McKinsey Financial Crisis, Past and Present

Providing an analysis of previous recessions and depressions, McKinsey gives clarity to the economic situation we find ourselves in. The public discussion is beginning to recognize that this is both a financial crisis and a recession. Most would agree that this environment is more toxic then previous events.

Living through the economic decline of the early 1980's, the Canadian governments much loved National Energy Policy and the decline in oil prices to single digits caused Calgary to become pretty much a ghost town. We had sections of the papers classified ads dedicated to the mandatory foreclosure announcements. You could fire a cannon down the downtown streets and never hit anyone. And that was during lunch. 

McKinsey have identified the early 1980's recession as fairly severe. The Canadian situation was exacerbated by the discriminatory policies of the Liberal government against the Western Provinces. And the politics of the Saudi's and the U.S. creating a decline in pricing that eventually did bankrupt the Former Soviet Union. This recession was amongst the longest. The two depressions that occurred in the 20th Century, the great one, and the lost decade of the Japanese. 

The way that I see this downturn is very much through the lens of Professor Carlota Perez' long range economic analysis. Citing five previous "depressions" that occurred in predictable fashion, all of these events were significant in that they were the means of initiating fundamental change in the key economic drivers. My opinion is we are moving from the inefficiencies of the bureaucracy, to organizational business models that exploit the full value of the Information and Communication Technologies (ICT).

What we can learn from this McKinsey paper might be valuable, so lets dig in. We see two groups of industries that are suffering as a result of the downturn. Auto's and manufacturing appear to be significantly over built with a capacity overhang of monstrous size. How government policies can overcome this "cost" is difficult to see. The decline of the U.S. based manufacturers to mere shadows of their current selves is what is needed to effect the changes that are needed in the economy. How the political leaders deal with this is unknown, and potentially dangerous as the natural forces are attempted to be stopped. 

On the other side the American economy is the high tech engine of the world. Companies like Apple, Google and Intel are global leaders with cash balances of up to $30 billion. These are the new economy preparing to lift all boats and make society more prosperous and efficient. Other then higher taxes that will be assessed to pay for the auto and mortgage bailouts, how will these companies attain the value add to make up the difference from the auto companies. Most people would agree that reorganization of firms holds the possibility of leveraging the talent in these organizations. 

From a company standpoint, the critical issue is the impact such shocks and subsequent downturns can have on the availability of credit—and the impact of a credit shortage on the real economy and on consumer and corporate confidence. The downturn after the S&L crisis of the 1980s and ’90s, when bank write-offs equaled some 4 percent of GDP, lasted about two years. GDP ended up about 4 to 5 percent lower than it would have been given the pre-crisis trend line. After the bursting of Japan’s asset bubble, the country’s economy grew by less than half a percent a year in real terms for a decade, and GDP ended up around 18 percent lower than it would have given its pre-crisis trend line. We estimate that the present credit crisis will cut real GDP by around 3 to 7 percent from trend growth. If the US economy were to follow the same path it did in the more severe crises, the total lost GDP could be two to three times greater than that estimate. pp. 1 - 2

Up to a 21% decline in U.S. GDP is a serious hit. A hit that would have to be ranked in the depression category. What is unique about a depression is the length of time that the declines occur and the lost opportunities of the economy during these protracted periods. Glossing over the problem, as the U.S. monetary and fiscal policies are attempting, is the wrong way to make the time shorten. Focusing on the strengths, job retraining and letting the social system kick in for those effected is where they should be focusing their efforts in my opinion. You have Toyota, Honda and Ford that are going to make it in the long term, lets leave it to them to work out the problems. A better fiscal stimulus may be tax cuts that provide the consumer with additional cash to use in their own transitions.

But the fallout from the past century’s two worst crises did considerably more damage. In the countries hardest hit by the 1990s’ Asian financial crisis—Indonesia, Malaysia, the Philippines, South Korea, and Thailand—GDP shrank by an average of 8 percent in 1998 in local-currency terms. Since their currencies halved in value, on average, in US dollar terms the damage was catastrophic—bankrupting many companies and causing widespread social unrest. And during the Great Depression, from 1929 to 1933, 28 percent of real GDP was lost. p. 2

Organizational changes would reduce the impact of these declines and enable the economies to grow well beyond what the current bureaucracies have established as possible. Acceptance of the scope of the difficulties that we are in seems to be the major impediment to thinking constructively as to our collective future. The pain is here, lets not wallow in it.

Equity markets are the most visible and dramatic indicators as crises unfold. At the end of October 2008, the S&P 500 index had fallen by 46 percent from its peak a year before (October 9, 2007, to October 27, 2008). By late November 2008, the US equity market had given up almost all of its gains since the 2001–02 dot-com bust. Although nobody knows if the market has reached bottom, the fall so far isn’t unusual by historical standards. Japan’s Nikkei 225 fell by 48 percent from peak to trough (December 29, 1989, to October 1, 1990) during the banking crisis, though the market has subsequently fallen still further; at the end of October 2008, it retained less than 20 percent of the peak value reached in 1999. During the Asian financial crisis, the equity markets of Indonesia, South Korea, and Thailand fell by 65, 72, and 85 percent, respectively, in local-currency terms. In the United States, the S&P 500 index fell by 49 percent from March 24, 2000, to October 9, 2002, after the tech bubble burst. pp. 2 - 3

The Japanese stock market remains at 20% of what it was in December 29, 1989! Lets not go down that road, where people choose to ignore the problems they are in, the cost is too high. Now with the aging population of Japan becoming a significant issue, their inability to address the scope of their problems in the early 1990's threatens to remove their economy from the global system. All as a result of high real estate valuations.

Since the peak, housing prices have fallen by 18 percent, as measured by the Case–Shiller housing index, whose futures imply a further fall of 19 percent from the peak. Losses in the housing and mortgage markets, when realized, could considerably exceed those in the stock market as of early December 2008. p. 4

McKinsey provides sound analysis of how companies should approach this downturn. Here are some of their recommendations. 

What should companies do?

We do not yet know how the current crisis will evolve. The confidence of consumers, corporations, and investors—a key factor—cannot be forecast. Nor can government policy. Yet research shows that in past recessions, companies pursuing a purely defensive strategy fared less well than their more active counterparts. As the economy enters what will probably be a difficult downturn, companies should prepare to seize their opportunities. p. 5

And for oil and gas, they should turn to this community to begin the process of building the software necessary to define and support the innovative oil and gas producer. A software application that is based on using the Joint Operating Committee as the key organizational construct of the industry. One that aligns the Joint Operating Committees communication, legal, financial, cultural, and operational decision making frameworks with the bureaucracies sole purpose, compliance and governance. A software application that eliminates the bureaucracy and replaces it with the Compliance & Governance Modules Military Command & Control metaphor. With this alignment the conflict and contradictions between the JOC and the bureaucracy cease. The Military Command & Control Metaphor governance methods of the People, Ideas & Objects Draft Specification provides a sound vision of the possibilities of what this community could build and support in terms of a more innovative oil and gas producer. 

Please, join me here.

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McKinsey Leading through uncertainty

This article was highlighted in McKinsey's Global Institute. Although it is part of McKinsey's  "The Crisis: A new era for management" and would be included in our review of those 19 standout papers. This article is co-authored by Diana Farrell, Director of the Global Institute and one of my favorite authors. This document, of all the McKinsey documents, will stand as a critical part of any oil and gas workers toolbox. It is an absolute must read and one that is on target in terms of what we should be doing in these economic times. (Click on the title of this entry.)

These times are different. It is clear that this is different when we can point to the large number of events that have not occurred before. For example, when was the last time Chrysler shut down all of its plants in North America. Although for only 30 days, I would ask how do you restart a car company? Or, the long list of retail operations that soon will be shuttering stores with no 30 day deadline.

I want to simply highlight the following four quotations that relate specifically to this project for oil and gas, and ask you to please join me here to start building the software that is necessary for rebuilding the oil and gas industry.

Most companies acted immediately in the autumn of 2008 when credit markets locked up: they cut discretionary spending, slowed investment, managed cash flows aggressively, laid off employees, shored up financing sources, and built capital by cutting dividends, raising equity, and so forth. While prudent, these actions probably won’t produce the short-term earnings that analysts expect, at least for most companies. In fact, it’s time they abandoned the idea that they can reliably deliver predictable earnings. Quarterly performance is no longer the objective, which must now be to ensure the long-term survival and health of the enterprise.

Professor Carlota Perez says the only way that we can move to a higher performing economy is by changing the basis of the economy. We can't do that on a prospective basis, only by keeping the preceding ways, the bureaucracy, until the point to where it collapses upon itself.

More resilient

A crisis is a chance to break ingrained structures and behaviors that sap the productivity and effectiveness of many organizations. Such moves aren’t a short-term crisis response—they often take a year or more to pay dividends—but are valuable in any scenario and could help a company survive if hard times persist. Although employees may dislike this approach, most will understand why management aims to make the organization more effective.

McKinsey is the number one consulting firm in the world. It has been for many years and have an established pedigree that others should aspire to. This next quotation should be taken with that in mind and the opportunity you have to join People, Ideas & Objects .

This may, for example, be the time to destroy the vertical organizational structures, retrofitted with ad hoc and matrix overlays, that encumber companies large and small. Such structures can burden professionals with several competing bosses. Internecine battles and unclear decisions are common. Turf wars between product, sales, and geographic managers kill promising projects. Searches for information aren’t productive, and countless hours are wasted on pointless e-mails, telephone calls, and meetings.

There is a clear vision of how an oil and gas producer could be more effective using the Joint Operating Committee. That vision is reflected in the Draft Specification.

Experience shows that streamlining an organization to define roles and the way those who hold them collaborate can greatly improve its effectiveness and decision making.

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McKinsey IT Global Survey

McKinsey have published their third annual Information Technology Global Survey. This survey was taken during a time of economic stress, and as such, I feel it necessary to comment on the state of economic affairs as I see them. Yesterday we saw Federal Reserve Chairman Ben Bernanke essentially capitulate to the power of this economic decline. Moving the interest rates to 0% and stating he will do what he has to do to solve these problems, there is a tacit recognition of the scope of this depression.

I have been referring to this downturn as the mother of all depressions, and I think I would get a consensus on that. The only remedy to this is to eliminate the inefficiency within the economy. That means radical organizational changes supported by powerful new IT systems. As I state on occasions "SAP is the bureaucracy" and to change the organization requires first and foremost a change in the systems used by the firm. It is within this economic backdrop of this survey that I make these comments. The survey respondents are generally the ones that will be fairly quickly losing their jobs. Click on the title of this entry to view the survey results.

It may be considered optimal or ideal to have IT lead the organization in term of innovation and competitive advantage. A competitive advantage that would be attainable by a fundamentally different system like the Draft Specification of People, Ideas & Objects could provide.

CIOs and other senior executives agree that ideally these capabilities should, for example, promote innovation and better enable companies to seize new opportunities. Still, they continue to see a gulf between these aspirations and the value that IT currently delivers. p. 1

Existing demands of IT and performance requirements show that the pressure to just stay afloat becomes more difficult.

The global economic downturn complicates matters. Respondents cite continuing pressures to deliver on existing IT projects and services at a time when they expect spending to fall. So they are making trade-offs: reducing IT operating expenses so they can maintain high-priority new investments that support broader business goals, such as improved sales force or supply chain management. p. 1

I suspect these types of decisions are being made throughout the oil and gas firms highlighted in our piggy series. Failure, despite the belief that the government can save everyone, is not an option. It is what is needed for society to move forward.

I have to reiterate the value that McKinsey Consulting is providing here. They are consistently showing the right direction for firms to move too. For the past number of years (3 by my count) they have shown that they are concerned about the economic consequences and are actively moving their firm and clients to the new model they preach. This survey is no different. As I have said before, I have allocated a sizable budget for their consulting to this project when we begin. Precisely for comments such as this.

Unprepared for disruption

Nearly two-thirds of respondents say their organizations are at risk from information- and technology-based disruption. Ranking highest among disruptive forces are potential shifts in customer expectations for better products or differentiated services enabled by information- and technology-based capabilities. p. 2

To add insult to injury, it is the other C class executives that are looking at their own internal IT groups with what sounds like the greatest of disappointment.

IT’s value to the corporation

The survey found aspirations for IT are substantially unmet: respondents see a large gulf between their IT organization’s current priorities and what IT could contribute. p. 3

Makes me think that there may be a spot for People, Ideas & Objects yet! And McKinsey reflects a strong intent for businesses to improve in this area. However, based on my experience with the Canadian producers I have highlighted as the Piggies, they are only concerned with their retirement and ensure their activity level remains low enough not to strain themselves. The point that I am trying to make is that saying this is the "intent" may make it through their budget processes, but we know it is mostly, if not all, BS.

This year’s results show an area of notable improvement: the way IT strategy is developed. Fifty-nine percent say that their companies develop multi-year IT plans, up from the 52 percent response last year, and 56 percent say that their IT strategies include technology-driven business innovations, versus 42 percent last year. Still, two-thirds of executives say further improvements are possible by integrating business and IT strategy more closely. They favor a process where IT strategy and the “art of the possible” in technology influence the development of business strategy, closing the loop in strategy development (Exhibit 3). This joint development of strategy by business and IT would reduce risks of surprise disruptions and better involve IT in bolstering competitive advantage. p. 3

The remainder of the document discusses the budget allocations of these managers. This I perceive as an academic exercise since none of it will come about. The economy will be acting swiftly against those that are unable to bridge the gap from the old to the new. And the new begins here with People, Ideas & Objects and the Draft Specification. Please join me here.

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McKinsey's Innovation Lessons From the 1930's

In their series dealing with the current economic crisis. McKinsey have published a short but interesting article on innovation in the 1930's. They have subtitled the document.

History suggests that even the deepest downturns can create huge opportunities for companies with money and ideas.

As part of their "Crisis" series, this document can be downloaded from here. Highlighting the efforts of DuPont in April 1930 and how they discovered and developed Neoprene. With low commodity prices and abundant research talent, they were able to discover and conduct their research over the course of the dirty thirties. They also highlight the successes of Hewlett-Packard and Polaroid during these times.

Their conclusion is one that should be considered carefully. We now have a situation where the governments around the world are attempting to stop the natural process of renewal. Instead of looking forward to the benfits of hardware, software, physics, nano-technology, bio-tecnology, genetics and a variety of new and promissing opportunities. We are proping up carcasses like GM, Fanny, Freddy and a long list of poorly run firms that don't want to face the music.

The experience of the 1930's also illustrates a broader point. Although deep downturns are destructive, they can also have an upside. The depression-era economist Joseph Schumpeter emphasized the positive consequences of downturns: the destruction of underperforming companies, the release of capital from dying sectors to new industries, and the movement to high-quality, skilled workers toward strong employers. For companies with cash and ideas, history shows that downturns can provide enormous strategic opportunities.

In oil and gas we have a variety of challenges that need a new approach. The approach I have suggested is documented in the Draft Specification, please join me here.

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Cisco's John Chamber's on MIT video

Subtitled "Building the Next Generation Company: Innovation, Talent, Excellence."

And we are back once again. I have not solved all of my technical issues, but I should be able to post every business day.

Outside of these technical issues my biggest problem is that it has become obvious to most people that addressing the organizational structures of companies is needed. The economic difficulties we are experiencing are providing the opportune time for the future leaders to implement the changes in their industries. The sheer volume of analysis being conducted on this topic has grown exponentially. Not only has the quantity increased, but the quality of the ideas being generated has improved. Much of this thinking is directly applicable to the work that I suggest we undertake in the oil and gas industry.

This current video from MIT promises to provide some valuable input to those people that are interested in this project. I previously reviewed an MIT video of Cisco's Chambers a few years ago, and was very impressed with this man's communicativeness, if that is a word. He is a truly impressive and articulate presenter. So lets dig in.

Not willing to hedge his bets and mitigate the consequences of what he says. Chambers fires his first comments with this sweeping declaration. Show me a leader in oil and gas that has the gumption to say these types of things.

What is exciting is what has changed and at the same time what has not. When you look at the future of companies, I think we are going to see the most fundamental changes in business and government. Moving from command and control to truly collaboration and team work.

Noting the recession is definitely taking hold, Chambers states that this is the opportunity to make the necessary changes. At around 6 minutes he states the following 3 points as his economics 101 prescription for addressing the economic impacts on your firm. 

1. Understand the effect on your company. Was the problem the consequence of your own actions.
   
2. How long do you think the recession will last and how deeply will it affect your firm.
   
3. The first action that should be taken is to prepare for the upturn.
   

Chamber's states governments role in the economy will be expanded. Something that I have noted in the business model of People, Ideas & Objects. Governments, and particularly those that have oil and gas production as part of their economy, have a vested interest in making this software development project go forward. The second point relates to all industries. Governments need to support the software industry much in the same manner and mindset in building the "Eisenhower Interstate". Software is the future's infrastructure, without it the future will not be as efficient as it could. 

Chambers goes on to comment that creating a change mindset scares people. Providing a vision  helps people to understand and to support the changes that are necessary. The vision I see for the oil and gas industry, as reflected in the Draft Specification, provides an understanding of how, by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer, it will provide the producer with the mindset and higher performance necessary of the future economy.

@ 12:30 Chambers talks specifically about business model innovation. Throughout this time he talks about the volume of productivity growth. That the Information and Communication Technologies would provide the ability for economies to exceed the expected productivity performance of most economists. From Chamber's perspective IT is not a cost, but an investment that provides real returns.

@ 16:20 Chambers recalls a discussion he had with Alan Greenspan of the Federal Reserve. Talking about the possibilities of heightened productivity from IT he notes that Greenspan stated "A new generation of innovation would be around the corner". Chambers I think has been one of the largest proponents of using IT with new business models and organizational changes. I only state this to square the circle of how these enhanced productivity volumes are achieved.

@ 18:28 Chambers notes that Cisco has moved from 1 or 2 major initiatives up to 26 initiatives in a single fiscal year. Reflecting the volume of work that is truly possible by innovative firms. Might I say that the oil and gas industry needs to up its performance in a manner similar to what Cisco has achieved. 

@ 29:00 Chambers begins to talk about the way that he works today. He blogs. And that is how he communicates. Wikis are proliferating through the organization. And the majority of his meetings are held virtually through Cisco's use of their own "telepresence" products. I had previously wrote about these products here. Chamber's reflects on the dramatic impact Telepresence has made on his travel schedule compared to three years ago. 

To participate in building the types of systems that are needed for a highly productive future in the oil and gas industry. We need to build the software that identifies and supports the Joint Operating Committee in the manner that the Draft Specification describes. We can begin that by readers joining this community by following these instructions.

Towards the end of the video Chambers begins to sell the Cisco Telepresence product line.  I am one that certainly has drank the technological kool aid and include the value of face to face virtual meetings as a critical part of this software development project. But there is a larger point that I would be missing if I did not state the value of face to face virtual meetings of the representatives of the different producers sitting at the virtual Joint Operating Committee. If, in addition, these people were supported by the kinds of business tools that are discussed in the Draft Specification, then I think we can see how the industry could expand the number of initiatives it undertakes and the society as a whole be able to depend on the energy industry to fuel their imaginations of what is possible. 

Please, join me here.

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Technical difficulties...

Have precluded me from posting. With the loss of my third and last computer, posting will be light.

McKinsey, Strategy in a structural break.

I can see this is going to be an all McKinsey month. McKinsey have undertaken a comprehensive revision of their website, and have now followed on with an increase in their sites content. This series appears to consist of 19 articles and I will be highlighting the pertinent ones in a series of blog posts this month. Our first document, as typical of McKinsey documents, is topical to the work that is being done in oil and gas, innovation, and People, Ideas & Objects. The subtitle or introduction begins within the context of our current economic situation;

During hard times, a structural break in the economy is an opportunity in disguise. To survive—and, eventually, to flourish—companies must learn to exploit it. p. 1

The world is quickly realizing the depth of the current economic difficulties. Whether we are in a deep recession or depression is the debate currently taking place. We certainly have much to be concerned about and will need to be mindful of the economic difficulties. We also have a variety of opportunities. If we look at this time as a clean slate, our opportunities are magnified substantially. Now is the time to ask, "what can we do", with corporate accountability, organizational performance, innovation and a brighter future being what is possible. An opportunity that we can call ours, if we take the opportunity. That is what this McKinsey article is about.

By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan. p. 1

The author rightly criticizes the "strategy" term to describe anything that may be happening with the firm. In that context this quote puts the strategy much clearer in my opinion. If we took the times that we are in and formulated a "real" strategy; and approached this depression from the viewpoint of a diagnosis of a challenge. We begin to see the People, Ideas & Objects software development project in line with this thinking of now being a great opportunity. The results of which will be going to winners and losers in the oil and gas game.

A structural break.

As I have stated here before, and based on the writings of Professor Carlota Perez, we are in a "turning" based on the developments brought on by the Information and Communication Technologies (ICT). Why do we get in the car to sit in the long line ups to get to work. It's not necessary, yet we are required to do so by the bureaucratic management of most firms. Is this sustainable? Or should we approach this structural break as an opportunity to make the changes to the oil and gas industry. Eliminating the structured hierarchy and replacing it with the Joint Operating Committee is what the 600,000 words on this blog are about.

A corporate crisis is often a sign that the company’s business model has petered out—that the industry’s underlying structure has changed dramatically, so old ways of doing business no longer work. In the 1990s, for instance, IBM’s basic model of layering options and peripherals atop an integrated line of mainframe computers began to fail. Demand for computing was up, but IBM’s way of providing it was down. Likewise, newspapers are now in crisis as the Internet grabs their readers and ads. Demand for information and analysis is increasing, but traditional publishing vehicles have difficulty making money from it. pp. 2 - 3

I point to the fact that the production and reserves of the oil and gas companies are in steep decline. The transition from the banking mentality of managing 10% returns on oil and gas investments has failed. The new basis of the innovative oil and gas firms business model is science. Where the earth science and engineering disciplines are enabled to fully exploit the current understanding and move the science and understanding forward. We know that a structural break has affected the production profiles of the producers, but did not create the corporate crisis that McKinsey suggests. The management of the producer firms were enabled in their ability to report record profits from higher prices. Therefore the corporate crisis that is needed is not as a result of the production and reserves decline, sad as that may seem, but the temporary 12 - 18 month decline in energy prices that we are currently experiencing. As it turns out I am frankly surprised at the scope of the decline in energy prices. Since this software development project was not developing the traction necessary for the producers to act, maybe now the oil and gas investor, who has been affected the most, will.

Based on the prior quote, the business model of the oil and gas producer has failed and a corporate crisis is what is necessary to clean out the industry. Here's hoping that I may find work in the oil and gas industry once again.

The wrong way forward in a structural break during hard times is to try more of the same. The break and the hard times are sure indications that an old pattern has already been pushed to its limits and is destroying value. p. 5

Here, here as they say in politics. Most of the producers have lost the ability to generate the profits their management needed to reward themselves, and their managements motivation is in question. The firms are in a state of crisis and are having most of their projects scaled down to preserve cash, something they should have a bounty of. However, are cash poor in the majority outside the international super majors.

Consider an analogy. When oil is cheap and plentiful, we create a vast infrastructure that works well if oil remains cheap and plentiful. When it becomes expensive, we wish we had a different infrastructure. Similarly, when economic opportunities abound, we invest in a management infrastructure that harvests them very well. When the field of opportunities becomes less verdant, we must change our management infrastructure. A system that requires companies to spend at least $300,000 a year in wages, benefits, support personnel, and systems to enable one educated person to do his or her job could be unsustainable in a less luxuriant world. p. 7

Doing things differently.

Enough discussion of what is plainly obvious to most outside the rarefied air of management. What do we do about this crisis. The second major point of my thesis was that software has taken on a much more important role in defining and supporting organizations. That to change anything, must first be reflected in the software. Coining the phrase "SAP is the bureaucracy" shows this thinking to be valid, and at the same time shows what would be necessary to make any changes.

So during structural breaks in hard times, cutting costs isn’t enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to simplify and simplify again. Since companies must become more modular and diverse, eliminate coordinating committees, review boards, and other mechanisms connecting businesses, products, or geographies. The aim of these cuts is to provide lean central and support services that don’t require business units to spend time and energy coordinating their activities. Break larger units into smaller ones to reveal cross-subsidies and to break political blockades. You may think that coordination costs will rise if you fragment the business, but you must do so to expose what ought to be streamlined. p. 7

By adopting the Joint Operating Committee (JOC) as the key organizational construct solves all of these objectives. Review of the Draft Specification shows the effect of simplifying the business to its JOC culture has the effect of providing the innovative oil and gas producer with the means to move to the science based business model.

But these changes require more. Software has been around for several generations in the oil and gas industry. None of it has fully satisfied the needs of the industry. Primarily because of the rapid changes that are reflected in the base business. What is needed is a software development capability to ensure that the innovative oil and gas producer can move and benefit from the many industry changes. A systems development that puts the users in the forefront of defining their needs. One that addresses the high failure rate of software development projects, where project and development risks play a significant part of those failures.

In ordinary hard times, the traditional moves are reducing fixed costs, scope, and variety. But in hard times accompanied by structural breaks, you must rethink the way you manage. Companies that survive and go on to prosper look beyond costs to the detailed structure of managerial work. Several new issues come to the forefront:

• How much extra work results from the way incentive and evaluation systems relentlessly pressure managers to look busy and outperform one another?
  
• Which information flows can you omit? Information that doesn’t inform value-creating decisions is a wasteful distraction.
  
• Which decisions and judgments can you standardize as policy rather than make in costly meetings and communications?
  
• How can you work with customers, suppliers, and the government to simplify their processes so that you can simplify yours?

Recessions are neither good for the economy nor morally uplifting. But since we are diving into a period of neck-snapping change, we had better start the process of reformation before it’s too late. p. 8

For oil and gas that means People, Ideas & Objects, please join me here.

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Information and Communication Technologies (ICT).

Change is over estimated in the short term, and underestimated in the long term, so the saying goes. Technology had a number of days of reckoning in the early part of this decade. A time when the elevators were projected to fail, for a day, and the creation of technologies that appeared to solve the source of all the worlds dog food problems. I was still working in management in the oil and gas industry, and had no compelling reason to join these hysterical technological projects. This software development project is not about the technology for technologies sake.

Today our economy is going through the necessary transition to enable society to move to higher performance metrics. Much of these economic changes will be focused around the elimination of the bureaucratic processes and replacing them with new and more innovative business models and organizations. This transition is driven by the inefficiency of the old ways in which to organize and is contrasted to what is possible in applications like People, Ideas & Objects. Structural organizational changes with today's Information Technology (IT) provide real value generating capabilities and efficiencies.

The economic news continues to surprise on the downside. It now appears that the economy is actually going to slow quite substantially, with many people uttering the D word. If there is a depression, and that is what is necessary to instill the changes in the industries, we are looking at a 5 year turn around. The necessary time to make the changes to the industries to enable the more efficient means to be built and become operational.

The stimulus that governments are now applying is a covert "Quantitative Easing" by the Federal Reserve. This policy, I think, has been put into place to eliminate the possibility of deflation coming into the picture. The Fed has pumped cash, straight from the printing press, into the economy in an unprecedented fashion. The best reading on what is happening is provided by Rebecca Wilder (not her real name.) Her blog post provides two graphs that show the money multiplier is collapsing, and the bank reserves are surging. The latter appears to me to be attempting to make up for the loss of economic activity due to the multiplier effect's decline.

Many people have already been affected by the market meltdown. Reliance on a good job, your pension, mutual funds, stocks and your home now seem to be the wrong strategy. The safe road now seems to have been the most risky alternative. What should someone do in order to deal with this situation. Hedge your bets. If the economy does complete the expected transitions it will be in a new form. One that optimizes the potential of ICT. Where systems like People, Ideas & Objects are built to enable the new economy to prosper. Like this project, none of these applications are built at this time. In many industries there is not even a comprehensive vision of what is possible in the future. I believe I have provided a strong and coherent vision of how the energy industry could operate in the future. And have led the charge to make the systems available to the marketplace at the soonest possible moment. I am unaware of any other alternative to turn too at this time.

For people to change requires that they be disrupted in this violent of a fashion. If we could all realize and act to make the transition seamless we would, but we can't. We must be disrupted to the point where the decision is made not to go to work, and what to do next. For that is the only means of comprehensive change that can be put in place. The reason people will stop going to work is because they know there is nothing there for them. Their next question is "what will I do now." And that is where this project comes into play. People, Ideas & Objects is the future for the oil and gas industry. A place where you will log into work as opposed to drive to the office. A place where the systems based on the vision of the Draft Specification provide the means and manner in which people can do their job in the industry.

These are the facts of the situation today. It would be better if we didn't have to go through these changes but that is not an option. The bureaucracies are unable to provide us with a sustainable way of life. Therefore we must move to build higher performance organizational structures. The upside is that these new ways of doing business will provide for substantially better standards of living then what we were accustomed to in the past.

So we can either hide from the difficulties and ignore that they are happening, or proactively make the transition as seamless as possible by accepting that this is and will happen. And govern yourself in a fashion to optimize the upsides. For oil and gas it is as simple as following the procedure necessary to join People, Ideas & Objects, and limiting the damages to your world. Please join me here.

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Bloomberg is reporting

A little off topic but the scope of the economic difficulties is coming into focus. Bloomberg is reporting the Fed and Treasury are prepared to provide unlimited financial resources to the market to offset the threat of deflation. If you have read the Preliminary Research Report that I wrote in May 2004 I expressed a concern that if left unchecked, the economy could slide into a deflationary period that would be particularly brutal. It would seem that the Fed is in agreement that this must be avoided and is willing to spend up to $7.4 trillion to eliminate the risk. 

Are we not pushing on a rope? Having the value of money erode in the market is one thing. Having the governments contribute to its further erosion by dropping interest rates and bailing out potentially failed organizations just seems wrong. People need higher interest rates in order to encourage savings. The more logical solution to this problem is to get people motivated to invest by giving them a decent return for the risk they are taking in their investments.

We can generally agree that the source of this problem was the low interest rates of the early part of this decade. (See my entry on mis-allocation of capital.) When capital provides little to no returns, with high risks associated with those returns, money is considered cheap. If money had a cost, would it not allocate financial resources to the projects with the highest return. When money is worth little investments have little to compete with. When the government guarantees every and all transactions, a sloppiness in the capital allocation process starts us down the road to moral hazard. 

I know this is contrary to current economic thinking but I have to ask are we only making this problem greater by further diluting the already sloppy capital allocation that has been carried out? It seems to me to be the case.

Our current policies of expansive money supply were created in the great depression. They are assumed that these are the means in which to have the economy return to a normal operating environment. But is this assumption, which is based on the lone event of the great depression interpreted incorrectly? Stuffing the banks full of cash does not make them want to loan it out. Handing money to consumers does not make them want to spend. What motivation is there to take a risk?

One unforeseen consequence of this over-stimulated economy is the demand for energy was obviously significantly overstated. The current price declines are a reflection of the influence of deflation in a market and the long term capital deflation appears to be right around the corner.  To make matters worse, the decline in reserves and production are only exacerbated by the energy industries long term capital projects being shelved. How many times have we seen these big projects stopped and never return. It will be a gutsy investor who stands up and says their building a new offshore drilling rig. Making our future production horizons even more constrained.

There are serious distortions being introduced into the marketplace for energy. I think the dynamics of the industry are accelerating at a pace that many of us, and certainly myself, are only now realizing how fast paced this environment is. One last link to Bloomberg shows them suing the Fed in order to determine if the Fed has made an unannounced change in their policies and are targeting inflation; to eliminate the deflation by flooding the market with "printed money." If we already have the recession, why doesn't the Fed invert the yield curve to force the market interest rates to rise. Throwing cash around in a panic is only making everyone nervous.

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The three Applications of the Preliminary Specification.

I thought that I would mention the design of the three applications that will house the modules of the Preliminary Specification. These three Applications have been determined to be the applications that the users, the producers and the Joint Operating Committee's will access. Essentially different views of the data, different views of the modules and different application processing contained within each Application. Each Application will contain different perspectives of the different modules as defined in the recently completed Draft Specification.

This work of identifying the Applications needs to be done in the Preliminary Specification and is a critical part of the People, Ideas & Objects deliverables. I have left the design and development of these modules to the greater community, as it is the community who will be best able to design these applications. The remaining work that needs to be done is too comprehensive for one individual to comprehend, understand and implement. Recall the budget, which has not been finalized, may contain the B, as in Billion dollars of development costs.

My role, as I have mentioned before, is to remove myself from any further design and development of the applications and modules. This is for my own sanity and the fact that I could really end up getting in the way with a number of my own preconceived notions that don't have any bearing on the performance of the innovative oil and gas producers. I have committed myself to ensuring that the resources and needs of the community are provided for the business end of these software developments.

I have a sense, and I have not done any research in this area, that the design and implementation of these applications will need to have significant research and development of new and unknown attributes. Just identifying what these attributes are will be a difficult and exciting area of research. I am calling for 100 individuals to participate in the Preliminary Specification. Researching the Applications will be a critical area where I suspect much value can be added. Please, join me here.

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