Langlois, Innovation and Process Part...

Today in our third installment of Professor Langlois paper "Innovation Processes and Industrial Districts" we discuss Transaction Cost Economics (TCE). Which are an important element of the Draft Specification. In 2009 Professor Oliver Williamson of Berkeley won the Nobel Prize in Economics for TCE, reflecting the heightened importance of this topic. Wikipedia defines the term here. Of note, once we have completed our review of Professor Langlois we will be moving on to a review of Professor Oliver Williamson. [Professor Williamson has the majority of his material behind pay walls and therefore are not freely available. I therefore will not be able to provide access to the documents.]

Professor Langlois talks about his concept of "Dynamic Transaction Costs" which he describes in his paper "Transaction Cost Economics in Real Time".

This paper attempts to place the theory of the boundaries of the firm within the context of the passage of time. More precisely, it resurrects and places in a modern frame some of the insights of the classical and Marshallian theories of organization. The modern reinterpretation of those theories centers around the 'capabilities' view of the firm. Taken together with governance costs, the capabilities of firm and market determine the boundaries of the firm in the short run.

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firms capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them.

Indeed, in cases in which systemic coordination is not the issue, the market may turn out to be the superior institution of coordination. In general, the capabilities view of the firm suggests that we look at the firm and market as alternative -- and sometime overlapping -- institutions of learning. p. 99

This discussion of Dynamic TCE is important to the oil and gas industry. At today's energy prices the average upstream employee generates approximately $4.1 million in annual revenue. (Based on Total's production of 2.34 mboe / day, 16,005 employees and today's prices.) Oil and gas is a capital intensive industry. The number of people that are employed in the global oil and gas industry is small compared to most industries. It is this nature of the oil and gas business that brings the relevance of Langlois' theories. To be innovative, will be costly, to employ the style of marketplace dynamics discussed in this paper will also be costly. However, the ability to increase the productivity of the employees and Industrial Districts (ID) will require these investments, and the funds will not necessarily be a large percentage of the costs incurred in the oil and gas industry.

3. Life Cycle Considerations

To help us recall the terms of the discussion Langlois brings in this excellent summary.

Inspired by Adam Smith’s discussion of the benefits of the division of labor, a number of classic accounts of the life cycle have associated the development of decentralized production systems with an increase in the extent of the market (Young 1928; Stigler 1951). In Stigler’s version, for example, firms start out vertically integrated because small markets do not permit specialization. An increased extent of the market permits the spinning off of those stages of production that benefit from increasing returns, thus generating the potential for an industrial district. As an industry ages in Stigler’s account, declining demand for the industry’s output would lead to an eventual reintegration. It is the central insight of transaction-cost economics since Coase (1937), however, that production costs alone cannot determine whether the division of labor will be coordinated through markets (as in an industrial district) or internally within vertically integrated firms. Transaction costs also matter. And technological change is one important source of transaction costs. p. 10

The oil and gas industry is not subject to a decrease in demand and therefore provides no opportunity for reintegration. I would argue that the scientific demands of energy exploration and production are poorly served by the "integrated" bureaucracies. Moving to a greater market orientation, as in the Draft Specification, will marginally affect production costs, and materially enhance the value in designing transactions as the Accounting Voucher module provides.

I want to reinforce these points by pointing out that the majority of field operations are conducted by third parties. Designing transactions is currently done in standard oil well drilling contracts where the chairman of the Joint Operating Committee selects each element of the wells drilling will be provided / conducted by the oil well drilling firm or the producer. Designing transactions are not foreign to the earth science and engineering resources in oil and gas, they are foreign to the administrative or ERP systems that the producer uses. I consider the Draft Specification is aligning the systems to the culture of the industry. Langlois notes that this leads to.

Because ID's do not comprise an entire market, their role in the generation of technical standards is complex. The relatively close levels of association between firms in an ID can ease the setting of standards within the district because much of the agreement may be achieved informally and the limited number of firms within an ID makes it easier to bring the interested firms together. Furthermore when there are only a few integrators who are determining overall design, less discussion may be needed to achieve commonly accepted interfaces between components. The effects of concentration on overall industry standards are less clear-cut and an industry may fragment into a number of groups dominated by local standards without agreement being reached on an overarching set of standards because there is sufficient volume of output within each ID to allow for self-sufficiency. As a result, while ID's may accelerate innovation along certain trajectories, they may also encourage myopic behavior in the gathering, generation and use of new knowledge. pp. 12 - 13

In this discussion I hope that I have highlighted the nature of how the Draft Specification enables the greater market orientation. By moving closer to the cultural influences of the business, increased dynamic transaction costs will be minimal. That is to say the major impediments to the ways and means of the industry operating in a more innovative fashion. Is 1) management who are focused on the firm, and 2) the ERP systems that are designed from other industries or early stage technologies [SAP]. People, Ideas & Objects provides the industry with the opportunity for a greater innovative footing. By identifying and supporting the industry standard Joint Operating Committee and its culturally systemic ways.

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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Langlois, Innovation and Process Part II

Today we discuss the second part of Professor Richard N. Langlois' January 2008 working paper "Innovation Process and Industrial Districts". A summary of the first part of this series would highlight how the service industry, Community of Independent Service Providers (CISP), users and producer firms would re-organize themselves to facilitate innovation. With the producer firms focusing on their core competitive advantages of 1) a unique asset base and 2) application of the scientific and engineering capabilities available to them. Producers would be able to increase their reserves and deliver-ability. The knowledge, tacit and codified, residing in the "Industrial District" (ID), or Small Knowledge Intensive Enterprise (SKIE) of which the CISP would be considered a part of. As Professor Langlois noted, these communities may be organized in local, regional, national and international fashion with communication being encouraged between each.

Today we are discussing the enhanced division of labor and specialization necessary to expand the economic output of the oil and gas industry. With energy demand projected to be insatiable, the focus of the industry is changing. The scientific capability of the oil and gas industry is somewhat fixed and to increase output will therefore require new forms of organization. People, Ideas & Objects proposes to build the software that identifies and supports the industry standard Joint Operating Committee as the key organizational construct of the innovative producer. Within the software it is implicit that the enhanced division of labor and specialization is a key output of the Draft Specification.

2. Specialization and Embeddedness in Industrial Districts

Differentiation, Specialization and Integration

It is an economic fact that growth is achieved through Adam Smith's division of labor and specialization. To take the energy industry to drill a well may currently require over 1,000 specialized individuals when we consider the scope of individuals from the drilling firms billing accountant to the rig hands, to the geologist engineers and staff at the member firms of the Joint Operating Committee. To move to a higher level of performance will require a more defined and broader division of labor and specialization. How this comes about is suggested in Professor Langlois' discussion of ID's. Moving the majority of the science based capability to the market is the logical choice when we consider the real competitive advantages of producers are resident in their asset base.

The Resource Marketplace module of the Draft Specification facilitates Langlois' ID's. The point that I am attempting to focus on is the need to have the necessary systems in place to support the innovation based market. In addition, a software development capability such as contemplated by People, Ideas & Objects, is necessary to continue the iterative developments within the marketplace, based on the ideas of the greater oil and gas community. 

As adaptation usually takes time, a system that is optimized in the sense that there is near-perfect efficiency in the integration of inputs is probably not only stable but static and hence endangered if the surrounding environment is unstable (as is almost always the case). It is important, therefore, that an industrial district actively generate change in its internal relationships and in those with the outside world, and that it is flexible enough to absorb change without serious losses in efficiency. Inability to change either or both of the internal and external relationships contributed to the decline of such industrial districts as the textile and fashion district of Como (Alberti, 2006) and the eyewear manufacturing district of Belluno (Camuffo, 2003). p. 4

Flexibility has its costs and these directly affect performance. That is a given, and a static industry is a dying industry. I think that Professor Langlois clearly shows the risks and shows that a balanced approach may be the best strategy. We run risks and rewards in whichever direction we take. And maybe the optimal strategy is an ability to pre-select the balance of these criteria within the systems we build. Irrespective of the choices made. The key criteria is an enhanced specialization, division of labor and a capability to further enhance the division of labor and specialization.

Embeddedness and Centralization

In our first quarter 2010 budget drive we proved the management within oil and gas will not act to develop the Draft Specification. Alternatively we have turned to the investor / shareholder as the source of our budget funding. Oil and gas investors have the opportunity through People, Ideas & Objects to build the infrastructure necessary to manage their oil and gas assets in the most profitable manner. [The stated objective of the CISP.] Langlois ID's and Perez' SKIEs facilitate this form of organization through the industry standard JOC.

Because of their structure, industrial districts offer important benefits in innovation processes. For one thing, the high levels of differentiation and specialization allow firms, in the Smithian fashion, to focus on aspects of the supply chain in which they are especially competent. p. 5

What was able to be achieved through the hierarchy and "bigger is better" organizational thinking has been lost in the past 25 years. Bureaucracies were known to be inefficiently efficient, and for the past 100 years society has benefited greatly. We now see the multitude of stakeholders of these large corporations disenchanted by the performance of these organizations. Society is concerned about the environment, consumers are demanding more, better and faster service, and shareholders are being treated as poorly as could possibly be conceived of just a few years ago. The only benefactors appear to be the management. Their lack of financial support for the ideas represented in People, Ideas & Objects ensure that their way will remain unchallenged.

I see the future in many ways being an extension of the individual. The scope of an investors domain would be much smaller and be a direct function of his / her own capabilities. A move toward a much more hands on type of operation. Management is redundant, compromised and has lost the motivation to act on its stakeholders best interest. I foresee the management role being codified in the People, Ideas & Objects software that the investor uses to manage their operations. This assumes substantial administrative performance is provided to the investor.

The stakeholders that would benefit from this need to orchestrate this monumental change through active financial support of People, Ideas & Objects. With the Community of Independent Service Providers being a critical element of the embeddedness and a "virtual" Industrial District. 

Strong ties (Granovetter, 1973) among workers, including managers, can increase the amount of information available to firms and the readiness of people to share what they know when relationships gain a dimension of friendship to counterbalance the competitiveness among firms. p. 5

Communities of Practice and Knowledge Diffusion

To suggest that the oil and gas investor / shareholder, organized around the JOC, supported by the CISP and other ID's -- as represented in the Resource Marketplace module of the Draft Specification, is a fundamental and bold redrawing of the ways and means of the oil and gas industry. One that is based on an understanding derived from 30 years of working in oil and gas, utilizing the capabilities of the mature Information Technologies and steeped in the academic research conducted here. One sees a vision of how the industry could operate in a more natural and logical manner. One consistent with the culture of the industry, the JOC, that is summarily ignored by SAP and other systems vendors. A vision that deals with issues and opportunities that are open and available to those in the changed oil and gas industry. However, does this vision provide the enhanced division of labor and specialization that we are seeking?

When embeddedness is strong, the creation of communities of practice (Wenger, 1998; Brown and Duguid, 2000) generates competences that, although possessed by individuals, are collective in that they are based on a set of practices that is common to all members of a community. These competences (both tacit and codified) can transcend firm boundaries and become characteristics of an entire industrial district. As Marshall (1975, 197) wrote of nineteenth century Britain, “To use a mode of speaking which workmen themselves use, the skill required for their work ‘is in the air, and children breathe it as they grow up’”. p. 6

Langlois defines a risk associated with a limited distribution of the Industrial District. The limited division of labor and lack of significant levels of specialization obstruct the opportunity for this type of community to develop to their full potential.

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

Although Langlois talks about networks and IT, not at the level needed for this discussion. Critical to the success of this type of industry re-organization will be a software development capability that is an active and involved member of the communities, ID's, SKIEs, CISP etc. This software development capability is what People, Ideas & Objects is proposing we build for these communities.

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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Langlois, Innovation Process Part I

Continuing on with our review of Professor Richard N. Lanlgois, we begin our review of "Innovation Process and Industrial Districts". This is a working paper that was published in January 2008 that deals with what are called "Industrial Districts" (ID) and is his contribution to the book "Handbook of Industrial Districts by Giacomo Becattini, Marco Bellandi, and Lisa De Propris". For the purposes of People, Ideas & Objects, ID's picks up on Professor Carlota Perez' Small Knowledge Intensive Enterprises (SKIE) which as you may recall, our Community of Independent Service Providers are a subset of. In our last few posts we were able to summarize the application of many of Langlois' theories in the Draft Specification.

Key to the success of the Draft Specification is the understanding of what the innovative oil and gas producers competitive advantages are. These are simply the unique asset base they hold and the direct application of the earth science and engineering capabilities available to them. It is considered that some of the engineering and earth scientists would be directly employed by the producer firms, however, there would be a pooling of these resources by the producers represented in the Joint Operating Committee (JOC). This pooling would be augmented by the service industries and a capability resident in the SKIE or ID in the local, regional, national and international communities.

Within an innovative oil and gas industry things will need to change based on the development and understanding of the sciences. Development, identification and analysis of this dynamic capability is what is being discussed in this paper by Professor's Robertson, Jacobson and Langlois.

Typically the Third Italy is dominated by production occurring in industrial districts. The districts are geographically defined productive systems, characterized by a large number of firms that are involved at various stages, and in various ways, in the production of a homogeneous product. A significant feature of industrial districts is that a very high proportion of firms within them are small. A characteristic of the industrial district is that it should be conceived as a social and economic whole. In industrial districts, social institutions are as important as economic. From Dansen and Whittam glossary of terms.

I am familiar with the Italian sun-glass manufacturers "Industrial District". It is in a region of Italy where the population of small towns are organized in a manner described in the definition. Most of the manufacturers and parts suppliers are working out of modified garages in their homes. The article that I read reflected that this enabled the Italians to focus on design and why they are regarded as the top designers. 

I find this paper challenges us in identifying many of the deficiencies and issues that remain unresolved in this proposed community / software development project. Many of the questions that should be asked are being openly discussed in this paper and provides us with the beginning of a discussion that addresses the question of "what's next". How will this community sustain itself and what are its risks and opportunities. Difficult questions and decisions that are needed to be resolved before they are discovered or happened upon. 

1. Introduction.

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

An appropriate comment and one that brings to mind the difficulties in achieving this within the oil and gas industry. Geography, the different professions involved, the complexity of the business of oil and gas, and the capability of the systems that support the business have to be built to accommodate innovation. What I see is these local, regional, national and international ID's all learning and applying the knowledge that is developed and made available. These ID's are a critical resource that are available to the JOC's and are the means in which knowledge is generated and diffused as innovation.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

What more could be necessary then the generation and diffusion of new knowledge in the oil and gas industry. This is why the Joint Operating Committee takes on an enhanced role in this systems development, and why the innovative oil and gas producer needs these systems. You can't get there, to an innovative footing, from where the industry stands today. The primary focus of this software development is to enable the innovation that is necessary for the industry to meet the needs of the energy consumer. And that is simply through enhancing the knowledge, understanding, and use of ideas, a community of people focused on solving the difficult issues associated with the oil and gas business.

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. These outcomes can then be relatively easily diffused among firms in the Industrial Districts (ID) because of embeddedness in a common environment. The obverse of this commonality of inspiration and ease of transmission of knowledge, however, may be an inordinately inward focus that results in an ignorance of or disdain for innovation processes in other regions or in industries not represented in the ID. Furthermore, there may be a relationship between the degree of embeddedness in the industrial district and innovation. It has been suggested that innovation increases as embeddedness increase up to a point, and that beyond that point further embeddedness results in reduced innovation performance at the firm level (Uzzi, 1997; Boschma, 2005). Thus, depending on circumstances, participation in an industrial district can either encourage or impeded innovation. pp. 1- 2

Leaving the question of the appropriateness of the concept of "industrial districts" use in oil and gas. We see the difficulty, or balance and risk associated with too much "embeddedness" and its consequences. In today's fast pace of change, the energy producer needs to be able to move with the developments in the underlying science, engineering and capabilities of the industry. Application and optimization of these to the producers asset base is the activity that generates the greatest value, the enhancement of reserves and productive capacity. Is it critical that a producer has the optimized means of drill bit manufacturing? Application of Industrial Districts or SKIEs is only a further extension of this logic or more defined division of labor.

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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McKinsey on the economy.

Yesterday we saw the markets respond negatively to the debt situation in Europe. This has had an adverse effect on the global markets with many reflecting a flight to quality. It appears to me that the effects of the various government stimulus initiatives have enabled economies to avoid the crisis from becoming to great. However, there are  those unsustainable levels of debt that are carried by most countries. This situation appears to be ignored by many administrations, including the U.S., and the need to address them seems to be the priority being asserted by investors. Loaning money out at low interest rates may be at an end. Markets will continue to reflect these concerns until such time as Professor Carlota Perez “Deployment” period is fully installed.  

McKinsey have published their Global Survey results which clearly reflect the concern for debt is substantial.   

Executives in Europe and North America are haunted by the perception of crippling public debt levels: 54 and 61 percent, respectively, think that public-debt levels will have a “significant” or “severely negative” impact on GDP growth in their home markets. In contrast, 45 percent of respondents in China and 24 percent in India expect that the level of public debt will have a “positive” impact or “no impact” in their home markets.

Volatility remains high and this is reflected in yesterday’s U.S. stock exchange drop of 1,000 points, suggesting that buyers were few and far between. This volatility, unlike in 2008, will not lead to the types of economic impact that we have just recovered from. However, with large debts and the potential for higher interest rates, the long term flexibility of countries, companies and individuals is more constrained. Looking at oil and gas companies balance sheets, and understanding that these were mostly financed in short term markets, higher interest charges may constrain their capital expenditure programs. Issuing debt on longer terms will have this effect even if there is no change in market rates.

McKinsey note two positive trends that may be developing. For many decades, short term concerns drove the agenda of most companies.

Companies are shifting their strategic planning from crisis mode to a more balanced consideration of short-term profitability and long-term strategic issues: one-third now focus equally on the short and long terms, compared with one-fifth in 2009.

Information Technology being a key variable in increasing firms competitive advantage. This reflecting a timeliness of People, Ideas & Objects and associated communities. 

Technology will continue to materially reshape consumer awareness, choice, and interactivity models, and companies should be striving to tap the power of technology to improve their competitive advantage.

Let’s hope these trends continue. 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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Langlois on Chandler Part II

Part II of our review of Professor Richard Langlois' paper "Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History". Today's post looks at capabilities development from an evolutionary point of view. Langlois notes his and Chandler's preference is to focus on evolution in the development of the firm and markets capabilities. One of the major problems with moving to use the People, Ideas & Objects Draft Specification is the radical or revolutionary nature of the necessary changes. The way in which most firms are operated today is substantially different then what is contemplated in the Draft Specification. In this post I argue these changes are evolutionary and bring the oil and gas producer closer to its more natural form of organization, the Joint Operating Committee (JOC).

During the 1960's systems capabilities were limited and their applications were quite crude. Organizational developments were therefore constrained by the limitations in Information Technologies. The focus of systems development was the firm itself, and that focus was driven primarily by the compliance and governance requirements of firms (Accounting, Tax, Royalty, SEC etc). The Joint Operating Committee was secondary to the demands of the compliance and governance frameworks of the firm. This systems thinking grew over a period of time in which it included several generations of people. Through this process the administration of oil and gas became more oriented to the compliance and governance frameworks and conversely more withdrawn from the five frameworks of the JOC.

It is my opinion that the Draft Specification is not revolutionary in it's move to the JOC, but evolutionary. Particularly from the point of view that we are moving towards the common-sense form of organization. Leaving this systems thinking perception behind is what is necessary for the innovative producer to attain the speed of operations necessary to compete in the oil and gas industry. Langlois notes;

Drawing on many of these ideas, Paul L. Robertson and I have proposed an evolutionary theory of what we call business institutions, that is, of markets, hierarchies, and the many hybrid forms that live between and around markets and hierarchies. What drives the theory are the costs faced by various business institutions of acquiring economic capabilities suitable to the profit opportunities they face. p. 360

With the escalating scientific demands contained within each barrel of oil, the key constraint is the number of earth scientists and engineers. Can we increase the volume of these key individuals at will? Of course not, and with the potential retirement of the senior levels, this issue will only become more acute as time passes. The Draft Specification deals with the limited engineering and earth science resources by addressing the bureaucracies need to develop 100% of their capabilities in-house. These silo's of capabilities built within each firm are designed to deal with every possible contingency. The building of individual silo's within each firm introduces a redundancy that is unaffordable in the current and future oil and gas industry.

There is also the issue of the means of organization of these resources. The hierarchy provides for an advanced division of labor, however, what is needed to expand the economic output of the oil and gas industry is a more detailed division of labor. The Draft Specification deals with the earth science and engineering demands by using the Information Technologies to pool the technical resources of each producer represented in the JOC. These technical resources are further enhanced by enabling a greater role of the service industries to provide a dynamic capability through the marketplaces that support the innovative oil and gas producers. These are reflected in the Draft Specification's  Military Command & Control Metaphor, Resource Marketplace, Knowledge & Learning and Research & Capabilities modules.

Please note as well, the Draft Specification places Intellectual Property (IP) development for the industry in the hands of those with incentives to earn their benefits. The producer firm's competitive advantage is derived from their asset base and application of the firm and markets scientific capabilities to those assets. Development of the IP necessary for multi-lateral fracing and other innovations is best left to the market. A market where those that have the ideas will benefit from their development. Simply the scientific issues that face the industry will not be resolved by a bureaucracy. The difficult and timely effort necessary to develop an idea will only be undertaken by those that deem some benefit in doing so. The Draft Specification therefore respects the IP rights of individuals and corporations that are able to expand the scientific capabilities of the oil and gas producer.

Professor Langlois notes three factors are important. Application of this framework to the methods used in the Draft Specification will provide an understanding of the choices that were made.

1. The pattern of existing capabilities in firms and market. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 360

2. The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 360

3. The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 360

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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John Hoffmeister

Former Shell Oil Company President John Hofmeister is in the news today and seems to be everywhere. Booz & Company have pre-released this article entitled "Why We Hate the Oil Companies". This article is a summary of his upcoming book by the same title, and it has some interesting points of view. Hofmeister is concerned, as we are at People, Ideas & Objects, about the demand side of the energy equation.

Total energy use in the United States has tripled in the six decades since 1950. Consumption has also shifted from manufacturing to residential and commercial use; much of this growth can be traced directly to the increased use of computers and associated servers, printers, and other devices. With the massive populations of the world’s emerging economies, the spiral of energy demand is accelerating. But both governments and the energy industry are dismally unprepared for a future of rapidly rising energy demand and insufficient sources of supply. pp. 2 - 3

And in a related article published by worldoil.com (Page 3).

More recently, despite the high oil price “wake up” call delivered to the US during the period 2005-2008, policymakers have been unable or unwilling to address the nation’s energy security, economic competitiveness that comes from affordable energy, and the potential jobs creation initiatives that a sound energy policy would and should deliver. Given the current trajectory of an aging infrastructure, decades of restrictions on drilling, failure to tackle the obstacles that prevent both more nuclear plant and clean coal plant projects, frittering at the edges of renewable energy, and avoidance of other energy “hard choices,” within the decade the nation faces an unprecedented energy abyss. p. 3

This is the clearest admission that we have seen about the energy supply situation in the U.S. Hofmeister puts the scope of the problem into focus for those, particularly the management of the bureaucracies, that deny the situation is as dire.

By 2020, there will be inadequate supplies of liquid fuels and electricity taking the nation toward inevitable gas lines, brown-outs, black-outs and extraordinary high prices. p. 3

We need to act. Spending more money to make the problems go away hasn't worked. In fact they have only wasted more time. We need to re-organize our approach to this problem. Re-organize around the Joint Operating Committee with systems and communities dedicated to supporting the innovative oil and gas producer. Otherwise.

The energy abyss will stick around for up to a full decade with all of the national insecurity, economic decline, joblessness and social malaise that accompanies energy shortages in third world countries. p. 3

I don't think that's the future we want to discover for the next twenty years. But if we leave it in the hands of the current management I think that future is certain. All that management have done is denied that the situation exists and avoided developing any solutions. After all, what harm would come to them if they had thrown a few dollars towards People, Ideas & Objects. The managements world is comfortable because they control the budget and therefore nothing can challenge their authority.

The energy industry, despite its technological, geological, chemical, physical, molecular, logistical, scientific and engineering expertise and capacity to deliver affordable energy in endless supply, given all of the natural sources of energy in this country, and the world, will be unable to supply the demand because of public policy constraints. Yet, it will bear the brunt of the blame for energy shortages. p. 3

Whether it is the fault of the public policy constraints as Hofmeister suggests, or managements inaction, either one will be the determining point. If management waits too long, and the public policy falls into line, then we'll know who the real culprit of any energy shortages is.

The nation has to come to grips with its energy future sooner, not later. The time is now not then. p. 3

I realize the tone and topic of this discussion is difficult. We however need to begin approaching these problems in a constructive manner, and that means building the Draft Specification. 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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Langlois on Chandler Part I

We move on to a review of Professor Richard N. Langlois and his research's application to People, Ideas & Objects. Langlois' research has been in the areas of the boundaries of firms and markets, modularity, transaction cost economics, the division of labor, capabilities and his "vanishing hand" theories. These are areas that were important in developing the Draft Specification, and as I recently noted both Professor's Carlota Perez and Richard Langlois' research have been critical in the development of People, Ideas & Objects. This review will highlight some of the key areas of Professor Langlois' research, we'll also look at a number of his recent papers that we have not discussed before, and review in detail his slide presentation.

We recently completed a review of Professor Alfred D. Chandler, and what better document to start our review of Professor Langlois then a look at his 2004 essay "Chandler in a Larger Frame: Markets, Transaction Costs and Organizational Form in History". Langlois begins;

In 1977, when Alfred D. Chandler's pathbreaking book The Visible Hand appeared, the large, vertically integrated, "Chandlerian" corporation had dominated the organizational landscape for nearly a century. In some interpretations, possibly including Chandler's own, The Visible Hand and subsequent works constitute a triumphalist account of the rise of that organizational form: the large, vertically integrated firm arose and prospered because of its inherent superiority, in all times and places, to more decentralized, market-oriented production arrangement. A quarter century later, however, the Chandlerian firm no longer dominates the landscape. It is under siege from a panoply of decentralized and market-like forms that often resemble some of the "inferior" nineteenth-century structures that the managerial enterprise had replaced. p. 355

The decline of the bureaucracy is of course the other major economic initiative that People, Ideas & Objects builds off of. Yesterday in our final review of Professor Carlota Perez' paper we defined the scope of the problem facing People, Ideas & Objects and its associated communities as being within our grasp or remaining rather distant. It is these large economic changes, the decline of the Chandlerian corporation, the great surge expected from the deployment phase of the financial crisis, that make the seemingly impossible tasks that we face, possible. Add to these economic times the impact of the Information & Communications Technology Revolution (ICTR) and we see the scope of our ambition may not be that far-reaching after all.

Moving to the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. Is a necessity to deal with the expanding earth science and engineering effort represented in each barrel of oil equivalent. Using the JOC we take the common-sense approach of aligning the bureaucracies compliance and governance frameworks with the legal, financial, operational decision making, cultural and communication frameworks of the JOC. In a world dominated by the network model of organization, why would you not integrate these frameworks in this fashion.

Critical to the success of People, Ideas & Objects is the tacit knowledge held in the user communities and Community of Independent Service Providers. To enable this knowledge requires that it be accessible in more efficient means. Tacit knowledge can not be codified and is resident only within the people who work within the oil and gas industry. Networks and tacit knowledge need to be combined through a software development capability such as that considered by People, Ideas & Objects.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying our a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

In People, Ideas & Objects version of an innovative oil and gas producer. Acquisition of the necessary tacit knowledge is through the marketplace metaphor represented in the Resource Marketplace Module. Langlois also notes the critical nature of tacit knowledge as a competitive advantage.

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints as one competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. Moreover, the costs that can make transacting difficult, and may lead to internalization, can go beyond those that arise in the course of safeguarding against opportunism or damping moral hazard through monitoring or incentive contracts. In such a world, economic activity may be afflicted with "dynamic transaction costs," the costs that arise in real time in the process of acquiring and coordinating productive knowledge. Members of one firm may quite literally not understand what another firm wants from them (for example, in supplier contracts) or is offering them (for example, in license contracts). In this setting, the costs of making contacts with potential partners, of educating potential licensees and franchisees, of teaching suppliers what it is one needs from them, and the like become very real factors determining where the boundaries between firms will emerge. pp. 359 - 360

I have extended this situation to include each participant of a JOC may effectively apply their own strategy to the assets. This strategy may not be known by any of its partners, and indeed, only in unique situations would each producer have the same assets in the region. For example, one producer may have surplus capacity in a near-by gas plant that is their key priority to optimize, whereas another may only have an interest in the producing gas wells.

To Langlois point about the tacit knowledge and the development of capabilities. One of the problems in oil and gas is that technical capabilities are developed within each bureaucracy to deal with any and all contingencies. With BP's current environmental PR efforts, we see that this containment within the bureaucracy is a failed application of capabilities. We need to also consider that the increase in scientific demands per barrel of oil requires more tacit knowledge from a constrained resource. The Draft Specification considers that these capabilities be dynamically generated through the service industry and the human resources of the working interest partners of the JOC. Only then will the future demand on these finite engineering and science based resources approach reasonable levels.

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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Perez, Crisis and Innovation Part VII

Today we complete our review of Professor Carlota Perez' February 2010 paper "The financial crisis and the future of innovation: A view of technical change with the aid of history." We continue to discuss the concept of the Small Knowledge Intensive Enterprises (SKIEs) and the implications that will be faced in implementing them in oil and gas. People, Ideas & Objects as a software developer is a member of the SKIEs and we are dealing with exactly these issues here today. That is money and where it will come from. I continue to look to the $3.5 trillion in annual oil and gas revenues as the primary source of funding of all the software development costs and financial resources for the Community of Independent Service Providers.

My experience in having funding sourced from investment capital or banking has been very negative. Talking to bankers and investment houses in the Calgary area; the topic turns very quickly to the revenues that will ultimately be sourced from the oil and gas firms. If we are working to secure the revenues from the oil and gas firms as the first task in getting funding from investment houses, then why would I need the investment house? Without the oil and gas management buy-in to the overall concept, these groups generally don't bite. Therefore, little time has been wasted in trying to generate any investment capital.

Banks understand two attributes of a start-up. One is the revenues that the firm generates. The other, in the case of People, Ideas & Objects, is the intangible nature of the assets in the firm. Intellectual Property without revenues doesn't get you in the door.

I would expect the same type of responses would be provided to any of the members of the CISP, or in Professor Perez' SKIEs. The key point to remember for this project, is that nothing will happen until such time as these communities are supported financially by the oil and gas investors / shareholders themselves. Therefore, that is what I spend my time writing about. This blog has substantial leverage in terms of the number of people who visit it daily. Our growth has averaged a remarkable 25% per quarter in the past year. This is the most effective way in which to appeal to those interested parties that may be capable of support.

Recognising intangible value

Professor Perez notes the difficulty in trying to raise capital for intangible assets. I disagree that this would bear any fruit. However, that has been my experience, yours as a member of the CISP might be different.

Naturally, the most vulnerable of all SKIEs and innovative companies are the start-ups. In the absence of venture capital, they are also the least likely to be able to obtain loans from banks, given the intangible nature of what they can usually offer as collateral. That is one of the reasons why individual “angels” and venture capital funds are the most appropriate providers of funds in those circumstances. They are often as knowledgeable as the innovators in the field of endeavour and can evaluate the likelihood of technological success and the capabilities of the project leaders. They can also complement the entrepreneurial capabilities and judge the market risk and the likely returns. p. 32

The fact of the matter is that without direct revenues being invested by the oil and gas producers themselves, no software and no supporting communities will develop. It is incumbent on these producers to make the investments and develop the capabilities that they will need. Otherwise we will continue to see management in complete control, sort of.

But policy innovations may be needed for stimulating venture capital and/or providing some other forms of direct or indirect support for innovators. p. 32

and

Whichever solutions prove to be practical, as knowledge capital becomes more prevalent, society will have to find a way of evaluating and recognising it. p. 33

Until such time as the oil and gas producers actively support this project and its communities no work will be done. Asking these communities to "put some skin in the game" is a ridiculous request. If the producers can't see any value now, then adding some volunteered time from the community will do nothing to help their focus. Let me repeat, the oil and gas industry is a $3.5 trillion / year industry. That is our initial source for funding, and as far as I'm concerned, the only viable source of funding.

Providing continuity of support along the life-cycle

It is important to keep our eye on the main point of this, up until now, exercise. It is about innovation in the oil and gas industry. An industry that is constrained by its bureaucracies. An industry who's product is the life-blood of the global economy and who's scientific demands per barrel of oil are escalating in a non-linear fashion. Having a handful of people contribute some volunteer time will not solve this problem. The scope of the problem can't be solved by some investment house or gracious banker. This needs the full and willing support of the oil and gas industry in order to be successful.

It is true that innovation requires patient capital; it is equally true that it needs continuity of support. Although it has been shown that the linear model of innovation is not valid, that the continuous flow from science to technology to engineering to innovation only holds in a few cases, there is indeed a sort of “linear model” from innovation to stable success. p. 33

And here is where I disagree with Professor Perez. Only the oil and gas industry will benefit from these direct investments in software, software development capabilities and supporting communities. Only the oil and gas industry with their $3.5 trillion annual revenue streams have the resources necessary to approach solving their problems.

However, since many research directions are uncertain and there can be serendipitous discoveries, it would be unwise to insist on a direct industry interest in all possible research projects. pp. 35 - 36

and

In finance, in particular, both the private and the public sector will need to modify or create new instruments in order to tailor them to the nature of the changing needs of innovators. Viewing networks as valid interlocutors, recognising and learning to assess intangible value, providing adequate and continuous life-cycle support and strengthening local R&D for present and future needs is in the national interest of each country and in that of the business community located on that territory. p. 37

So here we stand once again. Within grasp of solving this paradox, or another 100,000 miles to travel. 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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Perez, Crisis and Innovation Part VI

In a number of previous posts we briefly discussed Professor Carlota Perez concept of the Small Knowledge Intensive Enterprises (SKIEs). How this concept captures the Community of Independent Service Providers that are critical to the success of the oil and gas producer and People, Ideas & Objects software developments. This post deals exclusively with the topic of SKIEs and therefore accurately details the problems that our communities face. Through out her writings Professor Perez has consistently argued the need for a different point of view. A point of view of how things need to be structured in order for the deployment phase to be realized. Whether that is realized through enhanced government or business involvement is unknown at this time. What is clear is that these problems are what we face in building this software and are unaddressed by the current bureaucracy.

My argument that the management in the industry has been overly critical of the service sector is also a part of this discussion. During the 2007 - 2008 period we heard management complain that service industry costs were escalating excessively. Some companies went as far as to state that the service providers were gouging their clients. This in an environment where the oil price was $147.00, whom was really getting greedy. In retrospect, I think that the majority of these cost increases are attributable to management's inability to see the increased effort per barrel of oil.

The other area that I would raise that is directly on point with Professor Perez' discussion. Is the fact that the energy producers collect 100% of the funds for the primary and secondary industries involved in oil and gas. This does not entitle them to hold these resources from the service industries when the times get difficult. Cutting back on field operations has consistently been damaging to the ability of the service industry to fulfill its supporting role. People have been unwilling to see the oil and gas industry as a steady employer. They also see it as a boom-bust cycle where the hours demanded are excessive and the boom cycles introduce inexperienced field personnel to dangerous situations. The oil and gas producer should analyse the damage that occurs as a result of their turning on and off the financial support for the service industry providers.

Another behavior of the oil and gas companies is the ostracizing of those with alternative ideas. I have proposed a common sense approach to resolving the issues I see in oil and gas. An approach that strikes directly at the heart of the bureaucracy and renders them redundant. I am surprised at the scope of the efforts that have aligned against me. As we move into a world of ideas it is important to remember that ideas have consequences. And those consequences are not necessarily positive for all concerned.

SKIEs, SMEs and networks

Today's discussion extends these well known behaviors of the oil and gas companies. And applies them on a pro-active basis based on the future demands of a dynamic and innovative oil and gas industry. I think much can be learned by Professor Perez research and her development of the SKIEs as a critical resource. I think this is an area where industry should take detailed notes.

In this first quotation it is important to note that People, Ideas & Objects assumes that the innovative oil and gas producer is concerned with their earth science and engineering capabilities. And these capabilities as they are directly applied to the producers asset base. The remainder of the functions that are currently handled by the firm and marketplace are moved substantially to the marketplace in the Draft Specification.

There are at least two major consequences of the fact that the global corporations and the large firms increasingly achieve flexibility and higher competitiveness by outsourcing a significant part of the peripheral and of the highly specialised (non-core) activities. This practice is bound to result in much greater proportions of (1) the working population receiving irregular incomes and (2) the part of the economy without a cushion to withstand downturns. These problems directly affect general economic policy and the social security model while they indirectly condition innovation policy. pp. 30 - 31

The bureaucracy might argue then that they will provide for the field operations themselves. That all aspects of the field operations can be conducted by their company. In 2007 this strategy was also employed by some of the larger companies by buying drilling rigs of their own. It should be clear to anyone outside of the bureaucracies that these types of operations are destined to fail. Eventually the company would need to conduct their own research in drill bit manufacturing as a result of the entire secondary support industries leaving the energy industry. What Professor Perez brings to the table is a discussion based on the reality that the future will involve many smaller companies, not more bigger companies.

A much higher proportion of small units in the economy, taking care of a greater share of employment as well as of profits and national product, will require similar stabilising instruments to those discussed above and possibly new insurance schemes tailored to those special needs. p. 31

When we discuss the dynamic capabilities of the oil and gas industry as a whole. We are talking about the intangible nature of the services that are provided. The oil and gas industry fully understands the intangible nature of the industry. Most if not all costs of drilling a well are intangible services or unrecoverable costs. The category of costs that this project is concerned about, the CISP and People, Ideas & Objects software development costs, are going to be added to the dynamic capabilities of the oil and gas industry. These costs, like those in the secondary industries, can not be turned on and off without serious degradation and long term damage to that capability.

With the exception of companies specialising in biotech or nanotech or special materials, which may need high precision equipment, the other high cost is usually also intangible. It is the specialised software and the information services that they need to acquire to perform their job. Not meeting any of those payments can mean losing irreplaceable personnel or cutting-off the lifeline services. p. 31

The use of People, Ideas & Objects software application are free to the user communities and particularly the CISP. This however does not eliminate the argument that the producer firm will need to support the software development and cloud computing infrastructure on a go forward basis. With annual costs ranging in the $600 million to $1 billion for development and infrastructure, and several billion for the CISP, these costs are beyond what the industry has otherwise been willing to expend. However, it should be noted that the oil and gas producers are collecting over $3.5 trillion in annual revenues on oil and gas sales.

Innovative firms suffer from that problem in various ways. Specialised suppliers of Global Corporations (GCs) are expected to constantly do minor improvements and sometimes more significant ones. It can be that the user company is a partner in the innovation and jointly funds it with the supplier (it can also be a group of users) or that the supplier takes the initiative and seeks the funds. There are also suppliers whose speciality is to do development work i.e. they are innovators under contract. All those cases and many other situations can involve periods of no receipts at all (depending on the funding or contract arrangements) and also the risk of unpredictable delays. Of course, SKIEs are high profit companies and under normal circumstances would have reserves for these situations. But new forms of insurance and running lines of credit will need to appear as the number of companies with these characteristics grows. pp. 31 - 32

Much of these costs may currently be hidden in the services that are provided by employees in oil and gas companies. Employees that in this very near future will be deemed not core to the producers capabilities and asset base. And therefore become active members of the CISP.

It might be interesting to look at the network as the possible route to solving many of these new (or intensified) needs of small companies. There is already a tendency of similar companies to flock together to gain advantages of scale for certain activities that can be funded jointly such as training courses, international marketing, specialised software development, etc. The idea of collective insurance of groups of companies –in a sector or in a region– or even networks of networks, in order to increase the volume and reduce the risk premium could be an adequate direction to explore. p. 32

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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