How Open Source Projects Survive Poisonous People.

Google has had the capacity in the past few years to draw in many of the pioneer's and industry leaders to work for them. Two of these people, Ben Collins-Sussman and Brian Fitzpatrick are leaders in the open source world. Both have worked on Subversion which is the version control system used on this project. Of note, Google hired them to implement Subversion through out their product line, and in the process giving the tool the most significant test I could imagine.

The experiences they refer to throughout the presentation are based on work done for both Subversion and Apache. The topic of discussion focuses on how to avoid the toxic or poisonous people that can infect an open source project. The most important aspect of any contribution is to ensure that the team is not drawn down by people not reviewing the archives. Contributions have to be incremental to the work that has been done, not reiterating what has already happened.

The presenters open with their 4 areas of concern.

1. Comprehension
2. Fortification
3. Identification
   
4. Disinfection

The resource you are trying to protect is the Attention and Focus of the user and development community. Keeping disparate groups from losing focus and spending their attention in the wrong areas will lead to project failure. The methods to guard against these incidents is highlighted in their video. The first note is that poisonous people can;

1. Distract.
2. Emotionally drain your community.
3. Cause Needless infighting.
   

You need to avoid paralysis.

• People can derail forward progress by people being.
• Perfectionists.
• People obsessed with process.
• Even nice guys can do this unintentionally.
• The perfect is the enemy of the good.

The presenters then bring up the analogy of "Painting the bike shed". Which was an analogy that was used in the development of BSD Unix. The analogy goes; a nuclear plant that was needed to be built was progressing as good as it could. The entire development then stalled to determine what color the bike shed should be painted. The debate then ground to a halt on both the bike shed and the nuclear plant. Here the authors noted "The amount of discussion on a feature, is inversely proportional to their value. And is noted to be one of Parkinson's Law's.

Fortifying against the threat.

Politeness, Respect, Trust and Humility are necessary in an open source project. All of the deficiencies that the presenters had experienced originated from these 4 points.

Have a Mission, where do your want to go. Limit your developments scope. Define the project so that future requests can be classified as "its on our list of things to do" or "its not"

Mailing lists are a critical tool of the open source project, etiquette should be monitored and enforced. Review of the archives, don't let users disrespect any previous conversations by not reviewing the archives. A few more of their points include;

• Design documentation.
• Bug fixes.
• Document Mistakes. (Ensures that travels down dark alleys are limited and not repeated.)
• Code Changes (Change Log)
• Code Collaboration policies. Email is the key to participation.
• No powerpoints.
• Do big changes on branches for easier review. (Be generous on creating branches.)
• Spreading the "bus factor" so that developers move around alot. (Bus factor is how many people need to get hit by a bus before the project fails.)
  
• No names on top of source code files. (Makes people nervous) Everything is owned by everyone. (Cuts the pettiness.)
• Have well defined processes.
• Releasing Software
• Backport Bugs
• Test and release tarballs.
• Accepting and reviewing patches.
• Admitting new committers
• The community founders establish the culture.
• The culture becomes self selecting.
• Voting is a last resort
• A healthy community should rarely need to vote.

Identifying poisonous people.

Communications Annoyances

• Uses silly nicknames
• Uses multiple nicknames in different media
• Overuses Capital letters.
• Uses excessive punctuation.
• Acronyms are used.

General lack of a clue as to what is going on.

• Unable to pick up on the mood.
• Doesn't understand common goals of the community.
• Asks incessant questions.

Hostility

• Insults the status-quo.
• Angrily commands help.
• Attempts to blackmail.
• Attempts to deliberately rile people .
• Makes accusations of conspiracy.

Conceit

• Refuses to acknowledge the opinions of others.
• Makes sweeping claims.
• Usually about the projects future success.
• Re-opens topics that are long settled.
• Without reading the archives.

Lack of Cooperation

• Willing to complain but not help with anything.
• Unwilling to discuss design.
• Too insecure to take criticism.

Disinfecting your community.

• Is this person draining attention and focus?
• If so, is the person really likely to benefit the project?
• Is this person paralyzing the project?
• Is the dispute likely to finish soon?

Don't...

• feed the energy creature.
• give jerks purchase.
• engage them.
• get emotional

Do...

• pay attention to a newcomer.
• even if they're annoying at first.
• extract a real bug report if possible.
• know when to give up and ignore them.
• know when to forcibly boot them from community.

Summary

• Comprehend:
• Preserve attention and focus.

Fortify:

• Build a healthy community.

Identify:

• Look for tell tale signs.

Disinfect:

• Maintain calm and stand your ground.

And finally, the presenters put a special emphasis on decision making. All decisions can be discussed off-line, no decisions made without the documentation in the email lists. The reason why and what alternatives will show up in the archives and contributors can see the reasons and justification for the previous decisions. All of these excellent points will form a major part of the code of conduct that will be one of the first deliverables from this community.

Technorati Tags: Code-of-Conduct, development, software, tradition, Attention-Economy, Genesys

LEM Working paper series.

Dr. Giovanni Dosi was the centerpiece of research that I used in my thesis to derive the Joint Operating Committee would provide industry with greater speed and innovative-ness. Dr. Dosi is a professor at the Sant'Anna School of Advanced Studies in Pisa, Italy. Within the school there exists the "Laboratory of Economics and Management" of which they published a series of articles known as the "LEM Working Paper Series" which can be downloaded from their site located here. The purpose of this laboratory is;

The Laboratory of Economics and Management (L.E.M.) at the Sant'Anna School of Advanced Studies sponsors and hosts research in the areas of economics, organization theory and empirics, management and corporate strategies, public choice and other aspects of public policy, innovation studies, environment, industrial history and theory, cognitive and artificial sciences. It welcomes interdisciplinary endeavours and favours dialogue between empirical investigations, theoretical developments and normative contributions - concerning both corporate management and public policies.

Naturally this is the place I want to travel too next. The articles within this series will be researched in much the same manner that I did with Professor Langlois works. After the LEM series I want to go to Professor Schumpeter and review two of his books. And for those readers that may wish to read ahead. These books can be downloaded from here.

These articles are just a small sampling of the documents that are available through IDEAS. A variety of economics authors and researchers have decided these papers belong collectively in one place for people to download them. These downloads are free! Therefore, since my job now and in the future is devour these documents; learn and apply what I know about industry and publish them through this blog. I could not be happier. To review the documents are free, however, as in the case of Langlois. I have certainly crossed the line in terms of the fair use doctrine, and I am awaiting his assessment of how these transactions should be conducted. I will do the same for the others that I research. It is also mandatory that I note http://repec.org as the source of some of this information.

Technorati Tags: Genesys, Dosi, LEM, Research, Summary

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

Capabilities and Governance Part III

Professor Langlois' Slides (mentioned before here) # 178 provides an interesting quotation from G. B. Richardson

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

This comment captures very succinctly the reason that I am so closely reviewing this. I have suggested that the Joint Operating Committee is the ideal organizational construct and I now have strong concurrence of that concept in industry. I have recently suggested the Military Command analogy provides a management framework for the command and control mechanisms, and is a possible replacement of the hierarchy. And that is also receiving strong support in the industry. I now have stumbled into the collective works of Professor Langlois et al and can see things in a different perspective that provides the clear definitions of how this software will need to be built.
II Production and Governance: the Post-Coase literature.
A. Historical Sources of the Neglect of Production in the Post-Coase Literature.

The clear definition of production costs being incurred by the Joint Operating Committee and the transaction costs being incurred by the Military Command structure is a fairly clear and well established classification for the purposes of this review. Why is it that Langlois et al want to establish such a tie-in of these classifications with the governance and capabilities views of the firm? I will attempt to clarify for myself and my readers the validity of these theories in relation to the Joint Operating Committee and the Military Command Structure.

"Production costs determine technical (substitution) choices, but transaction costs determine which stages of the productive process are assigned to the institution of the price system and which to the institution of the firm. The kinds of costs are logically distinct; they are orthogonal to one another. As a result, issues of economic organization - such as the boundaries of the firm - cannot turn on considerations of production costs. Present-day theory has not only bought into this view but has arguably reinforced the separation." pp. 10

In a nutshell, the boundaries of the firm can not be defined by production costs. The methods the industry will use to organize its production is through the ability of transaction costs to determine the origin of the production cost from the market or the firm.
B. Production, Coordination, and Incentives in Present-Day Theory.

One of the key points that I noted in the October 2006 Final Research Report was the manner in which the command and control of the firm was not being tossed to the four winds in favour of the joint operating committee. It is specifically suggested that the command and control of the firm is supported through what I have called the Military Command style of management. A Military Command analogy that would enable a pooling of the industries resources and capabilities. Reducing the redundant duplication of capabilities that is built into each and every producer. The redundant duplication of capability necessary to conduct the operation of the producers assets. This has the effect of diluting the overall industry capability, decreasing the speed of operations and increasing the production and transaction costs of operations.

With Langlois' clear definition of "production costs" and "transaction costs." Langlois et al permits the experienced oil and gas worker to clearly discern the two separate components of the "firm" and its redefined boundaries. Boundaries that clearly fall into the two types of costs (production & transaction) and management functions (Joint Operating Committee & Military Command like matrix structure).

"As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination". pp. 11

and

"A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty." pp. 11

Here we have justification and need for the Military Command style of management control. Without the ability to organize the people in the manner that best suits the opportunity, co-ordination of the work would not occur. Production knowledge is a fundamental component of the tacit knowledge of the people in the organization. Each representative on the Joint Operating Committee operating in their respective disciplines know intuitively how to get the work that needs to get done, done. However, is that enough? It would appear to me that there is a role for the authorization, authority, policies and procedures to provide a framework of how oil and gas operations are conducted for company X. And this can be asserted through the Military Command type recognition of Generals to Privates. I would certainly stand guilty of Langlois et al's following quotation in asserting the Joint Operating Committee as the key, and only, organizational construct. However, clearly to do so, I would be incorrect as their are essentially two different organizations operating in two separate domains. Those that deal with production costs (JOC) and those that deal with transaction costs (Military Command). And each of these organizational domains need to be defined and supported in the software. A software application that identifies and supports the legal, financial, operational decision making, cultural, and most importantly the accountability frameworks of the oil and gas producer.

"Largely in a quest to make Coase's ideas more "operational," this literature has arguably both narrowed his explanation for the firm and moved its focus away from issues of coordination, especially qualities coordination. More precisely, both the issue of capabilities and the issue of the coordination of production - in the sense of aligning the knowledge and expectations of the parties who need to cooperate in production - have been overshadowed by a dominant interest in issues of incentive compatibility." pp. 12

and

"If, by contrast, the transacting parties were to pool their capital into a single enterprise in whose profits they jointly shared, the incentives for unproductive rent-seeking would be attenuated. And, because such unified organizations would choose the more productive specialized technology, they would win out in the competitive struggle against the contractual alternative." pp. 13

and

"If, however, assets are specifics, or if opportunism becomes possible for other reasons, it may be efficient to place the residual rights of control in the hands of only one of the parties by giving that party ownership of both sets of assets. In general, the owner ought to be the party whose possession of the residual right minimizes rent-seeking costs, which typically means the party whose contribution to the quasi-rents of cooperation is greater." pp. 14

and

"All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy." pp. 14

These last few quotes providing valuable information on how this software will be developed. I will be following this entry up with Capabilities and Governance Part V in the next few days. This will speak to the role of contracts as coordinating devices.

Technorati Tags: Genesys, Langlois, Software, Research, Capabilities, Development

The Public Petroleum Data Model

I am in receipt of a January 2007 publication from Nickels Publications. This month's issue is on Petroleum Software with the sub-title Upstream Data Surge, and focuses specifically on the Public Producers Data Model (PPDM). A non-profit organization dedicated to standardized data and database schema's for upstream oil and gas. PPDM provides a forum for software companies and producers to standardize the data set for oil and gas. They provide the Data Definition Language component of SQL to build the database for this data. PPDM have extended much of this into the standardization model necessary for the transactions between producers to be standardized. This brochure can be downloaded from the home page of their website.

I have written about PPDM before and those comments are here, here and here. I have now deprecated the comments that I made regarding the use of PPDM and I am now essentially supporting the data model. It would be a mistake to ignore the fine work of these people. The change of heart is based on the comments made by the Chairman of PPDM Arthur Boykiw:

"A second worry is monopoly. As common data standards are developed, oil and gas producers do not wish to see them become the private property of one or two software vendors."

I concur with Art's comments in terms of the standardized data model. There is no conflict between the data model and the copyright that I hold. Using the Joint Operating Committee as the key organizational construct uses a different perception of the data within the model than a system developed for the hierarchy would. As I indicated in the Final Research Report this copyright is a benefit for the energy industry, enabling it to focus on the right solution.

The analogy that PPDM puts out is addressed in "What the heck is a data model?

"Only very rarely does a high-rise office or apartment tower collapse due to poor construction. That's because everyone in the building industry must work within the terms of a building code. In a well governed country that safety code is based on carefully-defined technical terms and standards. The alternative - a construction sector in which architects, engineers, contractors and building materials manufacturers could each define their own safety standards - would be a recipe for disaster, and also for inefficiency.

In a parallel way, the Public Petroleum Data Model defines technical standards for anyone who creates upstream petroleum software applications and administers digital information. Each technical term or standard in the PPDM is defined so that it will mesh well with all of the others. That framework of definitions is called a data model.

Much like construction designers create an enormous range of high-rises, factories, houses and so forth within the building code, software developers can work marvels to the limit of their imaginations within the Public Petroleum Data Model. Think of PPDM as the software building code for the energy industry."

In the Final Research Report I noted a technical vision that included wireless, Java, asynchronous process management and IPv6. The combined effect of these technologies is a logarithmic growth in the data of a producer. How the producer deals with this growth is an integral part of the PPDM role. A process that we can freely contribute too and expand. This alleviates many of the problems and issues of developing a data model, for this development, for the industry and the

I am looking forward to commencing these developments. So many of the basics such as the PPDM Data Model are available to us that was not used by our competitors. In addition to PPDM we have the following attributes of this development that provide significant value to our system.

• Open Source Projects
• Sun Solaris Operating System
• Ingress Relational Database
• Java
• NetBeans and Eclipse Integrated Development Environments (IDE)
• Java Enterprise Edition
• Mature
• Robust
• Capable
• Broadband Internet Access
• Ubiquitous
• High user level capabilities.
  
• Grid Computing
• Processing power
• Low costs
• Zero footprint for producers.
• PPDM's data model
• Standardized
• Mature
• Technical alignment between the producers organizational frameworks
• Legal
• Financial
• Operational Decision Making
• Cultural
• Accountability
  

If there is a golden age for the development of systems, this has to be the beginning of it.

Technorati Tags: Capabilities, Software, Strategy, PPDM

photo courtesy David Sifry

MIT Museum Soap Box

The title of this entry will take you to a video from MIT's Museum "Soap Box" series. The two speakers, Professor Daniel Nocera, and Professor Angela Belcher focus the viewer’s attention on the energy challenges facing society. I highly recommend reviewing the video, the hour and a half is time well spent.

I believe that energy is one of the commodities that people fail to understand the significance of. Professor Nocera documents how the "alleged" alternatives are woefully inadequate to replace the energy produced by the oil, gas and coal industries. His analysis is accurate as he adds up the implications of each alternatives energy capability and capacity.

There are those that subscribe to the peak oil theory. There are those that say the world has adequate supplies for a long period of time. I fall on the peak oil side, based on my thirty years experience in the industry with the caveat that I am unable to discern what good reserves look like. I am not a geologist. Nonetheless both of these camps say that we are very close to having used up half of the known worlds reserves. This is the point that the peak oil theorists explain that deliver-ability will begin to decline and be irretrievably lost. This based on their projections scheduled to occur in 2012. I suspect 2012 will also be the point in time that the innovative oil and gas producer will be in highest demand. This last point is my justification for ensuring that we organize ourselves to meet those needs.

I would also assert during this transition to higher energy prices have been as a result of the short-term deliver-ability problems. Oil and gas has been in a holding and survival strategy since 1986. The producers are unable to ramp up production as quickly as they are now producing it, making for a short-term crisis that will approximate the crisis that we will see in 50 years.

In consideration of the date of 2012, the world has precious little time, around 50 years (2057) to come up with the alternatives that will fill the demands that Professor Nocera documents so well.

Technorati Tags: Genesys, MIT-Video, Innovation, Energy

Revised Final Research Report Abstract.

Preliminary or "Peer" review of the Final Research Report has been completed. The purpose of the peer review is to capture many of the attributes and issues that the industry sees in the report and to assimilate it here. Therefore I am submitting this Revised Abstract as a precursor to approaching the appropriate decision makers in industry. The results of the peer review include the following points.

"What does the industry get."

I am asserting a revised business model then what exists in the marketplace. Investment capital is unavailable for the software developments purposes. Looking at the long-term aspects of this software solution I have concluded it requires a strong revenue stream. This revenue stream starts with the subscription deposits noted below.

"Sticker Shock"

The costs mentioned in the Final Research Report are the total project costs to develop a Canadian oil and gas application. These development costs are amortized over the overall number of producers that subscribe to this development. Ideally this should be the industry at large. Discussion of these initial upfront costs being subsequently equalized over the industry is something that I would support. These costs are allocated over the life of the development, with well over half the costs being incurred in the last fiscal year of development. This provides a decision / stage gate point in time over the 4 cash calls.

"The Joint Operating Committee is the appropriate organizational construct."

This involves moving the "Accountability" framework, consisting of the "reporting", "regulatory" and "compliance" sub-frameworks, over to the "Financial", "Legal", "Operational Decision Making" and "Cultural" frameworks of the Joint Operating Committee. This re-alignment of the oil and gas producers organizational focus will have the material effect of increasing the scientific and engineering capability to a higher overall industry capacity. This is based on much of my current research in Professor Langlois, Dosi, Perez and others. This will also facilitate a faster speed of implementation of corporate policies. These concepts are proven in my research noted on http://innovation-in-oil-and-gas.blogspot.com. These concepts have substantial support from the academic community, as noted under the calls to action in the Final Research Report. And it can now be said has tangible industry support.

"The myriad of permutations and combinations of a facility."

Review of the Partnership Accounting module reflects how this system could be built to accommodate the needs of the industry. How this has been handled in the past is poor. I suggest in this research report that the methods and means are at our disposal to provide the CO&O Farm-in / out, Pooling, Lease and associated mail ballots, AFE's etc. The Partnership Accounting module will have the influence on the accounting either through a strict application of the chemical makeup of the product produced, or the legal agreement, or any point in between these two extremes. This is the nut that is being cracked through the development of this software.

Review and comment on the competitive landscape.

CGI was granted a production accounting development on a shared basis between a number of the senior producers. This applications delivery is now in excess of 14 months late and is rumored not to be able to meet its requirements. The limited scope of the application and focus on the linking to each and every ERP vendor makes this a still born project in my opinion. I am also concerned with the level of expectation that these developers would therefore be available to this project. This project will hire the necessary people to make the application function in the market as expected. The people therefore who are coming to this clean slate approach, I will ensure are the best available. I also have methods and means that I can use to increase the overall capacity of the development community in Calgary.

There is now a definitive mindset in the industry regarding the packaged applications provided by SAP and Oracle. There is a general agreement that the oil and gas industry is poorly understood and represented by these vendors and their offerings. It is also agreed that these vendors consider the Canadian oil and gas industry as a niche market, not worthy of any new development investments.

IBM has now sold Qbyte, their oil and gas solution in the market. 140 producers use this solution. Many feel they were buying IBM, and hence no one ever lost their job recommending IBM. Many producers feel the current offering, which will not be supported by the purchaser in this transaction, will have ripple effects throughout the industry. These ripple effects include having an ERP system that is not supported is inconsistent with the requirements of Sarbane's Oxeley. It also makes the demand for IT services during the next 3 years seriously over subscribed.

I want to highlight the point I made in the Final Research Report regarding the copyright I hold. This is a unifying point for the industry to rally around. I am only licensing one company to develop the software and there will not be this scattered or "Venture Capital" approach to developing many solutions at the same time. All the energies of the development community and energy industry are focused on getting it "right". I can state this as no developer will be able to develop alternative systems based on the joint operating committee without a license from myself. This will disable the Venture Capital approach through the fact that Sarbane's Oxeley and general prudence would not permit producers’ employees to use a system from a pirated venture.

Development needs.

The four stage-gate cash calls are calculated on the basis of 10 subscribing producers to this offering. (Based on the minimum budget of $87.7 million.)

* Deposits of $1,000,000 ($100,000 per producer) on or before February 28, 2007
* $10.6 m / # of subscribing producers ($1,06,000 per 10 producers). Due September 30, 2007
* $19.6 m / # of subscribing producers ($1,96,000 per 10 producers). Due September 30, 2008
* $57.5 m / # of subscribing producers ($5,750,000 per 10 producers). Due September 30, 2009

An additional request for 4,000 sq. ft. in the downtown core to September 30, 2008 is required.

Contact Information

Paul D. Cox
403-467-7971
Access my email address through the profile on this blog.

Technorati Tags: Development, Reference, Research, Strategy, Proposal, Genesys, Call-to-action

Photo courtesy troels

Capabilities and Governance Part II

Revisiting Langlois and Foss' "Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization" article. There were a number of other worthwhile points that I would like to comment on. In the last entry I discussed mostly the Governance attributes of the article, I would now like to focus on the Capabilities. I unfortunately need to quote extensively from the article and will probably violate the fair use doctrine of Dr. Langlois' and Foss' copyright. I have been in contact with them and will make them whole based on their determination of these writings.

Previously I wrote my opinion that the energy industry had developed as a competitive resource, and asserted that I thought there was a need to develop an industry-wide based capability. Today many of the companies that are of size in oil and gas are also the respective Chairmen of the joint operating committees for the properties they have interests in. This requires each producer to develop the capability to conduct those operations primarily through in-house staff. With the move to a stronger innovation mindset the industry would need additional capabilities and capacities, particularly in the science and engineering areas. This has become evident in today's marketplace. I have suggested in this blog that a pooling of the industries resources would enable a greater overall industry-wide technical capability. One that would eliminate the need for the high level of capabilities that each producer currently holds in its "siloed" corporation. The reason that companies would do this is to ensure that the company was able to continue to conduct all the operations they are involved in. The average engineering and geological work necessary for a barrel of oil increases annually and this trend is rapidly accelerating.

Today, this has already begun with a large portion of the industry operates on the industry wide capability basis. The large engineering firms are employed and indeed do the majority of the bullwork for the producers. What I want to assert is; with the industry transformed from "transfers" to "transactions" as discussed here, capabilities need to be expanded further to reach the potential of the industry. This to enhance the producers production profile under the revised organizational construct, the Joint Operating Committee. This thinking is consistent with Langlois et al.

"However, a new approach to economic organization, here called "the capabilities approach", that places production centre-stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization." pp. 2

I also want to assert that in dealing with the Joint Operating Committee's four frameworks (legal, financial, cultural, and operational decision making) leads me to Langlois' definition of production costs. And the regulatory, administrative and compliance frameworks lead me to what Langlois' describes as "transaction costs".

"The legacy of this "path-dependent history, we will argue, has been a tendency (albeit an imperfect tendency) to respect an implicit dichotomy between the production aspects and the exchange aspects of the firm or, to put it another way, between production costs and transaction costs." pp. 5

In my May 2004 proposal I successfully asserted the joint operating committee is the appropriate organizational construct for innovative oil and gas producers. And in particular I noted Dr. Wanda Orlikowski's Model of Structuration, which is based on Dr. Anthony Giddens Theory of Structuration, that software defines the organizational construct. Therefore, within the Model of Structuration, I have asserted the existing software applications define, support and constrain the hierarchy. And I went further to state that SAP is in fact, the bureaucracy. Langlois notes in his paper that Economists neglected organizational changes as benefits, and I would assert for the same reasons that they have been neglected by management, through their choice of their ERP software solution.

"Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behaviour but (also) of creating the possibilities for productive rent-seeking behaviour in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side." pp. 6

In my previous entry reviewing of Langlois et al theory, I noted how the transition from "transfers" to "transactions" could benefit the energy industry and provide enhanced performance through essentially defining new boundaries of the firm, and division of labor. From the Langlois et al article, the dovetailing of the governance issues meet the capabilities issues. And they go on further to suggest

"One of the important goals here is to bring the capabilities view more centrally into the ken of economists. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as a complementary area of research." pp. 7

Here we have further evidence of the point that I have made in my thesis. That software defines the organization. Or as I like to say SAP is the bureaucracy. The definition and implementation of the bureaucracy is what SAP does best, and may I assert is the primary reason for its success. We have now come a long way from the SAP styled organization in oil and gas to a point where new and better means of organization are not luxuries but necessities. The demands and constraints of the industry to produce more with less have only begun to be heard. Will SAP continue to support the petroleum producer in the near future? From what I hear through my current marketing efforts, apparently not.

More to come on this interesting topic.

Technorati Tags: Genesys, Langlois, Reference, Research, Strategy

Collaboration as an effective exploration tool.

One of the most difficult areas that needs to be approached is the secretive culture of the energy industry. This has always confused me. As most of the earth scientists and engineers involved in oil and gas have had some exposure to the academic world with its "publish or perish" and "peer review" methods of establishing and securing intellectual property. Why is there a hesitancy to publish what you know to earn the copyrights to what you discover? It might be suggested that the producers policies are the reasons for the secretive nature.

I read an interesting story in Canada's National Post this past weekend about Don Tapscott's new book, (no online version of this article can be found, the book on Amazon is here). The book is co-authored by Anthony D. Williams and is entitled "Wikinomics; How Mass Collaboration Changes Everything." An interesting title, however the story from my point of view is almost too good to be true. Apparently the CEO of GoldCorp Inc. Rob McEwen published all of the intellectual property information he and his small firm had on a certain mine that he owned. The small Toronto based miner was "struggling, besieged by strikes, lingering debts and an increasingly high cost of production." Sounds kind of familiar to me.

The short version of the story has McEwan hearing the story of Linus Torvalds and Linux during a visit to MIT in 1999. This brought McEwan to think:

"If Goldcorp employees couldn't find the Red Lake gold, maybe someone else could. And maybe the key to finding those people was to open up the exploration process in the same way Mr. Torvalds open-sourced Linux."

He then published all the data that was available about the mine and shared it with the world.
Turning the situation into a bit of a lottery with the best proposals being motivated to the challenge by $575,000 in prize money. The response to the challenge was significant. "Prospectors" from around the world got involved. The surprising thing was the entries came from disciplines that are not normally associated with geology. Students, consultants, mathematicians and military officers all contributed, representing applied math, advanced physics, intelligent systems, and computer graphics.

The results were surprising.

"110 targets were identified on the property 50% of which had never been identified by the company. More then 80% of the new targets yielded substantial quantities of gold. In fact, since the challenge was initiated, an astounding eight million ounces of gold have been found. Mr. McEwen estimates the collaborative process shaved two to three years off their exploration time."

and

"It catapulted the under performing $100 million mining company into a $9 billion juggernaut."

The conclusion to this excerpt is a difficult lesson, and one that takes a long time to learn.

"The Goldcorp story flies in the face of much conventional wisdom about how to run a business. Companies seek to protect their intellectual property, and through hiring and retaining the best people they generate new ideas, make new discoveries, compete and grow their business lines. Mr. McEwen saw things differently. He realized the uniquely qualified minds to make new discoveries were probably outside the boundaries of his organization, and by sharing some intellectual property he could harness a powerful new force - mass collaboration. In doing so, he stumbled successfully into the future of innovation, business and how wealth and just about everything else will be created."

Technorati Tags: Genesys, Innovation, Research, Strategy, Reference

A clarification of my contradiction.

In my previous post on the weekend, I stated that the industry should not fund the suppliers needs with the capital to build more rigs or capacity. And that would apply to all members of the service industry. The point that I was making is that the entrepreneurial and market forces are stunted by industry attempting to influence the market to get what it needs. The oil and gas producers need entrepreneurial activity to anticipate and provide the market with what it needs, when it needs it. The contradiction comes as a result of my asking industry to fund the development of these systems they need. How can I contradict myself in such a manner.

An important clarification would involve the difference between building drilling rigs and developing software. Software is a unique and important component in society, not to suggest that a rig is not. The business models are different in that all of the costs are in the up front initial phase, and the revenues are in the later phases. Software is intangible with nothing of value to leverage other then it's revenue stream. The purpose built software systems for industry needs should not be funded by capital infusions from the industry or venture capital. The funds necessary to develop these systems will be the revenue stream of the software developer.

The technical risks of the success of this software is highly dependent on the involvement of industry. If they have no skin in the game, then they are free to proceed in other directions leaving the development team and its potential investors in the lurch. By tying the industry to the funding in this manner also has them putting some skin in the game. Ensuring that the system gets built properly with the producers full attention.

Capital investment in software ceased during the dot com meltdown. The possibility of having someone stand up and finance this projects $110 million budget is laughable on the surface. The software is being built for the oil and gas industry and that is where the long term source of the software developers revenue will come from. Therefore, in my logic, revenue should also be used to develop the system. This method also reduces the producers costs by eliminating the venture capitalists costs and expectations.

Since the software business model is more long term, intangible and capital intensive then the drilling rig business model. This proposed model of revenue supported developments is the only manner that I should consider in taking on these developments, it is the only manner in which I have the full attention and support of the energy industry.

Technorati Tags: Genesys, Development, Plurality, Proposal
Photo courtesy troels

Capabilities and Governanace.

Continuing on with our review of Professor Richard N. Langlois, next up is his paper "Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization." Written by Langlois and Professor Nicolai J. Foss of the Copenhagen Business School. The title of this entry will take you to the Social Science Research Network to download the .pdf.

From the abstract of the document I would like to note how much of the work that Langlois et al are doing is applicable to the work being done here for oil and gas. I would suggest that oil and gas may become an excellent resource for this type of research. The abstract of this document states;

"However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization." pp. 1

Later in the document Langlois et al state

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

And

"In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead." pp. 31

I can only concur.

A little review of Langlois' theories may help to assimilate the contents of this document. The market model requires "transactions" to occur between separate economic units. These transactions create "friction" in terms of the resources necessary to process the transaction itself. Typically these "transaction" costs were mitigated by industry forming companies that held the production and capabilities. This is referred to as the "transfer" model by Langlois et al. In the "transfer" model an employer only needed to tell his employees what needed to be done, there would be no transactions to process other then for the employee salary.

What happens as a result of this avoidance of "transaction" costs is that the industry needs to be defined and controlled through the traditional hierarchy's command and control structure. One of the key points that Langlois et al is providing evidence of is, transaction costs are used by the market to provide the oil and gas producer with what it needs in an entrepreneurial manner. The market is able to anticipate and make the determination of where the industry is heading and will work to anticipate and capture the future demands of the producer.

Langlois et al states that with the automation of transactions through the current Information Technologies. Transaction costs can be reduced to an immaterial level. This provides industry with evidence and a means to move from transfers within organizations, to transactions in markets.

It is at this point that I want to assert how damaging an economic model it can be when an industry is based on "transfers" instead of "transactions". In Calgary a few years ago many of the Drilling suppliers found their capacity utilization hit 100%. However, the market demand may have been at approximately 125% of capacity. Based on the history of the ups and downs in the market, the drillers were very hesitant to invest to increase their capacity. Recall that surplus capacity in any industry can become one of the largest fixed costs of a firm. Hence the producers who were needing the increased drilling capacity commissioned and paid for drilling rigs for their exclusive use. The drilling contractor would operate the new rigs for the producer on the basis of the producer's needs.

Why this type of "transaction" should be avoided is based directly on the Langlois et al theories that we have learned to date. The driller and his competitors, and most importantly the new drillers seeking to enter the business, seeing a new dynamic in the capacity increases and utilization, lost all incentive to take a risk in the market. Bringing a new rig or new technology to the marketplace would be too risky for any new player. What the producer signalled to the entire industry is that the hierarchies would now micro manage a drilling division due to the investment in drilling rigs. These types of "messages" are what Langlois et al is speaking about. The wrong message is being sent to both the competitive supplier side and the producer side. If producer A is willing to buy his own rigs, then producer B will have to do the same to have his wells drilled. The supplier marketplace, seeing that it is now possible to defer the risk and capital costs of new capacities to the industry will sit back and await the time for a producer to ask for the next great innovation. This is how the western capitalist marketplace begins to take on characteristics of the former Soviet Union.

In this scenario of market "transfers" it has become very difficult due to the lack of innovation and capabilities focus. The large producers don't understand why the marketplace can't accommodate its needs, and therefore feels compelled to get things done on its own. This is in essence what their large capital cost overruns are symptomatic of. Until an oil and gas producer does something to make the situation better by intervening in their suppliers marketplaces, nothing gets done.

The ability and capability of the management of the producers to deal and manage with the problems of the entire marketplace are as a result of what Langlois at al speaks of. The micromanagement of an entire industry, its suppliers and employees is not the domain of the producers hierarchical management. It is the responsibility of the market place left to resolve its own difficulties. That this has not been done for so long in the oil and gas industry only makes it look like there is strong demand for the producers management. This is false, it is an illusion. What is needed is the producers to signal to the marketplace in its entirety, that the innovative and risk oriented marketplace is what is necessary for all concerned to prosper in this new age.

Technorati Tags: Langlois, Genesys, Research, Innovation

An excellent resource that is a must read.

The title of this entry will take you to Professor Langlois Economics 486 "The Economics of Organization" which to me is a highly recommended set of slides to view. They lay out in very fine detail the beginning and current theories of the firm and markets. I hope you enjoy this resource as much as I.

Technorati Tags: Innovation, Research, Langlois, Development

Langlois has more to say on transactions.

Professor Richard N. Langlois wrote a fairly current paper on "The secret life of mundane transaction costs". Clicking on the title of this entry will enable you to download the .pdf from the Social Science Research Network.

Professor Langlois refers to Oliver Williamson for a summary of what transaction costs are, "...costs of running the economic system". (2006 pp. 1) A large part of that system is the costs associated with establishing and supporting standards. Here in Alberta we have a number of groups that have created standard ways and means of conducting business in the oil and gas industry. These standards help to form and support the culture of the industry, and that is particularly, the joint operating committee, the organizational focus of these writings.

"The modularity theory of the firm."

Dr. Langlois uses the established industry standards and the methods of enforcing compliance into the economic system to "establish and maintain a system of property rights." Langlois organizes the costs into 3 categories, I will mention those categories and then provide examples of the types of costs that are incurred in each category.

1) "Contains the fixed costs of establishing and maintaining a system of property rights."

Including the basic laws of the land, and the Alberta Governments royalty and mineral rights development laws and regulations, Petroleum Accountants Society of Canada, Canadian Association of Petroleum Landman, Public Petroleum Data Model and other standards bodies. The point in this categorization is to determine what the real fixed costs of establishing and maintaining the standards of operations of oil and gas are in Alberta and Canada. Needless to say many of these organizations are representative of larger global groups that have influence through out the global oil and gas industry.

2) "Contains costs that are paid periodically. These depend on time, but not on number or volume of transactions."

Langlois interestingly takes this categorization and classifies items like salaries of police, costs that are a function of time, in application to oil and gas, this would include the SEC, FASB, Auditors, Engineering appraisals and other compliance costs to regulations as the variable or time dependent costs of establishing and maintaining property rights in the oil and gas industry.

3) "Contains all the costs that come with the number of transactions or volumes of transfers."

The last grouping of costs Langlois sets out is the definitive variable costs of production. Based on the level of activity is the criterion that establishes the volume of costs and what Lanlois describes as "Neo-Classical T-Costs." These would include the royalties actually paid, the investment dollars spent, the costs associated with the revenue from the production of oil and gas.

Langlois has categorized these further, and are combined into the following;

• Category 1 and 2 = Costs of establishing and maintaining property rights.
• Category 3 = the Neo-Classical T-Costs mentioned.
• Category 2 and 3 = Mundane transaction costs.

It is at this point Langlois sets out to establish that these costs categories "have a secret life" and indeed "have a secret life cycle". In summary he is establishing much of the information analysis, or the tool that I previously wrote about from Baldwin and Clark. Through this the architecture of the industry is combined with the standards to form not only the encapsulated (companies) and modules (individuals) but also a means of operation via the price system.

Dr. Langlois quotes Hayek in this regard; it is a salient point;

"The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information passed on and passed on only to those concerned. It is more that a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more that is reflected in the price movement." (Hayek 1945, pp. 526 - 527)

The architecture of the industry is what I have asserted is broken. Represented by the hierarchy, the oil and gas industry has been able to establish the appropriate standards and therefore maintain the property rights that are so critical to the development of the oil and gas industry. What is now redundant is the level of capability that is built up within each of the producers. Hierarchies have focused on their own needs and capabilities within the firm itself. Building extensive capacities to accommodate all of the needs that are associated with the category 1) 2) and 3) cost. What is needed is to conduct the analysis on the standards such that the efficient point of each transaction becomes the point of transfer. The tools to use are contained within these two documents of Langlois, Baldwin and Clark. This in a nutshell is the purpose and desired outcome of the development of the Genesys application. A reorganization, and a re-architecture of the oil and gas industry on a global basis.

Ensuring the necessary level of hidden information in each transaction is critical according to Langlois.

"Indeed, as the field of object-oriented programming has taught us, these hidden design parameters generally must not be communicated to others. This is the principle of encapsulation and information hiding. To allow another module knowledge of an access to one's inner workings is to invite those other modules to tinker - and thus to invite butterfly effects."

"The secret life"

Professor Langlois notes the friction that is created in transactions. The costs of standardization, counting and compensation when the tasks are assigned to a third party, or as Coase stated "the costs of using the price mechanism." These "friction" costs are incurred in the transaction as opposed to asking that the work be completed within the firm itself which Langlois suggests it simply doesn't pay to simplify and standardize the transactions, that the coordination costs can be limited by the market size, or if the transactions are more dynamic in nature and are subject to frequent change.

"The secret life cycle."

"With a larger extent of the market, and in the absence of any other kind of transaction costs, it starts to pay not only to subdivide tasks further but also to turn more transfers into transactions." pp. 26

And provides a necessary caution;

"But this is not the same thing as saying that we should observe vertical disintegration in a growing industry. Growth takes place in disequilibrium. And disequilibrium can lead to dynamic transaction costs, especially when the increase in the extent of the market calls for a systemic reorganization of the task-and-transfer system." pp. 27

As time passes, the volume of transactions increase, and the volume of dynamic transaction cost decrease. This makes inherent sense in that the ability to build an industry would require more transfers to mitigate the costs of un-standardized transaction costs. However, after time the reverse becomes the norm in that "thick markets will increasingly come to supplant management as a mechanism for buffering uncertainty". pp. 30 This phenomenon is what Langlois has called "The Vanishing Hand".

Technorati Tags: Development, Langlois, Research, Strategy

I want to reiterate my concern.

First, yes I want an iPhone as soon as possible. The networking and Mac OS / X underpinnings will make the "tool" usable by everyone and anyone.

Secondly, yes I will develop unique applications that employ the iPhone in the many ways the oil and gas users will want. Using Cascading Style Sheets, Ajax and JavaScript limit the scope of the applications that can run on the iPhone to ones imagination.


And thirdly, yes, I want to reiterate a concern that I mentioned last summer. As with any new technology the security and access privelages are becoming much more difficult to have under even reasonable control. My concern about wifi enabled pod slurping can and will be one of the greater risks to corporate security.

Technorati Tags: Security, Software, Innovation
Photo Courtesy of Apple.

Determining transactions, transfers and the division of labor.

Clicking on the title of this entry will enable you to download an article from the Social Science Research Network. This article was noted on Professor Langlois' guest blogging posts on Organizations and Markets and is a continuation of my research into his thinking. The article is written by Carliss Y. Baldwin and Kim B. Clark and is entitled:

"Where do organizations come from? A network design perspective of the theory of the firm."

The article discusses transactions and transfers of value in the business setting. A rather boring topic however, I think this article is of value in defining a tool for a company such as Genesys, with the means to analyze and develop new divisions of labor in oil and gas.

The approach that I am making here is based on the need to expand the growth opportunities of the oil and gas industry. Agreement amongst most economists would reflect that the expansion of Adam Smith's division of labor is the means to enhance the productivity of the oil and gas worker and the industry as a whole. Enabled by the new technologies, and reflected in the different make-up of markets as I proposed in the Human Resource Marketplace and Petroleum Lease Marketplace. The division of labor will need to be "adjusted" for every process, transaction, transfer and job. The tool that is defined in this paper provides us with the means to do this analysis.

Tearing into the document we find the articles definition of a transaction is:

"...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction."

The authors provide us with an appropriate definition. I would also assert the makeup and origin of these transactions might change due to the available information technologies. Oil and gas will have new more efficient means and methods to conduct transactions, and that is where the focus and value of this blog’s concepts are concerned. Does it make sense that a "Production Accountant" focus only on their employer’s production, or would it be more valuable to have the "Production Accountant" work for a variety of Joint Operating Committee's in a specific geographical area? "What would the revised job consist of..." is how we could analyze the changes with this tool.

The authors then introduce two concepts that are of critical competitive value, "Information Hiding" and "Thin Crossing Points". These two concepts define the need for the transaction and transfer to occur at the point where the simplest interface between the two parties exists. This "Thin Crossing Point" provides both vendor and purchaser with the ability to hide information from each other and still achieve the greatest level of efficiency in conducting the transaction, asserting that:

"The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains." pp. 17

Using the example of the "Production Accountant" we can now analyze whether the transactions of his / her efforts should be conducted at the simplest point. This is because the transactions that are involved are standardized, counted, valued and compensated on the basis of (here in Canada) the EUB, the Accounting and Operating Procedures as defined and agreed to by the Joint Operating Committee.

The reason that I have selected the Production Accountant is due to the fact that there are never enough of them. A position that requires specific skills that always seems to be in short supply. The industry as I have suggested throughout these writings needs to undertake a revolutionary new approach to the business of oil and gas. Based on the science and engineering, it's obvious that wells will be drilled at a faster rate and the decline in reserves will continue to accererate. Therefore to sustain and grow the base of oil and gas production will require more Production Accountants, or, as I have proposed a different way of accounting for the production.

The authors then note:

"Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work." pp.22

Intuitively Langlois was correct in his assertion that the decentralized production methods were more efficient then the high throughput production methods the industry is configured around. Therefore this last quotation provides a very detailed tool to determine the division of labor of the "revised" oil and gas industries. From this process the authors note:

"The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on..." Frederick Hayek (1945)

The authors provide another definition and concept:

"Encapsulated Network in a larger system of production is to facilitate complex transfers without making all of them transactions". pp 28

Which to my mind shows where the real value in this entire process is not only would the encapsulated network achieve the greatest efficiencies in the transfer and transaction. It would enable the participants to focus on their unique competitive advantages. I have suggested in previous postings and the research documents that the oil and gas industries competitive advantages lie in the oil and gas leases in which they own. The ability to find, develop and produce those reserves are the critical activity that the company is evaluated on. The producer should consider these assets and skills as the key point of where their competitive advantages are. The direct employment of production accountants within each company does not provide any value to the producer.

Therefore, the make or buy solution provides the justification for the new approach to defining the Production Accountants job, organization and processes. The ability to buy the services would offload the need to have each company with adequate production accountants to complete the required reporting. This assumes of course that the production accountants would be able to organize themselves in some manner that provided a greater overall capacity then what is currently available, and that is what the division of labor sets out to provide, an increased throughput from the same resource.

Technorati Tags: Innovation, Langlois, Research

Photo Courtesy Guileite

A quick note...

Clicking on the title of this entry will enable you to download the paper that Professor Langlois won for Shumpeter Prize, entitled. The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy.

Technorati Tags: Langlois, Research

Langlois provides more food for thought.

Dr. Richard N. Langlois has, to my mind, hit a few more balls out of the park. They come from "Chapter 4 The rise of the corporation." In it he suggests the organizations that developed over the past centuries sought "buffers" in order to mitigate the variances in markets. These buffers include inventories and in oil and gas commercial storage has been an area of significant investment over the past decade. These "buffers" help to offset the difficulties of the business and make the potential variances dissipate in terms of their magnitude and frequency. Langlois notes that buffers come with the cost of a lack of operational flexibility.

In the last three days the price of oil has fallen almost $8.00 or 12.5%. It is fair to assume that the costs of production have not declined by that amount, but what will we see the producers do from this price decline? They will probably revisit their capital budgets for the next year and slash them based on this new pricing information. The ability to reduce production, particularly from the fields that are high cost, and may now be losing money, does not exist.

Langlois states the concentration of high throughput production, the current industry makeup, is contrasted to the decentralized production model.

"In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered." pp.58

What would be required to transform the industry from a concentration of high throughput production to an industry using the decentralized production model?

With the radical shifts in the commodity prices the industry adopts one of two positions, full production with no capital expenditures or full production with full capital expenditures. Leading only to further and further problems down the road. What is needed is what Langlois suggests, a move to a decentralized production model, which to me sounds like the joint operating committee. Without the ability to limit the production of a facility that has begun costing due to the commodity price declines. The industry will forever be subject to wild swings in the prices of their commodities.

The scaling back of production based on its contribution is a scenario that I can easily see the ownership consensus of the joint operating committee attaining. Methods and procedures to map the costs to the prices and ensure that the facility is not run at a deficit in terms of its earnings. This would have the immediate effect of removing the high cost production from the market, so that the market could adjust based on that information. Is this not what OPEC has been doing in the last year?

Currently the greatest influence on the price of oil and gas is the 5 day weather forecast. This strikes me as insane. I am asserting the oil and gas industry is failing as a high throughput production type of industry. Langlois states that there is a process to enable these changes.

"Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is quantitatively new - knowledge not contained in the existing economic configuration." pp.27.

I can only hope that industry will accept these facts and proceed with this project. As next week marks the start of the marketing of these concepts we will know fairly soon.

Technorati Tags: Call-to-action, development, Langlois, Research, strategy

"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

Enterprise Search and Security.

New Idea Engineering publish a monthly newsletter that discusses the difficult topic of enterprise search and security. They have recently published a series of articles under the heading "Enterprise Search: Mapping Security Requirements to Enterprise Search." The three articles are available here, here and here.

In terms of the technology used in this application, I have stated the architecture that will be used here. Two major additions being added to the Genesys architecture are;

• Use of the Google Search Appliance.
• Virtualization of a producers environment on the Grid.

These New Idea Engineering articles point out a number of very important issues that I will address when we are getting closer to the start of development.

Photo Courtesy of fox2mike
Technorati Tags: Development, Strategy, Software, Security, Search

A new addition for 2007.

During December of 2006 I added the books that I have found of interest and feel provide some value to the readers who may share my passion for this topic. Another area that I think I will add some value for the reader is a listing and my justification for readers to go out and secure documents that are published in a variety of journals.

There are three authors that provide the stimulation for many of the ideas here. They are Dr. Paul Romer at Stanford, Dr. Giovanni Dosi at the Sant'Anna School of Advanced Studies and Dr. Carlota Perez who is a guest researcher at Cambridge University. These three have formed a topic that is of much interest to me and I would like to point out the individual documents that are currently being research by myself.

In the past I would post many of their thoughts and ideas, however, I believe that to be a violation of their Copyright. I therefore will only point them out and suggest that many of the documents are hard to source and in most cases, require access to the major academic database services.

So for this first installment I want to highlight three documents that combine to form a series of discussions about the changes that are happening in the business and technical worlds. They reflect the changes will be some of the most radical that we have faced in many years and will be difficult for people and organizations to adapt. Much of the writing notes a transition to a different time where the fundamental basis of the economy has changed. We are in this period now and it seems timely to review these three documents.

1. Perez, Carlota (2004) Finance and Technical Change: A Long Term View (Provided here from her website.)
2. Romer, Paul (2007) Economic Growth (Provided here from the Concise Encyclopedia of Economics.
3. Perez, Carlota (2003) Rethinking Globalization After the Collapse of the Financial Bubble: An essay on the challenges of the Third Millennium (Provided here from her website.)

I hope that you enjoy them as much as I. As I begin to conduct more research, I trust there will be many more of these types of posts.

Technorati Tags: Research, Innovation, Cluster, Dosi

Measuring Innovation in oil and gas.

It seems somewhat appropriate at the beginning of the new year to discuss what might be a good measurement of innovation in oil and gas. What criteria can an oil and gas company use to determine their level of innovation year over year, and in comparison to other producers. To me innovations purpose is to enhance the productivity of the oil and gas worker. Therefore, understanding there are reasonable exceptions, I would propose we use annual revenue per employee.

I have seen companies that have been able to achieve high metrics in terms of their productive capacity per employee. Mapped over a period of many years, revenue per employee would reflect on the producers ability to secure land, find commercial reserves and produce them profitably. Reflecting on the entire history of the facilities and fields the company owns and operates. Comments?

Technorati Tags: Innovation, Measurement, Strategy