OCI Research & Capabilities, Part III

 Professor Giovanni Dosi on Innovation

Introduction

It is through Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” that we will view the Research & Capabilities module. One of our objectives in the module is to establish a clear division of labor between computers and humans. Formulating ideas, making decisions and collaborating are captured in this module. Leaving the mundane transaction, data management, storage and processing tasks to computers. This I think is an appropriate division of labor in terms of the dynamic, innovative, accountable and profitable oil & gas producer. There is also a strong division of labor and specialization in producer firms' technical resources. This is done to mitigate resource shortfalls in the mid to long term. Another aspect is Professor Richard Langlois' comment that we are "moving knowledge to those with decision rights” as being the primary process that the Research & Capabilities module captures. And, that a user can right click at any time within the module and initiate any standard ERP action. This includes initiating a Work Order or AFE on anything in the module. This being an extension of Professor Carliss Baldwin’s research that notes “knowledge begets capabilities and capabilities beget actions.”

Professor Giovanni Dosi's paper discusses innovation's role in the market economy. It assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The investment in science and technologies is with the implicit expectation of a return on these investments. As a consequence, the firm also gains an additional structural competitive advantage by decreasing the cost and/or increasing capabilities of their products beyond those of its competitors. Professor Dosi notes in “Sources, Procedures and Microeconomic Effects of Innovation:”

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. p. 1121 

We discussed that the Accounting Voucher would enable the producer to charge the various joint accounts for their technical resources. This is with the implicit assumption that they would generate a return on the investment in the firm's capabilities. We also discussed the differences between what is acceptable practice today (with overhead allowances) and the different positions some might take on the topic. However, I think Professor Dosi’s point here should be taken as the key criteria for the industry's direction on the issue. You are “investing to provide the firm with additional structural competitive advantages by moving their products' costs and / or capabilities beyond that of the competition." The ability to sustain the state of the art oil & gas capabilities on the basis of what a producer earns from oil & gas production is a direct result of those capabilities, but also their land & asset base. However, shouldn’t those capabilities also earn a return on investment above and beyond oil & gas production?

It’s only reasonable that the producer firm approaches the operation of some technically difficult task with the appropriate capabilities. Innovation requires that producer capabilities be the base on which innovations can be leveraged. Professor Dosi's research identifies innovation's key factors. We will discuss these key factors and how they are integrated within the Research & Capabilities and other modules of the Preliminary Specification.

One housekeeping duty is to note that there is a “Capabilities & Commitments” interface in the Petroleum Lease Marketplace module. Which documents the contractual obligations that the producer is required to meet in terms of commitments to their various Joint Operating Committees that the producer is a participant in. And to leverage the capabilities of working interest partners who are likewise committed. This interface is placed in the Petroleum Lease Marketplace module to document contractual legal obligations. This interface will also be populated in the Research & Capabilities module.

Innovations Two Major Issues

We will now deal with the first of two major innovation issues, Professor Dosi notes:

Typically the search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Capabilities and stimuli generated with each firm and within the industry of which they complete. p. 1121

What you're capable of depends on what has been purposely developed within your firm. These capabilities have evolved over time and can be deployed repeatedly. As time passes further capabilities are developed and the firm becomes more efficient through a variety of different means. The firm's ability to develop these capabilities is limited by what the oil & gas service industry can provide. If they have only x number of rigs available, only so much work will be done. If the rigs can only drill shallow wells, the producer's science will be constrained by the service industry's capabilities. Furthermore, if the producer is a state of the art earth science and engineering wonder in a sea of producers who are barely able to successfully drill shallow wells, then the state of the art producer will be reduced to the same level as the others. The marketplace for producers in terms of their technical resources and capabilities has an enabling and constraining limit on what producers can do. Innovation is leveraged from this base.

The question therefore becomes how do we broaden the base of not only the producer but the service and greater oil & gas industries? Recall how the Research & Capabilities module has an "Ideas Marketplace" blog-like interface where members of both industries can post ideas of products and services that might be of interest to the producer firms. Producers may then support these ideas with funding and product direction to develop them into a product or service. This will enhance the capabilities of the producers. Recall the "Supplier Collaborative Interface" in the Resource Marketplace module that enables the industry as a whole to benefit from each producer's lessons learned. The "Gap Filling Interface" allows producers to anonymously identify gaps in service industry offerings. Filling gaps is the process of expanding specialization and division of labor. Offering new products and services based on a further defined division of labor. Or how the Research & Capabilities interface organizes information by geological zone, or other criteria. This is so that only those pertinent zones are populated for the individual Joint Operating Committees through the Knowledge & Learning module.

In the Partnership Accounting module we discussed the accounting attributes of the Work Order system in establishing working groups among industry participants. These could be informal working groups formed to study some geological or engineering situation among interested producers or other parties. The ability to form these groups, participate in them and develop further capabilities as a result of these studies is a critical aspect of how producers will develop their capabilities and innovativeness. Since the costs and the results are shared the industry as a whole advances. Leaving the producer open to further innovations. I see this as an area that will increase in activity. This is if the accounting logistics and bureaucratic nightmare that they create can be dealt with in the manner that the Partnership Accounting module Work Order does.

The second major issue Professor Giovanni Dosi defines is as follows.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

Again these only make sense in terms of being critical to enabling the producer firm's capabilities and innovations. The question becomes how does the Research & Capabilities module and the Preliminary Specification specifically deal with these key factors and issues to enhance innovation?

The first key factor that I want to address is the “supply of technical capabilities, skills, engineers etc.” That raising the quantity and quality of the earth science and engineering technical resources of the industry is possibly one of the three top issues of the industry. How does the Research & Capabilities module increase the supply of these resources? As we've stated here many times, the need to rely on the standard economic tools of an enhanced division of labor and specialization are the keys to solving this problem.

The issue is that these technical resources are limited for the foreseeable future. Through retirement and new recruits the population of earth science and engineering resources is constrained. Add to that the volume of earth science and engineering effort in each barrel of oil increases as time passes. Using specialization and the division of labor we can achieve higher throughput from the same resource base. That is the basis of the solution used in the Preliminary Specifications Research & Capabilities module.

If we look at the industry structure today, producers are building comprehensive capabilities needed to address every possible contingency within their organization. Earth science and engineering capabilities are overbuilt and substantial internal surplus capacity is left unused and unusable. Each producer pursuing the same strategy leaves a large surplus capacity that is unused and unusable industry wide. The pooling concept that People, Ideas & Objects has developed within the Preliminary Specification. Where producers of a Joint Operating Committee can pool their specialized technical resources to meet the properties' technical demands. Eliminates the overbuilding of capacities necessary to attain an operatorship classification within each producer firm, and enables producers to deploy this formerly unused and unusable surplus capacity to their chosen specialized capability.

Each producer needs to specialize in some high level earth science and engineering discipline. Today, covering the global scope of technical requirements is a massive undertaking. The future will require further specialization and division of labor to be undertaken in these scientific disciplines. Without choosing to specialize and using the pooling concept, the producer firms will be faced with such an onerous task as covering the global scope of these technical requirements as to be unprofitable. With the “pooling” approach People, Ideas & Objects has taken in the Research & Capabilities module. It is deemed necessary to avoid excess demand on diminishing resources. Demand is increasing due to enhanced exploration and production techniques needed for each incremental barrel of oil produced. An overall broadening of the science and technology necessary for exploration and production. And the objective of energy independence in North America.

That’s the first element of the division of labor and specialization inherent in the Preliminary Specification. The second element deals directly with the ability to organize technical resources in a manner that deals with how geology and engineering is done in the industry. With a dedicated software development capability such as People, Ideas & Objects Preliminary Specification, the ability to organize business service based offerings to meet the demands of the industry's earth science and engineering demands would now be possible. The expansion of the division of labor and specialization will therefore increase the industry's capacity throughput from the same volume of resources. This will also enhance the quality of resources.

Regarding "facilities for the communication of knowledge” as a key factor in innovation. The Research & Capabilities and the Knowledge & Learning modules are collaborative information systems that are “industry-wide” in their implementation. A review of the many interfaces mentioned here shows that the development and sharing of knowledge, which are critical for the development of the individual producer's capabilities and innovativeness, are systemic throughout this module. Combining their highly specialized capabilities with their partners in their Joint Operating Committees. It is the individual producers' distinct competitive advantage to augment their capabilities by coordinating the markets earth science & engineering capabilities and apply these to their land & asset base.

Lastly we need to develop an interface in the Research & Capabilities module that allows the producer to interact with the academic and research areas of the earth science and engineering disciplines. 

We now want to document the last of the key factors that Professor Giovanni Dosi states are necessary to support innovation. And then begin a discussion on these key factors and how they are implemented in the Research & Capabilities module of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

The conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, particularly in their on interfirm competition and on demand growth, financial facilities and patterns and criteria of allocation of funds to the industrial firms; macroeconomic trends, especially in the effects on changes in relative prices of inputs and outputs; public policy. (e.g., tax codes, patent laws, industrial policies, public procurement.) p.1121

It's only logical that innovation will spring from advanced markets with labor mobility, legal protection and capital markets. It's one thing to have these facilities provided, but it's another to have them aligned within the organization. With People, Ideas & Objects we align the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment permits the producer firm and the Joint Operating Committee to attain enhanced speed, innovation, accountability and profitability as a result. There are six additional Organizational Constructs that work to establish an appropriate culture for the industry to prosper. The seven Organizational Constructs include the Joint Operating Committee, Specialization and Division of Labor, Innovation, Markets, Professor Paul Romer's non-rival costs, Intellectual Property and Information Technology.

These key factors reflect that an innovative oil & gas producer must first be capable. Innovation leverages the capabilities of the service industry, the producer marketplace and the general market makeup. A key objective of the Research & Capabilities module is for the producer to achieve their greatest potential. Each producer will be able to demonstrate their own specific capabilities, and that level will depend on these key factors. Not all producers are built the same. Therefore, state of the art capabilities and highly innovative practices are not at risk of being copied by other producers. Therefore a producer's willingness to participate in the collaborative environment created in the Research & Capabilities module would not risk any proprietary competitive advantage. On the contrary, based on these key factors, non-participation would limit their competitive advantage.

This environment is the polar opposite of how the industry operates today. Certainly there are high levels of joint ventures in operation, however, those are designed to mitigate financial risk and regulatory compliance. And I am not suggesting a different posture be taken in terms of the industry's risk profile. Only that a more open and collaborative earth science and engineering level of discussion and participation is necessary for the industry to move to the next level of performance. And to begin the move to that next level of performance requires we build software that defines and supports the dynamic, innovative, accountable and profitable oil & gas producer. This is the People, Ideas & Objects Preliminary Specification.

OCI Research & Capabilities, Part II

 The Service Industry: Research and Development

One of the key points regarding the use of the Research & Capabilities module is that oil & gas producers receive 100% of the funds from oil & gas production. This entitles them to be the gatekeeper for all subsequent activity regarding how that money is expended. And that includes the “what” and “how” of service industry product and service innovations and offerings. In today’s capital markets little is tolerated for research and development that is not directly funded by customers. To expect that the service industry will divert its profits, or raise capital to fund its research and development efforts is foolish. It is clear that there must be a direct link between the service industry's research and the wallets of the customers (i.e. the producers). The service industry finds itself in difficult financial and operational conditions due to producers' activities these past decades. Capital structures have been completely destroyed. Capabilities and capacities have declined to 35% of prior levels and continue to degrade. The service industry has no faith, trust or goodwill in producers. People, Ideas & Objects argues that it is incumbent upon producers to finance the rebuilding of the service industry. This is under the principle that producers broke it, producers can fix it. To suggest that the service industry will rebuild on its own is valid. However, will that be the basis of a dynamic, innovative, accountable and profitable oil & gas producer and industry?

At the same time producers don’t want to participate when the money is thrown against the wall to see if it sticks. There must be clear direction and understanding given to the service industry as to the direction and need that the oil & gas industry has. For the past few years, at least in Canada, we have heard many independent producers calling out the service industry as greedy, lazy and taking advantage of the situation in the field. Implying that the demand for field operations by the oil & gas producers is so strong that the only means to control it for the service companies is to increase the prices they charge. I see this situation continuing due to a lack of innovation and capacity investment by the service industry.

To suggest that the oil & gas industry should fund service industry innovations is the last thing producers want to hear at this time. But it is the long-term solution to producer problems. Micro-managing based on cost-control will get the job done to no one's satisfaction. As industry demands increase, the ability to increase capacity and capabilities will be further constrained. This is due to no one working on those capacity-related problems of today. When the time comes, the problems of today will be significantly larger tomorrow. Particularly for energy consumers.

What is needed is the Research & Capabilities module of the People, Ideas & Objects Cloud Administration & Accounting for Oil & Gas software and service. This is needed to communicate between the service industry, entrepreneurs and oil & gas producers. Communication about the needs of the producers, backed up by dollars spent to develop innovation, capacity, capabilities, services and / or products. Providing financing and direction to the service industry certainly sounds more constructive than calling names, controlling costs or micro-managing. This functionality will be captured in the Research Budget Allocation Interface of the Research & Capabilities module. 

A Marketplace for Ideas

Let's review at a high level the process managed by the Research & Capabilities module of the People, Ideas & Objects Preliminary Specification. The module has an interface that we will call the “Ideas Marketplace Blog” which is a marketplace where people, firms and service providers actively post their ideas for new products and services to help in the exploration and production of oil & gas. This marketplace provides the producer firm with the ability to explore ideas and participate in their development with other producers. As time passes and the producer's capabilities develop, they can deploy these enhanced capabilities to their various Joint Operating Committees. This is done through interfaces in the Research & Capabilities and Knowledge & Learning modules. What we create in the Research & Capabilities module is a window into the ideas marketplace.

What is significant about ideas development? First it's one of the few areas that computers are unable to provide any assistance in. People are the necessary ingredient in ideas generation and application. The second significant aspect of ideas is that we need more of them. The volume of ideas today is an order of magnitude higher than a generation ago. And the volume will need to be an order of magnitude higher in just a few years. That is the nature of ideas.

If the innovative oil & gas producer iterates on the oil & gas industry science and technology. They will need to engage in a dynamic marketplace. One that deals in every kind of idea, good, bad, brilliant, dumb and original. For if today it takes one idea to build one unit of value, tomorrow it will demand two ideas to hold that value. In addition, it will take five ideas to build another unit of equal value. Such is the nature of where we’re heading. If you’re not participating in the marketplace of ideas, you won't participate in value.

We are seeing respect for ideas reflected in the marketplace. I have been overtly critical of the oil & gas industry's treatment of the service industries' Intellectual Property (IP). This must change and they must respect IP ownership and development if they are to benefit from a marketplace of ideas. There is no one who will participate in a marketplace if they see that oil & gas producers will continue to not respect their IP. If they risk their IP being poached by their customers, which is the case today, they will no longer participate. Therefore, the ideas marketplace will stagnate. At that time, if stagnation occurred, producers could call the service industry lazy and greedy as they did decades ago. A producer will compete and generate value by focusing on their distinct competitive advantages of their land & asset base, and coordinating the markets' earth science & engineering capacities and capabilities.

Seeding promising ideas with funding will be another and possibly the primary role for producers. However, since they will respect the IP of the owners they will only have to fund one project, not several “me too” copycats. This will allow the product or service owner to fully leverage the oil & gas producer marketplace for their product or service. Therefore, they will not have to rely too heavily on initial funding from just one individual producer.

In the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification we noted that the nature of the modules would enable users to initiate commercial actions on the ideas and activities in these modules. This discussion deals with actions that can be generated from those ideas and activities. It also discusses the importance of this module as an ERP system module.

ERP system modules have traditionally been focused on recording transactions and reporting those transactions to the various users of the information. Doing so is still a fundamental part of our Cloud Administration & Accounting for Oil & Gas software and service. However, if that is all that we are doing then we are missing so much of what an innovative oil & gas producer needs. In the sense of a Research & Capabilities module, the need to deal in the marketplace of ideas is where the producer needs to have a presence and understanding of what is happening in the oil & gas and service industries. Participation is mandatory for success in a world where ideas and implementation will take weeks and months, not years or decades.

An application that fulfills a producer's needs in this manner must have the input and contributions of other producers and the service industry. The application installation is in multiple industries, not just one producer. The user's perspective will be a window into the industries available to them. What will be needed is the ability to have systems that can initiate actions on those ideas and actions of interest to each user of the Research & Capabilities module.

We noted the ability to right click in the Research & Capabilities and Knowledge & Learning modules on any idea or action of interest. This would bring up a contextual menu of items where the user could select the ability to initiate a Work Order, an AFE with a partner in a Joint Operating Committee, etc. The point in mentioning this is from both McKinsey and Harvard Professor Carliss Baldwin. The first quote is from McKinsey “The 21st Century Organization.”

Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need, even if it resides in their own companies and coordinating their work with others.

Once they find something of interest the user of the Research & Capabilities and Knowledge & Learning modules should have the full scope of an ERP application at their disposal. The ability to initiate any commercial action would take the idle capabilities of the producer firm or the Joint Operating Committee and put them to use. As Professor Baldwin notes in “Modularity, Transactions and the Boundaries of Firms: A Synthesis.”

Changing routines, competencies or capabilities based on knowledge must cause firms to have shifting knowledge boundaries. The span or scope of knowledge available to a firm will change over time as required by its changing activities. But theories based on knowledge cannot directly explain the location of transactions. First, the domain of transactions is a domain of action: goods are made; services are performed; compensation is paid and received. But actions enter the knowledge based theories only indirectly: knowledge begets capability and capability begets action. The actions themselves lie outside the scope of these theories. p. 9

These quotes capture the importance of embedding these two modules within the People, Ideas & Objects Preliminary Specification. Without the ability to initiate actions within organizations, such as the Research & Capabilities provides, capabilities will be trapped. In a world where software needs to identify and support the organization first, these are significant considerations.

Management vs. the Internet, round one

We live in interesting times. The Internet has had a remarkable impact on our lives in the past quarter century. As we look forward, that impact has only begun. When we discuss the impact the Internet will have on oil & gas producer capabilities, we need to consider some critical factors in those capabilities. This discussion deals with those critical factors and how they are implemented in the People, Ideas & Objects Research & Capabilities module of the Preliminary Specification.

The purpose of a bureaucracy in the age of the Internet seems wasteful. A cumbersome and cluttered existence defies common sense due to the slowed pace of everything. The Preliminary Specification considers the Internet as an inherent given. Align the nine frameworks of the Joint Operating Committee and producers around the Joint Operating Committee. Establish marketplaces. Keeps the work that humans do, the decisions, the ideas, and the collaborations front and center, while automating the work that computers do best. To do otherwise would be a waste of the Internet opportunity.

One of our top two research providers, Professor Richard Langlois, wrote a book "The Dynamics of Industrial Capitalism" a few years ago that we reviewed as part of our research. The first chapter was entitled “Progressive Rationalization” and our quotes are from that chapter. In this first quote he notes the correlation between “new economic opportunities” such as the Internet and "organizational structure.”

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

If we look at the first critical factor, the new economic opportunity, which in our case is the Internet, according to Langlois the “problem of organization is bringing existing capabilities to bear on emerging opportunities or creating the necessary new capabilities.” The “character” of the Internet is that it enables collaboration within the Research & Capabilities module as we have discussed to date. Recall in our recent discussion we noted from Professor Carliss Baldwin that “knowledge begets capabilities and capabilities beget action.” The facilitation of knowledge and actions are the two areas where the Research & Capabilities module enables the user to interact and engage in the community, the producer firm and the industry. This will become more apparent as you read the Research & Capabilities module specification.

The second critical factor Langlois notes “is the existing structure of relevant capabilities.” And here the People, Ideas & Objects Preliminary Specification has a distinct advantage in that we isolate the short and long term perspectives of the producer firm between the Joint Operating Committee and the producer firm itself. By using the Joint Operating Committee in this fashion we are building on that innovation by leveraging Internet innovation.

In this quote from Professor Langlois he reflects on centuries of historical change and the manner in which that change came about.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. 

Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

The battle lines have been drawn. As the Vanishing Hand of the marketplace replaces the Visible Hand of management, it will be the Internet's market supporting capabilities that support the markets. Markets are the ultimate source of producers and Joint Operating Committee capabilities. Market coordination is therefore a competitive differentiation provided through Internet capabilities. It is the Internet vs. the bureaucracy. 

OCI Research & Capabilities, Part I

 Introduction

Next, we discuss the Research & Capabilities module of the Preliminary Specification. This is a dual specification module in that it shares many attributes with the Knowledge & Learning module. The difference is that Research & Capabilities is a firm, or producer facing module and the Knowledge & Learning module is a Joint Operating Committee module.

The Research & Capabilities module will help build value by managing the transition from the hierarchy to the aligned producer organization under People, Ideas & Objects software. In which the key Organization Construct of the Preliminary Specification, the Joint Operating Committee legal, financial, operational decision making, cultural, communication, innovation, and strategic frameworks align with the hierarchies' compliance and governance. And the other six Organizational Constructs which include markets, specialization and division of labor, Professor Paul Romer's non-rival costs, innovation, Intellectual Property and Information Technology. Making this cultural transition will create opportunities for people to change their work to be more efficient and effective. The “what” and “how” of this software is best described in a McKinsey article “The 21st Century Organization.” In a four-part report, McKinsey outlines what is required.

1) Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve all these objectives. By aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the Industrial Command & Control and having the financial interests of the producers drive the management of the Joint Operating Committee we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

2) Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical key roles discussed in the Research & Capabilities and Knowledge & Learning modules. Providing valuable insight to their users about the business that is above the day-to-day noise. Where the organization's long-term vision can be set, executed and realized through these two advanced software modules.

3) Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects Preliminary Specification, or Cloud Administration & Accounting for Oil & Gas. Marketplaces are things that people will participate in more in the future. Computers can provide assistance, but they are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

4) Relying on measurements of performance rather than supervision to get the most from self-directed professionals.

We have provided Artificial Intelligence, Performance Evaluation and Analytics & Statistics modules. Handing over the Performance Evaluation module to the team running the Joint Operating Committee will enable them to manage the property in the most efficient manner. They will be able to figure out what makes the most sense in terms of value, and generate more of it. A detailed set of financial statements of the actual costs of each Joint Operating Committee will be available for the first time. This will help them evaluate their financial performance.

It is clear that it’s no longer the 20th century. That managing an enterprise requires a different approach. The first thing needed to manage that enterprise is ERP software to define, support and enable a dynamic approach. With real shortages in the quality human resources necessary to maintain the market's energy demand for the long term, it will be the producer that can maintain a high performing organization based on the criteria we are discussing here.

It was in our Preliminary Research report (2004) that we learned about the influence that Information Technology (IT) had on organizations. IT defined and supported our organizations, enabled and constrained them. In order to eliminate these IT limitations, oil & gas producers need People, Ideas & Objects and our user communities software development capabilities. Then, as further constraints are identified, they can be addressed by our permanent software development capability. Dealing with new issues and opportunities. 

We have also discussed that current producers' capacity to deal with issues is constrained by the systems in use today. There is a repeated inability, or lack of capacity, to deal with the existing issues within the industry. Highlighting just the takeaway capacity and commodity pricing as the two premier issues that we seem to be reliving from the 1990’s. Industry is also unable to address new issues, such as the development of shale reserves and their relationship with the service industry. I have suggested that the industry seems to be in a never ending, repetitive cycle, fueled by "muddle through" that it cannot break free of. Their systems operate on a day to day basis and cannot deal with the long term perspective, change and cultural influences.

This cycle of day-to-day existence has created damage and destruction in the industry. To where the industry's value has been exhausted and the industry demands financial resources to sustain operations. Producers whose capital structures have been unsupported for almost a decade. Where the service and tertiary industries are unwilling to participate as they too have been financially and operationally destroyed. They are unwilling to trust, believe or have faith in the oil & gas producers. Producers broke it, they can fix it by providing the necessary capital for rebuilding. When producers have some skin in the game, maybe they’ll respect the service industry. This issue can be dealt with by adopting the Preliminary Specification, our user community and their service provider organizations. In addition, producers will acquire permanent ERP software development capabilities offered by People, Ideas & Objects. Then the dynamic, innovative, accountable and profitable oil and gas producer will be able to break the cycle of systems dependence and organizational definition. This will enable him to effectively plan and execute the business of the oil & gas business. Until we do this, it's helpful to become familiar with the various elements of the scenery we are in. And that primarily refers to the real losses on operations in North America that have occurred each and every year for the past four decades. Without investors who were deceived by specious financial statements, producers would not have survived and existed today.

The Research & Capabilities module provides an exit from this endless cycle. We describe how the company breaks away from what it has done before and develops its capabilities to enhance its business in the long run. 

McKinsey, The 21st Century Organization

We read through the four points from the McKinsey article on why we should use the Research & Capabilities module. This is for the long term perspective of an innovative oil and gas producer. We now want to revisit these points and highlight the significance of the opportunity presented by separating the long term perspective in the Research & Capabilities module from the day to day in the Knowledge & Learning module. In the McKinsey article it is noted:

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key Organizational Construct of an innovative and profitable oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. Providing an extension of the governance structure over the partnership with Industrial Command & Control. The Joint Operating Committee is isolated to the oil and gas company's day-to-day operations. This frees up the remaining portion of the producer to concern itself with the long-term value generation of the firm.

These Joint Operating Committees are autonomous in the sense that they focus on the most profitable means of oil & gas operations. They are driven through our Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. They're operated by a partnership, in which all participants are motivated equally by financial gain. Producers will have faith that "line managers will make good on a company's earnings targets.”

The Preliminary Specifications decentralized production model ensures that marginal production is shut-in so that those reserves can be saved for a time when commodity prices are higher and the reserves can be produced at a profit. So that the commodity markets are not flooded with marginal production causing the price collapses we've seen time after time. And that no producer will produce a marginal property. This production discipline will be adhered to when the producer has the flexibility to move up and down their production profile to maximize corporate profitability. Capital markets indirectly ensure production discipline. The decentralized production model is a feature of the Preliminary Specification and is contained primarily within the Resource Marketplace module, however all modules support this business model.

And in terms of the long term perspective, the Research & Capabilities module looks at the producer's interests in any number of Joint Operating Committees. This number may total thousands. Concerning themselves with each's operational performance would be daunting and impossible. And based on the previous discussion their involvement is limited. However, there may be systemic corporate similarities to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the firm's perspective, and in the long term. These are where business value can be generated through the Research & Capabilities module.

McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module can extract value in the long term. By passing on ideas, innovations or experiments results for the Joint Operating Committee to implement. The ability to influence any and all variables and to see any aspect of the firm and analyze it is the domain of this application module.

If we reduce the oil and gas producer's business down to the Joint Operating Committee's activities. By focusing only on the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else? The business must choose between the long-term and short-term horizons, a classic conflict that every company faces. How much should be sacrificed in the long term and in the short term? It should be noted that the module is Research & Capabilities. This discussion also focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? It was traditional for the producer to build in-house capabilities. The assumption in People, Ideas & Objects is that due to resource constraints, particularly in the earth science and engineering disciplines, producers cannot build the full scope of these capabilities in house. The need to collaborate with partners to build the global scope of the Joint Operating Committee capabilities is how these needs will be met. Therefore a specialization in the earth science and engineering capabilities of each producer firm will be the result of the division of labor between the partnership represented in the Joint Operating Committee. This is how the Preliminary Specification has chosen to increase the scientific throughput of the North American producers.

But we are talking about more than just the capabilities that each Joint Operating Committee demands. We are talking about the producer firm's capabilities and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions through trial and error and deductive tinkering.

We have detailed that the producer firm focuses on its land & asset base and earth science & engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day operations of the various Joint Operating Committees. These are the core and highly specialized scientists of the firm.

We discovered something very interesting in our research. When teams of people are deployed in Joint Operating Committees, such as what People, Ideas & Objects propose. Joint Operating Committee earth science and engineering capabilities will deteriorate. They need to be fed a constant stream of advancing and innovative ideas and possibilities to ensure that they remain up-to-date with science. These directives need to ensure efforts do not duplicate errors or replicate "blind bunny trails" unnecessarily in each and every Joint Operating Committee. Only proven, tested and implemented innovative products and procedures are deployed across the firm.

It may seem that I've contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't mean that they would be built within the firm, but rather that they would be organized through market coordination. The Research & Capabilities module should be viewed from an industry perspective. That although each firm will have specific people defined to support each firm's needed capabilities. The service industry will take on a more prominent role in providing much of the innovative capabilities developed through the innovative mindset and thinking employed by producer firms.

We’ve discussed the role the producer plays in determining the long-term horizon of the firm. How the Research & Capabilities module would provide a window into the various Joint Operating Committees. This would provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers' proprietary earth science and engineering knowledge, understanding and capabilities.

In the Preliminary Research Report we learned a surprising point about the producers' proprietary earth science and engineering knowledge, understanding and capabilities. In Brown & Duguid (1998) they make the following observations: 

The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow.Indeed, it’s often harder to stop ideas spreading than to spread them. (p. 102) 

We all recognize this information leakage to be inherently true. When someone discovers something newsworthy in the industry. It is generally well known throughout the industry soon after. It is either imputed through what is known, or the leakiness is porous. What should producers do to ensure information does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities beget actions." Simply put, it is impossible to stop leakage. The question therefore becomes, is it better to develop your aptitude by studying a text book or participating in a marketplace? People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding information, will deploy the right information to the right people at the right time.

According to McKinsey the solution requires...

... a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.

These tacit interactions are captured in the “Research” area of the Research & Capabilities module. Interaction with the larger communities to develop knowledge and understanding around the science of oil and gas not only expands the capabilities of the producer firm but iteratively expands the overall science. We learned two significant points regarding innovation from Professor Giovanni Dosi in Sources, Procedures and Microeconomic Effects of Innovation.

• That new science fuels new innovations, and new innovations fuel new science.
• Technical trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms.

People, Ideas & Objects research assumes that one technical trade-off in oil and gas is accurately reflected in the oil and gas commodity pricing. That these prices provide the resources to fuel dynamic, innovative, accountable and profitable oil and gas producers. Therefore, the faster we iterate on science and innovation, the more appropriate a capabilities-based producers strategy is.

This realignment across the producer and Joint Operating Committee is intuitive. From the Joint Operating Committee alignment of all seven frameworks focusing on performance as the driving motivation. In addition, the decentralized production model ensures profitable operations everywhere and always. This also makes sense when the Joint Operating Committee pursues an optimal short-term horizon. Making operational decisions based on the collaborative understanding of the Joint Operating Committee partnership. And the producer firm undertakes the long term horizon of the firm by interacting with their Joint Operating Committees, the remainder of the industry and the service industry. This is to build a base of earth science and engineering capabilities, through market coordination, needed for the firm. However, the strongest and easiest evidence that this is substantially correct is this quotation from Professor Richard Langlois in his working paper "The Austrian Theory of the Firm: Retrospect and Prospect."

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 8

To be specific, what we are doing in the Research & Capabilities module is “moving the knowledge to those with decision rights.” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is to “move the decision rights to those with knowledge." And that is where the conflict is being created. The Joint Operating Committee has the operational decision making framework and there is little to be done to change that. Knowledge is held within the participating producer firms. It is therefore necessary to create a process that sees knowledge flow from these producer firms to the Joint Operating Committee and that is what the Research & Capabilities module does.

OCI Financial Marketplace, Part V

 What About the Cash?

Let’s get to the real issue within the Financial Marketplace. Producer cash consumption. With each Joint Operating Committee being funded and operated through its own bank the cash of the producers will be scattered through a variety of accounts held within the various Joint Operating Committees they have an interest in. Or will they? Through this discussion we will trace the cash generated through the properties and the various operations that occur in the day-to-day of an oil & gas operation. What we will find is that from a cash balance point of view, the balance that the producer holds will be fundamentally unchanged. This is between the People, Ideas & Objects method of conducting business and the way it is done in the majority of today. 

What happens today is the net proceeds from the operation of the property are determined, each working interest share of those proceeds are calculated, and depending on whether the property is generating or consuming cash a check or an invoice is sent. The difference in the People, Ideas & Objects system is that where the property generates cash instead of issuing a check, the balance will be transferred to the individual producers. In the case where the property consumed cash it would still send an invoice. There would need to be some operating advance provided for the Joint Operating Committee to deal with any shortfalls while these invoices were being processed by the producer firms. In times when there are capital expenditures, cash calls which are the norm in the industry, will offset the demand for cash. 

One of the other key differences in the People, Ideas & Objects application modules is that the Joint Operating Committee is open to contributions from all participants. Producers pool their resources to fulfill the property requirements and that requires that each producer participate in some form or fashion. This is the pooling concept developed in the Preliminary Specification to deal specifically with anticipated resource restrictions in the earth science and engineering disciplines. Each month the Joint Operating Committee contributions are equalized in the process of determining net cash payable or receivable. They will be included in the joint venture billing. These equalized amounts will affect the cash balance in terms of the size of the payment. A producer could be compensated for the two components, the net proceeds of the property and their contribution through pooling and joint venture billing process. 

We have specified the Oracle Fusion Application Financial Management Suite as part of the Preliminary Specification. For purposes of these cash management activities we will use the Oracle Cloud ERP for these cash management purposes. I would caution readers that the manner in which these accounts are cleared have not been worked out. That is the purpose of the Preliminary Specification. These are still early days and problems such as these need to be resolved within the Preliminary Specifications budget. Today, the optimal method of clearing balances in the joint account is through clearing accounts in the general ledger. There is no reason that we can’t modify that concept to allow for the contributions of all producers within a Joint Operating Committee to contribute to the joint account. These contributions can cleared as they are today, and then add the additional step of equalizing the contributions. 

From another perspective, the interfaces to the variety of banks and producers' accounts for deposits and withdrawals will need to be worked through. Although this is not a technical issue, as all of this is being done today, the volume of transactions will be high compared to today’s traffic. Banks are well prepared for this. Producers are not. Particularly in Compliance & Governance. Automation of this type and at this level will make many people wince. They can continue with paper-based systems if they choose. The practical solution is that we build these systems with the appropriate internal controls to ensure that the process is managed efficiently and effectively and without the risks associated with this type of activity. The end result at the end of the day is that in today’s systems the Joint Operating Committee is essentially cleared of any cash balance. This will be the case in the future under the Preliminary Specifications Financial Marketplace module.

Cash Drainage

Due to the accounting methods used in oil & gas over the past four decades. Where the majority of overhead costs are capitalized on an average of 85% of the total. And when interest rates were high, interest costs were capitalized at high rates too. Large amounts of the producers' overhead are stored on the firm's balance sheet under property, plant and equipment. When capital costs are recognized on a unit of production method and that unit of production is the petroleum reserve, small amounts of capital costs are passed on to the consumers at any point in time. Therefore the cash used in paying these overhead and interest costs is not returned to the producer on a timely basis to meet the needs of the organization. The producer is left with seeking alternative sources of cash to cover the chronic shortfall of what business traditionally called the "cash float." In the past investors were called upon to make up the shortfall. They then learned the validity of such specious producer profits and moved on.

The Preliminary Specifications reorganization of the industry makes all producers' costs variable. Variable based on profitable production. If a property is unable to produce profitably, it can be shut-in without incurring an incremental loss. And therefore the producer increases their overall profitability when losses on properties no longer dilute profitable properties. Then producers can rely on consumers to replenish their funds to cover their overhead costs each month when they pass these costs directly on to them. While shut-in producers can determine what innovative methods of returning the property to profitable production.

We've accomplished this by restructuring administrative and accounting resources within the industry. By removing them from the producer firms and moving them to our user communities service provider organizations. Each service provider manages one process on behalf of the industry. If the property is shut-in, then no data will be generated, no service providers will perform work for that month, and no billings will be submitted to the Joint Operating Committee. This allows a producer to optimize profitability by moving up and down their production profiles.

Securitization

Securitization invokes the 2008 financial crisis with thoughts of mortgages purchased from banks, parsed based on their credit rating. These mortgages are repackaged as investments on Wall Street. Add in some sloppy accounting and poor legal work, some innovative ideas like synthetic credit derivative obligations, and then investors can see how such an idea can become the source of a banking crisis. Securitization, I think, has a role in the revised oil & gas industry. It could be a source of capital to develop the industry in the future. If working interest ownership positions within various Joint Operating Committees were repackaged as securitized investments and bought and sold on exchanges. Then some of the capital necessary to fund the next leg of the industry might be available. 

Securitization is potentially enabled in the Preliminary Specification through service providers detailing their work at the Joint Operating Committee level. This is for administrative and accounting costs. Joint Operating Committees will have actual overhead resources to conduct these services, costs and revenues to administer the property. Add these detailed overhead costs to the detailed royalty and operating costs and all of the Joint Operating Committees actual costs in their entirety will be recognized. Actual detailed accounting each month! With the capital costs of the property known, under the Preliminary Specification the property can prepare auditable financial statements for any Joint Operating Committee and for any month of the year. 

Therefore the net profits of the Joint Operating Committee can be calculated and determined accurately every month for every property. With the reserves data, working interests in these properties could be securitized and the producer could generate additional capital through the process. One other aspect of the Financial Marketplace module of the Preliminary Specification that is different is that due to the way the accounting is done, the operator and the working interest owners' overhead costs will be the same on a working interest basis. The operator will no longer carry the significant administrative and accounting resources and costs necessary to operate the properties on behalf of the Joint Operating Committees. And they will not be forced to capitalize these costs to hide them. The actual costs incurred by service providers will be distributed based on working interest distribution to all working interest owners. And this is why producers will use service providers for their administrative and accounting needs. Sharing the cost of a variable cost, industry-based capability offsets the need for each producer to develop their own in-house, fixed capacity and capability for administration and accounting. 

The Who, What, Where, When and Why of Investment Decisions

The speed and performance of the innovative and profitable oil & gas producer come about due to demands from the capital markets. Investors want to deploy their capital at that critical moment when results are about to be achieved. Such is the way of their business. Having a faster capital turnover is a means of increasing its effectiveness. Innovative and profitable producers that replicate this turnover within their organization will gain market recognition for their speed and performance. Speed is good, but not at the expense of performance. Quickly drilling dry wells doesn’t impress anyone. It is a reasonable approach to this tradeoff. 

There also needs to be a means to control what the firm is involved in in terms of investment criteria. This will be managed through the “Capital Allocation Interface” of the Financial Marketplace module. All investments are assessed based on their expected returns and risk profiles. It is imperative that the firm evaluates every opportunity and critically reviews the results. This is to ensure their investment selections are appropriate and within the framework of what the producer can do. 

And let’s be clear, most if not all producers have these processes operating within their organizations. However not within the organization's financial domain. What is proposed here in the Financial Marketplace module is controversial because the administration of these processes will be within the organization's financial jurisdiction. One in which this falls under the responsibility of the Chief Financial Officer and is administered in the Financial Marketplace module. It is my opinion that the CFO will continue to move away from a financial to a more technical background. Having a geologist or engineer as CFO may become the norm in the future. The CFO will have technical accounting aspects provided to them by their accounting firm, service providers and staff. Their ability to discern which projects to proceed with will be due to collaborations conducted within the speed, performance and control decision processes. In addition, they will participate in senior management and executive meetings. However, having these decision processes managed by a CFO who is an accountant would be the same as giving the keys to the Ferrari to a teenager. What positive outcome would be expected? 

To manage these processes we turn to the Oracle Middleware layer and specifically the Oracle Business Process Management Suite. We need to take these from the spreadsheet and ad hoc nature they're currently managed under. We need to put them through a defined and rigorous process that meets the organization's needs. From the C-class executives to the people who grind out the calculations. The decision process has to be defined and managed by software within the organization. It also needs to be highly collaborative with the decision-making process and well documented. It will be in this way that a firm can learn from what it is doing wrong, perhaps most importantly. Moreover, it can learn from what it does right. Right down to the details of who came up with the idea and who pushed it through. And then everyone will be able to answer who is responsible for that last big success in the firm.

Conclusion

I have criticized the officers and directors of the oil & gas producers. They have resisted the changes proposed in the Preliminary Specification and governed as if all was well. It needs to be asked if the oil & gas industry is the same industry when it receives $100.00 for its products when only a few years ago it received $25.00? I’m not sure it is the same. There has been a fundamental change from a low cost energy era, to an era that will see the rise of the innovation focused dynamic producer. The type of producer in these two domains is fundamentally different. The Preliminary Specification is designed for innovative producers. To make the transition from the low cost energy era to the era of innovation focused dynamic producers will require that we build the Preliminary Specification first. The Financial Marketplace module is a critical aspect of the Preliminary Specification. By aligning the industry's financial framework with the legal, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks we will achieve the speed, accountability, innovativeness and profitability we desire. In his book “The Dynamics of Industrial Capitalism,” Professor Langlois notes.

As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns – which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector – and a shocking suspicion dawns upon us that big business may have had more to do with creating [the modern] standard of life than with keeping it down. (Schumpeter 1950 [1976, p. 82].) p. 2

My two criticisms are that the officers and directors operate too slowly, and innovativeness is non-existent. In the financial marketplace the pace of activity will need to accelerate and mirror the changes in the producers. I think we have addressed these with the changes documented here in the Preliminary Specification. 

Schumpeter’s account of progressive rationalization takes the form of a contrast between two modes of economic organization, modes roughly cognate to the difference between the small owner-managed firm and the large multi-unit enterprise. Characteristically, however, the issue in Schumpeter is a dynamic one: he is concerned with the respective merits of these two modes of organization not in the static allocation of existing resources but in generation of economic change and growth. The paradox of Schumpeter is that he famously defended, and has come to be associated with, both of these modes as drivers of economic growth. Schumpeter has returned to prominence today as champion of the role of bold entrepreneurs in creating new combinations and redirecting the means of production into new channels, to such an extent that he is revered as an inspiration to the present-day field of entrepreneurship studies (Shane and Venkataraman, 2000). In this (Schumpeterian) literature, the force behind economic growth comes from individuals or small groups of individuals who work mostly outside the established structure of organization rather than from within it. pp. 17 - 18

It doesn't matter what configuration the producer firm is in, big or small, lean or bloated with bureaucracy. The future requires that we can provide for the market's energy needs. The financial crisis is providing relief in terms of a reduction in global economic growth and reduced energy demand. Eventually the increase in energy demand will resume and that is not something we can currently contemplate. What we have proven here in the Financial Marketplace module is that innovative and profitable oil & gas producers will demand more efficient capital structures. Those structures lead to the overall performance of the producer and the Joint Operating Committees they participate in. We need to get our heads around this energy demand situation and start dealing with a solution. Muddling through just seems too risky.

OCI Financial Marketplace, Part IV

 Dynamic Transaction Costs and Market Coordination

We'll now discuss “Dynamic Transaction Costs" in the Financial Marketplace module of the Preliminary Specification. Dynamic Transaction Costs are technological and organizational innovation costs incurred when capabilities are moved from the firm to the market or vice-versa. These are the costs when we establish a “Marketplace Interface” such as we're discussing in the Financial Marketplace module. But first in a paper entitled “Modularity in Organization, Technology and Society” Professor Richard Langlois provides us with this definition of capabilities.

This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge” and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888). p. 27

People, Ideas & Objects have also added “ideas” to “knowledge, experience and skills” for capabilities. The financial marketplace, that is the banking and investment community capabilities, are currently accessed by the oil & gas industry through the marketplace. Therefore the changes and the Dynamic Transaction Costs will be due to adapting to the “Marketplace Interface” of the Financial Marketplace module, and will be minimal. This is in comparison to the Dynamic Transaction Costs incurred in the Petroleum Lease Marketplace module where the marketplace currently doesn't exist and the capabilities are held within the producer firms. Professor Langlois describes Dynamic Transaction Costs in his paper “Transaction Cost Economics in Real Time.”

Over time, capabilities change as firms and markets learn. This implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-versa. 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. p. 99

What we therefore need is to record these technological and organizational innovation costs for both the producer firm and Joint Operating Committees. To have an account that clearly defines Dynamic Transaction Costs, whatever they may be, within the firm's chart of accounts or Joint Operating Committee. This would help identify and control these costs. This would also be the case for the Resource and Petroleum Lease Marketplace modules. Although some of the producers' costs for “change, notably technological and organizational innovation” would be associated with the fees paid to People, Ideas & Objects. There are other out of pocket expenses that the firms are incurring to make the changes to the “Marketplace Interfaces” and these costs need to be captured in the accounts.

We will now discuss the manner in which changes from the firm to the marketplace will occur. We will also discuss the importance of having software development capability like that proposed by People, Ideas & Objects. We will also discuss some of the interfaces previously introduced in the Resource Marketplace module that will be needed here in the Financial Marketplace module. The quotations are from Professor Richard Langlois’ “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism.” We begin by noting that although the marketplace for banking and investment dealers is well established, the coordination capabilities within the producer firms and the “Marketplace Interface” of the People, Ideas & Objects Financial Marketplace module are not currently available.

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3

Part of the process of developing the Preliminary Specification will be to identify the various standards that affect the markets and firms within the industry. These standards are part of market-supporting institutions. It may be through this process that it is determined that the market supporting institutions are inadequate for the producers' and Joint Operating Committees' needs. And it will be the responsibility of our user communities that are part of the People, Ideas & Objects software development. They will identify additional standards needed to ensure these markets are established and operated appropriately. It will also be necessary to ensure this is a continuous process. One in which the evaluation of market-supporting institutions is undertaken frequently to make sure producers' and Joint Operating Committee needs are continually met and an iterative software development approach is taken.

As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999) Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and to a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5

The Process of Renewal

To provide for these market-supporting institutions and to bring in enhanced services, when and if they are needed, we are introducing the “Gap-Filling Interface” that has been introduced elsewhere within the Preliminary Specification. Specialization and the division of labor are achieved through filling gaps. Jobs that were not done before are filled by newly created tasks and people who expand the division of labor. "Gap-Filling Interface" allows producer firms and Joint Operating Committees who see a gap within any service industry offering to publish their findings within the interface for product or service providers to understand and potentially configure. The key is that with the time and distance within the oil & gas industry, the demand for a service and its supply might never know of the others' existence. With the “Gap-Filling Interface” there is a reduction in time and space by using Information Technologies available today. The “Gap-Filling Interface” can also be used from the other perspective of the service provider configuring a product or service that fills a gap, then publishing that to the producers and Joint Operating Committee. With People, Ideas & Objects continuous software development capabilities we can join in the discussion and accommodate changes from a software perspective.

As we continue to document the capabilities of the various financial communities. And how these capabilities will be sourced from the marketplace by the producer firm and Joint Operating Committees. We see that technology is a large part of the organization and its definition. Particularly in the People, Ideas & Objects Financial Marketplace module where the “Marketplace Interface” brings everything together. We continue with our review of Professor Richard Langlois’ “Institution, Inertia and Changing Industrial Leadership.” And discuss whom will find the “Marketplace Interface” the most valuable in their pursuit of oil & gas innovation.

If we look at the scope of the changes made by the Preliminary Specification, they are substantial. The movement to the Joint Operating Committee, and six other Organizational Constructs, has remarkable impacts on every aspect of an oil & gas concern. Added to that is the use of advanced technology and innovative oil & gas producers operations are more in alignment with what innovative oil & gas producers operations should be than ever before. Yet oil & gas companies have not responded. They remain trapped in concrete with their SAP installations. Living a bureaucratic life so far removed from the oil & gas business that is mind-numbing. Adopting any change to People, Ideas & Objects is counter to the inertia built within the organization. This will only happen through creative destruction.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6

Therefore the people that will be attending the “Marketplace Interface” of the Financial Marketplace will be those that can accept the dynamics of industrial change and begin the process of renewal. Those looking for ways to operate their oil & gas land & asset base, and deploy their earth science & engineering capabilities. Those that will be able to claim their share of those minimum of $94 billion in annual losses caused by chronic commodity overproduction. Commodities highly susceptible to price maker characteristics. From Professors Langlois and Robinson "Firms, Markets and Economic Change: A Dynamic Theory of Business Institutions."

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 16

Here we have the advantage of moving towards industry culture. The Joint Operating Committee is the industry's cultural framework. People, Ideas & Objects Preliminary Specifications use of the Joint Operating Committee aligns its legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks with the hierarchy's compliance and governance frameworks. This alignment is in line with the industry's natural culture and therefore will succeed. The constrained, obscure and difficult ERP systems in use today are not aligned with these frameworks of the oil & gas industry. Instead, they focus on the corporate SEC, Tax and Royalty compliance needs. 

As the key Organizational Construct, the Joint Operating Committee has a dominant influence on establishing culture in the Preliminary Specification. People, Ideas & Objects, our user community and their service provider organizations have six other Organizational Constructs that define the culture of the industry we're rebuilding. Markets, Specialization and the Division of Labor, Professor Paul Romer's Non-Rival or sharing of costs, Intellectual Property, Innovation and Information Technology. Together, these factors establish the culture of a successful, dynamic, innovative, accountable and profitable oil & gas producer.

Can anyone provide a vision of how the existing bureaucracy will survive and prosper in the coming decade? Have these officers and directors taken any steps to deal with these issues? What is the future of the oil & gas industry? Do these officers and directors care? Many questions that can be answered by selecting and supporting the People, Ideas & Objects software development capability and Preliminary Specification.

Teece (1980) and others have generally neglected the negative side of Nelson and Winter's analysis, however, and fail to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 105

I may yet be surprised that one or two of these behemoths can break these chains of their own mindset and self interest. I will be surprised if that happens. Until then, we appeal to the investors in the industry to make the decision. And for users who are tired of the ways and means of what can best be described as the “old ways.”

More on the Gap Filling Interface

We continue our discussion of the “Gap-Filling Interface” in the Financial Marketplace module of the Preliminary Specification. And how a software development capability like that proposed by People, Ideas & Objects is necessary to support the changes instituted by the gap-filling process. But before we get to that I found these quotes from Professor Richard Langlois in his paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.” They detail exactly what the gap-filling process is.

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6

And

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

As gaps are discovered they will be published by users in the “Gap-Filling Interface” of the People, Ideas & Objects Preliminary Specification. There they can be seen by banks and investment houses that provide products and services to the producer firms and Joint Operating Committees. And in turn, develop a product or service to fill that gap in a manner that meets the needs identified. The reverse is also the case, that banks and investment houses may initiate the discovery of a gap and have the producer or Joint Operating Committee address the gap. In either of these scenarios the division of labor and specialization doesn’t consider the fact that the 21st century organization requires software to identify and support the roles and responsibilities within it. If we are to fill "gaps," it is not just a matter of having someone fill the position. It also requires that a dedicated software development team be available to prepare the software for the role. This is to be productive within the ERP system. This is the role People, Ideas & Objects provide in the Preliminary Specification. It is not a destination in terms of what the specification will be, but more a journey where the end result is a continuously improving system driven by its users' needs to ensure profitable oil & gas operations everywhere and always.

The other aspect of this software development capability is that this is prospectively an innovative oil & gas industry. Management operates on the basis of what is considered the acceptable norm in operations. They will need to break this mindset and become the innovative producers we all know deep down they want the industry to be. Either that or the forces of creative destruction will descend upon them. Either way the need for a dedicated software development capability will be necessary. Professor Langlois notes the following in his paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

The second hypothesis, which has resonances at least as far back as Gerschenkron’s famous “backwardness” thesis (Gerschenkron 1962), is that the way an economy responds to the problems of coordinating economic development depends not only on its own institutions and capabilities but also on institutions and capabilities elsewhere. It depends not only on an economy’s own history but on the history of other economies as well. The force of this observation is that an economy at the frontier of economic development (however we care to define that) is likely to respond to the coordination problem differently than an economy lagging behind that frontier. Specifically, an economy at the frontier is arguably more likely to rely on decentralized modes of coordination. This is so because uncertainty is greater at the frontier — uncertainty about technology, organizational form, market direction. p. 18

To pursue this economic frontier, the innovative and profitable oil & gas producer must have the tools at their disposal to develop their “institutions and capabilities.” It will be the “Gap Filling” interface in the Financial Marketplace module that provides for this.