McKinsey: Bryan and Rumelt, Part l

It is astonishing to me the pace and depth of research and articles that McKinsey are producing in this current economic crisis. And in suggesting that the scope is limited to the current crisis would be short selling the leadership that McKinsey have provided since at least 2005. I began writing this blog at the end of that year and have published 54 other McKinsey article reviews since. All of these being of the highest quality of input that I have been able to find.  

UCLA Professor Lowell Bryan and McKinsey Director Richard Rumelt talk about the strategies needed to address these financial difficulties. And in the introduction it is noted as to how we found ourselves in this financial crisis. 

Factors that lead executives to take huge unsecured risks. Including the separation of risk and rewards and too much managing by the numbers. 

Definitely on topic, and when an article starts off with the comment;

Dramatic failure of management and governance. 

I'm sold. The commentators introduce a metaphor for what they see today by drawing on experiences in the development and operation of the Hindenburg. One of the authors had the opportunity to discuss with an individual who rode across the Atlantic on the Hindenburg. Noting the individual marvelled at the smooth nature of the ride. Which of course it did until it crashed. The point being that the viewing of irrelevant statistics, such as the Hindenburg's smooth ride, miss the level and type of risks of that mode of transportation being inherently dangerous. Management at the manufacturer of the Hindenburg noted that the crash would be someone else's problem. 

In oil and gas I have written about the disjointed nature of the industry in this blog. Running the Pig series which highlights 4 local producers who have declining reserves and production, yet at the height of their folly they had assigned themselves $3.6 billion "in the money" stock options. 

Yet there is a larger issue at play in the industry, and this article is directly on point when it mentions the Hindenburg's management suggesting the crash was someone else's problem. Oil and gas production in the world is not growing. We've known that since 2005, and may indeed be in the early years of an advanced decline. Energy is the oxygen used to power our economies, without it we are all dead. Yet my daily interaction with oil and gas managers reflects that this is not deemed as their fault. That is someone else's problem. 

Asking difficult question like "what are we doing" vs reflecting on irrelevant results are some of the points made in the McKinsey article. They also point out the disconnect between management and ownership and reference Adam Smith's agency theory. These points are exactly why I believe the two sources of revenues for this software development project are the oil and gas investors themselves and the governments that have royalties as part of their income. 

The last point I want to make in this first edition of the McKinsey article is around the 8:10 point in the audio. A comment is made that people don't know where they are going

... and they haven't got a business model and strategy for where they are going, they have a strategy and business model for smooth sailing. 

I believe the future successful producer will have to move from the banking mentality of predictable returns to an innovative stance based on the underlying science and engineering of the industry. My research shows that using the Joint Operating Committee provides the appropriate stance for the innovation and science to iterate within the commercial environment of an oil and gas producer. These are some of the attributes that are captured in the Draft Specification. 

Finally, the 1700's in England saw 6 million people living in poverty and sickness. In 1850 England had 24 million people living in prosperity. This contrast is the effect that the industrial revolution had on the quality of life. Recall that Professor Ludwig von Mises says the industrial revolution was the solution to the problems of society. I think it is reasonable to assume that today's problems, and particularly the problems that McKinsey notes in this article, will be the problems that are solved through the Information Technology revolution. Please join us here. 

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Hagel & Brown, Shift Index.

Tonight I am in possession of an interesting paper that I'll evaluate in a future post. I felt it best that I point out this new paper so that others could get an early view of it as well. John Seely Brown and John Hagel are two authors that I covered in the Preliminary Research Report. There work is in the area of Web Services and its impact on business. 

The topic of the paper is the development of an index called the "Shift Index". I'll leave you with a quotation from Professor Scott Page who wrote the Forward.  

The Shift Index can be thought of as a new economy analog of the Composite Index of Leading Indicators, an old economy index that considers hours worked, unemployment applications, orders for capital goods, new building permits and the like. The Composite Index has its place, but its indicators don’t respond until months if not years into a shift. Walk through an innovation sequence: Bandwidth increases creating space for new social media. Entrepreneurs formulate ideas. Venture capitalists finance projects. Proposals prove viable. Finally, mezzanine funding spurs a ramp up in employment. Only then, in this last stage, does the Composite Index identify the shift. Using the Composite Index to track shifts is like driving a car by staring into the rear-view mirror. In contrast, the Shift Index lets us look out the front windshield. 

As important as the index may prove for strategic applications, it may have more impact in how it changes our conception of the economy. Interpreted through the lens of neoclassical economics, the Shift Index captures shifts in fundamentals, particularly on the cost side where technological changes allow firms to do more with less. But, the Shift Index, by name alone, calls into question the neoclassical mindset that focuses on re-equilibration.

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Jeroen van der Veer

We stand at the early dawn of a new energy future.

Comments such as this coming from the retiring CEO of Royal Dutch Shell are welcome and refreshing news to this community. We have a job to do and as van der Veer mentions a difficult one. Approaching these types of problems based on the way we do business today is going to leave us disappointed. Energy is reputed to be the second most complex industry to the space industry. As we increase the level of complexity and risk it is reasonable to assume the organizational methods should change. Particularly when we have Information Technologies as advanced and as mature as they are today. 

Indeed, fossil fuels, coal, oil and natural gas, will continue to provide more than half the world’s energy in 2050. 

This fact alone will require a tremendous volume of capital to discover, develop and produce these oil and gas resources. I don't think capital of this magnitude can be sourced from the traditional capital or debt markets. The resources necessary to fuel the industry will have to come from the prices these resources command in the marketplace. Price will therefore be the mechanism for rewarding innovative oil and gas producers.

Therefore we are challenged in transforming the oil and gas infrastructure and operations to a new competitive footing. One in which innovation is the key method of developing value. From the bureaucracies that have served us well in the past century, I can not foresee this challenge being met. I would argue that today's prices are reflecting that we are falling behind as a result of the organizational performance of the bureaucracy.

To help make this transition, interested people are invited to join this community. People who are working within the industry that know there is a better way in which to do their jobs. Taking the Draft Specification and adding to it the detail that is necessary for the global oil and gas industry to operate on the People, Ideas & Objects system. The community that forms here will be the beginnings of how the software gets built. And more importantly the Community of Independent Service Providers will provide the innovative oil and gas producer with the most profitable means to manage their operations.

Nonetheless, whatever the reality of our industry will look like. More energy will be needed to fuel the future. Energy is critical to our economic survival. And van der Veer reflects on the challenge ahead.

A growing population and higher standards of living for billions of people in the developing world will mean that we need all available sources of energy to keep the world’s economies humming. So, while the world races to build up alternative fuels, it must also find new sources of fossil fuels, including unconventional ones, such as oil sands.

Please join us here.

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May you live in interesting times.

Based on those charts of the Council of Foreign Relations the economy is in very bad shape, but if the economy can't source its energy needs, it will be far worse. A key aspect of this project has always included a strong element of industry renewal. The bureaucracy expired in its effectiveness and was the basis of my research into alternative organizational methods. In May 2004 I wrote the Preliminary Research Report which suggested the bureaucracy be replaced with the industry standard Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. 

We see a number of producers cutting back on their production, particularly a number of North American gas producers. Cutting back on production is a serious action that I have not seen before in my lifetime, but a welcome development. Pricing of energy has become a critical part of a producers tactical approach to the business. As the referenced article suggests, the oversupply of natural gas is leading to a collapse of natural gas pricing. Having a system such as People, Ideas & Objects considers this scenario in the Draft Specification. 

Reducing production is an operational decision that has to meet the majority voting requirements of the Joint Operating Committee. What I have suggested is that there be a predetermined point where prices would invoke a percentage decline in production. This being done in an automated fashion based on the Technical Vision of this software development project. A reduction in production that is pre-approved by the JOC to ensure that the costs do not exceed the revenues of the property. A strategy that optimizes the reserves of the property for maximum return over the life of the field. Yes, game theory being incorporated in these decisions. 

  

Today we also have the alternative sources of energy that were to have replaced "dirty" oil and gas, fading into their appropriate and irrelevant posture. Time is of the essence and we have little slack time in which to deal with the decline in reserves, production and development of our long term sources of oil and gas. Action is necessary or we jeopardize our quality of life by leaving it in the hands of these bureaucracies. Please join us here. 

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Council on Foreign Relations on the e...

The Council on Foreign Relations publishes a Quarterly update on the Economy. Their June 5, 2009 update is entitled "The Recession in Historical Context." If anyone was thinking our economic situation was just another recession, they should read this report. It consists of nine pages and 22 graphs comparing the average post-WWII recession, the average pre-WWII recession, the Great Depression and the current economic climate. These variables are framed by the 4 preceding years before the recessions, and continue through for the 4 years after the recessions started. Data includes the mean and the out lying range of values and is consistent throughout the graphs, rich in information and quite frightening. Have a look.

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Vicente Fox on leadership.

Former Mexican President Vicente Fox was in Calgary to make a speech about the demands of the energy industry. In the process of identifying the issue, he make the perfect recommendation for the formation of this community. 

Former Mexican president Vicente Fox called for an energy "super-body" that goes beyond politics, ideologies and business interests to help create a unified global approach to the industry.

This can't involve just one person. It has to be a broad and diverse group of people that are able to take the necessary actions and make the necessary decisions. A community of people who are concerned about the future of our global economy. An economy that is dependent on a stable and secure supply of energy. Fox notes;

"(There are) too many interests, too many diverse positions, too many sources of information, What I would love to see is a leader . . . somebody should bring in some order into the conducting of the issue of energy in the future," he said in an interview before his speech. "I don't see that happening in energy."

According to Fox, assembling the talent of leaders, researchers, think-tanks and universities would help create a common purpose: "Getting energy to its optimum in the future so that energy fuels economies of the world, and so that economies of the world, being successful, fuel jobs and fuel opportunities for people."

Please join us here.

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Interesting comments on Open Source

Open source software development provides solutions to the majority of the issues the business brings. Open source is the method of software development for People, Ideas & Objects. The value is attained through different groups seeing advantages from different perspectives. From a developer point of view, I found this series of quotes from a developer on the Google Chromium blog. 

With the release of Mac Chrome to the dev-channel, I wanted to talk about open source and expectations. What was the point of releasing at this stage, you might ask? It's clearly not finished. Clearly. It's missing a large number of features, some half implemented, others not at all. Why even bother? Doesn't it just make us look bad? 

Open source projects aren't simply about a runnable binary, they're about the community of users, testers, and developers who devote their time and skills to working on a product they believe in. They go hand in hand: there's no binary without the community and there's no community without the binary. At some point in the life-cycle of a project, you have to stop thinking solely about your small band of developers and start growing the larger supporting community that will become your users, testers, localizers, documentation writers, and possibly even new coders.

In "The Cathedral and the Bazaar", Eric Raymond writes:

"When you start community-building, what you need to be able to present is a plausible promise. Your program doesn't have to work particularly well. It can be crude, buggy, incomplete, and poorly documented. What it must not fail to do is (a) run, and (b) convince potential co-developers that it can be evolved into something really neat in the foreseeable future."

Eric Raymond is also the originator of the saying "given enough eyeballs, all bugs are shallow". Writing software doesn't start off with the perfect piece of code. It develops over time and iterates through many people reviewing, contributing, testing and correcting throughout the lifetime of the code. Everyone can contribute changes, individuals who have changes test their code to make sure it doesn't "break the build" and then submits the change file to a committer to review it and commit it to the code that makes up the application. These iterations continue on through various phases of the development. The phases include alpha, beta and everything in between. I raise these points now as these quotes from the Google developer accurately reflect the development perspective. 

We're not done yet, nor is it ready for the average user. It is, however, ready for those who want to live on the bleeding edge and help lend their talents towards completing it.

Another pillar of open source, along with releasing early, is releasing often. To that end, the dev channel will automatically receive weekly updates as development continues. You will be able to see the product improving from week to week and help immediately identify when things break. Getting feedback on new features as soon as they are completed helps the developers know if they hit the mark and helps close the feedback loop with the community. The community benefits by being more involved and connected and promoting further transparency in the development process. This wouldn't be possible if we only teased users with releases at widely-spaced intervals when most decisions had been set in stone (end-users who want that can use the beta or release channels).

Please join us here.

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A Roubini warning.

Click on the title of this entry to be taken to the Bloomberg "Editor's Pick" video page for a recent video of Nouriel Roubini. Bloomberg has changed their links in which to launch the default video player on your machine. I therefore don't know if the above link will work, if not please try to source the video from this web page. Additional information has been provided from this Wall Street Journal article picked up on Project Syndicate.

Professor Roubini has become famous over the past two years for correctly calling our current economic difficulties. His concern for the over-leverage of the shadow banking system pin points the root of the current difficulties. His remedies have to some extent been adopted globally and have caused the system to appear to recover. It is clear today that the perception that this nasty recession is over and the good times are just around the next corner. 

I have to agree with Professor Roubini that the complacency about our economy is dangerous. None of the remedies being prescribed in this Bloomberg video are in place today. None of the problems that lead to these difficulties have been solved. Roubini chases the issue back to the demise of Long Term Capital Management in the 1990's. This alone shows the extent of our problems. Too much money chasing too few opportunities are causing the bubbles and busts. So much of the world has been focused on housing, the most ineffective investment spending known to man-kind. As a result of this the complacency which Roubini speaks of, we have removed these difficult topics off the agenda. Leading us to fall into the same pit we appear to have just climbed out of.

The problem for us is that there are none of the tools that we used to get out of the pit the first time. We see the effectiveness of those tools in last weeks speech by Treasury Secretary Timothy Geithner; being laughed at when he says to the Chinese their foreign currency holdings are "very safe". The credibility of the U.S. as a reserve currency is in jeopardy and the Obama Nation has no understanding of the issue, its scope or what integrity means. As I write this I am learning that the Supreme Court has refused to hear the case of the bondholders in the Chrysler bankruptcy. I'd be interested in seeing how this plays out in the market tomorrow.  

I have reviewed the works of Professor Carlota Perez on this blog before. Selecting the Perez label from this blog will aggregate the 26 posts where I apply her long term economic research to this software development project. She predicted the demise of the old economy based on her research. Stating that the long term cycle was a constant in the world economy. Where the old ceases to provide the necessary value attribution and therefore systemically fails, to be replaced by the new based on newer technologies.  

People ask me why am I so pessimistic. And I have to answer that I am overly optimistic. The bureaucracy that runs our industries is incapable and unable to provide value for society. Today there is not much disagreement. If we take the point of view that the bureaucracy may be the main form of organization in 25 years, people definitely agree with me that it's days are numbered. So how do we make the change from the bureaucracy to the Joint Operating Committee, augmented with today's information technologies? The short answer is we can't.

We see the calling for radical change as a result of the bankruptcy of the auto industry and banks already fading from the urgent crisis driven thinking of just a few months ago. Organizations are about as static of a body as one could imagine. Without the crisis situation lasting the entire time to make the transition, no change management program will work. 

Unless Schumpeter's concept of Creative Destruction is allowed to eliminate the old from the marketplace, and the new is built up brick by brick and stick by stick, no wholesale organizational change can occur. The need for the people to make the decisions that GM, Chrysler, and the Banks are finished, and they don't appear to be able to make these tough decisions. The competitive marketplace remains depressed while the new fills the void. And for oil and gas that new is People, Ideas & Objects. 

Back to the issue of my optimism. It comes about as a result of the new organizations effectiveness. Firms born of the new organizational structures will provide real value to society. The current bureaucracies have been destroying value for over ten years, in my opinion. New organizations will provide a new and prosperous economy and quality of life for everyone. If only we could get rid of these dinosaur organizations.

For those that may want to dive deeper into the research I have conducted on this point. The Preliminary Research Report introduced the Cognitive and Motivational Paradox', and the Duality of Technologies. These define the theories that change is constrained by forces that are hard to resist. On one hand the Motivational Paradox precludes the adequate resources are committed to the change when production from the current system is necessary. The Cognitive Paradox involves the way people see new situations. Placing a filter of the old ways over what is new.

In order to eliminate these paradoxes from this software development project. We need to walk a fine line. Ensuring that there is a break between the old and the new in order to maintain the appropriate focus on the tasks at hand. 

Not to go into too much detail but one of the key tools for eliminating the paradox is the vision of the system as detailed in the Draft Specification. The natural form of organization in the oil and gas industry is the JOC. In the past people had to interpret the transaction from the JOC to the bureaucracy and systems they operated within. With People, Ideas & Object the system interprets the business in the way that people understand the business, through the Joint Operating Committee. Therefore what the user will be able to do with People, Ideas & Objects is think more naturally then they do in their day to day activities today. 

The use of the economic changes and the move to a more natural way of working within the oil and gas industry are the two ways that I have chosen to fight these two well understood paradox'. Please, join us here.

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McKinsey on Risk

McKinsey Consulting are providing a 14 minute video of Peter L. Bernstein talking about risk. This is a fascinating and valuable video that I promise you will learn one or two things about risk. It's unfortunate that the video marks the passing of Mr. Bernstein, but I have put his book "Against the Gods: The Remarkable Story of Risk" in my library.



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What's holding the project back?

Well there is that budget. We currently stand with no commitments to proceed with the development of these applications. I have established December 31, 2009 as the start date for the Preliminary Specification, however, this will be delayed if the funds are not secured by September 30, 2009. Delayed for approximately one year, or the end of 2010. I see the producers, and particularly ExxonMobil, Shell, BP and Chevron having a role and responsibility to ensure this project does not get delayed any further. I will continue to impress upon them, and other producers, that they have the most to lose and the most to win in the new energy era.

 

The budget has been set for the Preliminary Specification at $30 million. This represents 30% of the study or definition phase of the project and 3% of the proposed preliminary budget of $1 billion. Companies may argue that these costs are too prohibitive. I would point them to the People, Ideas & Objects business modeland value proposition to show them how these costs are actually the least expensive IT expenses they've faced in many years. I would then ask them how efficient are their organizations today. Give them a copy of Adam Smiths "The Wealth of Nations" and highlight the division of labor and specialization theories. And lastly ask them how, in the near future, are the most efficient organizations going to spontaneously appear in a global economy?

 

Tying together the role and responsibilities with the budget needs is the plain hard facts. If we want to skip portions of the Preliminary Specification, then we can increase the overall developments time, accuracy and costs to accommodate that. The point being the most effective time and energy to get it right is at the beginning. Skimping on the costs here is the wrong direction to take. And what are we talking about, if we were to source funds from only the four companies mentioned this would be a one time cost of $7.5 million each.

 

And for that there is no guarantee. If we subsequently choose to travel further down the development road. The value for these producers will exist in the applications ability to meet their unique organizations needs and asset requirements. What I am saying is, the onus falls on the producer firms that commit to this project; to not limit their contribution just to capital. The effort and understanding of their operations must be represented and operational within the finished software. I see this responsibility being the subscribing producers as much as it is the user groups. Success will be a matter of the collective will of many people. Please join us here.

 

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