Lazonick on Chandler Part IIIb

This is our third post from Lazonick's paper "The Chandlerian Corporation and the theory of innovative enterprise." In our past two blog posts we have learned some interesting things that are directly relevant to People, Ideas & Objects. In the first post we noted the three generic activities that require alignment; strategy, organization and finance. How the Draft Specification provides for these three activities. And the differences between two corporate strategies defined as "optimizers" and "innovators". Noting that Lazonick defines optimizers as non-innovators. In the second post we determined that the business of the oil and gas business required substantial investment to attain the necessary innovative strategic footing. How today the current bureaucracies are unwilling and incapable of making these investments. And that the investors / shareholders in oil and gas have the opportunity to form their own new and revised organizational ways and means around using the Joint Operating Committee as the key organizational construct, and the People, Ideas & Objects software development capability.

In the Preliminary Research Report it is noted that the higher commodity prices are a reallocation of the financial resources to support innovation. It is the product revenues from oil and gas sales that fuel the innovations. Financing of innovation through debt, equity or profits would be too costly and would generally be inadequate in terms of affecting the performance of the industry. A much larger source of funding is required to fuel the type of innovation that the oil and gas needs. Innovation is a profit generating activity. This fact becomes clearer in today's review of Lazonicks paper.

2. The theory of innovative enterprise cont

In the first quarter of 2010 People, Ideas & Objects attempted to fund its budget needs for the calendar year. As we are aware, the total sum of these activities generated $0.00. This in direct contrast to the 30 compelling reasons supporting why we should be funded. I have pointed to this funding failure as a fact that proves the bureaucracy will never fund these developments. The point is that this environment needs to be created and supported. As Schumpeter noted "innovation drives economic development."

The optimizing firm may calculate, on the basis of prior experience, the risk of a deterioration of current market conditions, but it has no way of contemplating, let alone calculating, the uncertainty of returns for conditions of supply and demand that, because innovation is involved, have yet to be created. The fact, moreover, that the optimizing firm will only finance investments for which an adequate return already exists creates an opportunity for the innovating firm to make innovative investments that, if successful, can enable it to out compete optimizing firms. Indeed, in the future optimizing firms may find that the cause of the “poor market conditions” that they face is not the result of an exogenous shift in the industry demand curve but rather the result of competition from innovating firms that have gained competitive advantage while their own managers happily optimized (as indeed the economics textbooks instructed them to do) subject given technological and market constraints. p. 9

Therefore I see the existence of two fundamentally different oil and gas industries for the next 10 years. Those that are optimizing and atrophying, and those that are innovating and growing. A key difference is the use of the People, Ideas & Objects software that supports and defines the innovative oil and gas producer. The critical role of the Community of Independent Service Providers (CISP) in enabling oil and gas innovation. And the direct investments in innovation that are needed.

An innovative strategy, with its fixed costs, results from the assessment by the firm’s strategic decision-makers of the quality and quantity of productive resources in which the firm must invest to develop higher quality processes and products than those previously available or that may be developed by competitors. It is this development of productive resources internal to the enterprise that creates the potential for an enterprise that pursues an innovative strategy to gain a sustained advantage over its competitors and emerge as dominant in its industry. p. 10

Lets be clear, the costs of these software developments are minuscule to the costs of developing the innovative oil and gas industry. The global oil and gas industry is currently a $3.8 trillion / year industry. I see a significant portion of those annual revenues being dedicated to the processes of innovation. A critical enabling resource within the industry will be the Community of Independent Service Providers, they are the ones that will have the skills and resources necessary to support the innovative oil and gas producer. They are how the energy industry evolves and matches or supports the innovations made at the producer level. Achieving the CISP's overall objective of providing their producer clients with the most profitable means of oil and gas operations. What is needed for both the software and communities to develop is to have access to these financial resources.

Such development of productive resources, when successful, becomes embodied in products, processes, and people with superior productive capabilities than those that had previously existed. But the high fixed costs that such investments entail mean that in and of themselves these investments place the firm at a competitive disadvantage until such time that, by developing and utilizing these investments, it can transform the technologies and access the markets that can generate returns. An innovative strategy that can eventually enable the firm to develop superior productive capabilities may place that firm at a cost disadvantage because such strategies tend to entail higher fixed costs than the fixed costs incurred by rivals that choose to optimize subject to given constraints. p. 10

I can not for the life of me see the energy industry as it exists today changing to the one described in the previous quote. It isn't in their organizational DNA. The process of creative destruction, or as I have detailed the two oil and gas industries, one optimizing the other innovating, is the only means that change of this scale can take place. As the optimizing firms atrophy and their earnings decline, assets will be sold to the innovators, creating a substantial opportunity for the innovative producer through this process of renewal.

If the size of investments in physical capital tends to increase the fixed costs of an innovative strategy, so too does the duration of the investment required for an organization of people to engage in the collective and cumulative—or organizational—learning that is the central characteristic of the innovation process. p. 10

and

The revenues (and not just the profits) that the innovating firm generates can be critical to maintaining its organization intact. When the innovating firm generates revenues, it has financial resources that can be allocated in a number of ways. If the gains from innovation are sufficient, the firm’s revenues create the possibility for self-financing....For the innovating firm, financial resources not only fund new investment but also enable the firm to keep its “learning” organization intact. The innovating firm can use the gains of innovative enterprise to reward its employees for their application of skill and effort to transforming technology (unbending the cost curve) and accessing markets (shifting out the demand curve). p. 13

We have commented on this blog many times before about the mechanical leverage that man has achieved over the past century. 18,000 man hours of labor is contained within each barrel of oil. To convert this factor into the number of man years of physical effort that is offset each year for each American, that number is 385. That is; each American receives the equivalent benefit of 385 man years of physical effort per year. Truly surprising and something that has to be maintained by ensuring that the oil and gas is available to continue to provide the offset. The point in raising this is to ask the question, at what point in time do we achieve an equivalent level of leverage in terms of intellectual thought? And as importantly, how do we get there? I know the first two steps are to gain a software development capability and secondly begin the development of the Community of Independent Service Providers.

The innovation process, that is, can potentially overcome the “constrained-optimization” trade-offs between consumption and production in the allocation of resources as well as between capital and labor, and even between enterprise and society, in the allocation of returns. It is for this reason that innovation can form the foundation for equitable and stable economic growth, or what I have called “sustainable prosperity” (Lazonick and O’Sullivan, 2002; Lazonick, 2009a). p. 14

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Oracle Stack - Oracle Fusion Applications

Continuing on with our review of the Oracle product offerings and defining which of their applications and architectures are to be included in the application modules of People, Ideas & Objects. In a previous post, we adopted wholesale the Oracle Database and Middleware product offerings. In another post we noted the Application Integration Architecture and how the Community of Independent Service Providers could use these tools to aid in the accounting integration of a producers system. All of the discussion of the Oracle products and architectures is being aggregated under the Oracle-Stack Label on this blog. Once our review is complete we will be updating the Draft Specification.

Oracle Fusion Applications are a difficult product to commit too since they don't exist as of yet. However, what we can determine from Oracle is that the project is providing the kind of application infrastructure that is necessary to build the Draft Specification and deliver it through the cloud computing paradigm. Oracle Fusion Applications and Middleware are using the best parts of the Agile / Scrum development methodology, and therefore consistent with our approach to development. There are no cultural differences between the Oracle methods and those that were proposed in People, Ideas & Objects developments.

Critical to the success of the Oracle Fusion Applications is their use and application of the Oracle Middleware stack. This is the way that applications are built in most architectures and is consistent with what we were proposing to do before we joined Oracle as a customer. Java Enterprise servers provide the necessary infrastructure and control of information that makes not using a Java Enterprise server, redundant. Recreating the wheel each time a project is started is counter to the Java way.

It is clear in many of the videos and documents that I viewed that the web is the centre of the user experience. All of the application demonstrations and presentations reflected this web centered delivery. Using standard web browsers, Oracle Fusion Middleware and Applications gains this ease of use and universality of access. Making the user experience robust in the cloud computing paradigm. We will need to determine if the web platform provides the level of access control and security necessary to meet our potential producers needs. It is reasonable to assume that if Oracle is using the browser this extensively, they've cracked the security problems and are satisfied with the control. The user having browser access would be a performance and ease-of-use improvement over using Java Web Start, which is the current method defined in the Draft Specification.

One of the key attributes of becoming an Oracle customer is the access to the understanding and knowledge they have in the ERP application market-space. Oracle is the largest enterprise software company. They have experience in developing, deploying and supporting their ERP application offerings. This experience is based on a history of PeopleSoft, J.D. Edwards, Siebel , BEA and Oracle Financials. Our costs may be substantially higher by using Oracle, but what we gain in doing so brings our product offering to a higher level of quality. According to videos that I viewed on YouTube Oracle has over 2,500 application developers just in the Fusion Applications development. As a result, we inherit the efforts of these people through the Java re-use attributes.

To view one of the best documents on Oracle Fusion Applications go here. Where on page five the following is noted.

The goal of Oracle Fusion Applications is to help customers transform their business into a next generation organization. This next-generation organization will have more adaptable business processes, more productive people, and more manageable systems. Next generation adaptability will come from a native service oriented architecture that allows for easier integration with other applications and configurable business processes. Embedded business intelligence, a rich, pervasive, and personalized user experience, and Enterprise 2.0 business processes will power next generation productivity. Finally centralized security, audit, and controls, and the ability to deploy applications on premise, as a service, or through business process outsourcing will deliver next generation manageability.

This quotation shows that Oracle and People, Ideas & Objects are wholly consistent in terms of our approach to defining and supporting the software for the innovative oil and gas producer. Therefore, the commitment to these products and architectures is made quite easily.

Next on this topic we'll review the Oracle Consulting offerings. Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Lazonick on Chandler Part III

In the first post on Professor Lazonick's paper we discussed the differences between optimization and innovation in terms of corporate culture. How in oil and gas we need to move from optimization to an innovation footing. To do so requires a substantial investment for the oil and gas producers. An investment that begins with the development of the software defined in the vision of the Draft Specification. An investment that up until today, the oil and gas industry has been unwilling to make. What I think Lazonick makes clear in this second part of our review of this paper is that the means to which to make the changes are within our grasp. All that is missing is the willingness to make the necessary investments. That willingness is a product of the innovative firms corporate culture.

2. The theory of innovative enterprise cont

Professor Lazonick begins with a comparison between what he calls the neoclassical firm and the innovative enterprise. The role of the entrepreneur and the assumptions supporting each. In oil and gas I see the bureaucracy believing theirs is a management discipline that deals with all aspects of the industry. That their management capabilities are the critical resource to the profitability of the industry.Lazonick notes;

There are two assumptions of the neoclassical theory of the firm that limit its ability to understand innovative enterprise. First, the neoclassical theory assumes that the entrepreneur plays no role in creating the disequilibrium condition that triggers the reallocation of resources from one industry to another. In the theory of the innovating firm, by contrast, entrepreneurs create new profitable opportunities, and thereby disrupt equilibrium conditions. Second, the neoclassical theory assumes that the entrepreneur requires no special expertise to compete in one industry rather than another. All that is required of the entrepreneur is that he follows the principle of profit maximization in the choice of industry in which to compete. In the theory of the innovating firm, in contrast, the entrepreneur’s specialized knowledge of the industry in which he chooses to compete is of utmost importance for his firm’s ability to be innovative in that industry. p. 6

My experience in dealing with management of the oil and gas industry is accurately captured in Lazonicks text. What management has learned is they too can control the disruptive nature of the entrepreneur, by not allocating any resources towards it, and hence avoid the disequilibrium that is created. Or so they believe. This behaviour has become systemic and has the companies actively avoiding the necessary investments in the business of the oil and gas business. Optimization is the word that everyone marches to and any producer that makes the necessary investments ininnovativeness is deemed risky.

The limiting assumption here is that the entrepreneur does not choose the firm’s level of fixed costs and the particular productive capabilities embodied in them as part of his firm’s investment strategy. In the theory of the innovating firm, the level of fixed costs manifests strategic decisions to make investments that are intended to endow the firm with distinctive productive capabilities compared with its competitors in the industry. p. 7

I referenced this article from the Calgary Herald the other day. It suggests the National Energy Board has determined that Alberta Natural Gas production will decline to 8.5BCF / day in 2012 from 12.7 today. Are we as an industry unaware of the consequences of inaction in the investments necessary for innovation? AsLazonick notes the costs of optimization eventually turn to eliminate the profit elements. The oil and gas industry in Alberta is experiencing these increased costs, of which they attribute to greedy suppliers, and the declining production values. Why, in discussing this with Canadian management, it clearly is not their fault. Imputing they are only a small part of the market.Lazonick discusses this U-shaped cost curve of the optimizers.

The assumption is that the addition of variable factors of production to the firm’s fixed factors of production results in a declining average productivity of these combined factors (i.e., the firm’s technology, which is also the industry’s technology). In deriving the U-shaped cost curve, neoclassical theorists give two quite plausible reasons why productivity declines as output expands. Both reasons assume that the key variable factor is labor. One reason is that as more variable factors are added to the fixed factors, increasingly crowded factory conditions reduce the productivity of each variable factor as, for example, workers continuously bump into one other. The other reason is that as more workers are added to the production process, the entrepreneur, as the fixed factor whose role it is to organize productive activities, experiences a “control loss” because of the increasing number of workers that he has to supervise and monitor. p. 7

It is reasonable to assume that by 2012 the Canadian producers lack of investment in innovation, and the increased costs associated with the U-shaped nature of the optimizers fixed and variable costs, will eliminate them from the marketplace. As I have indicated here on this blog before, Canada, and that is all of Canada, represents a negligible 2 percent of the readership of this blog. I can say with almost 100% assurance, when the scope of the Preliminary Specification is determined by the users, that Canada will not be represented in the functionality of the People, Ideas & Objects application. Conversely, the U.S. makes up 88% of the total users represented here. Anyone want to guess where the innovative, or profitable, elements of the oil and gas industry will be located?

Hence organization—in this case the relation between the entrepreneur as manager and the work force that he employs—becomes central to the neoclassical theory of the firm. Within the theory of the optimizing firm, the constraining assumption is that the entrepreneur passively accepts this condition of increasing costs, and optimizes subject to it as a constraint. In sharp contrast, in the theory of the innovating firm, the experience of increasing costs, as shown on the left-hand side of Figure 2, provides the firm’s strategic decision-makers with an understanding of the limits of the initial investment strategy, and with that information they make additional new investments for the strategic purpose of taking control of the variable factor that was the source of increasing costs [for an elaboration of this argument, seeLazonick (1991: ch. 3, 1993)]. An innovating firm would not take a condition of overcrowding or control loss that results in increasing costs as a “given constraint,” but rather would make investments in organization and technology to change that condition. In effect, for the sake of improving its capability to develop and utilize productive resources, the innovating firm makes strategic investments that transform variable costs into fixed costs, which the firm, in order to innovate successfully, must now endeavor to transform into low unit costs. pp. 7 - 8

Therefore investment in the productive capacity of the oil and gas industry starts here. Development of the innovative organization is deemed a necessity due to the demands of the marketplace and the increased complexity in the underlying earth science and engineering disciplines. Today we live in a sophisticated marketplace that demands the changes to organizational structure be contemplated and built within the software first. This is only the beginning of the investments that are necessary. These investments are a significant undertaking for the industry, and they are past due.

An innovative investment strategy is inherently uncertain, and investments in innovation must be made despite the existence of uncertainties concerning prospective returns. Any strategic manager who allocates resources to an innovative strategy faces three types of uncertainty: technological, market, and competitive. Technological uncertainty exists because the firm may be incapable of developing the higher quality processes and products envisaged in its innovative investment strategy; if one already knew how to generate a new product or process at the outset of the investment, it would not be innovation. p. 9

In Part III of this paper we will begin to look at the risks associated with an innovative strategy. Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Oracle - Stack Application Integration Architecture

We continue along with our review of Oracle Corporation product offerings in order to revise the Draft Specification. It is clear that the addition of Oracle products brings a level of capability to People, Ideas & Objects that is impressive. This is our second post on this topic, with our review being aggregated under the Oracle-Stack label on this blog. When we are complete, in terms of defining the Oracle Products that will be part of People, Ideas & Objects offerings, I will update the Draft Specification to include the changes. So far this has been a fairly easy process with the wholesale adoption of the Database and Middleware stacks of Oracle products. Today we move into the Application section of their product offerings. Specifically we look at their Application Integration Architecture (AIA).

One of the areas that Oracle has been busy with in the past decade is in the area of acquisitions. Might be the understatement of this century. They now own a substantial portion of the ERP and CRM business environments and are in possession of many of the top applications. PeopleSoft, BEA, Siebel, J.D. Edwards and Sun are just a few of the many acquisitions that they have made. These acquisitions have come with a substantial number of customers, particularly when you consider they also owned their own ERP systems in Oracle Financials. To get ahead of the competition they realized they needed to build a new generation of applications for their customers. Oracle Fusion Applications is that architecture and Oracle Application Integration Architecture is how those customers on PeopleSoft, Oracle Financials, Siebel, J.D. Edwards, SAP and others are going to move to Oracle Fusion Applications.

From People, Ideas & Objects point of view, we see that there are a number of systems that are used in the oil and gas marketplace. We are also like Oracle in that we are developers of custom applications based on the vision of the Draft Specification and the reality of Oracle Fusion Applications. The more I read about the Oracle product stack, the more I feel this is the correct direction to move. Oracle Fusion Applications appear to be bringing to market a different concept of what ERP systems are comprised of. Application names that end in "Hub" and "Engine" are exactly what we need to build Partnership Accounting, Accounting Voucher and other modules.

As has been indicated in many previous posts. The Community of Independent Service Providers are a key element of how the user community and People, Ideas & Objects developers interact. One of the key areas that we will be looking to the CISP for is the accounting systems integration. By using Oracle Application Integration Architecture tools they could move a producer from their current system, whether that is SAP, Oracle Financials, Qbyte or others to People, Ideas & Objects much quicker, with less cost and difficulty by predefining and pre-programming much of the interfaces across the disparate systems. With Oracle's stated objective of eventually moving all of their customers to Oracle Fusion Applications, making the integration from those applications as seamless as possible, is only common sense. What is different this time is the scale at which Oracle has approached the transition and that is reflected in the Application Integration Architecture offering. People, Ideas & Objects has access to these tools and a community of service providers, the CISP, to make these transitions as painless as possible.

Two resources are the most appropriate to review to get a handle on this unique and exciting tool set. Listen to a two part interview of Oracle Vice President Jose Lazarus, here and here, talking on AIA and the "Evolutionary Path to Fusion" white-paper. Some of the key thoughts behind the product are noted below.

• Supports transactions across multiple systems.
• Delivers integrated business process.
• Pre-built integration.
• Part of Fusion Applications.

Jose Lazuras talks about the Oracle product strategy for AIA. Their core strategy is to simply limit costs and risks of integrating multiple applications. In February of 2008 they expanded on this product strategy by introducing their "Foundation Pack" which is a programming module for integration purposes. If I didn't already have a job at People, Ideas & Objects I would certainly look into joining as a member of the CISP working on producer integrations. 

Lastly one can define what a product is by also defining what it is not. With our review of Oracle products it is determined that the People, Ideas & Objects application will be based on Oracle Fusion Applications (more on this in the next post on the Oracle-Stack) and therefore, will not be built on the following Oracle products.

• Oracle E-Business Suite
• PeopleSoft Enterprise
• Siebel
• J.D. Edwards Enterprise One
• J.D. Edwards World
• Agile
• AutoVue

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Lazonick on Chandler Part I

I introduced Professor Lazonick's paper the other day, it can be downloaded from here. I will be reviewing this paper in multiple posts. Professor Lazonick is from the University of Massachusetts at Lowell and based on a review of the bibliography for this paper, has been writing on the topic of innovation for over two decades. This is the first that I am aware of Professor Lazonick's writings, and we will definitely have to take a look at some of his other papers.

Lazonick starts off with an appropriate reference to Joseph Schumpeter about the importance of innovation.

More specifically, since, as Joseph Schumpeter (1934, 1950) recognized, innovation drives economic development. p. 1

Economic development from the point of view of greater productive capacity to produce oil and gas. How does the oil and gas industry produce more with the same volume of inputs? This is highly dependent on innovation and the capability to innovate that the industry develops. Lazonick notes Chandler;

Chandler (1990: 594) then goes on to articulate in two paragraphs, which I quote in full, what I consider to be the essence of his theory of innovative enterprise, including its contribution to the growth of the economy as a whole, that he had distilled from his trilogy. p. 2

Such organizational capabilities, of course, had to be created, and once established maintained. Their maintenance was as great a challenge as their creation, for facilities depreciate and skills atrophy. Moreover, changing technologies and markets constantly make both existing facilities and skills obsolete. One of the most critical tasks of top management has always been to maintain these capabilities and to integrate these facilities and skills into a unified organization—so that the whole becomes more than the sum of its parts. p. 3

Such organizational capabilities, in turn, have provided the source—the dynamic—for the continuing growth of the enterprise. They have made possible the earnings that supplied much of the funding for such growth. Even more important, they provided the specialized facilities and skills that gave the enterprise an advantage in foreign markets and in related industries. Because of these capabilities the basic goal of the modern industrial enterprise became long-term profits based on long-term growth—growth that increased the productivity, and so the competitive power, that drive the expansion of industrial capitalism. p. 3

2. The theory of innovative enterprise

The Preliminary Research Report, the Draft Specification and all of the work done at People, Ideas & Objects points directly at the Joint Operating Committee (JOC). The reason for this is that People, Ideas & Objects have determined that the JOC is the ideal organizational construct of the innovative energy producer. Lazonick summarizes why an organization like the JOC is that innovative construct for oil and gas, better then I have seen elsewhere.

A business enterprise seeks to transform productive resources into goods and services that can be sold to generate revenues. A theory of the firm, therefore, must, at a minimum, provide explanations for how this productive transformation occurs and how revenues are obtained. These explanations must focus on three generic activities in which the business enterprise engages: strategy, organization, and finance. Strategy allocates resources to investments in developing human and physical capabilities that, it is hoped, will enable the firm to compete for chosen product markets. Organization transforms technologies and accesses markets, and thereby develops and utilizes the value-creating capabilities of these resources to generate products that buyers want at prices that they are willing to pay. Finance sustains the process of developing technologies and accessing markets from the time at which investments in productive resources are made to the time at which financial returns are generated through the sale of products. p. 4

Chandler noted that "strategy follows structure". One of the key attributes of using the JOC is that it enables the strategy to be unique and specific to the property represented. In order for the value to be earned, each facility, each zone of oil and gas requires that a different strategy be implemented. One that is unique and develops the value based on the facts and the situation at the property.

With the structured hierarchy, and its close cousin the bureaucracy, the focus is on the corporate entity. This is reasonable until we discover the conflict associated with many corporate entities represented in each JOC. To eliminate the conflict at the JOC it is important to remember that consensus at the JOC is driven by financial interests. If the strategy and structure are both focused on the same organization, this conflict between corporate entities disappears.

The last attribute is equally important. To establish finance at the JOC does not seem to be an issue until it is realized the oil and gas finance mechanisms are focused on the corporate entity. The Financial Marketplace module of the Draft Specification moves the finance function from the corporate entity to the JOC. This enables proper matching of investments and returns based on the strategy and organizational alignment noted.

As this discussion of strategy, organization and finance show, the culture of the oil and gas industry is based on the Joint Operating Committee. The closer we move to that conceptual model, the greater the alignment, efficiencies and other attributes become. In addition to the focus on the culture of the JOC, there needs to be a revision in another attribute of culture of the energy industry. The culture that we want to change is what Lazonick and Chandler call the optimization culture, and is applied to the oil and gas industry in this post. 

I see the two cultures as being mutually exclusive. One, the JOC, being developed to deal with the unique requirements of the partnerships represented in oil and gas. And the optimization culture exists as a result of the "easy" energy era that existed in the 1980's and 1990's. There was a demand to survive commercially during this "easy" energy era. Innovation was the last thing that people thought of. Optimization for the survival of the firm was the skill that was rewarded. Lazonick notes;

The problem is, however, that the optimizing firm is not an innovating firm; indeed it can be characterized as an un-innovating firm. p. 5

How do we change from an optimizing to an innovative culture? What we do know is that software defines and supports the organization. Therefore to change the organization requires that we build the software first, and that is what we are doing at People, Ideas & Objects. Review of the remainder of Lazonicks paper will provide more answers, and I think that Lazonick and I are not talking about a wholesale change from optimizing to innovating. I would rephrase it for the purposes of the communities represented by People, Ideas & Objects as from where we are today; innovating on top of optimization, to change it to a culture of optimizing on top of innovations.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Focused on the Value

Number eight of eight in our "Focused on" series looks at the value proposition of People, Ideas & Objects. Noting how the costs of ERP systems have escalated. Where the business models in which they are sold provides People, Ideas & Objects with the opportunity to provide substantial competitive advantages.

The People, Ideas & Objects Value Proposition

Big ERP application costs have soared in the past few decades. Based on selling a generic solution to each producer, the business of selling big iron applications have been lucrative for the chosen few vendors. On the other hand producers are frustrated by the extensive one-off costs associated with customizing, supporting and operating these applications within their firms.

What if the software development costs associated with customization were aggregated for their use over the entire industry. People might argue that a producers competitive advantages would be diminished by everyone having access to the same software. I argue that the innovative oil and gas producers competitive advantages are based on their earth science and engineering capabilities applied to their asset base. Each producer holds a unique and mutually exclusive asset base to all other producers. As a result of this argument, the costs of custom development, although large in terms of aggregate, are infinitesimal in terms of a specific producers production base. This is the future of software and the value that People, Ideas & Objects is designed to provide.

In the marketplace today support costs are substantial as each producer must attain a capability to deal with any and all contingencies. Does the quality of a Java programmer have a direct impact on a producers reserves or production profile? Of course not, then why does the innovative oil and gas producer need to employ the Java programmer directly?

People, Ideas & Objects offers a compelling and competitive value proposition. Our funding is based on the software development and cloud computing costs, plus an element of profit for People, Ideas & Objects. A fundamentally different business model to the big iron ERP vendors. A business model that deals with the two critical conflicts in software, those conflicts being the source code and the software developers customers. Traditionally as more customers use the software, the costs to change the software code become progressively larger, and the costs to deploy the changes more difficult. People, Ideas & Objects eliminates these two conflicts by providing a software development capability and service based on cloud computing. If users determine that an application function is redundant and should be replaced, they won't get an argument from us.

As a result of the Information & Communication Technology Revolution (ICTR), software defines and supports organizations. It can be the glue that holds things together, it can be the cement that stops any change or innovation, and it can be the tools oil and gas investors need to develop their own organizational definitions. An organizational definition that provides enhanced ownership control, compliance and governance over the current bureaucracies methods. A software development capability as defined by People, Ideas & Objects is a necessity to operate in the dynamic and innovative oil and gas industry.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Focused on the Proof

Number seven of eight in our "Focused on" series looks at the academic proof supporting the transition to People, Ideas & Objects. How the academic community in general, and the key leadership within that community specifically, are actively promoting similar concepts.

The Proof

To summarize and provide proof that the academic community is squarely of similar mindset we need to only highlight the "Chandlerian Perspective". Consisting of the following three simple facts.

1. Technical innovation & Organizational Innovation are interdependent.
2. New Forms of Business organization & institutional arrangements are invented to solve specific economic problems.
3. Organizational & Institutional innovation is an evolutionary process - nothing guarantees "We get it right every time."

To consolidate all of the excellent research that we have reviewed on this blog would be impossible. In addition to our current review of Alfred D. Chandler, we have reviewed the works of (in order of importance to the work of People, Ideas & Objects). Professor's Carlota Perez, Richard N. Lanlgois, Carliss Baldwin, Giovanni Dosi, Oliver Williamson and many others. [Williamson winning last years Nobel prize in economics for Transaction Cost Economics.] All of these authors are focused on the impact of technology and organizational change.

Much of this academic review has been applied to the development of the Draft Specification. The Draft Specification provides a sound vision of how the problems facing the industry are resolved by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This vision sets out to define the boundaries of the firm and markets, how transactions are designed, how modularity in the specification creates a more specific division of labor and how these attributes affect science-based businesses.

One of the key break-through's of the Draft Specification is the use of marketplace's in the modular specification. There are three marketplaces, Resource, Financial and Petroleum Lease, in the specification. Importantly we have learned from Professor Ronald Coase that markets are created. This is a further extension of what we learned in the Preliminary Research Report     that software defines and supports organizations. As a further development in this area, we recently learned of a concept put forward by Professor Carliss Baldwin of "Actionable Transparency". Instead of confusing the reader I will leave it to their desire to further review the concept by selecting this label.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially 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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Focused on the Risk

A quick posting today. Number six of our "Focused on" series.

The Risk

The risk is that if we don't act in a timely fashion, the global productive capacity of the oil and gas industry could decline. We are already at a stagnant level since 2005, to decline would be a serious issue that seems so unnecessary. Exxon has stated that $20 trillion in capital is needed over the next 20 years to meet the market demand for oil and gas. I think we should organize ourselves first, otherwise we risk wasting time and money. Organizing ourselves around the Joint Operating Committee, the legal, financial, cultural, communication and operational decision making framework of the global oil and gas industry.

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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Focused on the Opportunity

During our first quarter budget drive, we documented 30 compelling reasons for industry to financially support People, Ideas & Objects software developments. These 30 compelling reasons are now codified into eight "Focused on" entries explaining our priorities and values. This is the fifth entry in this series and attempts to codify the opportunity that the Information Technology & Communication Revolution provides. Particularly through the lens that Professor Carlota Perez provides.

The Opportunity

There's more at play in terms of business opportunities then the insatiable demand for energy and high(er) energy prices. As energy producers see the long term prospects for oil and gas being quite lucrative. We also find ourselves at a period of time in which the economy is restructuring around the Information & Communication Technology Revolution (ICTR). Since 2005 we have closely followed the writings and ideas of Professor Carlota Perez. A summary of her work would show that now is the opportunity that provides for a revolutionary restructuring of all industries based on ICTR.

So if you are an earth science or engineer in oil and gas, or, in the business, economics and administration of oil and gas there are substantial opportunities for people to establish not only a career, but also a service offering based on defining and supporting the People, Ideas & Objects software developments. It is my opinion that people should view this opportunity as a complete and new beginning of oil and gas. One in which everything has to be invented and developed.

Highlighting the key points of Professor Perez' work is best left to a review of this blog's archives and her papers. (Note: Professor Perez has a new paper published that I will be reviewing soon. It can be downloaded from here.)This is the fiftieth article of ours on her work. Perez' research makes up a substantial body of work that provides real value for people who want to take advantage of these once in a lifetime opportunities. Posts highlighting her work can be aggregated under the Perez label.

Two areas that we have not covered in enough detail are the effect of the .com meltdown and the general maturation of the underlying Information Technologies. As Professor Perez states, revolutionary technologies are introduced through two phases, Installation and Deployment. Between these two phases is a period she calls the "Turning", in which the ICTR begins to lift all boats. The "Turning" was the .com meltdown. Reality is that now is the beginning of a potentially thirty year Deployment phase where Information Technology will remake all industries, and particularly oil and gas.

To the second point of the maturation of the underlying technologies. Everything from a technological point of view is in place to drive innovation. Companies like Oracle and Apple are not innovating off new architectures or technologies. They are combining the existing infrastructure in new and innovative ways that bring value to consumers and businesses. People, Ideas & Objects use of the Joint Operating Committee to identify and support the innovative oil and gas producer is the same thing. Providing architecture and technology to drive innovation.

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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Two points of interest.

I want to highlight two different issues or articles of interest today. The first is a video by Professor Simon Johnson of MIT making a presentation on his new book 13 Bankers. Although not directly on topic, the video provides a different perspective on the financial crisis, which has morphed itself into what is now called the debt crisis. A debt crisis that the oil and gas producers can ill afford. Professor Johnson's video makes the presentation of his issue, and it will be interesting to see how his ideas develop.



The second point of interest is a spectacular paper that I am reviewing. The paper is one of the many from the April issue of the Journal on Industrial and Corporate Change. The specific paper is written by Professor William Lazonick and is entitled "The Chandlerian corporation and the theory of innovative enterprise." The final paragraph of the document reads.

In the 2000s, it can fairly be said that the Chandlerian corporation has ceased to exist. In historical retrospect, Alfred Chandler uncovered the dynamics of a historically-specific business model that drove the development of the world’s richest economy. The essence of capitalism is, however, as Schumpeter recognized, change. The work of Chandler has provided us with a deep understanding of the foundations of US economic power in the middle decades of the last century. His work does not provide us with a roadmap for understanding the business models that have become dominant in the first decades of the 21st century. There is a need for us, who seek to build on the Chandlerian legacy, to remain committed to the integration of theory and history. My claim is that, with its focus on strategic control, organizational integration, and financial commitment, “the theory of innovative enterprise” is a potent framework for analyzing the process of change. It is a framework that, through the integration of theory and history, can enable us to “catch up with history” so that we can analyze the present as an evolving reality before the present as history passes us by.

I will be writing my review of this document in multiple parts. I am also extensively quoting the text and as such it is making for a long series of posts. In the back of my mind I think these posts would be substantially more valuable to the readers if they were to read the paper first and then review the application of Lazonick's paper to People, Ideas & Objects. So with that thought the paper can be downloaded from here.

The many points that Professor Lazonick is making are directly applicable to the oil and gas industry. Over a period of time, during the low energy prices era, the demands of the business  required optimization in order to survive. However, in the past 10 years the marketplace has changed to this new energy era we find ourselves in today. An era where demand is insatiable and supplies are constrained. Creating the higher commodity prices that re-allocate the financial resources towards the innovative oil and gas producer. The marketplace has shifted, however, the energy industry remains constrained in an optimizing mentality that is inconsistent with its needs.

The shift from optimization to an innovative footing is counter cultural. We can't get to the innovative footing the energy industry needs without Schumpeter's creative destruction being put into full force. What is also clear is that the move to an innovative footing is a substantial capital investment. Starting off with the development of People, Ideas & Objects and continuing on within each producer firm developing their own scientific capabilities. The current management are locked in the optimization mindset, and are conflicted by their reported earnings from higher commodity prices. They have poorly prepared us for the need to change, and have betrayed our interests in this constant pursuit of optimization. A constant pursuit of optimization that Lazonick shows leads to the destruction elements of Schumpeter's creative destruction.

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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