Free Riders and the Participation Bonus.

Free riders have been defined in wikipedia as

In economics, collective bargaining, psychology, and political science, "free riders" are those who consume more than their fair share of a public resource, or shoulder less than a fair share of the costs of its production. Free riding is usually considered to be an economic "problem" only when it leads to the non-production or under-production of a public good (and thus to Pareto inefficiency), or when it leads to the excessive use of a common property resource. The free rider problem is the question of how to limit free riding (or its negative effects) in these situations.

For the purpose of People, Ideas & Objects “free riders” is a serious problem that we have chosen to deal with in our Revenue Model. Simply our free rider problem is that many producer firms would feel their best approach to supporting People, Ideas & Objects would be to abstain from actively participating, particularly financially, and leave the burden to other producers to carry the weight of building the application without their direct participation. Applications such as People, Ideas & Objects can not be built with that method of participation.

The manner in which we solve this free rider problem is by assessing a late fee of 300% on top of our annual subscription fee. The annual subscription fees are due and payable on January 1 of the current year and need to be paid in full prior to the participation in the communities or prospective use of any software. Late fees are assessed on any outstanding annual subscription fees as of March 31, of the calendar year in which the fees were assessed. 2010 subscription fees were assessed at $1.00. 2011 subscription fees will also be assessed at $1.00. All fees, subscription and late, for all years, 2010 forward are to be paid before participation in communities can commence or prospectively use any software. Fees are assessed on the producers annual barrel of oil per equivalent production. (Eg. a producer currently producing 1 million boe / day would owe $1 million 2010 subscription fees and $3 million late fees, and $1 million 2011 subscription fees.)

The participation bonus is related to the late fee in that as firms that may have chosen to wait or hold back their participation in developing People, Ideas & Objects applications. That may have subsequently decide to join the development or begin using the application. Are then required to pay the subscription and late fees back to 2010 to the current date. As these lump sum payments are received by People, Ideas & Objects they offset the current years budgetary revenue requirements of the firm, therefore reducing the current years budget subscription fee value and therefore reducing those subscribing producers annual subscription fees for the subsequent subscription year. That’s the participation bonus.

It’s necessary that a project such as this deals with the free rider problem and at the same time reward those producers that participate early. For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Professor Giovanni Dosi, Part XIV

As technical paradigms are introduced companies accept and use these innovative capabilities at different rates. This rate of acceptance can be classified as early innovators, imitators and fence sitters. Thus a satisfactory understanding of the relationship between innovation and distribution of firms structural and performance characteristics also implies an analysis of the learning and competitive process through which an industry changes.

We have also seen over the past twenty years an interesting trend that has created significant differences in the stratification of the oil and gas industry in terms of the size of the producer and their associated innovativeness. The small organization was able to purchase reserves and facilities from the open market, or their previous owners, only to substantially increase the inherent value through increased production and / or performance. We can conclude that the bureaucracy inherent in the hierarchy had stifled the innovativeness in the larger organizations and most disturbing is the lack of concern or identification of this as an issue over the past number of decades.

Professor Dosi notes;

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157

Changing the innovative behaviour of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale in many instances can not be managed within the organization but needs to be managed through the forces of creative destruction in the greater economy. A time of dynamic change driven by the organizational changes focused around the innovative Joint Operating Committee.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Professor Giovanni Dosi, Part XIII

Professor Giovanni Dosi notes that most of the innovation occurring during the industrial revolution had been via the “technical trajectories of increasing mechanization of production and increasing exploitation of economies of scale.” However, these innovations have been on the basis of the "trade-offs between volume of production and flexibility of the production lines."

Robotics has had a tremendous impact on the makeup and mix of production runs and flexibility, the efficiency of small production runs, and the likely increase in the importance of plant related economies of scale.

Therefore it is concluded by Dosi that the increased flexibility afforded by robotics and automation, motivated primarily through the more speculative nature of demand prediction, has had the effect of decreasing the productivity effect of additional innovations. Ultimately, however, the expectation of the innovations effect is that it will move the costs lower over the smaller production volumes. We are now clearly seeing this in the innovation and diversity of offerings in the vehicle industry. (Greater costs being allocated over smaller production runs.)

In oil and gas we see what might be considered a parallel situation. The business cycle is more dependent on the reserve life of new reserves. With rapid three-year declines, specifically in gas, the question becomes: is this a product of the cumulative innovativeness in exploiting the technologies that have developed? Or, is the use and application of oil and gas technology yet to be tested against a more exploration style mindset consistent with the risk - reward of the current market pricing of the commodities.

Either way it appears that the exploration and exploitation of oil and gas reserves has and always will be a function of the technology based on the underlying sciences. This is undeniable, and may also be the cause of the shorter-term life cycle and diminished size of new reserves, which is agreed by most to be a trend that will continue. This reserve size and deliver-ability is paralleled in Dosi’s discussion of how innovations in industrial companies have been diluted by demand prediction and lower production volumes. Scientific and engineering innovations accelerating the extraction of oil and gas reserves and this trend continuing for the foreseeable future.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Professor Giovanni Dosi, Part XII

We return to our review of Professor Giovanni Dosi’s “Sources, Procedures, and Microeconomic Effects of Innovation”. Earlier we noted that the Joint Operating Committee (JOC) is the ideal or key organizational construct for innovation. There an innovation framework operates in alignment with the legal, financial, operational decision making, cultural and communication frameworks of the Joint Operating Committee. And if we moved the compliance and governance frameworks from the hierarchy into alignment with the six frameworks of the JOC, as People, Ideas & Objects suggests in the Draft Specification, we would achieve a greater speed, accountability and ‘innovativeness’ in the business of the oil and gas producer.

Professor Dosi discusses the phenomenon introduced earlier in our review when he asks, “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities, or both?”, and now considers the relationship between innovative activities and the dynamics of industrial structures and performance. Why do some companies attain greater value from Innovation?

Professor Dosi (1988) reference to the Schumpeterian hypothesis, “that bigness is relatively more conducive to innovation, that concentration and market power affect the propensity to innovate” and his rejection of that premise is evident in this paper’s following three points.

• First, although “there appears to be roughly a log linear relation within industries between firm size and R & D expenditures”, upon closer investigation, “estimates show roughly non-decreasing return of innovative process to firm size.” This is probably attributable to the fact that very large and very small firms conduct most R & D. p. 1151
• Second, although the expenditures in R & D incurred by large firms are impressive from a total expenditure perspective, the aggregate expenditures of small firms on a global basis becomes far greater in aggregate than the large business. p. 1151
• Third, money is not necessarily a good indicator of innovativeness. Large variances within industries can clearly be identified irrespective of firm size. p. 1152

Therefore “bigness” is not necessarily an element that enhances innovation. This might be intuitively understood by the small oil and gas producers ability to punch above their weight.

Dosi (1988) provides three caveats to the three differences noted.

• “Statistical proxies cannot capture aspects of technical change based on informal learning” p. 1152
• Secondly, “differences in businesses and business lines (and business or product life cycles) may provide discrepancies in comparison of “like” firms. p. 1152
• Thirdly, many firms are expending significant research dollars in keeping up with other firms innovations.  p. 1152

Or in summary, money is not necessarily a determinant of innovative success.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Oracle Changes the Game

Last week we saw a game changing decision in the Oracle vs. SAP court case in California. A court decision in which Copyright and Intellectual Property are upheld as the key to the software business.

People, Ideas & Objects has been based on the Copyright and Intellectual Property of the Preliminary Research report of using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This original idea has been developed further in this blog and applied in the development of the Draft Specification. Intellectual property that is original, pristine and designed to solve the issues that exist in the oil and gas industry.

Customers of software vendors need to have their software applications with this level of Intellectual Property and Copyright pedigree. I am pleased to be able to provide our potential oil and gas customers with this high level of assurance of Intellectual Property.

McKinsey, Global Forces Shaping Business and Society

Once again McKinsey have impressed with a thorough summary of the situation in the global economy. This video presentation is very high level and only touches on individual points. However provides an overall summary and captures a spirit of the global economy and its future direction. To me these McKinsey partners are discussing the future economy and the ways and means of how and what of how people will earn there way in the world.

A fascinating and well presented discussion I highly recommend bookmarking the video.

McKinsey on Creating Value

In a world where Cash-for-Clunkers and QE II are considered solutions to what ails our economy. It is refreshing to see this presentation by McKinsey Consulting. This presentation is talking about the ways that value is created and destroyed in firms. Although the video at times seems to stumble, it is only in the presentation of difficult material that makes it appear that way. What is being discussed are advanced concepts that need to be adopted by innovative oil and gas producers.

McKinsey identifies four of the mechanisms that generate and destroy value in business. In the Preliminary Research Report it was noted that focusing on growth as a strategy may not generate the value that a producer firm needs. That innovation is a strategy to optimize the value of the producer firm is the focus of People, Ideas & Objects.

In a related paper, McKinsey relates the difficulty for firms to focus on value generation.

It’s one thing for a CFO to understand the technical methods of valuation—and for members of the finance organization to apply them to help line managers monitor and improve company performance. But it’s still more powerful when CEOs, board members, and other non-financial executives internalize the principles of value creation. Doing so allows them to make independent, courageous, and even unpopular business decisions in the face of myths and misconceptions about what creates value.

The Draft Specification provides two modules that make these calculations and enable these decisions to be made, the Performance Evaluation, and Analytics & Statistics modules. These two modules functionality are very similar. The key difference is that the Performance Evaluation module deals with the producer firm and the Analytics & Statistics module views data from the Joint Operating Committee perspective.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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McKinsey on Centered Leadership

Today we continue on with the topic of leadership with review of two papers from McKinsey (here and here) that look into a research term they call Centered Leadership. Recently we had the opportunity to review an article from John Hagel and John Seely Brown on the need to develop leaders, and we noted how leadership is a skill that can’t be automated by computers. We’ll start with a quick review of the five elements of McKinsey’s centered leadership and then look at each element closer.

Over the past six years, McKinsey has developed a map of capabilities we call centered leadership. This concept has five dimensions: meaning, or finding your strengths and putting them to work in the service of a purpose that inspires you; positive framing, or adopting a more constructive way to view your world and convert even difficult situations into opportunities; connecting, or building a stronger sense of community and belonging; engaging, or pursuing opportunities disguised by risk; and energizing, or practicing ways to sustain your energy on a long leadership journey.

Applying these dimensions to the prospective users and Community of Independent Service Providers provides the following.

Meaning

People, Ideas & Objects is focused on providing the innovative oil and gas producer with the systems needed to identify and support the Joint Operating Committee. Through this revolutionary change, the industry will be able to better manage their operations. We have also asserted that through use of People, Ideas & Objects software and the Community of Independent Service Providers (CISP), we are able to provide the most profitable means of oil and gas operations. This is our competitive advantage and the we derive meaning from these facts. (Most profitable operations are attained through the lowest cost ERP system, and the software identifying and supporting enhanced divisions of labor and specialization.)

Time and again, we heard that sharing meaning to inspire colleagues requires leaders to become great storytellers, touching hearts as well as minds. These skills are particularly applicable for executives leading through major transitions, since it takes strong personal motivation to triumph over the discomfort and fear that accompany change and that can drown out formal corporate messages, which in any event rarely fire the souls of employees and inspire greater achievement.

Framing

People, Ideas & Objects sees the world optimistically. We live in times where intellectual leverage is being offered and made possible by advanced Information Technology. Setting us on a revolution that is equivalent to what we realized through mechanical leverage in the industrial revolution.

Positive psychologists have shown that some people tend to frame the world optimistically, others pessimistically. Optimists often have an edge: in our survey, three-quarters of the respondents who were particularly good at positive framing thought they had the right skills to lead change, while only 15 percent of those who weren’t thought so.

Connecting

To continue on with the theme of revolution, communications are cutting through the bureaucracies enabling us to connect to like minded individuals. People, Ideas & Objects software developments provide users and members of the Community of Independent Service Providers with the opportunity to leverage their connections into the commercial realm.

With communications traveling at warp speed, simple hierarchical cascades—from the CEO down until the chain breaks—are becoming less and less effective for leaders. For starters, leaders depend increasingly on their ability to manage complex webs of connections that aren’t suited to traditional, linear communication styles. Further, leaders can find the volume of communication in such networks overwhelming. While this environment can be challenging, it also allows more people to contribute, generating not only wisdom and a wealth of ideas but also immeasurable commitment.

Engaging

Of survey respondents who indicated they were poor at engaging—with risk, with fear, and even with opportunity—only 13 percent thought they had the skills to lead change. That’s hardly surprising: risk aversion and fear run rampant during times of change. Leaders who are good at acknowledging and countering these emotions can help their people summon the courage to act and thus unleash tremendous potential.

An element of engaging is how People, Ideas & Objects doesn’t take the time and effort of individuals without understanding the risks and fears they may have. Therefore, the ability to move forward with this project demands that the financial resources be in place before anyone is asked to contribute. People, Ideas & Objects will not ask anyone to incur either monetary or career risks from being involved in this project.

Managing Energy

McKinsey notes:

Sustaining change requires the enthusiasm and commitment of large numbers of people across an organization for an extended period of time. All too often, though, a change effort starts with a big bang of vision statements and detailed initiatives, only to see energy peter out. The opposite, when work escalates maniacally through a culture of “relentless enthusiasm,” is equally problematic. Either way, leaders will find it hard to sustain energy and commitment within the organization unless they systemically restore their own energy (physical, mental, emotional, and spiritual), as well as create the conditions and serve as role models for others to do the same. Our research suggests sustaining and restoring energy is something leaders often skimp on.

Sustaining the energy for this project is something that I consider to be an important part of what I do. For the past five years in which we have been writing about using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. We have been able to define the Draft Specification and carry this vision and strategy through some difficult periods. Keeping our “powder dry and our candle lit” for the day in which we begin the development of these systems. This process will continue until such time as the producers learn that their existing ways and means of operation are no longer able to generate value. When producers begin to lose money, we’ll know that our day is close at hand.

Moreover, this survey underscores the impact when leaders embrace not just one or two but all five dimensions of centered leadership. As our 2009 survey also suggested, finding meaning in one’s activities has the strongest impact on general satisfaction with one’s life, but the more dimensions that respondents say they have mastered, the more likely they are to rate themselves highly satisfied with their performance as leaders and with their lives generally.

For this project to succeed leadership from all areas will be needed. As automation of business processes continues and accelerates, skills such as leadership will increase in the day to day activities of most people. Looking ahead what does McKinsey recommend from their research in centered leadership?

• Centered leadership equips leaders for leading change. Among leaders who have mastered all five dimensions of centered leadership, 92 percent say they have the skills to lead through times of major change (versus 21 percent for those yet to master them). Since most executives are living through particularly turbulent economic times, a focus on centered leadership could benefit leaders significantly.
• Big organizations can learn from small ones. Across the board, executives at smaller organizations say they have mastered more dimensions of centered leadership and feel better about their work performance and overall satisfaction. These results suggest that larger organizations have much to learn from small ones on how to attract, motivate, and inspire their employees.
• Future leaders are most at risk. We have long believed that mastering centered leadership is most important for younger women and men who desire to lead, a belief these numbers underscore. The youngest respondents report the lowest scores in all dimensions except connecting. Given the correlation between higher scores and good outcomes, such as leadership effectiveness and general satisfaction, companies would benefit from undertaking the cultural transformation that centered leadership augurs.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Professor Giovanni Dosi, Part XI

Our review of the Preliminary Research Report, Professor Dosi’s paper “Sources, Procedures and Microeconomic Effects of Innovation” and the Draft Specification is providing evidence to answer two of our research questions. I think it is becoming clear that innovation can be the result, as our first research question asks, of a quantifiable and replicable process. What also is becoming clear is the lack of the processes that facilitate innovation, will most certainly lead to a lack of innovation. That to leave the process of innovation to chance is irresponsible, reckless and bound to fail.

The second research question we are seeing the answer to; is the Joint Operating Committee is the optimal organizational construct to identify and support innovation. Building the systems that support the legal, financial, operational decision making, cultural and communication frameworks of the JOC is our focus. However, what I am realizing is that innovation is also a framework of the JOC. That is to say we should be stating that the Joint Operating Committee is the legal, financial, operational decision making, cultural, communication and innovation framework of all producers. As a result of this realization I have changed the header to this blog to reflect this change.

Continuing with our review of Professor Dosi’s paper, he begins by summarizing that businesses commit to innovation stemming from exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms. His general point is that “observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other”. p. 1141

What opportunities are and will be constrained by not adopting a more innovative organizational structure? If the geological and engineering sciences progress in a substantial manner in the next few years, how will oil and gas companies adopt, employ, test, and prove these science's development without an enhanced capacity to innovate? How much of the drive towards innovation is the beginning of the understanding necessary to expand the science? How much of an inducement are the current commodity prices providing the global competition to innovate? Until producers capture these “appropriabilities” within their ERP systems, such as the Draft Specification does, innovation will be left to chance.

I am not asserting that efforts in the past were not innovative or moved the science substantially. The issue People, Ideas & Objects is raising is that the pace and speed of the science’s development in the near to mid-term, and particularly the long term, will accelerate based on the fact that, globally, reserve replacement continues to be progressively more challenging, and the prices realized for the commodities have begun to reflect these challenges. Professor Dosi (1988) concludes this section with “Finally, the evolution of the economic environment in the longer term, is instrumental in the selection of new technological paradigms, and, thus in the long term selection of the fundamental directions and procedures of innovative search.” p. 1142

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Professor Giovanni Dosi, Part X

In our review of Professor Giovanni Dosi’s paper, “Sources, Procedures, and Microeconomic Effects of Innovation“ we now ask what are the incentives to invest in the discovery of innovations and there development? Will these depend on the incentives that interested and motivated agents perceive in terms of expected economic returns? Professor Dosi calls “appropriability those properties of technological knowledge and technical artifacts, of markets and the legal environment that permit innovations as rent yielding assets against competitor’s imitation”.

Professor Dosi (1988) notes a study conducted by Richard Levin et al 1984, in which they studied “the varying empirical significance of appropriability devices of (a) patents, (b) secrecy, (c) lead times, (d) costs and time required for duplication, (e) learning curve effects, (f) superior sales and service efforts.” Professor Dosi (1988) observed, “that lead times and learning cures are relatively more effective ways of protecting process innovations, and patents a more effective way to protect product innovations.” Dosi concludes. “Finally, there appears to be quite significant inter-industrial variance in the importance of the various ways of protecting innovations and in the overall degrees of appropriability”. (p. 1139)

Oil and gas producers are focused on process innovations, industry suppliers on product innovations. Recognizing this division of labor is how People, Ideas & Objects Resource Marketplace module provides and facilitates a greater interaction between producers and suppliers. Each group is concerned with securing their innovative capabilities without creating any conflict with the other. (The producer looking to lead times, learning curves while suppliers using patents to protect their innovations and capabilities.)

Levin states that the control of complementary technologies becomes a “rent-earning firm-specific asset”. Professor Dosi (1988) states “in general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation a creative process, which involves search, which is not wholly distinct from the search for new development, and which is economically expensive - sometimes even more expensive then the original innovation, and applies to both patented and non-patented innovations.” (p. 1140)

With the fast changing science and technological paradigms and steep trajectories of the industry, the need to have the capability to innovate will be needed for each producer to develop on their own. If the costs of duplication are as steep as the costs of developing the internal capabilities, the producers should then rely on their process innovations to carry their firm. However, that also imputes that a greater level of co-dependency exists. Partners in the Joint Operating Committee will have resources available to commit to the projects and suppliers will have contributions as well. As the Resource Marketplace module seeks to eliminate the redundant and mutually exclusive capabilities being built within each silo’d corporation. The proposed alternative in the Draft Specification is to rely on the marketplace for development and deployment of these innovations.

To restate this another way. With the dual constraints of; the difficulty in increasing the volume of earth science and engineering resources in a material way, and secondly, the demand for greater volumes of science and engineering in each barrel of oil, the need for the producer to rely on the “market” (within the Resource Marketplace module) to define and support their innovative appropriability is a necessity. A means to effectively pool and manage the technical resources made available through the participants in the Joint Operating Committee and service industries, as contemplated in the Resource Marketplace module and Military Command & Control Metaphor.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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