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

My Christmas tradition...

In past years I have blogged a specific writing of my favorite author, Ralph Waldo Emerson. This year I am extending the tradition to me two new blogs.

The writing that I have selected for this year is Ambraham Lincoln. A writing that was prepared for the president at his funeral.

From RWE.org - The Complete Works of Ralph Waldo Emerson - Volume XI - Miscellanies (1884)
Contributed by Ralph Waldo Emerson
XV
ABRAHAM LINCOLN

REMARKS AT THE FUNERAL SERVICES HELD IN CONCORD, APRIL 19, 1865

" NATURE, they say, doth dote,
And cannot make a man
Save on some worn-out plan,
Repeating us by rote:
For him her Old-World moulds aside she threw,
And, choosing sweet clay from the breast
Of the unexhausted West,
'With stuff untainted shaped a hero new,
Wise, steadfast in the strength of God, and true.
How beautiful to see
Once more a shepherd of mankind indeed,
Who loved his charge, but never loved to lead;
One whose meek flock the people joyed to be,
Not lured by any cheat of birth,
But by his clear-grained human worth,
And brave old wisdom of sincerity!
They knew that outward grace is dust;
They could not choose but trust
In that sure-footed mind's unfaltering skill,
And supple-tempered will
That bent, like perfect steel, to spring again and thrust.

Nothing of Europe here,
Or, then, of Europe fronting mornward still,
Ere any names of Serf and Peer
Could Nature's equal scheme deface; . .
Here was a type of the true elder race,
And one of Plutarch's men talked with us face to face."
LOWELL, Commemoration Ode.

ABRAHAM LINCOLN

WE meet under the gloom of a calamity which darkens down over the minds of good men in all civil society, as the fearful tidings travel over sea, over land, from country to country, like the shadow of an uncalculated eclipse over the planet. Old as history is, and manifold as are its tragedies, I doubt if any death has caused so much pain to mankind as this has caused, or will cause, on its announcement ; and this, not so much because nations are by modern arts brought so closely together, as because of the mysterious hopes and fears which, in the present day, are connected with the name and institutions of America.

In this country, on Saturday, every one was struck dumb, and saw at first only deep below deep, as he meditated on the ghastly blow. And perhaps, at this hour, when the coffin which contains the dust of the President sets forward on its long march through mourning states, on its way to his home in Illinois, we might well be silent, and suffer the awful voices of the time to thunder to us. Yes, but that first despair was brief: the man was not so to be mourned. He was the most active and hopeful of men; and his work had not perished: but acclamations of praise for the task he had accomplished burst out into a song of triumph, which even tears for his death cannot keep down.

The President stood before us as a man of the people. He was thoroughly American, had never crossed the sea, had never been spoiled by English insularity or French dissipation ; a quite native, aboriginal man, as an acorn from the oak ; no aping of foreigners, no frivolous accomplishments, Kentuckian born, working on a farm, a flatboatman, a captain in the Black Hawk War, a country lawyer, a representative in the rural legislature of Illinois ;- on such modest foundations the broad structure of his fame was laid. How slowly, and yet by happily prepared steps, he came to his place. All of us remember - it is only a history of five or six years - the surprise and the disappointment of the country at his first nomination by the convention at Chicago. Mr. Seward, then in the culmination of his good fame, was the favorite of the Eastern States. And when the new and comparatively unknown name of Lincoln was announced (notwithstanding the report of the acclamations of that convention), we heard the result coldly and sadly. It seemed too rash, on a purely local reputation, to build so grave a trust in such anxious times ; and men naturally talked of the chances in politics as in-calculable. But it turned out not to be chance. The profound good opinion which the people of Illinois and of the West had conceived of him, and which they had imparted to their col-leagues, that they also might justify themselves to their constituents at home, was not rash, though they did not begin to know the riches of his worth.'

A plain man of the people, an extraordinary fortune attended him. He offered no shining qualities at the first encounter ; he did not offend by superiority. He had a face and manner which disarmed suspicion, which inspired confidence, which confirmed good will. He was a man without vices. He had a strong sense of duty, which it was very easy for him to obey. Then, he had what farmers call a long head ; was excellent in working out the sum for him-self; in arguing his case and convincing you fairly and firmly. Then, it turned out that he was a great worker ; had prodigious faculty of performance ; worked easily. A good worker is so rare ; everybody has some disabling quality. In a host of young men that start together and promise so many brilliant leaders for the next age, each fails on trial ; one by bad health, one by conceit, or by love of pleasure, or lethargy, or an ugly temper, - each has some disqualifying fault that throws him out of the career. But this man was sound to the core, cheerful, persistent, all right for labor, and liked nothing so well.

Then, he had a vast good nature, which made him tolerant and accessible to all ; fair-minded, leaning to the claim of the petitioner ; affable, and not sensible to the affliction which the innumerable visits paid to him when President would have brought to any one else.' And how this good nature became a noble humanity, in many a tragic case which the events of the war brought to him, every one will remember; and with what increasing tenderness he dealt when a whole race was thrown on his compassion. The poor negro said of him, on an impressive occasion, " Massa Linkum am eberywhere."
Then his broad good humor, running easily into jocular talk, in which he delighted and in which he excelled, was a rich gift to this wise man. It enabled him to keep his secret; to meet every kind of man and every rank in society ; to take off the edge of the severest decisions ; to mask his own purpose and sound his companion ; and to catch with true instinct the temper of every company he addressed. And, more than all, it is to a man of severe labor, in anxious and exhausting crises, the natural restorative, good as sleep, and is the protection of the overdriven brain against rancor and in-sanity.

He is the author of a multitude of good sayings, so disguised as pleasantries that it is certain they had no reputation at first but as jests ; and only later, by the very acceptance and adoption they find in the mouths of millions, turn out to be the wisdom of the hour. I am sure if this man had ruled in a period of less facility of printing, he would have become mythological in a very few years, like Æsop or Pilpay, or one of the Seven Wise Masters, by his fables and proverbs. But the weight and penetration of many passages in his letters, messages and speeches, hidden now by the very closeness of their application to the moment, are destined hereafter to wide fame. What pregnant definitions ; what unerring common sense ; what fore-sight ; and, on great occasion, what lofty, and more than national, what humane tone ! His brief speech at Gettysburg will not easily be surpassed by words on any recorded occasion. This, and one other American speech, that of John Brown to the court that tried him, and a part of Kossuth's speech at Birmingham, can only be compared with each other, and with no fourth.

His occupying the chair of state was a triumph of the good sense of mankind, and of the public conscience. This middle-class country had got a middle-class president, at last. Yes, in manners and sympathies, but not in powers, for his powers were superior. This man grew according to the need. His mind mastered the problem of the day ; and as the problem grew, so did his comprehension of it. Rarely was man so fitted to the event. In the midst of fears and jealousies, in the Babel of counsels and parties, this man wrought incessantly with all his might and all his honesty, laboring to find what the people wanted, and how to obtain that. It cannot be said there is any exaggeration of his worth. If ever a man was fairly tested, he was. There was no lack of resistance, nor of slander, nor of ridicule. The times have allowed no state secrets ; the nation has been in such ferment, such multitudes had to be trusted, that no secret could be kept. Every door was ajar, and we know all that be-fell.

Then, what an occasion was the whirlwind of the war. Here was place for no holiday magistrate, no fair-weather sailor ; the new pilot was hurried to the helm in a tornado. In four years, - four years of battle-days, - his endurance, his fertility of resources, his magnanimity, were sorely tried and never found wanting. There, by his courage, his justice, his even temper, his fertile counsel, his humanity, he stood a heroic figure in the centre of a heroic epoch. He is the true history of the American people in his time. Step by step he walked before them ; slow with their slowness, quickening his march by theirs, the true representative of this continent ; an entirely public man ; father of his country, the pulse of twenty millions throbbing in his heart, the thought of their minds articulated by his tongue.

Adam Smith remarks that the axe, which in Houbraken's portraits of British kings and worthies is engraved under those who have suffered at the block, adds a certain lofty charm to the picture. And who does not see, even in this tragedy so recent, how fast the terror and ruin of the massacre are already burning into glory around the victim ? Far happier this fate than to have lived to be wished away ; to have watched the decay of his own faculties ; to have seen - perhaps even he - the proverbial ingratitude of statesmen; to have seen mean men preferred. Had he not lived long enough to keep the greatest promise that ever man made to his fellow men, - the practical abolition of slavery ? He had seen Tennessee, Missouri and Maryland emancipate their slaves. He had seen Savannah, Charleston and Richmond surrendered ; had seen the main army of the rebellion lay down its arms. He had conquered the public opinion of Canada, England and France. Only Washington can compare with him in fortune.

And what if it should turn out, in the unfolding of the web, that he had reached the term ; that this heroic deliverer could no longer serve us ; that the rebellion had touched its natural conclusion, and what remained to be done required new and uncommitted hands, - a new spirit born out of the ashes of the war ; and that Heaven, wishing to show the world a completed benefactor, shall make him serve his country even more by his death than by his life ? Nations, like kings, are not good by facility and complaisance. " The kindness of kings consists in justice and strength." Easy good nature has been the dangerous foible of the Republic, and it was necessary that its enemies should outrage it, and drive us to unwonted firmness, to secure the salvation of this country in the next ages.

The ancients believed in a serene and beautiful Genius which ruled in the affairs of nations; which, with a slow but stern justice, carried for-ward the fortunes of certain chosen houses, weeding out single offenders or offending families, and securing at last the firm prosperity of the favorites of Heaven. It was too narrow a view of the Eternal Nemesis. There is a serene Providence which rules the fate of nations, which makes little account of time, little of one generation or race, makes no account of disasters, conquers alike by what is called defeat or by what is called victory, thrusts aside enemy and obstruction, crushes everything immoral as in-human, and obtains the ultimate triumph of the best race by the sacrifice of everything which resists the moral laws of the world.' It makes its own instruments, creates the man for the time, trains him in poverty, inspires his genius, and arms him for his task. It has given every race its own talent, and ordains that only that race which combines perfectly with the virtues of all shall endure.'

Technorati Tags: Emerson, Tradition, Innovation

One year summary.

It was December 29 last year that I started writing this blog. It was at the prompting from a friend that I write about the things that I was researching. Write about the things I was passionate about, to write about innovation in the oil and gas industry. I thank him for pointing out this opportunity to me. I started this blog with several specific objectives in mind;

1. Discuss the methods of (re)-organization of oil and gas firms, and specifically, replace the hierarchy or bureaucracy with the industry standard Joint Operating Committee (JOC).
   
2. Debate and discuss the attributes and elements of innovation within the oil and gas industry.
3. Explore the impact of today's information technologies, and their role in making energy firms more innovative and accountable.
4. Discover what is possible and how things could be better.
   

I am pleased to report that these objectives are being, and will continue to be, met. I am also pleased to report that I have no shortage of material to write about. The basis of this website is my Master's Thesis that proved the joint operating committee is the optimal organization for innovative oil and gas producers. The scale of this revised organizational structure is not small. The re-organization, re-configuration, and re-everything of every element of activity, process, data and approach in oil and gas is affected. I've certainly landed in the middle of a fire storm of controversy, conflict and best of all, value for all concerned.

Reviewing the material that I posted this past year, I noticed a theme that I thought was rather valuable for the industry. That these concepts and material, particularly the new organizations supported by the new information technologies, was being accepted in the larger academic arena. Explicit support was being built for these concepts. I was able to spin these concepts out of this weblog and publish the "Final Research Report." This support alone has significant tangible value for the energy industry. Value in that it documents the many calls to action that are being stated throughout the world for both the energy industry and business community in general.

There is something else I want to point out. That is the value that this weblog represents. I think the oil and gas worker has a central location for discussion and presentation of material that is consistent with the innovative employee / worker, and the technologies impact. These are the main focus of the recent revisions that I've done to the website. I am therefore making this an unexpected, and much valued objective of my writings.

Another area that I am particularly enthusiastic about is the Massachusetts EnerTech Cluster that was recently announced by Dr. Robert Metcalfe. This is based on the desperate need for something of this nature, and is building on the works done by the recent efforts of MIT's. This is necessary, and I would assert should have been done many years ago. I also foresee similar, however more limited, clusters of Energy Information Technologies in both Silicon Valley and Houston. These three locations will be the brain trust of how the energy needs of the future are met.

Technorati Tags: Innovation, Massachusetts-Enertech-Cluster, Proposal, Summary

MIT President Emeritus on MIT Video

Dr. Charles M. Vest provides an interesting discussion regarding the teaching and developmental challenges that the engineering disciplines will go through in the next 14 years.

At around the 35 minute point, Dr. Vest states their is a parallel to the current issues the energy industry faces, with the issues the auto industry faced in the 1970's. An interesting and accurate analogy.

During the Q and A Dr. Vest makes the point that at a diner with Secretary Rice, regarding the changes at the State Department, Newt Gingrich made it very clear, we have something that was built for a different era, that science and technology in industry have to re-organize to meet the challenges of today.

Technorati Tags: MIT-Video, MIT, Engineering, Innovation