The Draft Specification has moved.

I have moved the Draft Specification from the old wiki to two Knol pages. The Draft Specification is no longer accessible from the wiki. The first part is here and the second part is here. Knol makes it much easier to read and navigate.

Most of the text has been edited, Modules like the Security & Access Control are being rewritten and / or heavily edited so check back frequently for new information.

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In a word, Whiplash.

U.S. Energy Secretary James R. Schlesinger (1977 - 1979) once stated that energy is framed by two emotions, complacency and fear. There is an air of complacency since the oil price has fallen over $20. How distant the problems of earlier this month seem. It almost makes sense to fill the tank again.

How much of this price change is the result of the inventory builds in the U.S. is unknown at this time. Over the past two weeks we have seen exceptionally large builds as it is rumored that U.S. consumption dropped substantially. The two weeks of inventory build was preceded by an unusually large draw down of inventories the week before. I hope this is a sign of the effect of higher prices on consumer demand, but I think we may also be in for a bit of a surprise.

In Supply Chain Management there is a phenomenon known as whiplash. It is an appropriate phrase as the analogy to whiplash is appropriate. You learn the intricacies of this phenomenon by conducting a simulation of a beer supply chain. The retailer, distributor, warehouse and brewery are each represented by four individuals. The objective is to keep the appropriate amount of beer in stock to satisfy your companies needs.

Starting off the game with minimal supply in each location you begin by passing information confidentially from one area of the chain to the immediate neighbors. What happens is as the supply demands fluctuate the effect on inventory begins to switch between the two extremes. One moment you have an excess, which reduces your next order, then you are faced with a draw down of inventory and the supply never recovers. The phenomenon once it is in the supply chain is very difficult to remove. The variance in inventory at all four locations are providing absolutely useless information.

If as I suspect, whiplash has entered the U.S. inventory of energy, then we may see the resumption of demand and a significant draw down in inventory. Leading to price increases and so on...

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The End of IT As We Know it

Click on the title of this entry to view an interesting Sun Microsystems Net Talk that was produced in October 2007. It has some interesting statistics and opinions on where the Information Technologies (IT) are headed.

For instance, the number of people that Sun employs is 34,500 and over 25,000 of those are not assigned a permanent office or working environment. Many work from home or work occasionally in meeting rooms. This is how I see most industries operating and particularly the oil and gas industry. The mandatory attendance in your office from 8:00 to 5:00 will change to a more flexible schedule. The oil and gas industry operates 24 hours a day and this will be reflected in people's schedules. Another reason will be the time zone changes in the area of operations of the producer. Fuel costs on the daily commute may also become a primary reason for this change.

Java has 6 million developers. One for every thousand people in the world. Java has been the number one programming language for a number of years so this is not surprising. The ability to source the numbers of developers that are necessary for this project should, as a result, be easily accommodated.

Other comments in the presentation were around the concept of the "Enterprise computing in the open network." The costs associated for each company to build the appropriate data-center for their needs is quickly outstripping what is reasonable from a cost point of view. The reason is the demand for processing during peak loads is causing the companies to source additional processing capabilities. This is the beginning of a trend that is discussed in this video. A trend that is the reasoning behind Sun making the claim that a firm will have 100% of its processing, applications and networks provided by service providers. This is also the basic assumption in the People, Ideas & Objects application.

In oil and gas having the hardware, applications and network in-house does not provide any competitive advantage. The innovative producer has the land base and physical assets augmented by their understanding and application of earth sciences and engineering capabilities. IT is a cost that is best handled on a service basis. And as the Net Talk points out, services hosted by providers on the Internet. The presenter, Bob Worrall, Sun's CIO points out that this trend will be the end of the traditional Intranet and Data-center. The role of IT within the firm will involve aggregating the relevant services and distributing them. IT will be involved in management of the service providers.

An area that Sun is addressing at this point in time is the area of access control and security. You can watch a good summary provided by Craig MacDonald. Sun Federated Identity is a component of the first module in the People, Ideas & Objects, the Draft Security & Access Control Module. A module in which we are layering the Military Command & Control Metaphor over the Joint Operating Committee participants and those that work for them. This module provides access to the IT resources necessary for People to do their jobs. Providing the producer with access and assurance that data and information are provided to only users that are authorized. This area is a key differentiating point of all other systems providers and the key reason that I have used Sun Products exclusively in the Security & Access Control Module.

Sun suggests that billing is the issue or impediment to full deployment of this changed IT environment. It is difficult to quantify and value every transaction in a service level offering. What I think is needed is an overall service that is billed, based on the size of the producer, that covers the associated costs that are incurred by People, Ideas & Objects in providing that service. This will have to be something that is discussed when we move toward the deployment of this application.

On a related theme, Cisco has a number of videos on YouTube about their new "Tele-Presence" product. Although expensive in comparison to video chat, I think Cisco has identified a market here. When you have large numbers of people needing to sit down in a meeting on a regular basis, the services of Tele -Presence would help in facilitating that communication. Although costly from the point of view of an unproven technology, I think it may pay for itself in reducing flight and accommodation costs, and increase productivity through better communications. Have a look.

Cisco Tele-Presence

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McKinsey Managing Capital Projects.

This is number 38 of the long list of McKinsey articles. They are clearly making the organizational implications of Information and Communication Technologies (ICT) their specialty. Nonetheless this article talks about the managing of capital projects in the oil and gas industry. In the Draft Specification there are many new and innovative ways that capital expenditures are handled. A few key points are;

1.  Petroleum Lease Marketplace - The aggregation of the producers five year capital expenditure budget by geographical area. Such that suppliers and vendors can see where the industry is headed in terms of their needs. Providing the supplier with a window on the producers long term needs. 
2. Accounting Voucher - The best description of this module is that we are moving away from people managing the processes of transactions. And taking the higher level work of designing transactions. Tactical Project Management is the area within the Accounting Voucher module that handles these.
3. Compliance & Governance Module - This is where for a variety of reasons the Strategic-Project Management function is managed.

These modules work together to provide the tools for the industry. Both producers and suppliers, will work together on determining the project size, sourcing and tactical project management of the overall industry resources needed to satisfy the producers needs.

One criticism of the industry is that they overuse a handful of suppliers, and under use the rest. In essence they are holding a higher expectation of performance from their primary suppliers and the rest satisfy themselves on the bits left over. This has led the industry to the current situation where the volume of work being done exceeds the capability of the service industry. What is needed is a different approach. One in which the producers work to increase the overall capacity of the service industry. Then they will be able to effectively deal with the cost overruns and scheduling delays.

In the Draft Specification the modules mentioned provide the opportunity for the producer to plan the contract with the supplier and work with them to offset their weaknesses and build on their strengths. The majority of this transaction design is done through the Joint Operating Committee, as it is the "market" definition in this software application. In the McKinsey article this is the focus of the discussion and therefore lets begin.

Subtitled "Investments in capital projects is rising. First-rate contracting will help companies to get a leg up on their rivals." With most people consider the energy industry needs to invest up to $20 trillion in capital expenditures in order to meet the markets demand for energy. I don't think there is any doubt that the current state of capabilities of the companies is unable to approach even today's capital expenditure volume. Chronic cost overruns and project delays are symptoms of the low level of capability. Commodity prices have adjusted to make the investments profitable. Things need to change from an organizational point of view and the producers need to undertake a greater Project Management capability, and, begin working with the suppliers more closely in terms of developing their capacities and capabilities. McKinsey reflects on the issue;

Many of these undertakings are larger and more technological complex then ever. The result is heated competition for the basic materials, equipment and talent that all asset-intensive industries need to deliver multi-billion-dollar capital projects successfully. p. 1

and

Many asset owners are however struggling. Some companies approach every capital project as an isolated, individually tailored undertaking and fail to align the contracting efforts of individual project teams with their long term capital strategy. Others hastily lock themselves into agreements; choose inappropriate contracting models; or misjudge the risks, organizational resources, or skills that capital projects involve. Such mistakes generate missed opportunities, significant delays, and cost overruns in the hundreds of millions of dollars. p. 1

As is the case in many industries today the advanced economies have the additional problem of aging infrastructure. China and India are able to build with modern more efficient methods unconstrained by "the way it's done". The advanced economies infrastructure is rusting, as Matthew Simmons suggests, and will compete for the capital of the producer companies. Add to it the largest regulation and engineering requirements and you have a situation that's complexity is not being addressed by the producers current capabilities. In addition, McKinsey notes, that capital expenditures of all industries will increase from $54 Trillion in 2002 - 2007 to $71 Trillion in 2008 - 2013. Demand for the skills that are currently in short supply must be developed by the industry itself. Blaming the cost overruns on the service industry is the wrong approach.

Two of the biggest problems that I deal with in this project is how to break the mindset of the user and developers from what are called the motivational and cognitive paradoxes. These two paradoxes were discussed in the preliminary research report and are derived from the work of Sir AnthonyGiddens. Professor Professor Wanda Orlikowski defined them as follows;

"Based on extensive studies of user's experience with word processors, Carroll and Rosson (1988) identified two significant paradoxes; The motivational paradox arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning, and consequently productivity suffers. The cognitive paradox has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions." (Cox, Delisle 2003)

In other words change is not in our genes and clearly change is in the cards. I believe that systems are a big part of breaking these things down. If we use SAP we are constrained by the views of the developers who made that application for GM. If we ask the users what it is they do and in turn learn the entire scope of the industry understanding and apply that to the development process I think we have a chance of approaching the issues that McKinsey states in this article.

Heightened competition can increase the damage caused by poor decisions and, in some cases, make them more likely. p. 3

We see this phenomenon playing itself out in the tar-sands of Alberta. Too many producers attempting to do too many things all at once. The result is heightened competition, cost overruns and systemic project delays. These projects have a remaining work in progress capital budget of another $200 billion. If the industry is to achieve the level of market demand for energy it must approach this capital spending problem before the brain trust retires.

Another definition of the same problem is provided by McKinsey;

Meanwhile cultural factors -- notably many asset owners' strong focus on engineering -- shape an environment that doesn't value commercial skills highly. p. 3

This is an oil and gas business that is generally operated by the earth scientists and engineers. Commercial criteria don't necessarily get considered as McKinsey states;

At one industrial company, for instance, engineers defined the parameters for a new plant so narrowly that a critical piece of equipment could be obtained from only 2 suppliers rather than the 50 that might have been possible with a more sensible approach. p. 4

The solution that I propose to this problem is contained within the modular Draft Specification. Designing transactions to consider the elements that McKinsey raises in this article is the area where much of the research that was done in defining the Draft Specification. Professor Richard Langlois' research in understanding the component costs of transactions helps to understand where the costs of transactions occur. McKinsey addresses the same issue with a recommendation of three methods.

   1. Creating optimal delivery models for their deal.
   2. Orchestrating contract-award processes to ensure strong competition among the suppliers.
   3. Structuring supplier contracts to align the suppliers' incentives with their own. p. 5

These issues are projected to become critical in the next five to ten years as the brain trust of the industry retires. I have suggested, and defined within the Draft Specifications, that companies can no longer afford to build individual silos of capacity and capabilities within each firm. Companies need to pool their resources and talent through the cultural form of the Joint Operating Committee. Doing so will enhance the industries overall capability by reducing the duplication inherent in the development of each silo'd company.

With the demand for project management skills developing as noted in this article. It would seem prudent to ensure that the right approach be taken. The oil and gas industry is currently suffering with project delays and cost overruns. I would assert that they are not pursuing all the areas that need to be addressed due to shortages in these areas. It seem unreasonable in this day and age that the ability to expand the capabilities of the industry doesn't include organizational design and systems development. Join me here.

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New Institutional Economics, A Guidebook.

This may become mandatory reading for the users of this software development project. That's all that I can say after I read the table of contents of this book. (Click on the title of this entry to go to the editors website.)  I can't wait until its published. (Some time in August.)  In fact I think I will buy one for each of the users that are signed up for this development.  Just reading the chapters makes me drool. Here is the introduction from the editors website.

Institutions are today recognized as the main drivers of differences of performances among industries, nations, and regions. Thanks to Ronald Coase, Douglas North and Olivier Williamson, New Institutional Economics has been developing a comprehensive and consistent knowledge about the infrastructures required for the performance of an economy. The field is burgeoning with researches on firms’ organizational strategies, the reshaping of industries, the design of markets, alliances and networks to manage innovations, the interplay between private self-regulation and public ordering, the performances of alternative legal systems, the respective role of formal (e.g. legal) and informal (e.g. beliefs, customs) institutions, the design of political and constitutional systems, the management of reforms, development and transition policies, etc.

and

To carry out such a program, multi-disciplinarity stimulates cross-fertilization among political sciences, anthropology, sociology, management sciences, law, and economics. The goal of this book is to provide theoreticians, practitioners and advanced students in economics and social sciences with a guide to reconcile these many developments and better grasp the underlying methodologies. Based on contribution of recognized scholars, it draws a synthesis of the current knowledge and identifies the most relevant questions to be explored.

Kind of makes you feel we are on to something here.

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Something's not right.

As expected Encana announced their second quarter earnings. I'm having problems reconciling what my expectations were with what is reported. These are the points that I can't resolve.

Earnings were down slightly on higher revenue from prices and some production increase. Revenue was up 37% over the first quarter. The first quarter recorded a $1 Billion hit to revenue reflecting the losses from their derivatives. If prices are up, why would the second quarter hit for derivatives be only 25% of what was recorded in the first quarter. For Encana to experience a 37% increase in revenues would require them to experience a 62% increase on the 60% of production that is not covered by the derivatives contracts. How did the company experience that?

Secondly, the amount of text that is written about the actions of derivatives trading is voluminous. Pages of notes detailing in every conceivable table the present situation. With realized and unrealized losses from derivatives trading. What is however different here is that the financial statement treatment between the first quarter and second quarter, for derivatives is changed. The first quarter has the $1 Billion hit from derivatives listed as an offset to revenue. In the second quarter that is changed with a note to the statements that the change in reporting is due to the splitting of the company in two in December 2008. A split that has not been approved by the shareholders. And a cryptic comment that the derivative losses when realized would be allocated to the appropriate operation.

I don't honestly understand the situation that I detailed here. I used an average gas price of $11.00 for the quarter. Encana experienced gas prices of $10.93. The derivative loss for each unit of gas is $2.53. Calculating that on 1.6 BCF / day for 91 days production is $368 million not including the royalty effect. For the oil derivative on 23,000 bbls / day for 91 days at $70 equals another $105 million. The royalty effect is only on gas and that would have added another $103 million for an overall total of $576 million just for the second quarter.

It was my assumption, maybe incorrectly that the mark to market required the calculation for the remainder of the derivative contract. Why would you continue to mark to market the second half of 2008 on the basis of the contract price when the market price is so much higher?

It is of course always possible that I am incorrect in my calculations. I don't have enough information to fully reconcile the effect on earnings but I will certainly keep my eye on it.

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Business users.

I recently commented in a number of posts how developers and users need to communicate more effectively during the software development process. I suggested that Users may want to have a look at some of the tools that are available today and highlighted a series of videos on "Eclipse day at Google". I also commented that the developers may want to consider their NetBeans tool set to include some tools for enhancing the communications with users.

Business rules, data models, UML and XML make for a very precise definition of the business. However, to the business user these are very abstract representations of the business and there is so much more to what they do in their jobs. I think the business user needs to understand the Java Language to the level where they are thinking of their problems in Java and then can relate them to the developer. I think the developer needs to understand that an innovative and change oriented business needs to have development work done on a constant basis.

Making a comment on Geertjan's blog reflected well the attitude of the developers and how difficult a task this may be. I feel this is a serious problem. Users and developers in a distributed development project, as big as this project is, are going to need as much help as possible. I would go as far as to say that bridging this gap may be one of the next frontiers in developer productivity.

Then along came Anne. Anne Botha has picked up the topic of how difficult the current environment is for the business user. A developer by trade Anne tried a few jobs in which she became the prototypical "business user". Her writing is very frank, interesting and comical about this subject. She is writing 10 articles about her undercover adventures and I think she is defining this problem very eloquently in her first two posts. If you want to subscribe to her writing it is a little difficult as I don't think she has her own blog, and is posting the series at DZone. Her first two articles are here and here. Very informative and good entertainment.

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Langlois on Dosi and Lazonick

An interesting debate has begun between Professor Giovanni Dosi and Professor Richard N. Langlois. Dosi's 1988 "Sources, Procedures and Micro-economic Effects of Innovation" was the key document I used in the preliminary research report. Professor Richard N. Langlois has taken up the majority of writing and thinking on changes in business' organizational structure which was used in defining the Draft Specification.

Professor Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsonigo submitted a new paper a few weeks ago entitled Capitalism and Society. I have reviewed the paper and found nothing of real interest in it. It suggests that the large organizations have not been impacted by Information Technologies. A very provocative research topic but one that I think is limited in its scope. The research is based on a review of Italian and French firms. I am certain that there is not a substantial amount that can be related to the rest of the world. Old Europe doesn't change, they have the same firms occupying the top wrung of the corporate latter for over 50 years. Nothing changes much there.

Nonetheless much of the underlying premise for Dosi et al's research was based on Professor Langlois research, and specifically his paper entitled "The Vanishing Hand". This was a document that I reviewed here. Professor Langlois writes a response to Dosi et al that helps to clarify his position in writing about the boundaries of the firm and organizational change. Here is the focus of the discussion.

The Dosi et al. paper takes issue with the Langloisian point of view. The authors adduce statistical evidence on changes in the size‐distribution of firms and industrial concentration in the advanced economies over the past few decades that contradicts the notion that there has been a significant movement toward market coordination of the advanced economies. They argue that, if anything, organizational complexity has become greater in the ICT age, requiring industrial enterprises to engage in more, not less, organizational interactions, as distinct from market interactions. Indeed, they raise the possibility that organizational complexity, and hence the challenges for the visible hand of managerial coordination, may be greater across vertically specialized firms in the New Economy than it was within the vertically integrated firms of the Old Economy. (Lazonick 2008, p. 1.) p. 1

Nonetheless this is a finding that challenges Langlois' theory and the core underlying thinking of this software development project. I have suggested, and the Draft Specification reflects, that the "market" definition is the Joint Operating Committee (JOC) which imputes the volumes of suppliers and contractors involved in the service businesses, and the producer represents the firm.

Lanlgois cites IBM as his example of how Dosi et al misinterpret him. In the 1960's IBM was able to provide the soup to nuts type of computing experience that purchasers appreciated then. The majority of components were manufactured in-house by IBM. Today the situation has changed significantly as a result of the Information and Communication Technologies (ICT). Yes there are large businesses just as there always will be. However, the methods used to develop products and build them have changed substantially.

As an example I would select Apple which considers themselves to be a software development company. Their competitive advantage is in developing software that is substantially more "user friendly" and functional then other software. When it comes to hardware, Apple has not manufactured a computer for many years. They involve themselves in the design and secure manufacturing capability from other firms that specialize in chips, hard-drives, assembly etc. The iPod and iPhone are similar in that Apple notes on the product that it is designed in California, assembled in China and uses mostly Japanese parts. Therefore Dosi et al's argument that ICT has not changed the make up of firms is incorrect. They are predominately organized around the contract, which denotes clearly that the firm uses the market to attain their competitive advantage.

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jenne john 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi‐unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.

The Draft Specification uses much of Langlois thinking in its overall architecture. The best example I can think of is the use of the producers five year Capital Expenditure budgets. These budgets are aggregated by region and displayed in a fashion that enables the "market" of suppliers, the Schlumbergers, Halliburtons and Joes' Welding to peruse and determine what the producers may need in terms of their future spending. This information in the hands of the market will then enable innovative solutions to be proposed to the producer when the contract is sent out for bidding. Bringing a new capability to the firm with a perspective that is not limited to the firms current quarter.

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These companies don't deserve your respect.

As you can tell they haven't earned mine. They have sat back and done nothing about the markets demand for energy. Economists frequently say that prices tell the markets many things. Today the prices are shouting many things, but these companies management can't, or chose not to here them. They have done nothing other then endow themselves with complacency, inactivity, stock options and retirement benefits. Following the money reveals that they have been richly rewarded for their inactivity.

Faced with the overwhelming facts that I have presented in this web log. And the many proposals I have made to industry on systems supporting the JOC. They have done nothing. 37 McKinsey articles, 26 Articles from Professor Richard Langlois, 45 Calls to Action, publication of a future technical vision, etc. Codifying of all this research into a draft specification of eleven modules. The only response is the comment "not at this time".

The draft specification of eleven modules that are so fundamentally different from what is available today. Fundamentally different in that it sets out a course of action in making the producer companies innovative, increases industry wide capability and addresses many of the key issues facing the industry. But that requires effort on behalf of these companies.

Led by uninspired people with uninspired goals these companies have languished to the point where they are indistinguishable. Royalties are up, another reason to do nothing. They should be preparing for moves into the Beaufort Sea, the Arctic, offshore. Increasing the internal infrastructure necessary to explore. Instead they do the easy targets, the coal bed methane and shale oil. Have they no vision, drive or ambition?

I am unable to convince them of the merits of this research and software development. It's time for the shareholders of these energy companies to show the management the door. Either that or watch their investments wither away through dilution from management, declining reserves and ultimately declining production.

Does anyone believe inaction is the right approach? Are these managements able to foresee the future is different than what I have proposed here. Are they able to provide an alternate vision of how this industry has fundamentally changed? No they haven't. This series of entries showing the extent of the abuse of stock options, should provide you with an understanding that the direction we are traveling is not going to present any new opportunities for the companies or the shareholders that own them. All the opportunities involve stock option compensation and retirement of the fat and lazy management. If you doubt this after reading this series you may have a future in oil and gas management.

And what has my competition provided? SAP has stated that they want the upstream producer to get closer to the customer. Which is the most dramatic example of how SAP does not know anything about the upstream oil and gas business. Oracle is off doing something with the application vendors they purchased and the world is not holding it breath. I wouldn't either.

Sir Anthony Giddens theory of structuration, which was a part of the preliminary research report, states that organizations, society and people need to move in lock step or there will be failure. Society and people want to move ahead, organizations are holding up the show and causing all three to fail.

They have isolated themselves from any form of criticism and pursued their personal strategy of sloth, wealth and retirement at the expense of shareholders and society at large. They appear to me to be shut-ins as opposed to productive members of society. Where is the outrage? Failure is the only way to describe it. Join me here.

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McKinsey on Organizing for Value.

McKinsey have been able to provide a solid foundation for this software development project. This will be the 37th McKinsey article I have reviewed! (Click on the title for access to the document.) When it comes to organizational change and the impact of IT, McKinsey has invested heavily in this mega-trend and consistently gets it right. In applying this article to the oil and gas producer, strong support is given to the use of the Joint Operating Committee (JOC) as a key organizational construct of the industry.

This organizational blind spot, often combined with an excessive focus on short-term earnings, can produce unfortunate results, in our experience. Managers end up optimizing earnings goals at the expense of long-term growth and value creation. “We typically spend 80 percent of our time figuring out how to squeeze the economics, and only 20 percent on actual strategy, without numbers to back our decisions,” says one executive. Some readily admit to cutting back on value-creating projects in order to meet short-term earnings targets.

This is the systemic problem that all public companies face. Don't meet you targets for the quarter and you will be punished. Managing to these criteria becomes the focus and strategy that drives the management to perform at its best. It certainly leads many companies to focus on optimization at the expense of innovation and long term value generation. However, McKinsey are hitting on a key point with their definition of "value cells".

As a rule of thumb, value cells have standalone economics and must be relatively “homogeneous” in regard to their target market, business model, and peers—that is, they must have one target segment, one country or region, or one group of products. The trick is to create financial analyzes, such as P&L statements, as if a value cell were a stand-alone business. This is normally not done in a classic divisional structure, where each division’s financial's are an amalgam of different products, markets, and costs relating to shared assets. A useful litmus test is determining whether a value cell could be sold and whether there would be a clear market price for it.

A JOC does all the things that McKinsey define as required for a value cell. But their is more, McKinsey intimate that the value cells are somewhat separate from the divisional organization structure. Just as I have defined the boundaries of the firm and the JOC in the eleven module Draft Specification. The firm undertakes the role of establishing and attaining the financial targets, whereas the JOC develops the innovative ideas and builds value for the long term.

Value cells can easily coexist with the organizational structure of a division, which might need to take other factors into account, such as geographic proximity or economies of scale in common functions such as production plants, supply chain, or sales networks. As an overlay on an existing structure or a lens through which to view existing businesses, however, the cells facilitate strategic decision making.

An oil and gas firm may have hundreds of JOC's, this would cause the management workload to increase substantially. Not so McKinsey say;

In our experience, a company of above $10 billion market capitalization should probably be managed at the level of 20 to 50 value cells, rather than the more typical three to five divisions.

and

While managing so many value cells might appear to increase the CEO’s workload, the reverse is often true. Focusing more on single cells actually reduces complexity because managers find it much easier to identify and monitor the two or three operational metrics that truly drive performance, as well as to make decisions in a more straightforward way. In essence, the CEO can use value cells to take out a “disintermediation layer” between actual business decisions and the corporate planning process. Instead of aggregating strategies and economics into complex divisions and then spending lots of time understanding the overall strategy and performance, the CEO can take a larger number of more rapid, more specific, and more radical decisions at the value cell level.

This makes intuitive sense. The logic in using the JOC in the oil and gas industry is substantial. It is the financial, legal, operational decision making and cultural framework of the industry. Participants in JOC are motivated by financial rewards therefore concurrence can be easily attained. Today's Information and Communication Technologies (ICT) also enhance the expanded use of the JOC. In the Draft Specifications it is stated explicitly that the management role would increase in the redefined boundaries of the firm.

It’s worth noting that a value cells approach is meaningful only if a company has the courage to follow up on decisions to invest or divest. Managers must regularly scrutinize cells that destroy value and divest them if turnaround plans don’t materialize. They must nurture high-potential businesses aggressively and continuously. If competitors devote far more resources to a given business, for example, the real choice is exiting it or doubling down on the investment—not adapting marginally.

This however does not mean that our four little piggies can double down on their stock options. Which appears to be the only strategy in play. This next quote from McKinsey imputes the level of change that needs to be adopted within an organization. To benefit from value cells requires some major systems, organizational and people changes.

And that is what we have done in the eleven module People, Ideas & Objects Draft Specification. Our motivation is to focus on innovation within the JOC. That is what the commodity prices are telling the producers, and providing the financial resources for, to innovate. As everyone generally agrees, the easy oil is gone and an earth science and engineering based capability is the new methodology of earning value in the oil and gas industry. As science and innovation come to influence each other, the speed of change will accelerate. The firms in the industry have lost the ability to keep up with the market demand for energy. Without the systems to support any organizational changes in place, we are relegated to manual systems or utter failure.

Using value cells to emphasize value management requires some obvious implementation challenges—creating better data, exerting pressure to collaborate, adopting incentives that reflect the value created per cell. The real change of culture and mind-set requires even more: instilling business managers with the feeling that the new process gives them more freedom and more resources for good ideas.

We also live in a time where the technologies, based on the People, Ideas & Objects Technical Vision, will conspire to overwhelm the unprepared producer with information. Recall that Nobel Laureate Herbert Simon stated "a wealth of information creates a poverty of attention."

Focusing corporate and divisional decision processes on value and growth isn’t simple, particularly when the activities that create value are embedded in large divisions. Companies that adopt a finer-grained, granular approach can better identify and manage their value creating assets.

The performance of the oil and gas producers stock option compensation costs is the only thing spectacular coming from these firms. They have abused the trust of the investors and poorly prepared their firms for the changes brought about by the commodity prices. Potential retirement is liberating them from responsibility. The oil and gas industry has changed fundamentally? Someone should tell the management.

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