Pisano, Science Based Businesses Part I

Based on the weight of this new paper. We are including Harvard Professor Gary P. Pisano to our list of closely watched researchers. We haven't had the opportunity to add anyone to our list for many years. That's not as a result of a lack of quality content, it's that we are playing catch-up in terms of the work that has been done in the past 20 years. Look for the Pisano label to aggregate the posts that highlight his content. This first Part will highlight some of the assumptions that Professor Pisano is using, the extent of his research and reviews the Introduction of his new paper. The Evolution of Science-Based Business: Innovating How We Innovate.

For the work that we are doing here at People, Ideas & Objects, and particularly the oil and gas producers, this paper has substantial value. The Preliminary Research Report hypothesized the oil and gas industries underlying earth science and engineering disciplines were escalating. Each barrel of oil would require exponential volumes of these sciences as time passed. This underlying demand change in the sciences would lead to higher prices to offset the higher costs of exploration and production, hence rewarding the innovative oil and gas producer. This is the situation in the oil and gas marketplace today.

Professor Pisano's interests are in science based businesses. But more importantly, in the context of organizational and technological innovation.

Alfred Chandler taught us that organizational innovation and technological innovation are equal partners in the process of economic growth. Indeed, one often requires the other. In the late 19th and early 20th century, the large‐scale modern corporation both shaped and was shaped by advances in electrification, mass production, and transportation. Today, the specific technologies driving growth are, of course, quite different than they were a century ago. But, the fundamental lesson—that these technologies may require new organizational forms—is as relevant today now as it was then. p. 2

I would argue that technologies enable new organizational forms. Through our review of Harvard Professor Carliss Baldwin's research. People, Ideas & Objects have detailed a modular specification and a division between markets and firms in the Draft Specification. Information Technology (IT) defines and supports organizational constructs. And the People, Ideas & Objects software development capability provides the organizational flexibility that the producer will soon demand as necessary.

It is inherent in the Draft Specification that the market take a larger role in the science and innovation of the industry. The question is therefore asked, is the Draft Specification correct in it's assumption that research and innovation can be conducted within "markets" as opposed to in "firms"?

I argue that science‐based businesses face unique challenges as they straddle two worlds with very different time horizons, risks, expectations, and norms. Whereas once these challenges were managed inside the boundaries of corporate R&D labs—under the auspices of Chandler’s visible hand—today the invisible hand of markets increasingly governs them. An assessment of this form of governance against the requirements of science‐based businesses suggests a gap and a need for organizational innovation. The essay concludes with a discussion of what Chandler can teach us about science‐based business, and the organizational and institutional implications of science‐based business. p. 4

Elements of scientific risk are everywhere in the oil and gas industry. Outcomes are not necessarily predictable, and the lead times from idea to commercial success is substantial. The oil and gas industry qualifies as a science based business in Professor Pisano's strict interpretation.

In this paper Professor Pisano speaks about the different business models of how these science based businesses fund their research. Noting that the IBM, AT&T, 3M and Xerox research parks are reflective of an older era. If we accept Exxon's estimate that $20 trillion over 20 years is the required capital expenditure. We can ask is this demand for capital beyond the "normal" allocation mechanisms available in the marketplace? Are the capital and debt markets sophisticated enough to be able to determine which producers will be the winners and losers? I have argued throughout the Preliminary Research Report and this blog that the innovative producer will have the price mechanism reward innovative and scientific success.

If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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19, 20, 21...

Adding to the long list of compelling reasons that Directors, Shareholders and Investors should support these software developments. We add three more to total 21 compelling reasons.

We stand on the shoulders of several generations of giants.

As much criticism that we toss toward the bureaucracy, we must be careful to understand that the level of specialization and division of labor that is employed is significant. That to tear things down in a reckless manner would be irresponsible, and doesn't recognize the speed and altitude that our advanced societies and organizations are traveling at.

We also need to recognize that the bureaucracy can fail on their own. The need to have the alternative software and organizational constructs in place before they're necessary is something that we should be concerned about. Drawing an analogy to the banking industry, we can see that failure has its consequences.

Tacit knowledge drives software definition.

Tacit knowledge can not be captured in software. Tacit knowledge is how things are accomplished in oil and gas. And most importantly, how things are accomplished successfully. People, Ideas & Objects software development capability will provide users with the ability to develop the tools to use their tacit knowledge.

In an industry that is based on the earth sciences and engineering disciplines. Where each barrel of oil escalates the demands for ever more knowledge. The more effective deployment of human resources is challenged by these demands for more knowledge. Continuing to build individual scientific capabilities into each oil and gas company. To attain capabilities that are just-in-time for any anomaly, will bring about failure. Whereas through the Joint Operating Committee and the Draft Specification individual silo's are replaced by an overall industry capability that is pooled in each Joint Operating Committee.

The effective management of human resources in this fashion is inherent in the People, Ideas & Objects software application modules. Enabling the users of this software to build the tools to exercise their tacit knowledge is a necessary element of the future needs of the industry.

Enhanced Ownership Compliance & Governance.

This compelling reason consolidates the logic discussed in a number of recent blog posts. Our discussion of the role of government in funding the software development costs of their compliance requirements, particularly royalty compliance. Issuing legislation, regulations and assuming compliance does not consider the enhanced role of software in today's society. Professor Perez has challenged us to re-think the role of government. Government's direct involvement in developing the software for industry compliance is an area that we will continue to push for.

The directors, shareholders and investors want compliance to all governing legislation and regulations. These compliance requirements will be built-in with the transaction processing being built in People, Ideas & Objects Draft Specification. Compliance is a fall out of the transactions and actions being taken by the firms and their agents. Compliance should never be a driving criteria in decisions. One of the key value added processes in the Draft Specification is the Accounting Voucher Modules process for designing transactions.

With recent and prospective changes in the corporate board room. The role of directors, shareholders and investors is enhanced. Their direct involvement with the producers ERP system provider [or more specifically People, Ideas & Objects] enhances and enables greater compliance and governance for the owners and their direct representatives.

March 31, 2010 is the deadline for raising our 2010 operating budget. After which a variety of consequences, such as financial penalties and a loss of one years time will occur. Our appeal should be based on these 21 compelling reasons of how better the oil and gas industry and its operations could be handled. They may not be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Barbara Franklin on Nightly Business ...

Last nights Nightly Business Report has some interesting closing comments from Barbara Franklin. Ms. Franklin is a Director of Dow Chemical and Aetna Inc., and since 1980 has served on twelve other boards. She was also Commerce Secretary in the George H. W. Bush administration. Her comments were provocative and if correct show that shareholders, directors and investors are better able to deal with the governance of their firms.

Around 22:00 minutes into the show Mr. Franklin is introduced to discuss the "increasing role of shareholders in corporate governance" and "the rise of the shareholder is a blow to old school CEO's". Suggesting that our appeal to the shareholders and investors in oil and gas may not end in vain. In reviewing these comments it becomes obvious that I should include the Directors of the producer firms as I feel they too are interested in better corporate governance. A small oversight on my behalf.

The comments that resonate with the work that we are doing at People, Ideas & Objects are as follows:

The demise of the imperial CEO is at hand. They are more participatory and actively work with their boards.

After Enron and WorldCom scandals, the passage of Sarbane's Oxely act, a board room power shift emerged. Today boards are much more engaged with CEO's in a variety of ways.

• CEO Succession
• Strategy
• Ethics
• Executive Compensation
• Risk Oversight

And now a new board room power shift is in the wings. Some shareholders want to add their own candidates to a companies slate for election. Eliminating the need for proxy fights. The result could be a more collaborative governance structure in publicly traded companies. We'll see.

These are all positive initiatives. Since Ms. Franklin was speaking as if the first power shift, the boards being more engaged with CEO's, has occurred. The topics of Strategy, Ethics and Risk Oversight are areas where People, Ideas & Objects can add value to the producer firm. If as Ms Franklin suggests the second "power shift is in the wings" where shareholders are able to "add their own candidates to a companies slate" then corporate America could have the tools necessary to deal with many of the problems in today's business.

How could participation in People, Ideas & Objects budget funding help to make these "power shifts" more effective? For the shareholders, directors and investors having a direct say in the development of the software that their firm operates under, they will have the tools to deal with the firms issues and opportunities.

I have suggested many times in this blog that SAP is the bureaucracy. That management have used the SAP application to entrench their positions. As much as the management affect the change in the ERP software is the amount of change that can be exercised. Since SAP is static, the organizations do not change and management have SAP as their straw man excuse at hand.

If the ownership class had the ability to influence the software design, then they have the ability to influence much of the make up of their firm. People, Ideas & Objects is user based developments. The user community is comprised of all stakeholders. Since it is requested that the budget be funded by the shareholders, directors and investors of the firm, then they would have direct influence.

One of the breakthroughs of the Preliminary Research Report was the finding that software defines and supports the organization. To change the organization requires that the software be changed first. Therefore the investor, shareholders and directors need to acquire influence in a defined software development capability. In oil and gas that is People, Ideas & Objects.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Why would producers pay?

It is argued that oil and gas producers do not have the requisite motivation to fund the budget of People, Ideas & Objects. My concern in pushing this budget cycle is that the motivation to make the necessary changes has receded from the mindset of people in the industry. When the financial crisis was at its height, all seemed to be in desperate need of bringing about change. Now that the pressure brought on by the crisis doesn't exist, the sense of urgency to address these problems has passed. We have survived to live another day. To approach the manner in which business is conducted is off the radar of the majority of people within the industry.

It is far better that this has happened now then having it happen in the middle of our developments. I don't expect that "all is well" will be the call even as early as later this year. We have solved none of the problems that brought the system close to collapse. Stuffing the economy with up to $17 trillion in stimulus and cash has had a strong effect. The performance of the bureaucracy remains questionable and the opportunity for them to continue on, I'll agree, is well entrenched. What this imputes is that the only time something like People, Ideas & Objects can be developed is during a complete collapse of the industry.

So here is to living happily ever after. This last ditch attempt to acquire some funding to keep moving forward looks less probable each day. We'll certainly continue on until March 31, 2010 and see what might come about, after that we will have to evaluate everything in light of the funding failure.

In answer to the question that is being asked, why would the producers pay? The People, Ideas & Objects value proposition shares the one-time software development costs across the production profile of the industry. Simply the producer, like the user, will attain greater value by contributing then it's costs. As evidenced in yesterday's example of the start-up oil and gas producer. The engineer does not have to incur the overhead necessary to maintain compliance with the various regulatory agencies.

The People, Ideas & Objects software and the Community of Independent Service Providers (CISP) is a critical aspect of how the producers compliance is achieved. The tacit knowledge of the industry is held by the people that work in the business. The software can not capture this knowledge, but what can happen with People, Ideas & Objects is the CISP define, build and use the software tools needed to do their jobs.

Where we'll stand on March 31, 2010 in terms of our future is quite exhilarating. Nothing focuses the mind quite like this type of situation. What we need to be doing is getting to the business of the business of oil and gas. We face a questionable future, and the complexity and difficulty is only accelerating.

On a related note, I find the "elite" economists oddly sharing my frustration at the pace of these changes. Simon Johnson and this Reason Magazine piece are good examples of opportunities potentially being lost.

Needless to say we still have not received any expression of support, commitments or funding. [Maybe I should be the one to get the message.] If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Perez The Role of Government Part II

In this second part of answering Professor Carlota Perez' question "What role does the Government play in this?" we discuss the more general nature of the economy. In the first part we noted the expanded role that software plays in ensuring compliance to regulations. And how the software vendor has ultimately had to bear these software development costs alone with no financial support from the government agency issuing the regulations. In this second part I want to expand on the concept of this expanded role of software in our daily economic lives.

Lets assume that we have an engineer that recently saw the opportunity of a lifetime pass in front of her eyes. To realize this opportunity she needs to establish herself as an oil and gas producer and acquire land within a certain geographic location. The land and the money to purchase it are available, as are the drilling and other service industry technologies necessary to exploit the idea. The one problem this engineer has is that she has no access to systems that are capable of meeting the necessary compliance requirements of the jurisdictions she operates in. And no ability to interface with the various economic actors necessary to make the idea real.

Suddenly, she realizes that she is eliminated from pursuing this opportunity due to the fact that she has no software in which to operate this firm on an ongoing basis. Is the Governor of Texas willing to accept that the barriers to entry into the oil and gas industry becomes access to the necessary administrative software? Certainly the ability to build this capability exists, at approximately $2 million / year in additional administrative overhead.

The question is what is the governments role in the new economy. A new economy that is driven by the Information & Communication Technology Revolution. Where the access and ability to function in the marketplace assumes the ability to be in compliance with 400 pounds of paper regulations. An economy where engineers pursue new ideas or an economy of accountants and lawyers.

And how is it that People, Ideas & Objects is able to offer this engineer with a good idea with no costs associated with using the software? That is to say until she has established production, her costs for 2010 have been set at $1.00 / barrel of oil per day per year. Certainly there will be representatives from the Community of Independent Service Providers (CISP) assisting her in these compliance requirements. But the question of whether to "hire people or run software to be compliant" has been solved through People, Ideas & Objects. This overhead associated with the CISP is on an as needed basis and is a small fraction of the $2 million otherwise needed.

Many within the governments got ahead of this discussion by establishing the rules and regulations are self assessing. Self-assessing systems include most royalty regulations and of course many tax systems. If you make a mistake in filing your returns, you go to jail. It is necessary that negligence is not an excuse for mistakes. And I see no reason to abandon the self assessing style of system, if the software exists in the marketplace to ensure compliance. Governments have a fiduciary responsibility to their tax payers to ensure that equality and fairness are achieved, and that all revenues are collected. One side note is that Royalties are not taxes, but for the purposes of discussing self assessing systems, there are minimal differences.

Back to the question of the governments role in the new economy. Is it to facilitate high levels of access to all who want to compete in the oil and gas industry? Economic access or the lack of it has become a barrier to entry for all but those who have adequate size to maintain the administrative overhead. Will the engineer in this scenario, knowing that she could go to jail for not filing the right form, really be bothered to pursue that opportunity? And lets be clear, Bernie Madoff had no aversion to filing any forms.

Today I received notice from the Alberta Government that they do not share in the concerns that I expressed in Part I of this discussion. I indicated that our policies were to not build any software to meet Alberta's royalty requirements. And they indicated that Mr. Peter Watson, Deputy Minister of the Energy department has received that message. This point was probably moot as I do not see the user community including any Canadian jurisdiction in the Preliminary Specifications scope. Regrettable, but true.

Join me here and lets work together in finding the right answers. If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Budget Conversation Part II

The question as to what happens after March 31, 2010 and we don't have our budget for 2010 funded. Do we pack up and go home? There is nothing worse for a project like People, Ideas & Objects to have been turned down for its funding request. It puts the entire project at greater risk of ever being funded. So what is the plan, what do we transition to if the funding for 2010 is not secured?

The cut and run mentality is something that I have great difficulty with. I don't start something to have it left unfinished. The fact that the budget possibilities are more limited do not deter me from proceeding with this project. The May 2004 Preliminary Research Report was named "Plurality should not be assumed without necessity" or Occam's Razor for a reason. I knew that this level of change would be difficult. The quotation that I used for describing this difficulty was from the 1997 Report to the World Bank.

This statement was written by Ernst & Young in a 1997 report to the World Bank, and was described as: “It’s not what you know that you do not know that hurts you. It’s what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” Knoop & Valor (1997)

What I do know is we have not attained success. On the other side of the coin, I know what dangerous means. We will continue on in some fashion irrespective of the outcome of this budget drive. In the event that we do not receive any support, what frustrates me the most is that we are effectively losing another year. One change that might be considered is that we immediately commence a budget drive for the entire design and planning stage. These have been costed at $150 - 200 million.

In terms of the context of energy, failure has consequences. If I have to live the consequences of this project for a while longer that is fine. I'm not dragging anyone or anything down in the manner that this project is being proposed. I want to establish an environment where the motivation is to succeed. And if that success is not attainable with the current configuration, we'll work with the communities [investor, shareholder, user and Community of Independent Service Providers] to get it right.

Join me here and lets work together in finding the right answers. If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Dosi Nature of Technologies Part II

Continuing on with our review of Professor Dosi's most recent paper. "On the nature of technologies: knowledge, procedures, artifacts, and production inputs." In our previous post we focused on specialization and the division of labor. How we stand on the shoulders of several generations of giants, and as an industry we are metaphorically traveling at a high rate of speed and altitude. The problem is that's not efficient enough. Any misstep, like what the bank managers orchestrated on their industry, could be detrimental to society, organizations and people. And how unlike the banking industry, now is the time for the oil and gas leadership to ensure they have options and alternatives, like the one People, Ideas & Objects is offering. And now is the time to fund these developments.

In this second installment of our review, Professor Dosi discusses technologies in more detail. How tacit knowledge is the key in enabling the technological advances and the role of science in the development of that knowledge. In this post I will continue to discuss the important role of having the Community of Independent Service Providers enable the technologies, and specifically the People, Ideas & Objects applications, with their design and tacit knowledge.

Innovating off of the science, the tacit knowledge and the application modules of the People, Ideas & Objects software is something that is necessary. Innovation is not the act of one individual but the acts of an entire industry. The focus and strength of the innovations are not guided by any one individual, but the general markets that make up the oil and gas industry. Concentrating these resources in this fashion is the work of the software. Generating the iterative developments of the sciences and innovation is the work of the people with the tacit knowledge.

3. Technologies as artifacts

Static interpretations of how oil and gas is produced are guide posts and not destinations. Traveling as we are, the speed and dynamic nature of what the industry is capable of is about to accelerate. I believe it will be the conflicts and contradictions that we face that will lead us to make the breakthroughs in both the science and innovation in the industry.

Dynamically, innovation can be fruitfully studied in terms of modifications and improvements of the performance characteristics of each component and of the system as a whole. In fact, bottlenecks and ‘imbalances’ in the functionalities within products and systems have been identified as important ‘focusing devices’, as Nathan Rosenberg put it, driving technological advances (see Rosenberg, 1976, and Hughes, 1989 on the ‘reverse salient’ pushing technological advances).2 The dynamics of both ‘incremental’ change and more radical ruptures in the structure and functionalities of artifacts are precisely, as we shall see, two central concerns of evolutionary theories of innovation. p. 175

Those with advanced educations will see these are the standard methods used in the development of sciences for the past 2400 years.

4. The underlying knowledge bases

What is known in oil and gas, and what is discovered moves remarkably quickly. Information within the geological sciences or engineering disciplines travels between companies faster then within the companies themselves. This understanding was provided to us by Dosi in his 1988 "Source, Procedures and Micro-economic Effects of Innovation", the primary research document of the Preliminary Research Report.

In fact, important advances have been made over the last quarter of a century in the identification across different technologies of (i) the characteristics of such knowledge—e.g. to what extent is it codified in the ‘recipes’ themselves or openly available in the relevant professional communities or, conversely, to what extent is it embodied in the tacit skills of the actors themselves—and (ii) its sources. p. 175

This is intuitively understood as geologists better understand the implications involved in geological discovery then organizations with non-geologists employed. The same can be stated for any profession and would also include the administrative groups involved in the industry. The tacit knowledge held by these individuals is not organization specific.

Tacitness refers to the inability by the actor(s) implicated, or even by sophisticated observers, to explicitly articulate the sequences of procedures by which ‘things are done’, problems are solved, behavioural patterns are formed, etc. (see Dosi et al., 2005 and references therein; Nelson and Winter, 1982, especially chapter 4; Polanyi, 1967). In a nutshell, tacitness is a measure of the degree to which ‘we know more than we can tell’. In terms of the recipe story, tacit knowledge is precisely what is not (or sometimes cannot even in principle be) codified within the recipe itself, but—as in the earlier example of the cake—remains in the mind (or better in the practice) of grandmother and is transmitted more by example than by instruction. p. 176

Professor Dosi gets to the heart of the problem at hand. How do we unleash this dynamic potential? How is it organized? Where does the bureaucracy, with it's forms and budgets, fit in? Is the Joint Operating Committee better able to focus and tap these resources to greater effect?

In turn, the different degrees of tacitness of particular bodies of knowledge and the dynamics of knowledge codification have manifold implications for patterns of innovation, the division of labour and the presence/absence of ‘markets for technology’ (cf. Arora et al., 2001; Dosi et al., 2008B). p. 176

It is with these considerations that the Draft Specification was designed to address. These are the issues that we face and these are the opportunities. This next quotation of Professor Dosi's captures his brilliance in the area of innovation and why it is so applicable to oil and gas.

Regarding the sources of technological knowledge, nowadays a good deal of ‘economically useful’ technological knowledge is mastered by business firms, which even undertake, in some developed countries, a small but not negligible portion of the efforts aimed at a more speculative understandings of the physical, chemical, biological properties of our world (i.e., they also undertake ‘basic science’). Most often knowledge internally generated by the firms is complemented by knowledge emanating from external institutions such as universities and public laboratories and from other industrial actors such as suppliers and customers (see the discussion in Dosi, 1988; Freeman, 1994; Klevorick et al., 1995). p. 176

Add to this the knowledge emanating from partners represented in the Joint Operating Committee and I think we begin to see how it is that the oil and gas industry can approach the problems that it faces. The Arctic, off-shore, tar-sands, logistical, financial and political all become approachable. Is it any surprise that no pipeline for Alaska or Arctic gas is currently being built?

The reconstruction of the diverse institutional origins of novel learning opportunities helps in going beyond a first, very rough, representation of ‘endogenous’ versus ‘exogenous’ technical progress and, second, but equally importantly, it also helps in identifying inter-sectoral and inter-technological differences in the drivers of innovation. p. 176

Or in other words, innovation does have an office. If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Hands off the throttle

One of the issues that I have talked about consistently on this blog is the manner in which management control all aspects of the oil and gas "market". Receiving all of the proceeds of the oil and gas production entitles them to influence the market in ways that are contrary to the markets benefits. What I mean is the managers feel that it is their money and they should expend it as they feel fit. Bringing all attributes of the oil and gas marketplace within their domain of responsibility. This was evident in the $147 oil market when they stated the costs associated with field operations were escalating faster then inflation. This prompted them to state that "suppliers were getting greedy".

Who's really getting greedy. The reverse side of this coin is just as ugly. I place the reason for this problem on the on again off again throttle actions of the management. That is the field operations are being populated with enough individuals who are addicted to drugs that complete camps are failing. Attempts to run "dry" camps fall into the same problem. What I think the problem is, is that management have consistently moved the throttle on and off once too often.

Anyone that wanted to work in oil and gas soon found the feast vs. famine environment not to their liking. Oil and gas field operations are difficult, dangerous, remote and frustrating. Frustrating from the point of view that the general rule is that the lowest IQ will dictate the outcome of any teams tasks. When NooB's are addicted to drugs they bring a level of unknowing and complete unreliability to the task at hand, the outcome is failure. Good people don't want to be associated with failure. Besides, other industries do exist.

To make my life more difficult again, there is a second aspect of this problem. The conflict of interest problem. This is very evident in the IT area, where many people feel little to no value is generated for the volumes of money they consume. When a good friend or cousin has an idea for how they could introduce a new widget, they inevitably show up on the doorstep. Where they promote the importance of the manager and suggest he should hire them to put the widget in place at his firm. The rest of this scenario has been played out a thousand times and no one seems to ever mention it. But we all know that the reason for many of the failures to generate value in IT is a matter of perspective. If you look at it from the perspective of the manager who has an ownership interest in the widget producer, then success is the word.

Lets put another card on the table. One that I have talked about consistently on this blog as well. The issue is that I should not own the Intellectual Property that is represented in the Draft Specification, Preliminary Research Report or this blog. This is not the way in the managers world. The first thing they did when I proposed that we conduct the research in September 2003 is state that they don't hire small research firms. And turned around and hired Cambridge Energy Research Associates to conduct the research. So I funded the research myself and published the Preliminary Research Report in May 2004. Little did the managers know that by that time, CERA hadn't completed their work yet! This is representative of the expectation that management is entitled to use whatever IP they desire when they desire to use it. And without compensating the inventor or creator.

The problem with this last point, is that the next great innovation is not going to be easy. Earning the rights to the copyright or patent is compensation for the difficult work done to generate the breakthrough. Without this compensation, of having monopoly rights on the use of the IP, the motivation doesn't exist to do the work. This is how the founding fathers of the U.S. Constitution wrote the laws, the oil and gas managers may have an issue with them as well. Otherwise without IP you have a stagnant market where no real innovation is occurring.

There has to be a better way. I think we need to look closely at the attributes that make a producer profitable. Is Intellectual Property of field operations a critical success factor in Exxon's profitability? Of course not. Does Exxon manufacture their own drill bits? Of course not. The profitable nature of any oil and gas company is the legal access to the reserves, [the lease] and the physical assets used in production. Outside of that it's the scientific and engineering capabilities of the people that the producer employ. No where will you find the management of IP as poorly handled as by the current management in oil and gas firms.

How the Draft Specification deals with this unique and irreversible [irreversible while management are at the helm] situation is by essentially removing management from the decision making process. Let markets be markets, but also provide them with more information. What is needed is a revenue or business model for the service industry so that they can invest and develop their skills and capabilities with a somewhat greater assurance that tomorrow, they won't starve. All of those service providers are being treated like they are in kindergarten, and I know this because of the response that we have received from the same management. I may be openly critical of them, however, they deserve it. Since it's 4:00 on a Friday they won't see it anyway.

The first information these service providers receive is the detailed capital and operating expenditure budgets of the producers for the next 5 - 10 years. Whether this data is detailed in the reserve reports or actual AFE's, the Draft Specification Resource Marketplace Module aggregates all the producers that use the system and publishes the information by geographical region. No specific producers data is known. It's all aggregate. None of this data is for certain, it may be different when the time comes. But what can be determined is what level of investment may be made by a service provider to achieve their corporate goals and strategies. Imagine you have an idea of applying hydraulic fracturing to "tight" sands. And you have an idea on how to retrofit that fracturing technology in a way to release that gas in a manner that could help those producers. You see the costs associated with drilling in these areas and you think it might work, think it might cause the drilling costs to decline substantially and have prepared a patent application for the device.

Having secured his idea in the patent application. The entrepreneur begins writing about the idea in the search-able Research & Capabilities Module of the Draft Specification. There he further earns the rights of copyright and, introduces the idea to the marketplace for producers to participate financially in developing the innovation and the marketplace gains the benefit of knowing the ideas and building off of them earlier. And before anyone realizes, the tight sands are the next great frontier of gas exploration due to the innovation contained within this one device.

The point being that information is what is needed for people to make reliable decisions upon. The industry needs to recognize the Intellectual Property laws that exist in the western world. Management can't succeed when there is no benefit to the one who thinks about the innovation. Management needs to respect the law of the land and stop this filthy habit.

If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Two new papers for review.

A heads up that when we finish off with Professor Dosi's "On the nature of technologies: knowledge, procedures, artifacts and production inputs". Two new papers have been discovered that provide real value for the work that we're doing here.

The first is a 1986 paper from Professor Carlota Perez. Originally written in Spanish, it was translated into English by Professor Perez herself in January 2009. Reading it through provides a very clear understanding of the beginnings of her theories and ideas. The clarity is remarkable, particularly for those that are recent additions to this blogs community. The paper entitled "The New Technologies: An Integrated View" can be downloaded from here.

The second paper that we are going to review is from a new author. "The Evolution of Science Based Business: Innovating how we Innovate" by Harvard Professor Gary P. Pisano. Oil and gas is the ultimate science based business. One that is shifting in its complexity and difficulty. This paper can be downloaded from here.

There appears to be no end to the high quality academic research available on these topics. If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Perez on the role of government

Back in 2005, when I first read the Strategy & Business Thought Leader Interview with Professor Carlota Perez. Professor Perez stated something that I found interesting and thought provoking. Her comment in the article was as follows.

S+B: What role does the government play in this?

Perez: A big role. I think that market fundamentalism today is as much of an obstacle to world economic growth in the next decades as state fundamentalism was in the 1970s and ’80s. Government needs to be reinvented, using as much imagination as it took to design the welfare state in the first place. It all seems impossible now, but things always seem impossible at this point in the surge. Between 1934 and 1946, a lot of economists believed that high unemployment was inevitable, because both industry and agriculture were shedding labor. But just after that, with an adequate institutional framework for mass production and consumption, the U.S. entered its biggest full-employment period in history.

Compliance frameworks have been how governments regulated business. Today, shareholders of firms have never felt more unable to deal with the businesses that they own. A systemic failure of the banking industry shows that boards of directors are powerless to deal with management. Bringing into question corporate governance and compliance as one of the premier issues that everyone would agree on.

This discussion about compliance may be about different perspectives on how compliance is achieved. I see compliance as a fallout of the transactions themselves. Net profits attract taxes. Oil and gas production incurs royalties. Stock exchanges impose transparency. In a transaction focused ERP software application as described in the Draft Specification. Where design of transactions is deemed one of the value adding attributes of a business, the Tax, Royalty and SEC requirements are not the driving attribute of the decisions being made. Or they shouldn't be. Granted interpretation of the regulations is the fine art that does generate substantial value for a firm. But these can be done on a global or overall firm basis after the fact. The point that is being made here is that compliance is a fall out of transactions. Secondly, compliance is a critical and inherent aspect of the transaction itself. Separation of compliance from the transactions is how Enron, WorldCom and Bernie Madoff achieved their scams.

In this post I want to propose a hypothesis of how things have became so disjointed. Based on Professor Perez' prompting us to rethink the role of government; have the software developers been the ones that fumbled the compliance football? Or has the lack of recognition of the importance of the role of software developers in ensuring compliance, been an inherent part of the breakdown?

In these past few days, when we have been discussing the compliance requirements of oil and gas producers. I have stated that the Compliance sub-frameworks of SEC, Tax and Royalty need to be aligned to the five frameworks of the Joint Operating Committee. The lack of alignment is part of the problem. I have also recently published the policies that People, Ideas & Objects has for compliance to royalties. That is we don't pay for the software development costs of any royalty framework. Since 1993 it has been my experience that producers won't pay for royalty compliance software development. It's 2010 and not one system exists to properly calculate a producers obligation. The evidence is in. Our policy is that the royalty holder will need to pay People, Ideas & Objects to develop the royalty compliant software. It's a compliance policy that is either 100 or 0% compliant. This is particularly valid when the Alberta Government is looking into it's sixth review of royalties since 2007.

The government's role in these situations has always been to pass legislation, enforce and administer the regulations. Why have they not funded the software that maintains the compliance for the oil and gas producers? Everyone at the table has someone who is paying their costs, except for the software developer. Governments toss these regulations out, expect compliance and its the lowly software developer who is required to fund the development of the software? We have no skin in the game, and are indeed hesitant to employ anything but the 0% solution. If compliance is such a large issue in today's business market. Why are the governments leaving it to a disinterested groups of software developers, who in turn have to sell what they did to uninterested investors or the producers themselves. This is a lose, lose proposition.

I think this is one of the areas where Professor Perez is correct. The software development costs associated with the compliance frameworks [royalty, tax and SEC] should be funded directly by the government agency that demands compliance. This is an area where government needs to think how they can be more effective in their responsibilities to their stakeholders. We are relying on an administrative framework that is a generation or two behind the fact that software is a critical piece of the compliance world.

Another point is that government's writing generic applications to maintain compliance won't work. The analogy of putting a 1956 Soviet Lada engine in a 2010 Ferrari is appropriate. Just send the cash. The JOC's decisions have compliance implications. Compliance needs to be natural elements of the processes, written by the same developers, in the same programming languages, designed by the same users. Therefore to integrate them, the software developers have to do the functionality and the compliance. For those governments that are concerned about funding several software firms, that's not my problem. Making the regulations more easily integrated might be an area where value could be generated.

People, Ideas & Objects face market, financial and technical risks. If we manage our cash in an effective manner. And are able to internally fund the compliance development costs ourselves. And then in the eleventh hour, when the application is 95% complete and everyone is exhausted, the producers lose the desire to continue funding People, Ideas & Objects. This type of financial failure is the primary cause that software systems have failed. With approximately $1 billion in projected costs, we would be foolish to even attempt to build a compliance framework ourselves. Particularly with a government such as Alberta's that changes the rules every six months.

One last point is that People, Ideas & Objects is user based developments. Our objective is to provide the oil and gas producer with the most profitable means of oil and gas operations. Think of this compliance issue from these user and producer orientations. And that does not mean that we just skip compliance, and that does not mean that we will fund these costs ourselves.

On a related note to this, here is a video of British Conservative Leader David Cameron talking about "The next age of government". He also has some answers.



If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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