Our Governance & Compliance Framework

One area that I have not touched on recently is the Compliance & Governance Modules attributes. I think the key attribute that makes People, Ideas & Objects more functional and higher in performance is the Military Command & Control Metaphor that is incorporated in the Draft Specification.

Lets face it, the hierarchy is in control and has been extremely effective and efficient for over 100 years. It has been the great innovation of the Twentieth Century and deserves more respect than what I frequently belittle it as in this blog.

It also needs to know that it's time to go. Retirement is the right thing to do for the global economy to proceed in new organizational directions and methods. This is also what I think this current economic depression is. The old dying off for the new to take over.

What is the "new" and what can it do to replace the inefficiently efficient hierarchy. If we consider the "installed base" of how things operate around the world. Our Governance Model will have to be a method of organizational structure that competes with a very well established culture. And that is what the Military Command & Control Metaphor (MCCM) is capable of doing. And why it is selected as the alternate Governance structure of the People, Ideas & Objects software application modules.

The advantages we gain in adopting the MCCM are significant. The Joint Operating Committee is the organizational representative of the oil and gas partnership. A partnership that operates systemically and culturally throughout the industry. Occasionally some oil and gas assets are owned exclusively by one producer, but those situations are rare. When it comes to risk mitigation and extending the aerial extent of the operations, partnerships are a necessity.

The cultural equivalent to the hierarchy is the MCCM. People understand the rank and file of the Military far sooner then they are exposed to a hierarchy. For at least half the population, the MCCM is well ingrained by the age of five.

One advantage we see in representing a property with an MCCM. Traditionally the ability for the one producer that is designated operator is required to undertake all the necessary capabilities to manage the property. This has lead to the building of redundant and mutually exclusive capabilities in each and every producer firm. This creates the false expectation that the industry needs more talent. Whereas I think there is concurrence in the industry that it needs to more effectively deploy the resources they have, more so then acquiring new talent.

If there were a pooling of the resources of the partnerships. Then the MCCM will enable the pooled resources to operate in much the same fashion as NATO's member countries assign resources. What country is willing and capable of helping out and then the planning and assignments can be parsed out. What is necessary for these to happen is the elimination of the designated operator classification, and an ability to cost the pooled contributions to each producer in their correct or equalized ownership share. These are done in the Partnership Accounting Module of the People, Ideas & Objects Draft Specification.

A critical part of the success of the MCCM is the Community of Independent Service Providers (CIPS). They are the authors of the People, Ideas & Objects application and the people that will be providing the resources to be pooled in the JOC. They, operating their own independent services business', with the People, Ideas & Objects software in which they designed, are constantly enhancing, are the people that the producers of the JOC will be looking to fill the various and necessary roles.

I think the concept of using the Military Command & Control Metaphor is ready, and should be used in the Governance Framework of the oil and gas industry. These are the ideas that are included in the vision as detailed in the Draft Specification of the People, Ideas & Objects software application. Two related concepts that should be discussed soon are the enhanced division of labor and the natural separation of markets and firms. With the JOC being the market, and the producer of course being the firm. Please join me here in this worthwhile cause and I'll certainly do my best to make sure this content finds the people that will make this happen.

Technorati Tags: People's Military-Command Governance Organization Innovation

McKinsey Financial Crisis, Past and Present

Providing an analysis of previous recessions and depressions, McKinsey gives clarity to the economic situation we find ourselves in. The public discussion is beginning to recognize that this is both a financial crisis and a recession. Most would agree that this environment is more toxic then previous events.

Living through the economic decline of the early 1980's, the Canadian governments much loved National Energy Policy and the decline in oil prices to single digits caused Calgary to become pretty much a ghost town. We had sections of the papers classified ads dedicated to the mandatory foreclosure announcements. You could fire a cannon down the downtown streets and never hit anyone. And that was during lunch. 

McKinsey have identified the early 1980's recession as fairly severe. The Canadian situation was exacerbated by the discriminatory policies of the Liberal government against the Western Provinces. And the politics of the Saudi's and the U.S. creating a decline in pricing that eventually did bankrupt the Former Soviet Union. This recession was amongst the longest. The two depressions that occurred in the 20th Century, the great one, and the lost decade of the Japanese. 

The way that I see this downturn is very much through the lens of Professor Carlota Perez' long range economic analysis. Citing five previous "depressions" that occurred in predictable fashion, all of these events were significant in that they were the means of initiating fundamental change in the key economic drivers. My opinion is we are moving from the inefficiencies of the bureaucracy, to organizational business models that exploit the full value of the Information and Communication Technologies (ICT).

What we can learn from this McKinsey paper might be valuable, so lets dig in. We see two groups of industries that are suffering as a result of the downturn. Auto's and manufacturing appear to be significantly over built with a capacity overhang of monstrous size. How government policies can overcome this "cost" is difficult to see. The decline of the U.S. based manufacturers to mere shadows of their current selves is what is needed to effect the changes that are needed in the economy. How the political leaders deal with this is unknown, and potentially dangerous as the natural forces are attempted to be stopped. 

On the other side the American economy is the high tech engine of the world. Companies like Apple, Google and Intel are global leaders with cash balances of up to $30 billion. These are the new economy preparing to lift all boats and make society more prosperous and efficient. Other then higher taxes that will be assessed to pay for the auto and mortgage bailouts, how will these companies attain the value add to make up the difference from the auto companies. Most people would agree that reorganization of firms holds the possibility of leveraging the talent in these organizations. 

From a company standpoint, the critical issue is the impact such shocks and subsequent downturns can have on the availability of credit—and the impact of a credit shortage on the real economy and on consumer and corporate confidence. The downturn after the S&L crisis of the 1980s and ’90s, when bank write-offs equaled some 4 percent of GDP, lasted about two years. GDP ended up about 4 to 5 percent lower than it would have been given the pre-crisis trend line. After the bursting of Japan’s asset bubble, the country’s economy grew by less than half a percent a year in real terms for a decade, and GDP ended up around 18 percent lower than it would have given its pre-crisis trend line. We estimate that the present credit crisis will cut real GDP by around 3 to 7 percent from trend growth. If the US economy were to follow the same path it did in the more severe crises, the total lost GDP could be two to three times greater than that estimate. pp. 1 - 2

Up to a 21% decline in U.S. GDP is a serious hit. A hit that would have to be ranked in the depression category. What is unique about a depression is the length of time that the declines occur and the lost opportunities of the economy during these protracted periods. Glossing over the problem, as the U.S. monetary and fiscal policies are attempting, is the wrong way to make the time shorten. Focusing on the strengths, job retraining and letting the social system kick in for those effected is where they should be focusing their efforts in my opinion. You have Toyota, Honda and Ford that are going to make it in the long term, lets leave it to them to work out the problems. A better fiscal stimulus may be tax cuts that provide the consumer with additional cash to use in their own transitions.

But the fallout from the past century’s two worst crises did considerably more damage. In the countries hardest hit by the 1990s’ Asian financial crisis—Indonesia, Malaysia, the Philippines, South Korea, and Thailand—GDP shrank by an average of 8 percent in 1998 in local-currency terms. Since their currencies halved in value, on average, in US dollar terms the damage was catastrophic—bankrupting many companies and causing widespread social unrest. And during the Great Depression, from 1929 to 1933, 28 percent of real GDP was lost. p. 2

Organizational changes would reduce the impact of these declines and enable the economies to grow well beyond what the current bureaucracies have established as possible. Acceptance of the scope of the difficulties that we are in seems to be the major impediment to thinking constructively as to our collective future. The pain is here, lets not wallow in it.

Equity markets are the most visible and dramatic indicators as crises unfold. At the end of October 2008, the S&P 500 index had fallen by 46 percent from its peak a year before (October 9, 2007, to October 27, 2008). By late November 2008, the US equity market had given up almost all of its gains since the 2001–02 dot-com bust. Although nobody knows if the market has reached bottom, the fall so far isn’t unusual by historical standards. Japan’s Nikkei 225 fell by 48 percent from peak to trough (December 29, 1989, to October 1, 1990) during the banking crisis, though the market has subsequently fallen still further; at the end of October 2008, it retained less than 20 percent of the peak value reached in 1999. During the Asian financial crisis, the equity markets of Indonesia, South Korea, and Thailand fell by 65, 72, and 85 percent, respectively, in local-currency terms. In the United States, the S&P 500 index fell by 49 percent from March 24, 2000, to October 9, 2002, after the tech bubble burst. pp. 2 - 3

The Japanese stock market remains at 20% of what it was in December 29, 1989! Lets not go down that road, where people choose to ignore the problems they are in, the cost is too high. Now with the aging population of Japan becoming a significant issue, their inability to address the scope of their problems in the early 1990's threatens to remove their economy from the global system. All as a result of high real estate valuations.

Since the peak, housing prices have fallen by 18 percent, as measured by the Case–Shiller housing index, whose futures imply a further fall of 19 percent from the peak. Losses in the housing and mortgage markets, when realized, could considerably exceed those in the stock market as of early December 2008. p. 4

McKinsey provides sound analysis of how companies should approach this downturn. Here are some of their recommendations. 

What should companies do?

We do not yet know how the current crisis will evolve. The confidence of consumers, corporations, and investors—a key factor—cannot be forecast. Nor can government policy. Yet research shows that in past recessions, companies pursuing a purely defensive strategy fared less well than their more active counterparts. As the economy enters what will probably be a difficult downturn, companies should prepare to seize their opportunities. p. 5

And for oil and gas, they should turn to this community to begin the process of building the software necessary to define and support the innovative oil and gas producer. A software application that is based on using the Joint Operating Committee as the key organizational construct of the industry. One that aligns the Joint Operating Committees communication, legal, financial, cultural, and operational decision making frameworks with the bureaucracies sole purpose, compliance and governance. A software application that eliminates the bureaucracy and replaces it with the Compliance & Governance Modules Military Command & Control metaphor. With this alignment the conflict and contradictions between the JOC and the bureaucracy cease. The Military Command & Control Metaphor governance methods of the People, Ideas & Objects Draft Specification provides a sound vision of the possibilities of what this community could build and support in terms of a more innovative oil and gas producer. 

Please, join me here.

Technorati Tags: People's McKinsey Perez Military-Command Economics

Where we're at, Part II

In reviewing the recent posts of Professor Langlois' works, I find there are many points of great interest. Modularity is a critical component of the development environment of Java. Dr. James Gosling, the founder of Java, has put together an extremely powerful and safe environment in which we can develop these modular applications. One point that I should have made in those entries is the logical application of the Military Command & Control Structure (MCCS).

MCCS has its own label to aggregate all of the postings in this blog. It is an important concept of using the Joint Operating Committee (JOC) and I would suggest a review of the posts to gain a strong understanding of the principles that I have proposed. The principle is that a means of command and control is necessary to replace the hierarchical command and control that is otherwise lost in specifically recognizing the JOC. By recognizing the JOC there are many opportunities to accelerate the performance of a producer. By pooling the joint human and other resources, and making them fully available to the Joint Account, virtually, the performance of the work being done by the JOC will increase. The work being the planning and execution of the drilling, completing, building of gathering and facilities. To have the JOC populated by the members seconded (permanently) to the JOC and operating in a manner consistent with the Military analogy of command and control. Not only the people who are actively representing the owners of the JOC, but the suppliers and vendors that are usually the boots on the ground in implementing the plan. This enhanced collaboration would provide a collective knowledge base and would be able to mitigate any issues as quickly as is possible. It should also, in an almost natural way, provide the documentation and transaction processing as direct fall-outs of the decisions and actions of those active JOC's.

Modularity demands the Military Styled Command & Control Structure. The loose coupling that modularity in the organization, and in the systems, requires a strong bond to ensure that it is operating as expected. This bond is the MCCS. In periods of high growth and rapid change modularity needs the support of the MCCS.

Most importantly we have addressed the scope of this application with the analogy that Langlois uses in architecting these systems. The industry would not hire "two interior decorators" to design and implement 1/2 of a room. Systems, and systems design need to have a more holistic approach. Modules help to define exactly where the user will find what it is that they are looking for. Some of the modules reside in the exclusive domain of the firm, such as the Research Module, and some reside exclusively in the market domain, such as the Petroleum Lease Marketplace Module.

I am recreating the table that I produced after review of some of Langlois' works. This makes the division between the market and the firm as I foresee the JOC being employed. Various elements of the JOC are assigned the responsibility of the market and in other areas, such as research, are assigned the primary domain of the firm.

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	s
Routine, compliance and accountability	s	P
Research	s	P
Development	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

P = Primary
s = secondary

So if we take a moment and define some of the modular architecture of this system.

• Partnership Accounting Module,
• Petroleum Lease Marketplace,
• Human & Supplier Resource Marketplace,
• Financial Resource Marketplace,
• Governance & Compliance Module, (a.k.a. Military Command & Control Structure)
• Research Module

These module classifications enable one to begin to see the value of modular thinking. Langlois noted Hayek's comment;

"Abstract symbols and rules can provide a visible information structure that allows individuals to operate effectively on the basis of their more concrete (and hidden) information." p. 16

Those who are within the oil and gas industry can clearly see and determine where each part of their understanding of the industry would fall under. The beginnings of seeing the "hidden" information is already beginning to bear fruit, just with these modules classifications. It is very clear to me where I could find a specific issue, information or opportunity in the appropriate module. This "hidden" data and information is a very powerful concept. These six modules will become the core of the system we are building here. If there are any other modules that you might think of, please comment on it.

Recall a salient point of Langlois regarding private property;

"There is also a flip side. Ownership may not only insulate one from certain kinds of unforeseen change, it may also enable one to generate radical change." p. 25

I read this as being innovation, where the innovation is being generated in the modular architecture that I have laid out? And this is the point, it is no where specifically but innovation is everywhere. The innovations may come from anyone using any of the modules. Innovation is not something that can be defined as a process. It needs however, to be facilitated through the organizational construct that allows the innovators to apply their craft.

Technorati Tags: Genesys, Lanlois, Modularity, Military-Command, Summary

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.

Technorati Tags: Genesys, McAfee, Military-Command, Capabilities, Innovation, Harvard, Research

Photos Courtesy Troels Myrup

Innovation and Talent in the Indian IT industry.

John Hagel III has written many good articles and topics on the effects of IT on organizations. Through his writtings he has also introduced us to many other good authors like Professor Richard Langlois'. Today Hagel has posted a great blog entry that accurately captures some of the technical risk that I anticipate we will experience here in the oil and gas industry. The conclusion he comes to at an Indian IT conference reinforces the division of labor theories of Adam Smith. I had noted the number of individuals that were involved in drilling a well, from the Chairman of the Joint Operating Committee to the billing clerk at the water trucking company would expand in their numbers to facilitate faster and more abundant and effective economic output. Hagel states the same thing for business in general and states that the Indian development community will need to address this problem. His conclusion is stated here;

These efforts in turn would expose the Indian IT service companies to the challenges of coordinating activities across large networks of partners given existing IT architectures. By gaining firsthand experience in the limitations of these architectures, Indian IT service companies would be well-positioned to drive another wave of innovation in IT architectures. In my talk on Web 2.0 at NASSCOM, I suggested that Indian IT service companies are natural candidates to define and deploy fundamentally new IT architectures that work from the “outside-in”.

In contrast to traditional IT architectures that emerged in the center of the firm and imperfectly extend their reach beyond the boundaries of individual enterprises, we are in desperate need of IT architectures that start with the assumption that the task is to coordinate activities across hundreds, if not thousands of firms. By starting with this perspective, we would need to re-think the nature of transactions and define roles and governance processes accordingly. In fact, we would likely move from today’s transactional architectures to much more helpful relational architectures designed to support enduring and deepening relationships across individuals and institutions.

I think in order to achieve this there needs to be a Military Styled Command and Control structure to replace the hierarchy. One that provides the flexibility of many firms working together to achieve common objectives. Flexibility to have staff of all the associated firms with the knowledge of who conducts what and at what level of authority. This intermixing can then, and only then achieve the types of results that we are all seeking here.

Technorati Tags: Genesys, Langlois, Hagel, Military-Command, Software, Organization

Where we're at.

This past month we seem to have travelled quite far in terms of the optimal organizational structure for producers. A summary table of the concepts and roles of each component would help to provide clarity of all the issues we have discovered and discussed. This table recalls the basic premise of this work being the Joint Operating Committee, and adds to it the work of Langlois, Foss, Winter and Dosi. As this research is ongoing and the table would be considered subject to adjustment in the near future. However, I think it currently provides the oil and gas worker with an understanding of where the roles of the firm and market begin and end.

I have separated the various areas of responsibility and frameworks into either the Market or Firm. Within each construct I placed the "P" as the item being a Primary role or "s" as being a secondary role within in the market or firm. Each category / construct can then be seen to provide the separation of responsibilities, the boundaries of the firm and the division of duties.

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	s
Routine, compliance and accountability	s	P
Research	s	P
Development	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

P = Primary
s = secondary

Technorati Tags: Genesys, Dosi, Langlois, Military-Command, Plurality, Research, Winter

Towards a Neo-Shumpterian Theory of the Firm.

Professor Sydney G. Winter is the Deloitte and Touche Professor of Management at The Wharton School of the University of Pennsylvania. The Wharton School consistently ranks as one of the best business schools on the globe. I have read Professor Winter's works before, particularly in combination of the work that he has co-authored with Professor Giovanni Dosi. The title of this article stood out in terms of a good follow through on Professor Langlois' theories.

In the abstract, Professor Winter provides a little more focus in to the theme of this research;

"Schumpeterian analysis requires an intuitively appealing and realistic conceptualization of the distinction between routine and innovative behavior, and in particular, a conceptualization relevant to complex organizations and complex tasks."

Which leads me to ask, is Professor Winter stating that innovation can be handled by the Joint Operating Committee, and "routine" tasks handled by the Military Styled Command and Control Structure? This role definition helps to understand the division of labor and the barriers of the firm in assigning tasks. However, I would state that these classifications are both right and wrong. The role of the Military Styled Command and Control Structure (MSCC) is not limited to compliance and routine. The most important aspect of the firm is well represented in the case study of Chrysler by Thomas H. Davenport and John C. Beck in "The Strategy and Structure of Firms in The Attention Economy." (This document is behind a paid wall but you may be able to find elsewhere. It is in the March / April 2002 Ivey Business Journal.)

"One example, of both a problem and a solution, is the Chrysler division of DaimlerChrysler. In the early 1990's, it shifted to cross-functional "platform teams" that managed the entire process of developing a new vehicle. Over all, these teams worked well, producing both successful new car designs and shorter development cycles. But the functional organization that had focused attention on producing and maintaining technical skills was no longer in place. Soon, technical experts found themselves working not with others of their ilk, but with manufacturers, marketers and financial experts on cross-functional issues. The result? A recurrence of quality problems that Chrysler had previously solved. The company is now attempting to turn some of its attention to increasing functional and technical knowledge by organizing "Tech Clubs," so that engineers in specific domains of car development can meet with each other and exchange ideas. In general, matrix structures such as these create attention problems; our innate focus on hierarchy and threat / reward does not match well with situations where it is not clear which dimension is the primary one. But Chrysler's Tech Club approach, a kind of "stealth" matrix, avoids this problem by giving only informal legitimacy to a second dimension of structure. It's important to understand that the balancing act here is not about power, but rather about attention; Chrysler needs employees to stay focused on the process of developing new vehicles, but not forget about enhancing their technical skills. The Tech Club structure seems to get that balance just about right." pp. 52

Just as Chrysler needed to redeploy "Tech Club's" to recapture the engineering capability that was no longer being developed in the "platform teams". And it would probably be safe to say the engineering capability atrophied under Chrysler's revised organizational structure. For oil and gas I see the potentially similar atrophy of earth sciences and engineering capabilities by leaving the Joint Operating Committee (JOC) as the only organizational construct and relegating the Military Styled Structure to "routine" tasks. The scientific capability and the strategic land base of the producer are two of the primary areas of responsibility that those members of a producers MSCC are providing. The nature of the MSCC is about the "firm", and the JOC is about the "market" to relate them back to the discussion around Professor Langlois' theories. Professor Winter takes these concepts to the next step with this quote.

"But the edge of production set is the edge of an abyss so far as technical knowledge is concerned: We there encounter the Great Unknown. When an attempt is made to introduce the phenomenon of technological change into this conceptual scheme, the theorist is almost forced to try to play the new game by the old rules. This means that certain production possibilities are suddenly extracted from the Unknown and added to the Known. There is ordinarily no analysis as to why particular possibilities rather than others should be thus discovered, and considerations of mathematical convenience determine, by default, the path of technological development is such a theoretical world." pp. 3

The oil and gas industry is not static. We are entering a time where the demands of the engineers and geologists is accelerating at a ferocious rate. Innovation will straddle both the JOC and MSCC organizational constructs. How much of these capabilities, innovation capabilities and scientific capabilities, are captured, managed, enhanced, tested, and redeployed within the JOC and MSCC? What I want to do here is ensure that the "routine" tasks of "transaction costs" and accountability are not the only responsibility of the MSCC. I would suggest the MSCC is the "research" and the JOC is the "development" in the traditional Research and Development classifications. This is an overall objective of this re-organization of the industry, to enhance the speed, innovativeness and capability of the producer and the industry. Professor Winter adds some more problems and opportunities to these concepts;

"But "knowing how to bake a cake" is clearly not the same thing as "knowing how to bring together in one place all of the ingredients for a cake". pp. 4

and

"Just to have a label, let us call this level of discussion of a technique the conceptual level as distinguished from the operational level discussed earlier. Two points should be made about it." pp. 6

Here we have a clear definition of the roles within the various organizations. Are you able to bake a cake, or know how to build a kitchen for the Chef to bake many cakes? Do you know how to drill a well, or do you know how to advance the science of geology and engineering? Professor Winter continues with some additional issues regarding the capability and ability of staff within these classifications.

"When a corporation president whose experience is in finance succeeds one who started as a production engineer, the technique that the corporation is using changes even before the new president makes his first phone call: The same procedures are now embedded in a new frame of experience and analogy." pp. 6

and

"Knowing your job' in such an organization is partly a matter of having the necessary repertoire of actions, and partly knowing which actions go with which incoming signals. Each individual has some ability to perform a considerably larger set of actions than are called for in his job, but to the extent that "practice makes perfect" he will acquire superior skill in the ones actually called for. [The man who graduated as a chemical engineer becomes gradually specialized first in petroleum refining and then in those particular aspects of particular refining methods that are central to his job.] As emphasized previously, a large part of any individuals conceptual understanding of his job consists of images of other peoples' jobs." pp. 7

Within the producer there will be those that are practiced at drilling wells effectively and those that conduct research effectively due to the nature of their jobs and previous experiences. The cultivation of two separate and disparate "types" of employees is not necessarily new, it is necessary that these be clearly differentiated within the producers JOC and MSCC. The interactions and communications between employees and particularly between the two organizational constructs is answered here:

"Any single individuals conceptual understanding of the firm in its entirety is mainly at an extremely abstract and aggregative level." pp. 7

"By far the most important coordinating and organizing force is the invisible interlocking structure of mutually consistent expectations held by the various members of the organization: Each correctly expects that he will receive familiar signals from the others, and will respond in the familiar ways" pp. 7

These last quotes emphasizing the tacit interactions that are so prevalent in today's organizations. Dr. Winter then quotes directly from Schumpeter;

"It is easy to see that the characteristic of being in a higher rank, the function of superintendence in itself, constitutes no essential economic distinction. The mere circumstance that ranks one worker above another in the industrial organization, in a directing and superintending position, does not make his labor into something distinct. (p.20)"pp. 8

"But we see at once that the necessity of making decisions occurs in any work. No cobbler's apprentice can repair a shoe without making some resolutions and without deciding independently some question, however, small." (p. 20) pp.8

"... insofar as individuals in their economic conduct simply draw conclusions from known circumstances -- and that indeed is what we are here dealing with and what economics has always dealt with -- it is of no significance whether they are directing or directed. (p. 21)" pp.8

"The data which have governed the economic system in the past are familiar, and if they remain unchanged the system will continue in the same way. (p.22)" pp.8

Winter then comments on the difficulties of how these definitions are understood by the "worker" as classified as the "manager" and "entrepreneur".

"In short, the manager of a firm, when the economic system is in an equilibrium circular flow, is just another guy who knows his job in a firm full of people who know their jobs. The firm in equilibrium knows the technique it is using because it is using it, and has been for some time past." pp. 8

and

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

Walking along this road will be difficult. The changes that are being realized and instilled within this software that we are developing will initially provide comfort to few. Change is a difficult and necessary action that is being driven, I suggest, by societies demands for energy, and peoples need to be "less" burdened by the demands of their work. I wrote extensively in the "Plurality" document about Dr. Anthony Giddens and Dr. Wanda Orlikowski and their structuration theory and model of structuration here. Review and familiarity with these theories will help to understand the role of change.

"The general emphasis in Schumpeter's work is, of course, on the entrepreneurial phenomenon in its most pure and dramatic form, where single individuals provide the leadership needed to bring about drastically new ways of doing things. But he does occasionally point out the essential continuity between these instances of dramatic innovation and the smallest sort of adaptation, to changing conditions." pp. 9

"Moral: Sometimes an innovation involving substantial technological novelty is much less costly and difficult than a change which, by standards external to the firm, is simple and commonplace. Viewed from inside the firm, technological novelty is only one among several reasons why an attempt to change techniques may involve large and unpredictable costs." pp. 10

Professor Winter moral provides some evidence that we are traveling the shortest route through these changes. I believe so. How much change the development and use of these systems brings about is unknown, however, the directness of our objectives helps in making the journey shorter, and potentially less painful. Professor Winter goes on in the document to note some principles of Neo-Schumpeterian Theory.

1) Contrary to the received theory of the firm, no sharp distinction can made between techniques known to the firm and those that are unknown. There is, instead, a quite continuous gradation from highly routine behaviour, to highly innovative behaviour. pp. 11

2) Relativity to existing routines: the only techniques which may appropriately be considered "perfectly known" to the firm are those it is actually performing, and has been performing repetitively. Furthermore, if we revert to the metaphor of Figures 3 and 4, the steepest part of the percent known curve is reached very quickly as the firm departs from its existing routines. Costs and uncertainties pile up rapidly for all but the most minor departures from well worn paths - even when the new direction is one already taken by other firms. pp. 11

3) A new method of production is a minor departure from an old one the the extent that (a) the repertories represented by the individuals currently in the firm contain the relevant skills, in roughly the right amounts, and (b) only minor "rewiring" is needed in order to create the interlocking system of signals and expectations that will evoke the appropriate actions at the appropriate time, (c) the relationship between the new technique and the old is correctly conceptualized by most individuals - so that planning for the change can go forward under largely correct premises as to who is capable of what. Similarity of list of ingredients may be a useful proxy variable for some of the considerations, but it is not a fundamental aspect of the closeness of one technique to another." pp. 11

4) Just as the fragmentation of knowledge in the firm makes innovation difficult and the consequences of attempted innovation unpredictable, nor does it tend to frustrate the economist who wants to predict the lines that innovation will take. The firm gradually "learns" a new method of production, vast numbers of details of the routines established will be determined by considerations that play no part in ordinary economic calculus, and may in addition be unknown to most of the firms managers, let alone to the observing economist. Not infrequently, decisions with quite major consequences for the firms future economic transaction will turn on such considerations. "Mere mangers" may behave predictably, entrepreneurs (and the organizations led by them) do not especially if the prognosticator directs his attention only to the economic influence on behavior. " pp. 12

Finally, as with Professor Langlois, I have abused the fair use of Professor Winter's copyright. As with Langlois, I am in contact with Professor Winter to determine what is required to make him whole under this phenomenal document. He leaves with a conclusion that resonates with my thinking of where we are headed too, and to a large extent why;

Thus a neo-Schumpeterian theory of the firm would be a historical theory in the sense that significant differences among firms would be regarded as historically determined; it would be a dynamic theory because only in the context of such a theory can the traditional problems of price theory be confronted anew, and, ideally, it would be probabilistic -- the existence of a multiplicity of unobservable factors that shape firm behavior would be explicitly recognized. Clearly, the program is an ambitious one, involving conceptual, theoretical and empirical questions of great difficulty. Success in building a new theoretical road can not be guaranteed, and the easier choice is to walk the old one. The question is how long are we prepared to content ourselves with a theory that is simple at the price of being simplistic. pp. 11

Photo Courtesy Kaley Davis

Technorati Tags: Genesys, Attention-Economy, Capabilities, Development, Winter, Research

Capabilities and Governance, Conclusion

Langlois' et al's theories have taken us a long way in terms of researching the optimal organizational construct for oil and gas. I have suggested, and the industry concurs with me, that greater recognition of the Joint Operating Committee as the organizational construct provides value within the industry. Through this review, Langlois has taken us down some roads that we otherwise may have travelled on our own. I am certain that we would have discovered many of the same pitfalls that Langlois discovered and noted in his many papers. The use of "production" costs and "transaction" costs as clear classifications of costs managed by two "sub-organizations" either the Joint Operating Committee (production costs or market) or Military Command and Control Structure (transactions costs or firm).

I would like to end this research of Professor Langlois with the note that I will be writing more about his theories as we progress. I have added him to the stable of excellent research that is being conducted by Dosi, Perez, Romer, Winter and Schumpeter. Recall that Langlois is a recipient of the Schumpeter Prize, a well earned attribute. In closing with this final entry on Capabilities and Governance I want to highlight some of the salient quotations. They are;

"The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved." pp. 21

and

"If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion." pp.21

and

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

"Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals." pp. 17

These last quotes of Langlois reflecting to me the role that industry needs to help define and develop. A process of coordination that will be an inherent part of the software development process. A coordination process that industry can and will benefit from without the perceived costs of loosing any competitive advantage. A process that can evolve with the shared cooperation that comes from an enhanced competitive understanding. One that will identify the key competitive criteria as the producers land base, and the capability to explore, produce and exploit these much needed energy resources.

"In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production cots for the same type of productive actively." pp. 18

"This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization." pp. 18

And industry can then achieve many of the promised benefits.

"... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities." pp 19

"If by contrast, the old configuration of capabilities lies within large vertically integrated organizations, creative destruction may well take the form of markets superseding firms. History offers many examples of both." pp. 21

These changes are needed, and based on my current marketing, much desired. People know intuitively the time is now to proceed in these directions. A time to realize many of the benefits that are promised through their Public Petroleum Data Model, Royalty Simplification, Petroleum Accountants Society of Canada and Canadian Association of Petroleum Land-man and other standardizations.

"If however, change is autonomous - if change can take place in separate subsystems without greatly affecting the way those subsystems are connected together - then markets, which can take advantage of specialized and decentralized knowledge, may be at a relative advantage. Here the issue of standards enters the picture: for standards are typically ways of fixing the connections among subsystems so that change is channeled in autonomous directions. Langlois and Robinson (1992, 1995) call this kind of structure a modular system." pp. 22

"But more quantitative empirical studies also suggest that differential capabilities, and therefor production costs, are significant variables for explaining the boundaries of the firm. In Graham Walker and Donald Weber's (1984) empirical study of the make-or-buy decision, the most important explanatory variable turned out to be the indicator for differential firm capabilities, that is, for production costs." pp. 22

Technorati Tags: Capabilities, Governance, Langlois, Military-Command, Genesys, Software, Strategy

photo courtesy David Sifry

"Economic growth is about the evolution of a complex structure"

In his book "The Dynamics of Industrial Capitalism" Richard N. Langlois, Professor of Economics at the University of Connecticut stated, "Economic growth is about the evolution of a complex structure". This expands on Adam Smith's theory of the division of labor.

If the energy industry is going to increase its output, the first order of business is to settle on a new form of organizational structure. In oil and gas the joint operating committee is the legal, financial, operational decision making and cultural frameworks of the industry. This is on a global basis. Once the software is built to explicitly support the joint operating committee, recall that software defines and constrains the organization; the industry can then proceed to expand its output. I am at a loss to determine what other means could be used to increase the capacity output?

Here we have further academic support for using the Joint Operating Committee. With over 230 years since Adam Smith wrote his theory on the division of labor, it is a testament to the strength of his thinking that we quote him so frequently. Dr. Langlois' quotation provides further evidence that the ability to expand will first and foremost require new organizational forms to institute growth. To me the choice is very simple.

Technorati Tags: Call-to-action, Military-Command, Research

Human Resource Marketplace

More editing.

The Human Resource Marketplace is derived from the software's prospective user base of eligible oil and gas workers. Its purpose is to provide global access to the human resources the oil and gas industry needs to conduct its operations. Organizing the volumes of people and making them readily accessible by other users from interested producers and joint operating committee's. The Human Resource Marketplace will be a free resource for its users and is part of the overall system that will be financially supported by the oil and gas industry.

The population of these software users will include the full scope of the professions, trades and skill set found in the industry, and its suppliers, regulators and governments around the world. These users are the critical resource to the success of this system and the oil and gas industry. They are the driving force in defining and demanding the types and quality of software applications they need to operate effectively in the oil and gas industry.

As has been stated elsewhere, the ability to access the necessary human resources is a challenge for the energy industry. This challenge is expected to increase as the brain trust of the industry begins their retirement. Industry already is taxing the maximum amounts of employee time and is actively competing on the basis of lifestyle benefits to acquire and maintain talent. This proposal assumes that industry agrees with this author's opinion that people want to be more effective at their jobs. Enhanced employee effectiveness is best achieved through higher productivity and this proposal shares these concerns of industry and its employees. I am boldly suggesting here that the condition of employee effectiveness begins with the effective reorganization with these objectives in mind. The process of creating more creative, productive and innovative oil and gas workers needs to be planned and implemented through this software development proposal.

What this proposal offers industry is a software development capability. An ERP software development capability that sources its application development's leadership, direction and functionality from its user's involvement and demands. It is these users who will demand and expect the necessary software applications be crafted and built from the developers employed by Genesys. Creating a virtual environment where developers and users collaborate. Building a new generation of software systems based on the reorganization of the industry around the Joint Operating Committee.

The Human Resource Marketplace user's interface will be their gateway to completing their task's, fulfilling their roles and responsibilities to the Joint Operating Committee's that actively hire and engage their skills. Each user will have free and unlimited access to the Human Resource Module to manage the:

• Marketing of their skills.
• Day to day interactions with other users.
• Managing and completing their work.
• Accounting, billing and banking services.
• Work orders and contracting with producers.

All access will be controlled by a high quality security system that ensures access to the system is by authorized users only. It will ensures all access is accredited and verified as to their accessibility. Included in this verification will be:

• Educational transcripts.
• Verified and supported employment references and documentation of their Curriculum Vitae.
• General ranking and task capability. (See section on Military Command.)

Once accredited it will be up to the user to maintain their on-line presence and work environment. Representatives of the producers will have access to source their employee needs through the Petroleum Lease Marketplace module and or Partnership Accounting described elsewhere. It should be evident that this module is conceived as the major point of contact for the user working in the oil and gas industry. All the primary transaction and document access, creation and processing is done, from the user's point of view, through this portal.

Specific technical attributes of the Human Resource Marketplace module.

This application will manage the Genesys domain name for users based on "first.lastname@genesys-energy.com". This will be the manner in which people access their work and tasks, eliminating the need "to drive to the office". This portability of the user creates issues regarding the level of automation adopted by industry. Manual processes will be limited in the virtual world, primarily due to the need to present data to many different users simultaneously. Efforts through this application need to be focused on this point. If a firm requires paper pushing employees in the future, they will have no competitively sustainable business, and potentially no business partners. Nonetheless to help with this transformation of the working environment, Google's Tessaract OCR (Optical Character Recognition) engine will be embedded within this application.

Each user, producer and joint operating committee will have access through their specific portal (Human Resource Marketplace, Petroleum Lease Marketplace and / or Partnership Accounting modules). Therefore security at the portal has to be of the highest grade and quality possible, has to capture these needs and most importantly the security module needs to be built first. To layer in a management security requirement after the system has been built will prove fruitless. The security module specifications and possibilities that exist today are such that the type of security level that can be achieved will be more then adequate for the needs described here. As this system will also be operated on Sun Microsystems grid, a higher level of security is achieved and provided. Security is the first priority for this system.

The Human Resource Marketplace will provide:

• Modules for marketing their products and services. These will consist of blogs and Wiki access for each user to actively promote and market their skills and services to the full range of producers as represented in the joint operating committees, service providers and employers.
• Access to community based Wiki. (Specific areas for Accounting, Geology, Engineering, and Land etc.) Including glossaries, dictionaries and other reference material pertinent to the oil and gas industry.
• In the military command section of this proposal there is discussion surrounding how the command and control of the hierarchy is replaced. The command and control issue is resolved by adopting a military command type of structure. The rank and role that an individual will have with respect to its client producers and assigned joint operating committees that make up the users "place of employment".
• Search module access (Google appliance) within the user's authorized domain.
• Project management module consisting of a variety of project management, calendar and task management.
• An RSS pool / reader.

In short, a social network for the oil and gas industry worker to access and manage the work they are doing. It may appear that the service will take on a "MySpace" type of atmosphere and that would be incorrect. The purpose of this environment is that the presentation to the other users is based on your professional life, not just a social aggregator.

Technorati Tags: Genesys, Proposal, Marketplace, People