Professor Peter Klein on Entrepreneurship

We have an interesting paper that deals with the topic of entrepreneurial leadership. I am of the belief that entrepreneurship will be a much larger component in each and every individuals makeup. People's careers used to span their working life at a single firm. Careers now span the working life of an individual within one industry. In the very near future, we may see careers span multiple companies as well as multiple industries.

To achieve this level of dynamic working environment, an individual will be relying far more heavily on their entrepreneurial skills. What does that mean, and what exactly are entrepreneurial skills and entrepreneurial leadership. This paper offers the opportunity to better define these difficult to quantify and qualify terms. These entrepreneurial definitions are also key attributes of making this software development project successful.

This web-log has never reviewed any of Professor Peter Klein's work. I have however subscribed to the Organizations and Markets (their Feed ) web-log of Peter Klein and Nicholas Foss' for over two years and as such have either highlighted individual posts through the Google reader interface, or commented on them briefly through Professor Langlois' writings.

It was through Organizations and Markets that Professor Langlois was introduced as a guest blogger. Professor Langlois had just received the Schumpeter prize and was writing as a guest. He now frequently writes as a regular contributor to Organizations and Markets and his research was a foundation on which the Draft Specification was built.

The topic of Entrepreneurship has become more and more a part of the mainstay of the business environment. This has particularly been the case since the 2000 .com crash. The entrepreneur has since become enabled through the Information and Communication Technologies. Technologies that are real in comparison to what was hoisted as innovative in the pre-2000 era. So lets find out what we can learn in order to assist the understanding of the users and developers about these somewhat vague terms.

Professor Klein sets the stage of how critical the entrepreneur has become.

"Entrepreneurship is one of the fastest-growing fields within economics, management, finance and even law. Surprisingly, however, while the entrepreneur is fundamentally an economic agent -- the "driving force of the market," in Mises's (1949, p. 249) phrase -- modern theories of economic organization and strategy maintain an ambivalent relationship with entrepreneurship." p. 1

I would be at a loss to further define the role of the entrepreneur importance in this software development project. I have selected the name of this project based on Professor Paul Romer's new growth theory that involves People, Ideas & Things. Whereas "Things" is replaced with the software "Objects" that we use to capture the oil and gas business understanding in the software. Professor Klein also discusses some of the difficulty in defining what an entrepreneur is.

"It is widely recognized that entrepreneurship is somehow important, but there is little consensus about how the entrepreneurial role should be modeled and incorporated in economics and strategy. Indeed, the most important works in the economic literature on entrepreneurship -- Schumpeter's account of innovation, Knight's theory of project, and Kirzner's analysis of entrepreneurial discovery -- are views as interesting, but idiosyncratic insights that do not easily generalize to other contexts and problems. p. 1

Why this is important. I think every business user has been faced with the near impossible task of making changes in the reports and analysis of their systems and data. Many are forced to use the interfaces that are provided by an SAP or Oracle application. Interfaces that the users could improve upon with some minor data, processing or alternative changes. However, knowing the difficulty in making these changes has silenced any and all initiative in the corporate world.

Asking for change will require too much effort and political skill to make the changes worthwhile. It is through the users ability to discuss their information processing requirements in this project, and subsequently see and incrementally improve upon the software applications that they use. This is what People, Ideas & Objects is providing, a place where users and developers can work together to make the oil and gas worker more enabled, innovative and entrepreneurial.

Making the working environment more user friendly may have been a goal prior to the web. Now users demand higher quality applications that they can make changes to. This is an important concept and Professor Klein states the reason why.

More recently, the Austrian economist Israel Kirzner has popularized the notion of entrepreneurship as discovery, or alertness to profit opportunities. p. 2

If change is the constant, and we are to enable the entrepreneurial spirit of the individuals that work in the industry; to discover, be alert and to most importantly implement profit opportunities. These are the primary motivating factors of these individuals. Why would they need to file a change request, fill out the forms, estimate the costs, seek budget approval, and have the signing by four authorized individuals to benefit the company? These changes need to be able to be implemented in a more efficient manner through the natural interaction of the users and the developers.

Innovation has at its core certain trial and error elements. Approving the bureaucratic change request that ultimately leads to an error will ensure that user is never authorized again. However, what we have learned about the innovative oil and gas producer is that failure is the critical part of learning. An error should not mean that the individual has no credibility for future changes. It should mean exactly the opposite. Who therefore should be the one to make the decision on what changes the users want? Particularly if the individuals compensation is at stake.

Opportunities are essentially subjective phenomena (Foss, Klein, Kor, and Mahoney, 2008). As such, opportunities are neither “discovered” nor “created” (Alvarez and Barney, 2007), but imagined. They exist, in other words, only in the minds of decision-makers. p. 2

Recall in the "Secrets of Successful Execution" blog post, "Execution is the result of thousands of decisions made every day by employees acting according to the information they have and their own self interest." And...

By contrast, the classic contributions to the economic theory of entrepreneurship from Schumpeter, Knight, Mises, Kirzner, and others model entrepreneurship as a function, activity, or process, not an employment category or market structure. The entrepreneurial function has been characterized in various ways: judgment (Cantillon, 1755; Knight, 1921; Casson, 1982; Langlois and Cosgel, 1993; Foss and Klein, 2005), innovation (Schumpeter, 1911), adaptation (Schultz, 1975, 1982), alertness (Kirzner, 1973, 1979, 1992), and coordination (Witt 1998a, 1998b, 2003). p. 4

I would think that attempting to source these qualities from the management of a firm would be futile.

By focusing too narrowly on self-employment and start-up companies, the contemporary literature may be understating the role of entrepreneurship in the economy and in business organization. p. 4

It bears asking, is the entrepreneur the prototypical employee of the future? Klein now focuses on the profit motive of the entrepreneur in their optimal situation. Suggesting that the competitive and profit motive are the reasons that workers in the oil and gas industry will be motivated to make these changes. If the user has a vested interest in their own profits as a result of their actions, does that also imply that the producers interests are well taken care of by the user?

Judgment is distinct from boldness, innovation, alertness, and leadership. Judgment must be exercised in mundane circumstances, for ongoing operations as well as new ventures. Alertness is the ability to react to existing opportunities while judgment refers to beliefs about new opportunities. Those who specialize in judgmental decision making may be dynamic, charismatic leaders, but they need not possess these traits. In short, in this view, decision making under un-certainty is entrepreneurial, whether it involves imagination, creativity, leadership, and related factors or not. pp. 5 - 6

and

Mises’s point is that a socialist economy may assign individuals to be workers, managers, technicians, inventors, and the like, but it cannot, by definition, have entrepreneurs, because there are no money profits and losses. Entrepreneurship, and not labor or management or technological expertise, is the crucial element of the market economy. As Mises puts it: directors of socialist enterprises may be allowed to “play market,” to make capital investment decisions as if they were allocating scarce capital across activities in an economizing way, but entrepreneurs cannot be asked to “play speculation and investment” (Mises,1949, p. 705). Without entrepreneurship, a complex, dynamic economy cannot allocate resources to their highest valued use. p. 7

Entrepreneurship as opportunity identification.

Is it in the best interests of the oil and gas firm and industry to permit the individual to be more entrepreneurial? And lets be candid, they will as a result of this freedom be better able to earn much higher wages and profits then they would qualify for in today's organization. Although the costs of employment may be higher for firms within the industry, the ability of the industry to move further and faster is the net result. And with prices for energy commanding ever larger revenues, this sharing of the value is of the best interest to all concerned.

The most important exception is the literature in management and organization theory on opportunity discovery or opportunity identification, or what Shane (2003) calls the “individual–opportunity nexus.” p. 7

and

Shane and Venkataraman (2000, p. 220) define entrepreneurial opportunities as “those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production.” p. 8

Klein seeks to parse what an entrepreneur is in terms of a classification based on type. Defining a "Discovery" and "Creation" approach. A mix of these two classifications of entrepreneurs would work hand in hand in developing new sources of value for the oil and gas producer.

Entrepreneurship research may be able to realize higher marginal returns by focusing on entrepreneurial action, rather than its presumed antecedents. Alvarez and Barney (2007) argue that entrepreneurial objectives, characteristics, and decision-making differ systematically depending on whether opportunities are modeled as discovered or created. In the “discovery approach,” for example, entrepreneurial actions are responses to exogenous shocks, while in the “creation approach,” such actions are endogenous. Discovery entrepreneurs focus on predicting systematic risks, formulating complete and stable strategies, and procuring capital from external sources. Creation entrepreneurs, by contrast, appreciate iterative, inductive, incremental decision making, are comfortable with emergent and flexible strategies, and tend to rely on internal finance. pp. 11 - 12

As with sharing in the profits of their entrepreneurial actions, losses that are incurred in the discovery and innovation process would be shared as well. This also provides the entrepreneur with the knowledge that risk is inherent in their actions and they should be mindful of the consequences.

Likewise, realized entrepreneurial losses do not fit naturally within a creation framework. Alvarez and Barney (2007) emphasize that “creation entrepreneurs” do take into account potential losses, the “acceptable losses” described by Sarasvathy (2001). “[A]n entrepreneur engages in entrepreneurial actions when the total losses that can be created by such activities are not too large” (Alvarez and Barney, 2007, p. 19). However, when those losses are realized, it seems more straightforward to think in terms of mistaken beliefs about the future—expected prices and sales revenues that did not, in fact, materialize—then the “disappearance” of an opportunity that was previously created. Entrepreneurs do not, in other words, “create” the future, they “imagine” it, and their imagination can be wrong as often as it is right. p. 13

Opportunities as a black box.

Here is where Professor Klein gets into the topic of why a firm needs to compensate the entrepreneur for these actions. Why can't the people employed by the firm determine these opportunities as a nine to five salary based job? Klein identifies the key characteristic that is necessary to make the entrepreneur, and not the salaried employee, motivated. These characteristics are also necessary characteristics in the future oil and gas industry. An industry that has unlimited potential when the resources of the industry are released to earn profits in their chosen field. And I am not talking about just the engineers and earth scientists, all those are critical, but also the people that are involved in the business of the producer and are able to optimize the profit seeking potential through other professions such as Accounting and Administration.

Although some researchers argue that the subjective or socially constructed nature of opportunity makes it impossible to separate opportunity from the individual, others contend that opportunity is as an objective construct visible to or created by the knowledgeable or attuned entrepreneur. Either way, a set of weakly held assumptions about the nature and sources of opportunity appear to dominate much of the discussion in the literature. pp. 13 - 14

and

Do we need a precise definition of opportunities to move forward? Can one do entrepreneurship research without specifying what, exactly, entrepreneurial opportunities “are”? Can we treat opportunities as a “black box,” much as other concepts in management such as culture, leadership, routines, capabilities, and the like are treated (Abell, Felin, and Foss, 2007)? p. 14

and

The creation approach treats opportunities as the result of entrepreneurial action. Opportunities do not exist objectively, ex ante, but are created, ex nihilo, as entrepreneurs act based on their subjective beliefs. “Creation opportunities are social constructions that do not exist independent of entrepreneur’s perceptions” (Alvarez and Barney, 2007, p. 15). In this sense, the creation approach sounds like the imagination approach described here. Still, like the discovery approach, the creation approach makes the opportunity the unit of analysis. How entrepreneurs create opportunities, and how they subsequently seek to exploit those opportunities, is the focus of the research program. pp. 14 - 15

and

An alternative way to frame a subjectivist approach to entrepreneurship, emphasizing uncertainty and the passage of time, is to drop the concept of “opportunity” altogether. If opportunities are inherently subjective, and we treat them as a black box, then the unit of analysis should not be opportunities, but rather some action—in Knightian terms, the assembly of resources in the present in anticipation of (uncertain) receipts in the future. p. 15

For the purposes of this post I think we risk losing the reader and the substantial value that Professor Klien has developed here. With a clear definition of the entrepreneur in the innovative oil and gas producer we can see how the dynamic nature of the industry can develop. What this display's in rather stark terms is the role of management. The management is substantially diminished in the innovative oil and gas producer firm. Although not completely eliminated, the roles of management, and particularly those skills that emulate much of the Soviet era "central planner" are eliminated.

Through the little piggies analysis of Encana, Petro-Canada, Nexen and CNRL. We see the capabilities of the current management is unable to understand;

• The business that they are in, selling production forward at substantially discounted prices.
  
• Unable to attain the speed in which they approach the business, announcing declining production levels.
• The level of innovativeness that is lacking. More of the same (particularly stock option compensation) offered as the solution.
  

Eliminating the level of management "planning" and their associated high costs are what the investor should seek to achieve through the development of this software.

Foss, Foss, Klein, and Klein (2007) show how this approach provides new insights into the emergence, boundaries, and internal organization of the firm. Firms exist not only to economize on transaction costs, but also as a means for the exercise of entrepreneurial judgment, and as a low-cost mechanism for entrepreneurs to experiment with various combination's of heterogeneous capital goods. Changes in firm boundaries can likewise be understood as the result of processes of entrepreneurial experimentation. And internal organization can be interpreted as the means by which the entrepreneur delegates particular decision rights to subordinates who exercise a form of “derived” judgment on his behalf (Foss, Foss, and Klein, 2007). pp. 19 - 20

It is critical to recall the key competitive advantage of the innovative oil and gas producer is their land base, physical infrastructure and capabilities in finding, developing and producing oil and gas. The entrepreneurial services necessary for the producer to achieve the maximum profit in this business are very broad and I suggest must be based on the markets (or JOC's) offerings. Klien also notes.

Here, as in Coase (1937), the employment relationship is central to the theory of the firm. The entrepreneur’s primary task is to coordinate the human resources that make up the firm. Foss, Foss, Klein, and Klein (2007), by contrast, focus on alienable assets, as in Knight (1921). They define the firm as the entrepreneur plus the alienable resources the entrepreneur owns and thus controls. Each approach has strengths and weaknesses. The cognitive approach explains the dynamics among team members but not necessarily their contractual relationships. Must the charismatic leader necessarily own physical capital, or can he be an employee or independent contractor? Formulating a business plan, communicating a corporate culture, and the like are clearly important dimensions of business leadership. But are they attributes of the successful manager or the successful entrepreneur? pp. 20 - 21

Of course there is always an alternative to what is discussed in this blog. That is to do nothing. If however, you feel that the time for these changes is now, join me here. If you know of like minded people, send them the URL to this blog and most importantly, click on the PayPal button to donate.

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The Secrets of Successful Strategy Execution

Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness -- decision rights and information flow. p.2

Difficult to ignore a paper with that sub-title. Harvard has prepared a database of over 1,000 companies with 125,000 survey respondents. These people were asked specifically if the "important strategic and operational decisions are quickly translated into action, the majority answered no".

Here is the reason why so many of the companies that I have highlighted in the stock option review are failing. Harvard states;

Execution is the result of thousands of decisions made every day by employees acting according to the information they have and their own self interest.

Harvard used the information in their database to determine four criteria for more effective execution. They are;

• Clarifying decision rights.
• Designing information flows.
• Aligning motivators
• Making changes to structure.

Now I may be biased but I think this software development project scores high on each of the four criteria. Here's why;

Clarifying decision rights.

The Joint Operating Committee (JOC) is the operational decision making framework of the oil and gas industry. Only in the very rare situation in which a firm owns 100% of the working interest does this not apply. Yet none of the ERP software vendors, SAP or Oracle, recognize this fact or even the existence of the JOC. The business of the business can not be separated from compliance and governance. Therefore to clarify the decision rights requires that the JOC be recognized, supported and enabled within the producer organization, and appropriate governance and compliance is placed around the JOC's.

Looking at this situation from the firm perspective. Whether it is the Compliance & Governance, Analytics & Statistics and Petroleum Lease Marketplace modules. The decisions between the market and firm are clearly defined based on the well established culture of the industry. Enabling the JOC with the Information and Communication Technologies (ICT) and supported by a software development capability will clarify the decision rights that are held within the JOC.

Designing information flows.

The purpose of this software development project is to build the systems to make the information flows in the JOC (or market) and Firm (producers) more natural. Users are the key to defining what and how they do their jobs. Their jobs span the collective understanding of the entire industry. To preclude them from being involved in a software development role is the continuation of the top-down, disconnected and failed developments we have seen before.

Aligning motivators.

There has been a number of points made in this web log regarding the alignment of motivators. The JOC is represented by producer companies that are motivated equally by the profit interest. This is why the culture of the industry has placed the necessary mechanisms for the JOC to make the operational decisions in this business.

Making changes to structure.

In defining the boundaries of the firms, the Draft Specification has a remarkable influence in the changes made to the structure of the market, which includes the resources of the service industry. These are represented in the JOC and enable the collaboration, transaction management, automated processing and decision making to flow as a result of the desires of the participants.

On the other hand the firms role is expanded by parsing the firm between the short term and long term views. Adding the Research & Capabilities module to the Draft Specification ensures that the mechanisms and means are available to the firm to pursue the long term focus by some of its staff.

Harvard notes that the changes made in the first two categories have dramatic effect. And also note;

In efforts to improve performance, most organizations go right to structural measures because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete. Such steps generally reap some short-term efficiencies quickly, but in so doing address only the symptoms of dysfunction, not its root causes. Several years later, companies usually end up in the same place they started. Structural change can and should be part of the path to improved execution, but it’s best to think of it as the capstone, not the cornerstone, of any organizational transformation. p. 2

They cite an example of how an anonymous firm restructured to reduce the volumes of layers of management. It was noted in the Harvard article, the same firm essentially had to redo the restructuring. By not defining decision rights and information flows in the first restructuring, the company implemented a temporary fix that was soon overridden by the management who reclaimed the former structure.

In a related article from Booz, Allen Hamilton "The Dominant Gene"

Unclear decision rights not only paralyze decision making, they impede information flow and precipitate work-arounds that subvert formal reporting lines. Blocked information flows result in poor decisions, limited career development and a reinforcement of structural silo's. p. 1

Sound like any oil and gas company you know? Think of this process next time you hear a CEO, COO or CFO promise an increase of X% over the production base. How is it that they are able to make these claims?

Redefining the role of the firm and market in the manner that the Draft Specification provides; is a move towards the culture of the oil and gas industry. Developing software to meet the demands of users provides the opportunity to have the entire scope of oil and gas operations and business handled in the most efficient manner. Then the producer can most effectively execute based on the criteria that Harvard notes here.

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

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Encana, the software company.

Word on the street is Encana has a large 200+ person software development project being sourced from the local market. Seems they want to be able to consolidate the financials of Oil-Co and Gas-Co, the two companies being created by splitting up the firm. Therefore they need to hire these people to make sure all their systems are speaking the right language and they can sing from the same song sheet.

Why would an oil and gas company hire from the market the individuals that are needed to build a small application. That's right a small application. This thinking goes back to the troglodyte age when oil and gas firms did everything for themselves. Now there are far more cost effective ways of doing things, but obviously Encana has size and scale on their side. Soon they will be manufacturing their own drill bits, they're invincible.

Just so happens that the Draft Specification includes the ability to conduct all those consolidations that Encana needs. That's right, using the SEC's just announced IDEA platform as one of the cornerstone applications of the Compliance & Governance module. This allows investors to have unlimited access and control to a standard tag library where they can query and develop any type of scenario on any number of companies. The combinations and permutations are unlimited.

So by the time the powers that be at Encana have blown 100% of the costs of developing their software, no one else in the industry will have access to it. Brilliant. Incur 100% of the costs because it is your core competency; and make sure it doesn't play well with others, even though the SEC standard is applicable to all companies. Encana must know something about the software business that I don't.

Here's an idea, I'd be willing to take a similar amount of money from Encana, and deliver a complete systems based on the Draft Specification. Now that's a modern value proposition that adds real value to an oil and gas producer.

It's comments like these that get me into trouble you see. I should learn to keep my mouth shut so that the IT Manager that christened this project doesn't get offended. And, by keeping quiet I would also make sure that IBM, CGI, EDS and the other TLA's (Three Letter Acronyms) don't get questioned on their business ethics by selling something to someone who should know they don't need it.

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

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Beyond the red Horizon.

Like CNRL's Mission Statement says, lets have some "fun". First off, with 3 Chairman and 40 vice-presidents is it any wonder they have such high stock option compensation costs? Think of it, that's 430 fingers (including thumbs) that can be pointed at the responsible culprit. Doesn't even include the C class executives.

As we look out just beyond the Horizon, (Horizon being CNRL's heavy oil project) I think we see some critical issues being presented to CNRL's politburo. Critical issues that may have escaped the central planners and I don't want to get into a finger pointing exercise as to whose fault it will be. The number one issue that I think this management is soon to face is the credit crisis that is brewing in Europe and the U.S.

Specifically I think that financial capital is in a state of seizure that is unlike anything we may have seen in the past. The impact of this credit crisis will be limited to those institutions that are involved in granting financial capital and those that need it. If you need financial capital don't bother knocking on the door, you won't know what the response will be.

CNRL is in the unfortunate position of needing a lot of capital. How this company thought they could reach this far beyond the horizon is a surprise to me. With $26 billion of debt on the books, a whopping $3 billion working capital deficiency, they head into the final stages of funding their largest project of all time. Not only is the capital necessary to finish off the project, the cost overruns of an additional $1 billion were recently announced with more schedule slip; and that doesn't include any of the operating costs necessary for start up. Yikes.

I think the analogy to the housing market in the states may be appropriate. Instead, we see an unused and unneeded heavy oil plant sitting idle. The only activity you'll see is the local welders taking back their unpaid work. The one thing we do know for sure is the bigger they are the harder they fall.

Lets assume for a moment that I'm wrong. And the project does start up as planned. Where are you going to put another 100,000 boe / day of production? Tanks? No pipelines currently exist to take the product out of the province. No refiners are able to take on more heavy oil production. This of course assumes they can find and finance the condensate volumes necessary to dilute the production.

This nightmare scenario assumes that the management has all the other aspects of the operation under tight control. Recall the losses that were incurred in the second quarter of this year from stock option compensation and hedging losses. CNRL reported a $350 million loss in the second quarter of 2008. But lets be serious, this high cost heavy oil production project will start with profits and cash gushing out of the ground just like Jed Clampett from the Beverly Hillbillies experienced.

I know if I worked at CNRL, I'd cash my options and start that retirement. When management are gaming the stock price with tours to Warren Buffet and Bill Gates, and lets not forget Paris or Britney. Goosing the price of the stock doesn't have the desired long term effect when Buffet can't follow the script. Jumping ship makes the most sense. Particularly when it becomes obvious the other 45 management types are out of good ideas.

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

Pig compliments of http://designedtoat.com/pig.htm

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Paris Hilton on Tuesday, and Britney on Wednesday...

We see the spectacular increase in the four little pigs stock as a result of the plant tour of Warren Buffet and Bill Gates. Such is the focus of this management that they know they can boost their stock price by inviting celebrities for plant tours.

I would suggest that Paris and Britney ask the four little piggies how it is they qualify for $3.3 billion in stock option compensation.

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News Alert: Pigs can fly.

I have now, for all intents and purposes, completed the series of reviewing the four little piggies. What have we learned. I think the senior bureaucracies of the oil and gas industry have proven they are relic's of a time that has past. The points that I take from their earnings related comments are all slanted toward the positives in the oil and gas business. Positives that they have no direct effect over. At the same time they attempt to hide the difficulties that are a direct result of their greed and incompetence.

Lastly I suggest that they are unable to understand the nature of their business due to the speed and velocity of markets, and the archaic use of Information & Communications Technologies. Systems and procedures that were developed for businesses that existed in the 1980's and maybe the early 1990's. Items such as;

• Highlighting their revenue growth and operating profits.

This point I find particularly galling. The revenue's are up due to the prices. Production is actually down year over year in most instances.

• Noting the costs associated with hedging is unrealized.

And therefore not relevant to the earnings potential of the firm. These hedging losses to me reflect that the management are unaware of which business they operate in.

• Noting the costs associated with stock options are also unrealized in reporting cash flow numbers.

Highlighting cash flow numbers vs. net profit numbers has the ability to confuse the press and create a distraction to their "actual" performance. What the management seem unaware of is at some point those checks for hedging and stock based compensation will be written and will affect future cash flows. I suggest the time these cash flows are impacted will be well after the current crops retirements. Leaving the industry in complete shambles.

My ability to contrast the existing management failures with the vision and research conducted in this project provides the justification for proceeding with this software development project. As we move into discovering the sources of revenue that will fund this development in the long term, it should be clear that I have not received any support from the existing management. They are not interested in providing an alternative method of organization that would compete with their current methods. Methods that have been very lucrative for a management that does nothing positive.

Clearly the attention of the world is now focused on China. These Olympic Games promise to show the world how China has grown in their standard of living, and how it competes with us for energy. How the current crop of management was unable to see this trend is due to them being blinded by their stock options. There is nothing better then competition to bring out the best in human kind. Particularly, competition in methods of organizing an oil and gas firm. Therefore I will resume writing once the games have closed and we re-focus on these problems together.

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What does Professor Carlota Perez have to say.

Professor Carlota Perez research shares a great deal of the founding and grounding of this software development project. Her influence can be seen in the current Draft Specification and the approach we are taking to build this software. The Perez label of this blog has nine items in which I reviewed a part of her many presentations and papers. Her ideas can be found in these articles, videos, slides and current papers, here, here and here. I want to review the last paper in this post, but first there is a video that she provides on her website that summarizes her research in ten minutes. That video is here and I highly recommend it for the interested users and developers of this software development project.

Her identification of the economic era we find ourselves in resonates with much of the disruption that we are seeing in the world economy. My initial introduction to her theories was in this 2005 Booz Allen Hamilton Strategy & Business article. I am particularly fond of the seventh slide in this series where she details the effect on our lives.

• A new way of living.
• New Ways of transportation and communication.
• New ways of producing.
• A new way of working.

Beginning with my review of Great Surges of Development and Alternative Forms of Globalization. January 2007. I am focusing more on Professor Perez' Section 5 "Why Globalization" and Section 7 "The Institutional Challenge" for new information and ideas based on her studies. Particularly with this jewel.

Why Globalization

Still, the question may arise as to why globalization should be inevitable. The answer is that reaching for giant global markets is a natural consequence of applying the potential of information and telecommunications technologies (ICT). Intangible products, not only recognize no physical frontiers by traveling instantly and invisibly through communications channels, they also have zero or negligible marginal cost and no structural limit to market growth. Yet they often have high research and development investment, hence the need to maximize markets. Moreover, the greater the number of users of a particular network or product the greater its value and the lower the prices can be, while maintaining growing profitability. p. 17

and

In terms of the size of firm they can accommodate, ICTs go well beyond the maximum size that the old international or transnational corporations were able to achieve with their pyramidal structures. Not only is it possible to guide, monitor and control a truly giant organization when it is networked, but territorial coverage and organizational complexity are relatively easy to handle with ICT and are likely to become much more so with further adaptive innovation. The technology itself is all-pervasive and can be incorporated into the most sophisticated processes for biotechnology, nano-technology or space travel as much as into the most traditional production systems, from global positioning of sheep to information about fishing conditions for small fishermen. The more varied the users the wider the innovation and wealth creating space. p. 18

In other words we are justified in including the entire scope of the globe in terms of our reach. And that an enabling technology, such as this project, will have a material affect on the oil and gas industry. This should be expected, I think, and the users and developers that get involved here will be provided with significant opportunities to expand their reach.

Regarding the size and scope of global firms, the logic of the potential leads to assessing the whole planet for comparative advantages and estimating production and transaction costs “as if” the economic space were unlimited. The greater and more diversified the economic space for global firms, the better for the production networks. p. 18

The research that was done on Professor Richard Langlois' papers and others on transaction cost theory was not a mistake in terms of the value that it will have on the oil and gas industry.

Thus globalization in some form or other is inherent to the nature of the current paradigm, as much as national economies were to the previous. The specific form that it takes in the future and the institutional framework that will guide it will depend on a multitude of factors, political, social, ideological, economic and even climatic. p. 18

The Institutional Challenge

I have been critical of the established oil and gas companies. They have refused to sponsor this software development project. Reviewing Professor Perez' research shows this is to be expected. They are dying off and the new will be built to move in and replace the old. If the International Oil Companies lost 600,000 barrels of oil per day in the last year, next year will see an ever increasing volume of decline. The investors in those companies should support this software development so that they have a means to manage those investments in the future. Investments that may be sold at fire sale prices by the IOC's. As Professor Perez' research into how previous situations developed

Unleashing all the growth potential of each technological revolution in the deployment period requires overcoming the basic tensions inherited from the installation period. A changeover of power would have to take place, turning over the helm of the economy from financial to production capital. In concrete terms this means favoring long-term over short term investments; stimulating production investment and employment-creation rather than feeding the financial casino or housing bubbles; aiming at innovations for true market expansion and not for quick financial gains; inducing the search for profits from real production and not from manipulating money; in short, favoring the real economy over the paper economy at all levels: global, national and local. p. 20

As mentioned in the previous post, as we search for forms of revenue to support these development, Professor Perez provides an interesting outlet.

The finance-led neo-liberal version of globalization applied up to now can be said to have accomplished the “destruction half” of institutional creative destruction. Perhaps that was unavoidable given the differences between the mass production paradigm and this one and the need to dismantle much of the institutional framework set up for the previous one. But, if “State fundamentalism” could have been seen as an obstacle during the installation period of the ICT surge, “market fundamentalism” is now a major obstacle for unleashing the deployment period. The continuation of unrestrained and unregulated free markets will only worsen the tensions that are the direct result of the operation of those very markets. Governments must intervene to shift the tables, not by reversing into the old mode but by creating appropriate institutions (and / or transforming the existing ones) in order to foster the deployment of the current paradigm. That is the creative half of institutional modernization. p. 20

This comment resonates with me. If the free market was working, this project would have been funded. But for the controversial nature that this project attacks the established power groups, this project will never be funded by those currently in power. Evidence of this is their ability to withstand production losses with no concern, other then for their stock options. Possibly many of the governments, such as Alberta's, the United Arab Emirates, Saudi Arabia, Russia, Britain and the U.S. will be the groups that realize the need for this projects funding. I think that this is a valid question to be asked. Are markets working? If so how in a free market economy could the global housing bubble be inflated so high. Professor Perez has a valid point in raising this controversial topic.

Professor Perez points to the methods used by President Roosevelt in the previous "turning". One could ask what is the need for Ben Bernanke to go so far in supporting the decline in housing. And the zeal at which each party's candidates are offering government solutions to fix the problems in the markets, so that the markets themselves do not collapse.

If it all sounds utopian, the reader might try to imagine the situation in the previous Turning Point. In the midst of the 1930s Roosevelt was being accused of communism for wanting the State to intervene in the economy to create employment and introduce various social security measures to confront the depression. At that time, few would have been ready to give credence to someone proposing the design of a Welfare State with full employment and with workers’ wages being sufficient to own a house full of electrical appliances and with an automobile at the door. p. 21

and

At the level of individual countries, or regions, opportunities are a moving target and action has to be designed for the conditions of tomorrow and not those of yesterday. There are three tools that can help visualize possible future directions and help viable design:

• understanding the process of assimilation of technological revolutions;
• grasping the logic of the techno-economic paradigm and
• searching the world for successful experimentation already underway.

Contributing elements for the first two has been the object of this paper. In the realm of social experiments there is much to analyze and reflect upon in today’s world. p. 21

If you are not familiar with the writings of Professor Perez, I hope this blog post provides strong motivation to begin a comprehensive view. I have highlighted many of the links in this post and hope that you find her work as stimulating as I do. It is pertinent to the users and developers in this project, pertinent because it provides a road-map for which they can follow through a rather turbulent time.

If you or someone you know can make this project real, please use the PayPal button on the left hand side, and join me here.

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This little piggie built a house of straw.

Canadian Natural Resources Ltd (CNQ) have finally announced their earnings, or should I say losses. These were originally schedule for Monday this week, and for some reason they moved them to today. Hmm.

From a management point of view this company performed exceptionally. For just the second quarter of 2008 they recorded an additional $459 million in stock based compensation. We should all toast CNRL for their audacity and guts in providing these quarterly reports.

From a company point of view there is a lot to be concerned about. Not only is the management out to lunch with respect to lining their pockets. They insist on proving to the world that they have no idea what business they are in. The hedging got a little hairy, and as such they had to record a $2.369 billion charge for "risk management activities". I think they should call it "activities of a risky management".

Over the last 12 months the firm has realized a decline in production of 41,024 barrels of oil equivalent. Oddly enough I don't think this was the reason that management awarded themselves.

This company has stepped on the proverbial land mine and are about to be slaughtered like a pig. In this day and age with the credit crunch beginning to affect the general economy. This management took it upon themselves to bury themselves with debt. Just like a pig in a mud pit. I would say this firm is on red alert to try and save itself from the receivers.

How in the world could a firm run themselves into a negative working capital position of $3.1280 billion. Simply by going into a lot of debt. $26.260 billion total debt is enough to collapse the firm just from the juggling necessary to keep that much revolving.

The over reaching and bad management have come to the point where serious action should be taken. The stocks activities this past week will certainly have the Securities and Exchange Commission sending over some Wells Notices. So I'll leave it to SEC Chairman Christopher Cox, no relation, to do the heavy lifting on this one.

Oh and by the way the firm only lost $347 million for the second quarter of 2008. So the shareholders will have to be happy with that. After all what can they do about it? If you know of an investor or employee of CNRL give them a kindly email of this blog post so that they can donate to this worthy cause, and join me here.

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Marshall Carter on MIT Video

A new video worth watching from MIT has Marshall Carter, Chairman, Board of Directors, New York Stock Exchange Group, and Director, NYSE conducting a case study in the changes he implemented.

Before I get into this video I want to communicate the process this software development project is taking.

• May 2004, Publication noting the Joint Operating Committee was the legal, financial, operation decision making and cultural framework of the oil and gas industry. And was the means in which the oil and gas industry would become innovative.
• May 2004 to December 2007, research into the validity and requirements of a system to support the innovative oil and gas producer.
• December 2007 to July 2008 Publication of the Draft Specification.
• July 2008 Determine the current management, systems and leadership are failing societies demands for energy.
• August 2008 Define and develop sources of revenue. Commence development (defined below)

Marshall Carter in setting out his case asks the following questions. I have answered these same questions from this software development projects point of view.

1) How do we know when to change?

There has to be a wide consensus that now is the time to change the current management and systems within the oil and gas industry.

2) How do we know when to launch our new strategic direction?

When the problem is evident to every energy consumer and every energy investor that the current course is a dead end.

3) How did we do it.

In a few years we may be able to answer this. I would suppose that the timetable above adds some clarity as to what has been done and where we are going.

4) How did we convince employees.

Most of the users and developers are sourced from the energy companies themselves. This is necessary as they are the ones that know and operate the business. They are also aware of the current situation and direction at the oil and gas company is futile and may not survive the disruptive changes that the industry will be going through.

5) How much effort would be needed to ensure the changes stick.

I believe that the Draft Specification answers many of the questions of what fits where. It also answers many of the problems that are systemic in the industry today. This system is the most logical means for a producer to operate. Therefore the natural tendency of users is to default towards the Draft Specification.

Marshall Carter then states that it was necessary to "build a vision from the bottom up". If anything, I think the hostility that management has shown to this project, and the hostility that I have been able to return prove this is not a "top down solution".

Carter also states "show those that resist change, that change is irresistible." I think forward progress of this software development project will soon prove to the management their way is dying. The following eight items are what Carter suggests is necessary for leading successful change. My response to each point is provided.

Leading Successful Change

• Sense of Urgency

There is no greater sense of urgency then the one that the energy consumer currently faces.

• Guiding Coalition

The use within this project to use the collaborative tools and methods to make this project a result of the users and developers who work within oil and gas. What has not been expressed before is an appeal that I think resonates with the users. Users have ideas on how to make things better. They don't have access to change the Information Technologies that they are required to use. This software development project enables them with a software development capability, source of revenue and chance to affect change within their area of work.

• Vision & Strategy

A vision and strategy that is grounded in the research and academic thinking. A strategy and vision that captures the possibilities of the Information Technologies available to users today.

• Communicating the Change Vision

Blogs and Knol's are powerful tools for reaching out to like minded groups.

• Empowering Broad based action.

This is more of a personal decision for the users and developers to make. No company or manager needs to approve their participation here. People with Ideas and who need software Objects to help them do them their jobs.

• Short Term Wins.

We can move to provide the short list of development targets (listed below) within a reasonable period of time.

• Consolidate Gains and Provide More Change.

The development targets should enable the community to move further and faster then they ever believed they could.

• Anchoring new approaches in the culture.

Using the Joint Operating Committee is enabling the use of the culture of the industry. If this is a requirement of successful change, what does that say about this software development project?

Marshal Carter towards the end notes that what gets measured gets done. So I want to set out these short term targets for the community.

• Establish a user based definition of security and access control requirements.

• Establish "User Archetypes" that implement the Military Command & Control Metaphor.

• Develop and test the Security & Access Control module using Sun's Federated Identity and Project Hydrazine.
• Go live with the users of this systems as soon as possible. Iteratively improve the products user interface, performance and security to meet and exceed user based standards.
• Resell the security offering under license to other industries.
• User based Wiki development towards final specifications.

Lastly Carter notes "Engineering systems at this point is a thinking [and building] process which allows you to identify and solve problems". So lets get to work. Find people to donate and participate in this project, and join me here.

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That's 3.7 million man years per day, lost.

In the book "Profit from the Peak" it was noted that each barrel of oil is leveraged to 18,000 man hours of equivalent labor. This is intuitively logical to most energy consumers. Based on Friday's New York Times, the one year 600,000 barrel per day production loss by the International Oil Companies (IOC's) translates into almost 3.7 million man years of work / day. That is each and every day from now on.

It's time to make this software development project real. Quoting Professor Murray Rothbard’s (1985, p. 283) words:

“Entrepreneurial ideas without money are mere parlor games until the money is obtained and committed to the projects.”

It is therefore time to stop playing parlor games and get down to the job of building this software development project. If the loss of 3.7 million man years per day doesn't quantify the size of this problem nothing else will.

Therefore I am asking everyone and anyone who has access to a budget, investor, oil and gas firm, energy consumer or friend. And would like to donate towards developing this project. Please click on the newly installed PayPal button to make a donation to this worthwhile project. The service accepts all major credit cards and since I will be declaring these donations as revenue, you will be able to deduct the donation from your taxes.

Most of all, thank you, and join me here.

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