Showing posts with label von Hipple. Show all posts
Showing posts with label von Hipple. Show all posts

Wednesday, January 20, 2010

Professor Baldwin and von Hipple VI

To finish off the review of Professor Carliss Baldwin and Professor Eric von Hipple's paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". I feel it is appropriate to highlight just the final paragraph of the document. It speaks to all that we are working to do for the oil and gas industry.
We conclude by observing again that we believe we are in the midst of a major paradigm shift: technological trends are causing a change in the way innovation gets done in advanced market economies. As design and communication costs exogenously decline, single user and open collaborative innovation models will be viable for a steadily wider range of design. They will present an increasing challenge to the traditional paradigm of producer-based design – but, when open, they are good for social welfare and should be encouraged.
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Wednesday, January 13, 2010

Academics get on board.

A trend is forming in the academic community. There are no shortage of papers that address the types of opportunities that now exist in the technological, organizational and innovation areas of academic research. This is an extremely strong trend, one that is a follow-on to the massive effort that went into determining the causes and effects of the financial crisis. As we move away from the possibility of a meltdown, we can see the resources of the academic community moving forward in terms of where business should position itself to succeed in the future.

It started for People, Ideas & Objects with Professors Baldwin and von Hipple's paper. We took a detailed and comprehensive review of the paper due to its pertinence and value to the Community of Independent Service Providers and the producers that support People, Ideas & Objects. That review will soon be joined by one from Professor Giovanni Dosi entitled "On the nature of technologies: knowledge, procedures, artifacts and production inputs". Professor Dosi's work was the key or primary research component contained in the Preliminary Research Report. His work helped to define what an innovative oil and gas producer would need, and that the Joint Operating Committee (JOC) is indeed the means to achieve that innovativeness. This new paper resonates with the work that is being done here. I will be reviewing all these papers in this blog as soon as I can get to them.

An additional paper from Professors Wanda Orlikowski of MIT permits me to write about something that I was too reserved to write about. This paper will add a layer, or dimension, to our software developments that ties together many of the questions users have. Professor Orlikowski's work was used in the Preliminary Research Report as well. Her work had defined the Technological Model of Structuration based on Professor Anthony Giddens Structuration Theory. It was through this work we were able to define the cognitive and motivational paradox' of building these software modules. Her Model of Structuration was also used to determine that software defines the organization. Therefore to change the organization requires that we first change the software. Which led me to coin the phrase "SAP is the bureaucracy".

We also have two very good papers from Professor Carlota Perez of Cambridge University. She has been able to define for People, Ideas & Objects the economic environment we find ourselves in. Basing her theories on the research of economic events over the last 300 years. This has provided us with an understanding that the Information and Communication Technologies (ICT) are creating significant economic changes. These changes are reflected in the dot com bubble and our recent financial driven bubbles. And now that these "events" have occurred, as she predicted, we can see the context of the current ICT Revolution is ready to be exploited. Recall what Ludwig von Mises said about the industry revolution. It was the solution to the problems at that time. We find ourselves in similarly challenged times and the ICT Revolution is the solution to those problems.

All of these works from Hagel, Baldwin, von Hipple, Dosi, Orlikowski, Perez and others show the time for the oil and gas industry to undertake the types of revisions prescribed by People, Ideas & Objects is now. It is important to highlight this development in this posting. People who contribute their time and energy to the developments of People, Ideas & Objects are compensated handsomely for their contributions. It is however not enough to start these developments until we can assure the producers and users that this project will be successful. That the people behind this development are taking the steps necessary to ensure success and that the super human effort of going beyond what is expected can be undertaken by every individual who participates. The point of this post to highlight some of the areas that we can show the producers and users that this success is closer to being attained. What we have so far is as follows:

1)    There is general and widespread understanding that the oil and gas industry has entered an era where the cheap energy is gone. What remains is politically, logistically, financially and technically much more difficult. An exponentially higher level of difficulty. It has been noted by Exxon and others this will require upwards of $20 trillion additional capital over the next 20 years.

2)    Professor Oliver Williamson's Nobel Prize in Economics being awarded for Transaction Cost Economics (TCE). This was a surprise event in that this relatively obscure area of the science. TCE has now been recognized for its importance on a go forward basis. Most importantly the Draft Specification incorporates the state of the art understanding of Transaction Cost Economics.

3)    Our competition, Oracle and SAP have used and abused the oil and gas industry for too long. Neither have products that are satisfactory for the upstream oil and gas industry. Importantly Oracle has taken themselves out of the game by spending $39 in research and acquisition costs to bring Oracle Fusion to the world. This level of capital expenditure will price Oracle out of most of the markets they operate in. In addition, the oil and gas industry will need to spend at least as much in customized development costs as People, Ideas & Objects blank slate approach would.

4)    The oil and gas producers are being called to fund our budget for 2010. At $10 million this is the amount of money that I think we can physically spend. It is being applied to the Preliminary Specification based on the Draft Specification and the agile development methodology. This is not to suggest that the entire design will be complete with this budget. It would be fool hardy to suggest that this project will be undertaken on the basis of $10 million in design costs. I hope that we will be able to develop the first iteration of the Draft, Preliminary, Detailed and Final Specification's within the scope of a $100 million commitment. People, Ideas & Objects Users, Developers, Account Managers and Project Managers all need to see the oil and gas industry commit these resources for this design. Success demands this.

5)    The academic community, through independent actions of the noted leadership in their disciplines, highlight this area as a key area of value accretion to all businesses. People need to be seeing the academic community rallying around these concepts. Providing help for our users and producers to foresee how success can be attained. I would also suggest that the academic community is raising a serious warning to those producers who do not heed this call. It has been convenient for the bureaucrats to belittle People, Ideas & Objects, they may now be doing so at their own expense.

Here are the five compelling reasons that users and producers should get behind in this project. What is possible and attainable in People, Ideas & Objects has never been done before. For this reason the up-front analysis and work to ensure this project is successful is necessary. We are very close to that point, and the people want to move-on from just thinking and reading about it. If you are a producer that wants to support this project, please follow our Funding Policies & Procedures. If you are user that would like to join us, please follow this procedure.

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Tuesday, January 12, 2010

John Hagel's Institutional Innovation

This blog follows the works of John Hagel very closely. His work has provided much insight and direction from the point of view of how Information Technology affects business. In the May 2004 Preliminary Research Report John Hagel and John Seely Brown were highlighted to provide a definition of the developing "web services". Today Hagel's research fall's mostly under the category of innovation and his most recent post on "Edge Perspectives with John Hagel" raises the term "Institutional Innovation" of which I had not heard of before, and accurately reflects the type of work that is being done on Innovation in oil and gas.

Institutional Innovation is such a logical name for the type of innovation that we are seeking to develop. Hagel wrote in October 2007 about his concept and obviously I missed it. Talking about the types of innovation that were developing in the far east, Institutional Innovation is different then product or organizational innovation that are generally focused on one company. The definition that Hagel provides is;

In these very diverse industries, we saw entrepreneurs re-thinking institutional arrangements across very large numbers of enterprises, offering all participants an opportunity to learn faster and innovate more effectively by working together. While Western companies were lured into various forms of financial leverage, these entrepreneurs were developing sophisticated approaches to capability leverage in scalable business networks that could generate not just one product innovation, but an accelerating stream of product and service innovations.
Use of the Joint Operating Committee (JOC) by definition is not just one company. (Exceptions to every rule, if a firm were the only producer in the JOC they would operate the assets in the same manner as if they had partners.) The JOC is an organizational construct that the oil and gas industry established in the very beginning to deal with the risks involved in the business, and / or, the merging of interests due to the aerial extent of the assets owned. Clearly to reduce your risk you brought on partners, and when assets grew progressively larger, building gas plants and facilities every mile was impractical.

The JOC is a form of organization that is recognized in every producer. Many "fields" may have up to 100 or more partners, each with disparate assets and percentages, each pursuing their own corporate strategy and being profitable in a multitude of ways. No two may be alike. The JOC has been the culture of the industry from the beginning, it is the legal and financial framework and all producers have operational decision making and communications that recognize the management of the asset. It is these five frameworks that are being enabled in People, Ideas & Objects and it is these five frameworks that are necessary for the producer to be able to decide and implement their best strategies. The hierarchy, in oil and gas, has relegated itself to the compliance and governance of the firm. These frameworks manage the royalty obligations, the tax obligations and the security obligations. It is the royalty, tax and security frameworks that Oracle and SAP have handled to date, ask them about a JOC and they look at you with a puzzled look and wonder why you don't want to get closer to your customers. ;)

 

Our purpose at People, Ideas & Objects is to move the tax, royalty and security frameworks over to the JOC in order align them with the cultural, financial, legal, communication and operational decision making frameworks. This re-alignment does at least two really big things.

  • First it enables accountability. When compliance and governance are separated from operational decision making no one is able to be held accountable. Who made the decisions that earned the 100% increase in profits? Why does this company seem to make the same mistakes over and over? These types of questions will be easily answered when the individuals who are responsible for the wins will be recognized, and those that are going through the motions will also be identified.
  • Secondly "Institutional Innovation" is enabled and the producer can iterate on the science and innovations in the business of oil and gas. Now oil and gas only involves chemistry, physics and biology at its core, and this is why Matthew Simmons says it is the second most complex industry to the space industry. Innovation on these sciences is what needs to take place for the industry to move quicker and provide the market with oil and gas. With the state of globalization, does anyone believe we are producing enough for the future? I am sure the political and logistical difficulties will only accelerate as well. Higher commodity prices are rewarding the producers that innovate the most. I can definitely see why a bureaucracy could be failing in these tasks.

Hagle notes why Institutional Innovation would be a good term to define People, Ideas & Objects.
Institutional innovation is different - it defines new ways of working together, ways that can scale much more effectively across large numbers of very diverse enterprises. It provides ways to flexibly reconfigure capability while at the same time building long-term trust based relationships that help participants to learn faster.
Our review of Professor Baldwin and von Hipples paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaboration Innovation" shows People, Ideas & Objects form of Open Collaborative Innovation provides real value for the User communities and the producers who subscribe to these developments. Hagel is on the same page with his "Institutional Innovations" and his recently published concept of the "Shift Index".
Institutional innovation has enormous power to disrupt and drive major new forms of economic value creation and capture. Much of its power stems from its ability to blindside incumbents who hold onto traditional mindsets. As I argued in the Shift Index, new digital infrastructures and related public policy shifts are increasingly rendering obsolete the assumptions that Western executives hold about what is required to create and capture economic value.

Until and unless Western executives begin to aggressively challenge these assumptions and awaken to the potential of institutional innovation, they will remain vulnerable to attack. They must begin to recognize that the most promising forms of innovation emerging in developing economies are not at the level of individual products or services but rather at a much deeper level – novel approaches to scalable peer learning shaped by institutional innovation.
Those last two paragraphs are golden. The bureaucracy has certainly fought long and hard to ignore People, Ideas & Objects. We sit at very lofty heights in our standard of living and economy. These bureaucracies are putting in jeopardy these advanced lifestyles we have become accustomed to. Falling from here could be painful. I am concerned that the bureaucracy will never support these development and have instead directed our appeal to the investors and shareholders, the real oil and gas men and women, to fund these developments as an alternative form of organization. If you are a producer that would like to support these developments please follow our funding policies and procedures and if you are someone with oil and gas experience that knows we can do better, please join me here

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Monday, January 11, 2010

Professor's Baldwin and von Hipple V

Part V of our review of Professor Baldwin's and von Hipple's working paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaboration Innovation." Lets assume for a moment the knowledge of how the oil and gas industry could be codified by 1,000 people. Much as the people are being organized and their contributions codified in the People, Ideas & Objects Preliminary Specification. Speaking prospectively, irrespective of the fact that these people are members of the Community of Independent Service Providers (CISP) and they earn their living through the contributions they make to the software, and their oil and gas producer clients. What's in it for them. Baldwin and von Hipple make the following point clear.

User innovators will choose to participate in an open collaborative innovation project if the increased communication cost each incurs by joining the project is more than offset by the value of designs obtained from others. To formalize this idea, assume that a large-scale innovation opportunity is perceived by a group of N communicating designers. As rational actors, each member of the group (indexed by i) will estimate the value of the large design and parse it into two subsets: (1) that part, valued at vsi, which the focal individual can complete himself at a reasonable cost (by definition, vsi > dsi); and (2) that part, valued at voi, which would be “nice to have”, but which he cannot complete at a reasonable cost given his skills and other sticky information on hand (by definition voi ≤ doi ).
Turning to the oil and gas producer, what's in it for them to support the People, Ideas & Objects developers and the associated CISP? Clearly the User innovations as Baldwin and von Hipple call them applies to the producer as well. They have access to a system that replicates any and all processes within the oil and gas industry. It's not that they need to have all those processes managed, but it is possible for them to run their firm in the most profitable manner by using People, Ideas & Objects and the CISP. The costs of the software are as little as a $1.00 per year per barrel of oil equivalent daily production. Yet they too are benefiting from these open collaborative innovations in the same manner the CISP is.
Consider finally the model of open collaborative innovation. Recall that open collaborative innovation projects involve users and others who share the work of generating a design and also reveal the outputs from their individual and collective design efforts openly for anyone to use. In such projects, some participants benefit from the design itself – directly in the case of users, indirectly in the case of suppliers or users of complements that are increased in value by that design. Each of these incurs the cost of doing some fraction of the work but obtains the value of the entire design, including additions and improvements generated by others. Other participants obtain private benefits such as learning, reputation, fun, etc that are not related to the project’s innovation outputs. For ease of exposition, we will derive the bounds of the model for user innovators first, and then consider the impact of other participants on those bounds.
Simple, but why has this not been done to date? Clearly the costs of collaboration on a large scale have dropped to minuscule levels. The Internet not only reduced the costs but also enabled these formerly disparate groups to associate with little to no costs. The only requirements to finding other groups of interested people is to Google the topics of your interest.
This is the first bound on the open collaborative innovation model. It establishes the importance of communication cost and technology for the viability of the open collaborative model of innovation. The lower the cost of communicating with the group, the lower the threshold other members’ contributions must meet to justify an attempt to collaborate. Higher communication costs affect inequality (5) in two ways: they increase the direct cost of contributing and they reduce the probability that others will reciprocate. It follows that if communication costs are high, an open collaborative project cannot get off the ground. But if communication costs are low for everyone, it is rational for each member of the group to contribute designs to the general pool and expect that others will contribute complementary designs or improve on his own design. This is in fact the pattern observed in successful open source projects and other forums of open collaborative innovation (Raymond, 1999; Franke and Shah, 2003; Baldwin et. al. 2006; Lakhani and von Hippel, 2009).
It would have been prohibitive, boring and frustrating to attempt the collaboration design of the Preliminary Specification without the Internet. Communication and design costs would have escalated to exorbitant amounts and the quality of the end product would be far less then the "open" collaboration design that Baldwin and von Hipple write about and is being employed by People, Ideas & Objects for this software development. There's more. As in this next quotation, the scope and scale of these designs can now be undertaken. The 2010 budget for the preliminary specification has been set at $10 million, yet the scope of the application is far greater then any other application designed in the oil and gas marketplace.
Note that this bound is N times greater than the bound on the design cost of the average single user innovator. Thus given low-enough costs of communication, open collaborative user innovators operating within a task-divisible and modular architecture can pursue much larger innovation opportunities than single user innovators acting alone.
The importance of this fact is how individuals should reconcile the ambition of this project to the reality of life. Building an application that uses the "industry" perspective through the JOC brings the scope to a frighteningly large level. The JOC is a generic organizational structure that is and can be populated by any number of changing numbers of producers and the people that work within the oil and gas industry. The use of the JOC in the Draft Specification is what demands open collaborative innovation design. Critical to making this an operational possibility is the ability of the Preliminary Specification to implement the Draft Specifications Military Command & Control Metaphor as a key cornerstone of the Compliance & Governance module.
But if communication costs are low enough to clear these hurdles, then the second bound [(6) and (6’)] shows that, using a modular design architecture as a means of coordinating their work, a collaborative group can develop an innovative design that is many times larger in scale than any single member of the group could manage alone.
Figure 3 in the paper shows that the Open Collaboration Innovation is able to approach a far higher level of design sophistication then the Producer Innovators. At no time before has this level of design sophistication been possible nor has the scope and scale been so (relatively) easy to approach. Producers and Users, and particularly members of the Community of Independent Service Providers stand to gain substantially from their contributions to this project. The overall design is comprehensive and ambitious. Today's technologies, and particularly the Internet, enable the type of systems design that the Draft and Preliminary Specifications involve. And although I don't think I mentioned the last two phases of the design publicly before. Now would be a good time to note that the Preliminary Specification will be used in a similar manner to the Detailed and Final Specifications. (Please note with a lag of six months the Detailed Specification can be completed concurrently to the Preliminary Specification.) The costs, which are budgeted at $10 million for the Preliminary Specification are negligible. To participate in these development as a supporting producer please follow our Funding Policies and Procedures here. And if you want to participate as a User or a member of the Community of Independent Service Providers please join us here.

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Saturday, January 09, 2010

Professor's Baldwin and von Hipple IV B

In this entry I will highlight many pertinent points of Baldwin and von Hipple's research. Much of the context and content of their work is new, and as they state, not necessarily covered before.

However, to our knowledge, there has been no systematic thinking about the conditions under which each model is likely to appear, and whether each is expanding or contracting relative to the other two. To make progress on these question, it is necessaryto develop a theoretical framework that locates all three models in a more general space of attributes. That is our aim in this section.
People, Ideas & Objects is based on open collaborative innovation. Based on the modular Draft Specification as its starting point, the contributions of users is necessary to cover the scope of work undertaken in the oil and gas industry. This scope of work has never previously been undertaken due to the communication and design costs prior to the Internet were prohibitive. Only today with the Internet and the tools that are available can we seek to codify the understanding of "what" and "how" the oil and gas industry operates as. This codification is being captured here in the Preliminary Specification that will form the basis of the People, Ideas & Objects application modules. It is the technology that is enabling this to be undertaken. Use of the Joint Operating Committee was the hypothesis of this projects in the May 2004 Preliminary Research Report, and is therefore, the underlying reason that this project holds the promise of "resolving every administrative problem in oil and gas in the last fifty years." (Not my words.) It is the "aha" moment that people have when they realize the Joint Operating Committee is the key to enabling these performance and innovation based opportunities.
In the particular branch we are most concerned with, organizational forms and industry structures are taken to be endogenous and historically contingent (Chandler, 1962, 1977; Wlliamson, 1985, 1991; Nelson and Winter, 1982; Aoki, 1984, 2001; Langlois, 1986a, 2002; Baldwin and Clark 2000; Jacobies, 2005). Different forms may be selected to suit different environments and then adaptively modified. Thus organizational forms emerge in history and recede as technologies and preferences change.
I highlight the last sentence of that quotation as we are now at the point where changes can be implemented. Our economic challenges today require us to undertake these types of organizational changes. What has brought us to this point is no longer capable of carrying us further. And indeed we will fall further behind if these organizational changes are not implemented in a timely manner. For the Community of Independent Service Providers (CISP) it is important to become involved in this project as its sustainability is represented in the fact that organizational forms do not change that frequently.

We have seen the 20th Century benefit from the work done by the hierarchy. Clearly society is better off today then if we had not had the model of organization we use so systemically in business today. We have also benefited from the use of computer technologies that have enabled the reach of the hierarchy to span far greater then previously possible. This is where the oil and gas industry became too focused on the hierarchy as opposed to the Joint Operating Committee. As companies employed greater levels of Information Technology, they began to focus on internal needs of the bureaucracy and avoided the business of the business as represented in the many Joint Operating Committee's of the firm. To address those JOC's it would have required to undertake the design that is being done in its first iteration in the Preliminary Specification. Baldwin and von Hipple note that the design costs and communication costs would be too great to overcome in any time prior to the Internet. Now these costs are substantially below 1/3 of 1% of the industry. Viable by any measure.
Finally in contrast to virtually all prior work except for Chandler (1962, 1977), we take an explicitly technological approach to the question of viability. Fundamentally we assume that in a free economy, the organizational forms that survive are ones with benefits exceeding their costs (Fama and Jensen, 1983a, b). Costs in turn are determined by technology and change over time.
Costs as represented by this projects Business Model are minuscule when compared to the revenue streams of the oil and gas industry.
Adopting Chandler's logic, we should expect a particular organizational form to be prevalent when its technologically determined costs are low, and to be ascendant - i.e., growing relative to other forms - when its costs are declining relative to the costs of other forms.
Today, design costs and communication costs are declining rapidly, and modular design architectures are becoming common for many products. In the rest of this section, we argue that these largely exogenous technological trends make single user innovation and especially open collaborative innovation viable across a wider range of innovation activities than was the case before the arrival of technologies such as personal computers and the Internet. We have seen and expect to continue to see, single user innovation and open collaborative innovation growing in importance relative to producer innovation in most sectors of the economy. We do not believe that producer innovation will disappear, but we do expect it to become less pervasive and ubiquitous than was the case during most of the 20th century.
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Wednesday, January 06, 2010

Professor's Baldwin and von Hipple IV A

Before the Christmas break we were reviewing a paper from Professor's Carliss Baldwin and Eric von Hipple. Our review was comprehensive as the majority of the material is pertinent to both the development of People, Ideas & Objects software and associated Community of Independent Service Providers, (CISP) and the innovative oil and gas producer. The title of the paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". To date there are three blog posts reviewing this paper here, here and here. Reintroducing this work by reviewing the three posts, re-highlighting the papers abstract, and finally adding some of the papers definitions will help refresh our memory of this very pertinent work.

In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with - and may displace – producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.
We see the value that this paper has to this community, not only in defining how this community operates, but also the validity for the CISP participants investing their careers, and how the innovative oil and gas producer can approach the scope of their organizational constraints. I expect to have the next installment of this paper completed within the next week. This involves the review of their analysis of the three different models of innovation, or section 3 "Where is each model viable."

It may also be of value to review our 2010 budget to see how the user within the CISP generates their own economic value. They are compensated for their work in designing and contributing to the development of the software. And secondly, their use of the finished software application is available to them as members of the CISP, free of charge. Their use of the software is part of the value adding services they provide to their innovative oil and gas clients. People, Ideas & Objects generates our Fees and Penalties from the producers that benefit from this software. These charges are assessed based on our business model.

Baldwin & von Hipple's Definitions
A single use innovator is a single firm or individual that creates an innovation in order to use it.
A producer innovator is a single, non-collaborating firm.
An open collaborative innovation project involves contributors who share the work of generating a design and also reveal the outputs from their individuals and collective design efforts openly for anyone to use. The defining properties of this model are twofold: (1) the participants are not rivals with respect to the innovative design (otherwise they would not collaborate) and (2) they do not individually or collectively plan to sell products or services incorporating the innovation or intellectual property rights related to it. An example of such a project is an open source software project.
A design is a set of instructions that specify how to produce a novel product or service.
A given mode of innovation is viable with respect to a particular innovation opportunity if the innovator or each participant in a group of innovators finds it worthwhile to incur the requisite costs to gain the anticipated value of the innovation. By focusing on anticipated benefits and costs we assume that potential innovators are rational actors who can forecast the likely effects of their design effort and choose whether or not to expend the effort (Simon, 1981; Langlois, 1986b; Jensen and Meckling, 1994; Scott, 2001).
Our definitions of viability is related to: the contracting view of economic organizations; to the concept of solvency in finance; and to the concept of equilibrium in institutional game theory.
In contracting literature, firms and other organizations are viewed as a "nexus of contracts,", that is, a set of voluntary agreements (Alchian and Demsetz, 1972; Jensen and Meckling, 1976; Fama and Jensen, 1983a, b; Demsetz, 1988; Hart, 1995). For the firm or organization to continue in existence, each party must perceive himself or herself to be better off with the contracting relationship than outside of it.
We define an innovation opportunity as the opportunity to create a new design. With respect to a particular innovation opportunity, each of the three models of innovation may be viable or not, depending on the benefits and costs flowing to the actors.
In terms of benefits, we define the value of an innovation, V, as the benefit that a party expects to gain from converting an innovation opportunity into a new design - the recipe - and then turning the design into a useful product, process or service.
Each innovation opportunity has four generic costs: design cost, communication cost, production cost and transaction cost.
Design cost, d, is the cost of creating the design for an innovation.
  1. The cost of identifying the functional requirements (that is, what the design is supposed to do); 
  2. The cost of dividing the overall problem into sub-problems, which can be solved separately;
  3. The cost of solving the sub-problems;
  4. the cost of recombining the sub-problems' solutions into a functioning whole.
Communication cost, c, is the cost of transferring design related information among participants in different organizations during the design process.
Production cost, u, is the cost of carrying out the design instructions to produce the specified good or service.
Transaction cost, t, is the cost of establishing property rights and engaging in compensated exchanges of property.
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Monday, December 14, 2009

Professor's Baldwin and von Hipple III

The third part of our review of the Baldwin and von Hipple paper focuses on the literature review. It is in this section of the paper that the issue of Intellectual Property is raised. Baldwin and von Hipple write what most people would consider to be factual in understanding how innovations are developed.
When taken together, the findings of all these empirical studies make it very clear that users have long been and are doing a lot of commercially-significant process development and product modification in many fields.
Let us first gain an understanding of what the authors define as Users. This user description is not different from what we are employing here at People, Ideas & Objects.
Users, as we define the term, are firms or individual consumers that expect to benefit from using a design, a product or a service. In contrast, producers expect to benefit from selling a design, a product, or a service. Innovation user and innovation producer are thus two general "functional" relationships between innovator and innovation. Users are unique in that they alone benefit directly from innovation. Producers must sell innovation-related products or services to users, hence the value of innovation to producers is derived from users willingness to pay. Thus, in order to profit, inventors must sell or license knowledge related to their new design, manufacture and sell goods embodying the innovations; or deliver and sell services incorporating complementing the innovations.
Users have unlimited access to the Intellectual Property that is developed by People, Ideas & Objects and the community. This IP, and all associated ideas, are a product of the User community and freely available for the user community to employ in their own service offering to their oil and gas clients. The only limitation for users is the ability to run the binary of the software is limited to People, Ideas & Objects exclusively. Also only licensed users who are active in the community will have access to the software, ideas and knowledge held within the community. Creating an exclusive service offering who's focus is to provide the oil and gas producer with the most profitable means of oil and gas operations.

The users then earn their fees in providing the services and software to oil and gas producers. Users are licensed to access this information based on their own skills and provide those services to their oil and gas producer clients at no charge for the software or the access to the underlying IP. (Users bill their clients for their services.) Clearly the involvement of a user within this community is critical to the success of the project, as we discussed yesterday. And this success provides the users with a means to pursue their career in the most effective manner that they see fit. Why do we do this.
Reexaminations of traditional economic arguments triggered by evidence of free revealing show that innovators generally freely reveal for two economically rational reasons. First, it is in practice difficult to effectively protect most innovations via secrecy or intellectual property rights. Second, significant private benefits often accrue to innovators that do freely reveal their innovations.
The Draft Specification is designed around eleven modules. Professor's Baldwin, Langlois and Williamson have defined the benefits of modularity and the importance of modular designs. Here the authors provide a good summary of how modularity fits within this project.
Modularity is important for collaboration in design because separate modules can be worked on independently and in parallel, without intense ongoing communication across modules. Designers working on different modules in a large system do not have to be colocated, but can still create a system in which the parts can be integrated and will function together as a whole. In small projects or within modules, designers can utilize “actionable transparency” rather than modularity to achieve coordination. When projects are small, each designer’s activities are “transparent” to his or her collaborators. In open collaborative projects, modularity and actionable transparency generally go hand in hand, with both factors contributing to the divisibility of tasks (Colfer, 2009).
Here in this last quotation is the real value of the CISP. The value of participating in this community is reflected in the name People, Ideas & Objects. Ideas are non-rival and therefore participation brings about the greatest attributes of ideas for all involved. Ideas are able to build on the prior knowledge and the many innovations and ideas that came before it. Having the communities ideas and innovation backed up by a user driven software development capability, only makes this more worthwhile for the members of the community and their oil and gas producer clients.
Building on arguments of Ghosh (1998), Raymond (1999), and von Hippel and von Krogh (2003), Baldwin and Clark (2006 b) showed formally that, if communication costs are low relative to design costs, then any degree of modularity suffices to cause rational innovators that do not compete with respect to the design being developed to prefer collaborative innovation over independent innovation. This result hinges on the fact that the innovative design itself is a non-rival good: each participant in a collaborative effort gets the value of the whole design, but incurs only a fraction of the design cost.
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Sunday, December 13, 2009

Professor's Baldwin and von Hipple II

I want to expand on Professor's Carliss Baldwin and Eric von Hippel's paper that we recently started reviewing. I think this paper is critical in defining many of the attributes of this software development project, and will add value with new insight and information. Specifically, in applying the findings in this paper I hope to prove to the User community that this type of project is less risky from the point of view of them investing their time and efforts in participating. The pace of this paper's review will be thorough and complete. Limiting our review in this second installment to just the Introduction and Overview.

As background information, People, Ideas & Objects software applications are marrying the User groups that define their needs in the software, with the software developers. This relationship is permanent and maintains the project in a constant state of change based on the users innovations. Software is not a destination but is best considered a journey. Users of People, Ideas & Objects applications are those that use this software in combination with their own service operations. The Community of Independent Service Providers derive their revenue from both the producers that employ them for their services and from People, Ideas & Objects for the work the users do in designing, implementing and working on development of the software. Creating an environment where the users are key in every aspect and element of this community.

This change oriented and innovation based community will generate their own innovations. In addition the People, Ideas & Objects software needs to mirror the needs of the producers who are iterating on the earth science and engineering innovations involved in oil and gas. The point I want to make is the users commitment to this community involves substantial risk and a comprehensive career commitment. Of the three models of innovation People, Ideas & Objects and the Community of Independent Service Providers fall into the authors "open collaborative model".
Our analysis will lead us to conclude that innovation by individual users and also open collaborative innovation are modes of innovating that increasingly compete with and may displace producer innovation in may parts of the economy.
We will argue that when it is technologically feasible, the transition from closed producer or single user innovation to open single user or collaborative innovation is also desirable in terms of social welfare, hence worthy of support by policy-makers. This is due to the free dissemination of innovation designs associated with the open model. Open innovation generates innovation without exclusivity or monopoly, and so should improve social welfare other things equal.
This last quote is in line with why this project is called People, Ideas & Objects. It is derivative of Professor Paul Romer's new growth theory of People, Ideas & Things. Which states in the virtual world ideas can be used by many people without diminishing the value to anyone else. The important take away for me was that we are needing exponential volumes of ideas to expand our economy. How these ideas are vetted, developed and implemented is the topic of Professor Baldwin and von Hipple's paper and this software development.

Users need to understand that the success of this project is wholly dependent on their involvement. This paper provides evidence that this mode of open collaborative innovation is preferable, "should improve social welfare" and will be successful. Therefore mitigating their risks in investing their time and efforts in this community. I think this provides the user with the most sound and economic basis for their review of this project from the point of view evaluating their investment in this model. Please join me here.

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Tuesday, December 08, 2009

Professor's Baldwin and von Hipple I

Professor's Carliss Baldwin of Harvard, and Eric von Hipple of MIT have jointly published a paper that is of the highest quality and topical focus. Entitled "Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation." Carliss Baldwin is someone we have followed closely on this blog. Her work has been in the area of Modularity, Transaction Costs and Thin Crossing Points and is incorporated in the Draft Specification, mostly in the Accounting Voucher module. You can find our review of her work by selecting the Baldwin Label on this blog. We have also reviewed Eric von Hipple's work here as well. A review of his book "Democratizing Innovation", (Free eBook here.) and an MIT video of his presentation. His work is mostly on innovation and we have incorporated some of his ideas in the Draft Specification. Specifically, use of his understanding of Intellectual Property (IP) and how it can be applied in communities such as People, Ideas & Objects. I will briefly discuss IP in this post and hopefully be able to write about it in greater detail in the near future. Nonetheless, these IP related thoughts are incorporated here in the way that People can join this project. Coverage of Professor von Hipple's work does not have a label to aggregate all the posts in this blog, however you can search this blog for his content.

I want to put all this material out in this post, and address more of the substance in subsequent posts. I think this paper is of the highest quality and very pertinent to the work that is being done at People, Ideas & Objects. The abstract of this paper says it all.
In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with - and may displace – producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.

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