The Preliminary Specification Part CLXVI (RM Part XX)

We now turn to the capabilities view of the Preliminary Specification. Capabilities are such a critical part of innovation and we have the Research & Capabilities module that focuses on the firms capabilities. But what are they and where do they reside. We have shown how the Preliminary Specification would provide the capability to suspend production in the “Marginal Production Threshold Interface”, until the marginal costs of production are realized by the commodity price. By using the “decentralized production model,” the production and overhead costs, like the costs of Production Accountants, would not be incurred without any monthly production. Maintaining the firms profitability and saving the reserves for a time when prices are more favorable.

We have listed the capabilities of the firm in the Research & Capabilities module and they are accessed through the Knowledge & Learning module by the various Joint Operating Committees. We have used the football analogy to describe how they are formulated and deployed through a variety of interfaces but we have not discussed in any detail what the content of the pages of the “Capabilities Interface” are. Lets first of all be clear, it is the Joint Operating Committees that employ the engineers and geologists from their various firms that are running the show and that is why the modules are configured that way. The information that is contained within the “Capabilities Interface” is for them to project manage the service industry members in the Resource Marketplace module.

Lets take a brief walk down the differences between what exists today and what needs to change in the People, Ideas & Objects Preliminary Specification. One area of Professor Richard Langlois’ research is in what is called Transaction Cost Economics (TCE). The market model requires that “transactions” occur between separate economic units. These transactions create “friction” in terms of the resources necessary to process the transaction itself. Therefore in the past, to avoid the costly friction of transaction costs, firms hired people as employees to conduct a variety of tasks and only told them what was required in exchange for a paycheck. This mitigated the cost of paying someone $5.00 to type a letter each time you needed that task completed etc. Langlois et al states that with the automation of transactions through the current Information Technologies, transaction costs can be reduced to an immaterial level. This is happening at a time when coincidentally the scope of operations of the hierarchy have spanned to an impossible level. The hierarchy must now make a choice, either fully integrate and take control of all of the means of production, or decentralize and let the market provide for the means of production. The Preliminary Specification assumes the latter and the Resource Marketplace module will provide the capabilities for the producer firm and Joint Operating Committee to achieve those capabilities from the market. From Professor Langlois’ Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.

"However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization." pp. 1

and

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

We have captured some of the elements in the already mentioned interfaces of the modules of the Preliminary Specification. Additional interfaces would include the “Transaction Design Interface” of the Accounting Voucher module. And in the Resource Marketplace module we have discussed in past blog posts the three interfaces; the “Actionable Information Interface”, “Supplier Collaborative Interface” and the “Gap Filing Interface”. Each of these would be used in some fashion in discussion of moving to a “decentralized production model”. There are however, many more elements of this research that we will discover and develop as we continue.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXV (RM Part XIX

In discussing the role of the Production Accountant and the scope of the changes that are contemplated as a result of the Preliminary Specification. I am reminded of the George Bernard Shaw quotation.

The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.

We continue today to discuss the revised division of labor and specialization that would be done through the Resource Marketplace module of the Preliminary Specification. Moving the Production Accounting role to the Joint Operating Committee, having a service provider focus on a specific geographical region to report on for all the producers represented there, and reorganizing the work to increase the throughput of the accounting function should be the objective of the analysis and process management of the Resource Marketplace module. This analysis will also depend heavily on the “Transaction Design Interface” of the Accounting Voucher module.

First of all what are we trying to do here. The idea that I have in mind is that which is referred to as an “Encapsulated Network”. Within this network which might represent a large gas plant that aggregates gas from thousands of wells from many miles and from many different producers with many different kinds of gas. Will be one Production Accounting service provider residing in the region providing services to all of the producers and gas plant and gathering system owners. They will be the ones who will be preparing the Material Balance Reports for all of the Joint Operating Committees in the Accounting Voucher of the People, Ideas & Objects system. Each molecule of gas, as it moves through the system of production on to its sale contract will be reported through the various Material Balance Reports and the associated other production related reports. And as it incurs a point where it can be, as we discussed yesterday, standardized, counted, valued, compensated in terms of a production accounting transfer, then the system will account for that transfer on behalf of the Production Accounting service provider. At the end of the month the billing of the systems Production Accounting will total up the various transfers for the Encapsulated Network and bill the individual Joint Operating Committees for their share of the Production Accounting costs for the month. Professor Langlois notes two important things with respect to these Encapsulated Network and transactions.

Encapsulated Network in a larger system of production is to facilitate complex transfers without making all of them transactions. p 28

and

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

Now that each process within the Production Accounting role has been defined in terms of its revenue generating capabilities then the service provider can organize the service on the basis of where and how they earn the most profits. Either by providing those services at the lowest costs or by providing those services which are the most technically difficult will bring the highest profits. The point being that the service provider is free to reorganize the service in any way that they can in order to provide a better service at lower cost. That imputes a greater division of labor and further standardization. A process that they will become more expert in as time passes and as such will be the source of their future profitability.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLXIV (RM XVIII)

In today’s post we want to carry on with the discussion of how the industry would transition to a “decentralized production model” from its current “high throughput production” model through the Resource Marketplace module of the Preliminary Specification. We will be using the example of the Production Accountant and the changes that would need to be made in order to make the transition from one model to the other. Using the type of analysis that will be needed to be made during the development of the People, Ideas & Objects software. And is one of the reasons for the high costs of this software development.

The Production Accountant will be primarily working with the Material Balance Report and associated reports contained within the Accounting Voucher module. Recall that the Material Balance Report is a Joint Operating Committee report that is prepared on behalf of all the participants in the various JOC’s that are captured in the report. That would denote that the Production Accountant would also work for the JOC. It is therefore asked why would they work for a specific producer? Since the Material Balance Report seeks to balance a facility or area that the JOC has their facility or interest in, then the Production Accountant can bill their services to the JOC. Taking this to the next logical step why doesn’t the Production Accountant work on all of the facilities in the region for all of the JOC’s. That way there would be an efficiency and understanding of the overall region in terms of what is happening. The Production Accountant could be responsible for handling the Material Balance Report and associated reports for the entire region. Then if the region were to grow into a large gas facility, then the Production Accountants could organize themselves into a service provider that could service their clients on the basis of a renewed standardization and division of labor. This process would also provide the producers with the desired transition to the “decentralized production model” in that no production accounting service fees would be incurred if no production came from the facility that month.

The method to analyse and organize the transition to the Production Accountant as a service provider is based on the following.

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Although as we mentioned at the beginning, and noted in the quotation, this analysis is costly, however because it is being done once on behalf of the subscribing producers to People, Ideas & Objects. And assuming that we gain significant volumes of subscribing producers, the costs to each producer of this analysis is immaterial.

By standardizing, counting, valuing and compensating the tasks and transfers of the Production Accounting role and embedding the results within the Resource Marketplace and Accounting Voucher modules of the Preliminary Specification we can provide the value to the Joint Operating Committees in this fashion. If you believe that producers should have their own army of Production Accountants then we probably disagree on how the job should be done. It is in the Petroleum Lease Marketplace module that the selection of either the partnerships agreed to production allocation, or how do you say “factual” basis of production allocation should be made. We understand that there are these two methodologies. Usually the smaller plants follow the chemical facts. The larger plants usually follow the agreements. People, Ideas & Objects Preliminary Specification Accounting Voucher modules Material Balance Report can report in either fashion. Leaving the job of the Production Accountant to be politically inert as to how to allocate the production. Tomorrow we will discuss further the division of labor of the Production Accounting role.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXIII (RM Part XVII)

We start our fourth pass through the Preliminary Specification in the Resource Marketplace module with a look at Chapter 4 “The Rise of the Corporation” of Professor Richard Langlois book “The Dynamics of Industrial Capitalism”. In this chapter he suggests that organizations developed “buffers” in order to mitigate the variances in markets. These buffers would include inventories and in oil and gas that would include commercial storage. These “buffers” help to offset the difficulties in the business and make the potential variances dissipate in terms of their magnitude and frequency. Langlois however, notes that buffers come with the cost of a lack of operational flexibility, and as it turns out a whole lot more. Commercial storage of natural gas is at record levels in North America and gas prices are at $2.52 / mmbtu. A price that would make most of the gas productions costs exceed the price received.

Professor Langlois states that there are two business models that we can chose from. The “high throughput production” model or the “decentralized production model”. Currently the industry is operating under the “high throughput production” model and through the choice of developing and using the People, Ideas & Objects software we can transform the industry model to the “decentralized production model”. This will be a theme that will be discussed throughout the fourth pass through the Preliminary Specification. Here is how the two models operate.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58

When difficult times arise, such as we are experiencing in the natural gas business today, the reaction is to cut back on capital expenditures. This is a blunt and ineffective tool to deal with the problem of overproduction and the real culprit, record storage. What has to happen is the marginal production has to be removed from the market until such time as the price realized covers its costs and a reasonable profit is earned. The decentralized production model will allow the producers to throttle back the production volumes and correspondingly cut back on production and overhead costs, until such time as the prices recover to cover the marginal cost of the production and an element of profit. Other wise we are going to see these violent over reactions in the prices of the commodities.

To achieve this removal of the marginal production the producers are going to need the restructuring around the “decentralized production model”. This will require the development of software to define and support these attributes in the organization first and foremost. You can’t restructure a fundamental change of this scope in the industry without first making the software that defines and supports that change. That is what we are doing here in People, Ideas & Objects.

The operational decision making framework of the industry is held with the Joint Operating Committee. Within the Petroleum Lease Marketplace module we will have the “Marginal Production Threshold Interface” where the partnership can agree to the volumetric decrease, or shutting in of production based on the point when the marginal costs exceed the revenues from production. If there is a commensurate drop in the costs and overhead of the shut-in marginal production, then the producer will not lose or gain any financial benefit from the drop in production. They will save those reserves for a time when they will be produced profitably. If the industry begins to drop their marginal production in this manner then the declines in prices will be limited on the downside and the record volumes in storage will be yesterdays news.

Within the Resource Marketplace module we will begin to discuss the necessary changes to the makeup of the service industry and resource marketplace. The division of labor and how the services are provided to the producers will need to be changed if in one month there may be no production at certain facilities. Otherwise the industry will have to make due with $2.52 gas.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXII (General Part III)

Of the research that has been undertaken by People, Ideas & Objects. Three individuals work has had the greatest impact on the development of the work that has been undertaken here. They are Professors Giovanni Dosi, Richard Langlois and Carlota Perez. Our third pass through the Preliminary Specification used Professor Dosi’s 1988 paper “The Sources Procedures and Microeconomic Effects of Innovation”. And now we start our fourth pass through the Preliminary Specification which will use the work of Professor Richard Langlois.

Professor Langlois is the professor of economics at the University of Connecticut. His principle area of research is the economics of organizations. Recently, Professor Langlois has focused his research on explaining the changes in corporate organization in the late twentieth and early twenty first century, a set of phenomena he refers to as the Vanishing Hand. The vanishing hand is consistent with the decentralized methods of using the Joint Operating Committee in the Preliminary Specification.

The topics of discussion in this fourth pass will be varied, however, it would be ideal that we could state specifically what a capability is at the end of this pass through the Preliminary Specification. The topics will include capabilities, modularity, transaction cost economics, designing transactions, innovation, specialization and the division of labor, the boundary between markets and firms, among many others. To say that these topics, and Professor Langlois had a strong influence in the makeup of the Preliminary Specification would be an understatement. We will be using the full complement of blog posts that were written on Professor Langlois’ papers. As it stands there are 59 posts in which we reference his work. Therefore this fourth pass may take a while to complete, however I am certain that it will be worthwhile, and tomorrow we will start with the Resource Marketplace module

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXI (General Part II)

With these last few posts on governance we have come to the end of our third or innovation pass through the Preliminary Specification. This has focused on Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation”. We have learned much from this paper, and with its application to the Preliminary Specification we have been able to leverage this knowledge into the oil and gas industry.

We will begin with our fourth pass through the Preliminary Specification tomorrow. This will have a capabilities focus and will highlight the work of Professor Richard N. Langlois, another of our key research providers.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLX (C&G Part XVII)

Through our discussion of the Preliminary Specification we have noted that the innovative oil and gas producer will have two distinct sources of revenue. The first is the oil and gas production, and the second is the value added process of the capabilities they provide to the various Joint Operating Committees and working groups they participate in. This blog post will discuss the governance over the capabilities to ensure that the revenues are charged to the appropriate partners in the Compliance & Governance module.

With the expanding volume of work required for each barrel of oil produced. The demand for earth science and engineering resources continues to grow. The supply of these resources are somewhat constrained as the ability to increase them in the short to mid term is difficult. People, Ideas & Objects has approached the supply of these technical resources by developing software that defines and supports a greater division of labor and specialization. And by pooling the technical resources available from the partners represented in the Joint Operating Committee. This pooling will take the available capabilities of each producer and match them to the needs of the property to ensure that the requirements are fulfilled. Eliminating the unused and unusable surplus capacity of resources in the industry. Capabilities provided in this fashion will be costed to the joint account on the basis of an industry standard cost that recognizes the education, skill and experience of the resource.

Revenues from the provisioning of engineering and geological capabilities to the Joint Operating Committee are a necessary part of the oil and gas business. With the expansion in the volume of work required for each barrel of oil produced there is commensurate difficulty in securing the capabilities in-house. There is also increased difficulty just to maintain the capabilities. The need for the producer to build the capabilities becomes an issue of how to develop them if they can not source a dedicated revenue stream to support them. By having a dedicated revenue stream to support the engineering and geological costs then the producer can better manage their operation.

In terms of governance the Preliminary Specification will provide the “Capabilities Revenues & Support Interface” in the Compliance & Governance module. This will provide a summary of all of the charges to the various joint accounts and working groups for any engineering and geological resources during the period the user requests. This interface will also have targets for the departments to achieve in terms of their percentage cost recoveries and budgeted incomes. These targets should be able to be allocated to the individual joint accounts.

These revenues should be displayed in the proper context on the “Capabilities Revenues & Support Interface”. That is to say they should be presented in a pro-forma income statement showing the costs of these resources, which would include resource costs and the various other costs of rent, technical support, equipment etc. This would show the progress in terms of how the firm had moved towards meeting its targets.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLIX (C&G Part XVI)

The level of innovation within the oil and gas producer has / will become more and more challenging as the earth sciences and engineering disciplines continue their steep trajectories. With so much activity in this area, and the implications being so broad and far reaching there will be areas where substantial value might be left uncultivated by the producer. These could be in the scientific or business areas of the firm and the question becomes who is responsible for seeing that this value is captured? This post will detail how the Compliance & Governance module of the Preliminary Specification will help to deal with this situation.

With our look at technological paradigms and the effect they have on scientific and innovative trajectories in oil and gas. When discussing these points on innovation, it is important to remember that the sciences, the trajectories they are on, and the opportunities they generate for a producer, are accelerating and will continue to do so. With this in mind, we note that Professor Dosi suggests two separate phenomenon are observed:

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. 
• Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

As we have learned these new opportunities will be in the technological and business areas of the firm. The opportunities will be within the scope of the oil and gas businesses competitive advantages of its land and asset base, and earth science and engineering capabilities. However, much of it will also be generated outside of the firms core area, in the service industry, through the further division of labor and specialization, and in non-related business areas that are new and not well serviced by existing businesses. Most of this business value will be easily captured for the firm. That however does not necessarily mean that it should be pursued by the firm. It is critical at these times that the governance model of the firm stick to its knitting and pursue its key competitive strategies. That to move outside of its core strategies, to pick up some of these low lying fruits would be to distract it from the real job at hand. This has to be the job of those who are ensuring the governance model is upheld. At the same time, any value that is in the core competitive strategy that is not realized, must be captured and steps taken to systemically realize the value from that point forward.

To ensure that the firm remains on its competitive strategy there will be one interface developed with two different elements to it. This will be called the “Capabilities & Deployment Additions Interface”. The first element will be a summary of the additions that were made to the “Capabilities Interface”. By reviewing the current additions, i.e. all of the text that was added in the last quarter, to the interface. The user will be able to determine if the firm has been able to maintain its overall focus on developing its capabilities in line with its goals and objectives. If it sees that it is suddenly researching the development of drill bits then it knows that it is on an inappropriate direction. The second element is similar in its characteristics but uses the “Planning & Deployment Interface”. With the deployment of its capabilities it can see that the firm has deployed its resources in a manner that is consistent with the firms objectives and goals. That no capabilities were deployed to commission drilling rigs was done during the quarter.

In the same way that the capabilities and deployment of them can be reviewed, the AFE and Work Orders can be reviewed for the quarter as well. These will provide an understanding of what the firm has done in participation with the partners and other producers in the industry. After reviewing these activities the user of the “Capabilities & Deployment Interface” will be able to ensure that the focus of the producer has remained consistent with the objectives of the firm. Any potential deviations could be dealt with through discussions with the management and corrective actions taken.

Focusing on where it can generate the greatest value is the only concern of the firm. To pursue the value that might be available in other areas is a distraction that should be of no concern to the firm. However, understanding that at the same time there is new value being generated in the firm as a result of the steep trajectories that the relevant and core strategic science is on. That this new value may be reflected in other areas of the firm, and needs to be captured is part of the “Capabilities & Deployment Interface” of the Compliance & Governance module.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLVIII (C&G Part XV)

In today’s post we want to continue with our discussion of the corporate governance over the uncertainty of the innovation process. And how good governance will seek to moderate the investments in innovation and attempt to make it a routine aspect of the firms activities. We have noted that innovation is a quantifiable and replicable process, it is however, anything but routine. At the same time I want to reiterate that innovation and good governance are not mutually exclusive. And with that jumble of contradictions lets begin.

Writing the Preliminary Specification is an innovation that People, Ideas & Objects is undertaking. It is something that is significant and will happen only once. It is not something that will happen every day and is unusual for it to be undertaken. These are the characteristics of innovation. When a firm undertakes to do something innovative it is usually something that is new and significant to their firm. It involves some risk and imputes a high level of uncertainty. Professor Giovanni Dosi notes.

However, even in the case of “normal” technical search (as opposed to the “extraordinary” exploration associated with the quest for new paradigms) strong uncertainty is present. Even when the fundamental knowledge base and the expected directions of advance are fairly well known, it is still often the case that one must first engage in exploratory research, development, and design before knowing what the outcome will be (what the properties of a new chemical compound will be, what an effective design will look like, etc.) and what some manageable results will cost, or, indeed, whether very useful results will emerge. p. 1135

Unfortunately this is the state of the oil and gas business as it stands today. That every well drilled is literally the result of someones theory as to what the existence of oil and gas is. Certainly anything classified as exploratory, and much of the development work, would meet this criteria of being innovative.

As a result, firms tend to work with relatively general and event-independent routines (with rules of the kind “... spend x% of sales on R & D,” ... distribute your research activity between basic research, risky projects, incremental innovations according to some routine shares ...” and sometimes meta-rules of the kind “with high interest rates or low profits cut basic research,” etc.). This finding is corroborated by ample managerial evidence and also by recent more rigorous econometric tests; see Griliches and Ariel Pakes (1986) who find that “the pattern of R & D investment within a firm is essentially a random walk with a relatively low error variance” (pp. 10 - 11). 

Going back to the example of People, Ideas & Objects. Writing the Preliminary Specification is not routine, however, it is in a long line of routine research and development projects that have been undertaken to explore the development of user driven software for the innovative oil and gas producers, based on using the Joint Operating Committee.

In this sense, Schumpeter’s hypothesis about the routinization of innovation (Joseph Schumpeter 1942) and the persistence of innovation-related uncertainty must not be in conflict but may well complement each other. As suggested by the “late” Schumpeter, one may conjecture that large-scale corporate research has become the prevailing form of organization of innovation because it is most effective in exploiting and internalizing the tacit and cumulative feature of technological knowledge (Mowery 1980; Pavitt 1986). Moreover, companies tend to adopt steady policies (rules), because they face complex and unpredictable environments where they cannot forecast future states of the world, or even “map” notional events into actions, and outcomes (Dosi and Orsenigo 1986; Heiner 1983, 1988). Internalized corporate search exploits the cumulativeness and complexity of technological knowledge. Together with steady rules, firms try to reduce the uncertainty of innovative search, without however, eliminating it. pp. 1134 - 1135

This is where corporate governance does not necessarily conflict with innovation. Priorities and budgets need to be set and established. A corporate focus has to be imposed. That is what a good corporate governance model will provide the innovative oil and gas producer. Otherwise the firms pursuit would be an out of control science experiment. I think with the governance mechanisms that have been mentioned to date, the “Research Budget Allocation Interface” and the Military Command & Control Metaphor provide the beginnings of good governance. We’ll continue on with our discussion here, however, I want to stress again that the user communities input into the Preliminary Specification will be able to provide substantial value in this area.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLVII (C&G Part XIV)

In today’s post we want to begin a discussion of the governance over the processes of innovation in the Compliance & Governance module of the Preliminary Specification. In particular we want to look at the overall process of success and failure that innovation invokes and is reflected in Professor Giovanni Dosi’s following quote.

In general the uncertainty associated with innovative activities is much stronger than that with which familiar economic model deals. It involves not only lack of knowledge of the precise cost and outcomes of different alternatives, but often also lack of knowledge of what the alternatives are (see Freeman 1982; Nelson 1981a; Nelson and Winter 1982). 

This is not what those in corporate governance want to hear. What however should make them happier is that we have the “Research Budget Allocation Interface” in the Research & Capabilities module. Recall that this interface documents the information that the firm is involved in, and summarizes the activities that are currently ongoing and have costs budgeted. If a Work Order has some Research or Innovation being undertaken then it will be listed in the interface. If an AFE has some of these activities it too will be listed in the interface. Within the Research Budget Allocation Interface the ability of its user to review all of the activities that are ongoing within the firm would be possible. The risk of any duplications would be discovered and the budget allocation for research and innovation costs would be prioritized and given some corporate direction.

Additionally there is the Military Command & Control Metaphor (MCCM) providing governance over the innovation process. The MCCM was developed in order to be able pool the technical resources in the Joint Operating Committee, however it has just as much application in the producer firm. By using the MCCM for the innovative activities within the Research & Capabilities module, then the firm is able to keep a tight control over whom is involved in the innovation activities. By imposing a chain of command, and control over the people who may be seconded from different departments in the firm, the MCCM helps to provide good governance over the innovation in the firm.

We know there is more to innovation then this. Sometimes it is the un-qualifiable and un-quantifiable that we are seeking. Professor Dosi notes.

In fact, let us distinguish between (a) the notion of uncertainty familiar to economic analysis defined in terms of imperfect information about the occurrence of a known list of events and (b) what we could call strong uncertainty whereby the list of possible events is unknown and one does not know either the consequences of particular actions for any given event (more on this in Dosi and Egidi 1987). 

I suggest that, in general, innovative search is characterized by strong uncertainty. This applies, in primis to those phases of technical change that could be called pre-paradigmatic: During these highly exploratory periods one faces a double uncertainty regarding both the practical outcomes of the innovative search and also the scientific and technological principles and the problem-solving procedures on which technological advances could be based. When a technological paradigm is established, it brings with it a reduction of uncertainty, in the sense that it focuses the directions of search and forms the grounds for formatting technological and market expectations more surely. (In this respect, technological trajectories are not only the ex post description of the patterns of technical change, but also, as mentioned, the basis of heuristics asking “where do we go from here?”) p. 1134

This has / will become the nature of the oil and gas business. Good governance over the innovation process will have to limit the amount of its involvement so that the innovations can develop. At the same time this does not preclude the oversight mentioned at the beginning of this blog post. And there may be substantially more “good governance” that the user community can determine when their involvement in these developments is unleashed.

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.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.