagh 2001). pp. 7
"Organizational root causes." Thankfully the energy industry has determined the Joint Operating Committee is their key organizational construct. This alleviates them from the onerous task that many industries will now conduct to determine what their optimal structures are. However, this does not relieve the energy industry from some serious pain nonetheless.
As difficult as intra-firm propagation of novel business processes can be, propagating them across firms is typically far more challenging. The process configuration that works well in one firm might not transfer well to one with a different culture, set of pre-existing routine, mix of incentive, asset base, and approach to human resources. Empirical research show that many beneficial managerial practices are not universally diffused across firms (Bloom and Van Reenen 2005) and highlights the importance of complementarities in explaining the difficulty of diffusion (Ichiowski et al. 1997)
and
This work suggests that the boundary of the firm is a significant barrier to the diffusion of IT-enabled work changes. This conclusion is supported by research on the heterogeneity of workplace reorganizations in the presence of IT (Bresnahan et al. 2002) and by research that reveals large differences in firm - level outcomes such as productivity growth even after controlling for IT investment (Brynjolfsson and Hitt 2000). pp. 8
First, the theory asserts that while knowledge is non-rival, it is at least somewhat excludable (Romer 1990). That is, trade secrets, path dependence, intellectual property protection, and other mechanisms combine to give the generator of new knowledge the ability to at least partially exclude others from its benefits. Second, new growth theory maintains that knowledge based competition tends to become monopolistic over time (Romer 1992). Increasing returns to knowledge, a cornerstone of new growth theory, implies that leading firms will build up significant advantages over their rivals such that they become monopolies. This idea is consistent with the insight that information itself can create economies of scale because of its relative ease of replication (Wilson 1975). Monopolies are not eternal, however, because of a third stylized fact labeled "creative destruction" by Joseph Schumpeter. Competitive equilibria are repeatedly disturbed by innovation and new knowledge; consequently, new ways of working displace old ones. Outcomes and end states, as a result, become very difficult to predict (Romer 1994, Arthur 1996). One result that can be anticipated is that, as competition revolves increasingly around knowledge, Schumpeterian creative destruction becomes increasingly pronounced. pp. 9
We argue, however, that IT-based capabilities such as business process replication and standardization, monitoring, and remote collaboration are just as likely to be beneficial to larger firms.
and
This hypothesis is consistent with White's speculation that "Improved technologies of managing and monitoring may have helped overcome the inherent difficulties of managing larger organizations (Williamson 1967) and thus encouraged larger enterprises" (White 2002).
and
Our broad hypothesis is that because the capabilities IT delivers are valuable, difficult to acquire, and often transient, IT in recent years has become the opposite of a competitive leveler, or a "cost of business that must be paid by all but provides distinction to none" (Carr 2003). pp. 10
This suggests that assets and people are all the same. Which of course is not the case. How a firm, a producer and an individual would approach the Genesys application in this context would be different in terms of their needs, skills and capabilities. I can assure you that they manner in which I use Goolge would be fundamentally different then what most people understand of the resource. I would further refute that a homogenization is progressively more difficult to carry out for sophisticated tasks. As the hardware and software concepts increase in complexity, and their speed of implementation provides those that are aware and can accommodate them, can and will accelerate their business position over those that are not as quick.
That is, the volatility of market shares increase as the total IT stock in the industry increases. pp. 12
As a result, firms are able to more rapidly and completely replicate their innovations in business processes, achieving scale without mass. Other types of IT, such as email, knowledge management systems, wikis, and instant messaging allow firms to propagate innovation that are less structured than entire business processes (McAfee 2006). IT makes it possible for better techniques and processes to become rapidly known and adopted throughout the organization. pp. 19
We show through a formal model how this process can lead to increased turbulence and concentration. In particular, competition becomes increasingly Schumpeterian as innovators are able to leverage their best practices to rapidly gain market share. At the same time, competitors and new entrants have the opportunity to more rapidly leap-frog and displace leading firms. Our model is consistent not only with the increase in productivity growth since the mid-1990's but also with the higher levels of turbulence. Furthermore, as predicted by our model, concentration levels have also increased in IT intensive industries, an outcome that is not consistent with other explanations for higher turbulence. pp.19
and
Further research could also help determine the duration of IT's competitive impact. pp. 20
Professor Sydney Winter had some additional comments that are in the vein of what these authors are discussing. The document is the Economics of Strategic Opportunity and these following quotations provide some guidance regarding the homogenization of an industry. (Italics for emphasis.)
The resource allocation decisions that shape the path of advancing knowledge are necessarily made, at each point of the path, on the basis of the limited knowledge then available. Surveying available knowledge from such a vantage point is like surveying a landscape on a hazy day. Some things are close enough to be seen clearly, other remote enough to be totally invisible. The intermediate conditions cover a broad range and are complex to describe. In that range, the verdict on the visibility of a particular feature depends crucially on what definition of "visible" is chosen from a range of plausible alternative. Similarly, whether something is to be regarded as "known" or not will often depend on what one chooses to mean by "known" and why one cares; ultimately it depends on the degree of indefiniteness concerning details that is regarded as consistent with the thing being "known".
and
Visibility across the landscape of productive knowledge is arguably an even more complex phenomenon than ordinary visibility. A particularly complex type of haze arise from the fact that, in all sphere, practical knowledge consists in large measure of knowledge of how to try to find solutions to problems that have not previously been encountered. pp. 19
Thus, decisions near the knowledge frontier are made in the face of a lot of haziness about the details and significant uncertainty as to how the general picture will develop down the road. ... ...Thus, decisions are made in a haze that arises partly from exogenous constraints, but is partly a chosen response to a recognized trade off between thinking and doing, between analyzing prospects and making progress. pp. 20
There is a substantial theoretical literature on induced innovation, though the attention devoted to it falls far short of what it deserves. Most of it models the problem in a recognizably mainstream style, with a logic that parallels quite closely the standard analysis of choice of technique. This is unfortunate, since it means that the limitations of standard production theory are extended into a domain that could potentially afford an escape from them. Evolutionary modeling in the area has mostly been done incidental to other purposes, and has not been featured in its own right. pp. 22


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Wednesday, February 14, 2007

New working papers from Harvard.

Two documents that are directly on topic of this blog were recently published at Harvard University. Both have been co-authored by Associate Professor Andrew McAfee of Harvard University. As I subscribe to his blog, readers should be fairly familiar with his work if you follow the "Google Reader My Starred Items" list on this blog, there is also a convenient RSS Feed.

The new working papers are entitled:

Electronic Hierarchies and Electronic Heterarchies: Relationship Specific Asset and the Governance of Inter-firm IT

Authored by: Professor Andrew McAfee, Harvard Business School, Marco Bettiol, University of Padua, and Maria Chiarvesio, University of Udine.

Scale without Mass: Business Process Replication and Industry Dynamics

Authored by: Erik Brynolfsson, MIT Sloan School, Andrew McAfee, Harvard Business School, Michael Sorell, Harvard Business School, Feng Zhu Harvard Business School.

I am adding these two working papers to the LEM Working Paper series review of Dosi, Winter, Langlois and others. As these working papers are current, I will be reviewing them right after the document that I have started now entitled "Toward an Evolutionary Theory of Production".

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