Leading and Creating Collaboration in Decentralized Organizations

Heather M. Caruso
Todd Rogers
Max Bazerman

Click on the title of this entry to download the .pdf. This Harvard Business School Working Paper provides some insight into the group dynamics of collaboration. I find many of the comments and recommendations are very consistent with my own experiences. These are skills that are necessary in today's marketplace, and I think that the level of collaboration is just beginning to evolve and will become much more complex in the very near future. The authors start out with a chilling example of collaborations failure and looks into the types of group and individual failures.

In reviewing the Web Services paradigm I sourced a document from John Seely Brown and John Hagel with can be read here. In that article it was discussed how the division of labor caused the dynamic of information leaking out of organizations faster then the information is transfered within the organization.

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 then to spread them.” (p. 102)

We see this phenomenon in oil and gas where news travels very quickly through the industry. If it were an accounting issue it would be openly discussed with the audit firm, the professional associations and within the industry specific organizations such as the Petroleum Accountants Society. Discussions between CFO's of the various producers is very common and many of these conversations are beyond the scope of many of the other C class executives technical understanding.

The authors note a current example of this "stickiness" and start out with a chilling example of collaborations failure and then look into the types of group and individual failures.

Many employees note that, in decentralized organizations, it is harder to deal with other divisions or departments of their organization than it is to negotiate with outside suppliers or customers. In ordinary cases, this inter-organizational coordination failure which can cost substantial sums of money. In other cases, these failures can be catastrophic, as different agencies within the U.S. intelligence community (notably, the CIA and FBI) neglected to integrate knowledge of the looming threats that existed prior to September 11th, 2001. p. 2

and

Often, instances of coordination failure stem from the failure to appropriately structure the organization around the key inter-dependencies within the organization - whether that suggests organizing by function (e.g., sales, marketing, manufacturing, engineering, etc.), by product group, or by region. Yet, even when organizations are able to design divisions around the appropriate dimensions, there will always be a need to integrate information across the resulting units. We focus this paper on improving information coordination across these organizational units to maximize organizational effectiveness. p. 2

"The Need for Coordination Across Organizational Boundaries."

It is at this point that I believe the energy industry breaks from convention. The Joint Operating Committee (JOC) is the legal, financial, cultural and operational decision-making framework of the industry. The software that is used summarily ignores these facts. SAP, Oracle and others do not fully recognize these facts within their domain of functionality and processing. Theirs are focused more on the classic modular breakdown of General Ledger, Accounts Payable and Accounts Recievable with the occassional Land and Production modules designed to handle the company's interest.

As organizations grow to serve multiple product areas, regions, or demographic groups, they move toward decentralized structure, which enable them to structure the organization around organizational units that match the most important organizational dimension. This system makes it unnecessary for each unit to constantly involve the rest of the company in their local affairs, relying instead on each unit to coordinate their actions with others only when necessary, and to otherwise focus their relatively undivided energies on the niche for which they have been made experts. As a result, these decentralized units demand less monitoring from busy top management teams, expand the organizations capacity to explore and adapt to its environment, and create space for innovative, entrepreneurial problem solving. In addition, it is easier to motivate performance in a decentralized organization than in a tightly controlled centralized structure.

And possibly the authors are speaking proactively. In that the future dynamics of the organization will move closer toward a market configuration as opposed to the strucutured hiearchy. It would certainly appear in this next quotation that is the mindset of the authors.

Nevertheless the world is getting smaller. The various pockets of human society are becoming more dynamic and diverse because they are coming closer together, connected by an increasingly dense web of physical and technological expressways. With these connections, synchronized patterns and coordinated activities are likely to emerge across multiple locales, though they may be exceedingly complex, often anticipate, identify and respond to patterns of activity across the diverse niches their subdivision serve. p. 3

Which is all well and good but as we all have experienced in life, there are consequences of these things. And this is where collaboration can really cause disruption in the day to day functioning of inter-organizational communications. How can each and every producer within a JOC deal with the group dynamics of the property. I would suggest that ignoring the JOC for the majority of the time has been the bureaucracies and software vendors' means of dealing with these group dynamics. The problem with this position is that the tools necessary to have a more direct involvement are influencing the industry and the performance metrics of the JOC may (will?) provide real competitive advantages to those producers that embrace this new dynamic.

Unfortunately, the rapid and novel changes that create the demand for decentralization in the first place often place organization leaders in a considerably less certain, and consequently less commanding, position. p. 3

And here must be classified as another call to action;

Leaders cannot afford to possibly wait for these unstructured collaborations to emerge on their own. Boundaries and bad habits make organization members unlikely to instinctively reach across divisional lines to integrate their knowledge and activities appropriately. p. 4

"Barriers to Information Sharing across Organization Boundaries"

"Intergroup Bias"

There may be over 100,000 JOC's in the global oil and gas industry. Each one is distinct and has elements that make each one mutually exclusive to the others. Different partners, wells, facilities and location are just some of the attributes that make them unique. The authors suggest that this may impede collaboration between the companies associated with a JOC.

One key barrier to cross-boundary information sharing stems from one of the very reasons organizations establish group boundaries to begin with: to create and maintain a recognizable and meaningful distinction between two or more groups in the organization. p. 5

With the assocated size of many JOC's it is possible to have hundreds and possible several thousand people employed exclusively in one JOC. Therefore for each company to dedicate staff to that one area would not lead to too much difficulty. However, the firm has needs that are associated with that JOC that are above and beyond those individuals focus. Much as I have written about the possible difficulties experienced by Chrysler. Where the firm may lose some of its overall technical capability by the focus being exclusively on the JOC and the market that supports it. The firm needs to conduct elements of science and technology capabiliities which in addition to its land base are its key competitive advantages. Here the authors indirectly note the problem that I think is highly related to the Chrysler situation that I wrote about here.

In a decentralized organization, the salience of differing groups memberships and this self serving motivation set the stage for integroup bias - the systematic tendency to unfairly treat one's own group or its members better than a non-membership group or its members. p. 5

and

Competitive pressures on the different groups in a decentralized organization could easily provoke similar forms of intergroup antagonism and diminish or destroy any hope of unstructured, emergent collaboration. Company funding, access to markets, intellectual property rights, and numerous other organizational assets are all potentially scarce resources over which groups with the organization may have to (or feel they have to) compete. p. 6

and

This suggests that the fog created by legitimate competition between organizational groups can prevent group members from recognizing or taking advantage of unrelated opportunities to share mutually beneficial information and collaborate. If derogation of the out-group extends to derogation of the information it possesses, members of one group might foolishly reflect useful information from another group. Alternatively, perceived competition might create an exaggerated fear of sabotage form the other group, predisposing group members to hoard or withhold information form other groups that might leave them vulnerable. p. 6

These quotations add more focus to the problems that may be experienced by establishing the boundaries of the firms in this proposed software development. On the surface it may appear that the need to abort the idea of developing this software would be an ideal position. I would argue that noting could be further from the truth. It is the time and place that we find ourselves operating in that challenge us to work in a more decentralized manner. The technologies, the competitive pressures, the risks and the rewards would lead or motivate individuals to operate at this higher level. The risks are clearly articulated by the authors in this next quotation.

The now-famous intelligence failures surrounding September 11 reveal a situation in which the sometimes conflicting goals of the CIA (intelligence gathering) and FBI (Criminal Prosecution) have created the perception of inter-agency competition for information, time, and access to key informants or suspects. p. 7

One remedy that I could suggest may be effective would be for each company that has a working interest in a JOC would be entitled to the data and information that is available to the active members of the JOC. The ability to share information between the groups electronically is something that can be managed in an appropriate manner when the industry has the capability of a dedicated software developer as proposed here. Lastly the authors note that this intergroup bias may be a simple feature of the assignment of people to groups. What the technology proposal inherent in this blogs writings is attempting. Is to enhance the cross functional collaboration between the various disciplines involved in oil and gas. Hence this proposal provides the opportunity of eliminating one element of the intergroup bias.

Competition is certainly a powerful driver of intergroup bias, but it is not actually a necessary precondition for the emergence of bias. Remarkably, intergroup bias will arise with little more than the mere assignment of people into distinct groups. p. 7

"Group Territoriality"

Group dynamics have a potentially negative effect on the dynamics of establishing the market as the basis of the JOC definition. If these group dynamics are not clearly defined and dealt with the effectiveness of the market and the firm will be at risk. The intergroup bias has a strong tacit concurrence to the definition described, as does Group Territoriality defined by the authors as.

Organizational boundaries do not only serve to distinguish groups from one another, but also to help groups define themselves in a more absolute sense. Unfortunately, just as the former effect poses a threat to cross-boundary coordination through intergroup bias, the latter effect can have negative implications as well. p. 9

and

Once these items are identified as part of a groups territory, we suggest that they afford group members a sense of psychological ownership - claims to, or feelings of possessiveness and attachment toward, those objects. p. 9

When we add the elements of the cognitive and motivational paradoxes to these group dynamics, I think we can see some of the reasons why group territoriality comes into play. There is a sense of urgency involved in many of the operations of oil and gas that can further affect group dynamics. Therefore I think that this should be an area of intense study during this development. Not to add further fuel to the fire, but there is a large disparity in many of the peoples acceptance and use of technology. Not everyone will have the same capacities to deal with the technologies and see the opportunities that others see.

We classify these behaviours as instances of group territoriality action undertaken by a group or by individuals on behalf of their group which are designed to reflect, communicate, preserve, or restore the group's psychological ownership of its territory. Unlike intergroup bias, this preferential attention to the intergroup does not stem from the desire to improve the standing of one's group relative to others. Instead, this behaviour is more inward-looking; it stems from the need to respect and reaffirm the identity, efficacy, and security of the group with the organization. Nevertheless, group territoriality can constitute a significant barrier to emergent intergroup collaboration and information exchange. p. 10

and

Through marking and defining behaviors, group territoriality can often work against information exchange in decentralized organizations. These behaviours exaggerate each organizational unit's focus on itself, facilitating possessiveness and disregard for other units. p. 13

and

The second group need that undergirds group territoriality is the need to establish and maintain a sense of group efficacy in organizational relevant domains. This form of efficacy refers to a groups belief in its collective ability to organize and perform the activities necessary to achieve desired goals, At the broadest level, identification and protection of group territory helps groups to identify the goals they should aspire to achieve. Moreover, when a group's territory is widely recognized by others, such recognition can serve as an implicit endorsement of the group's efficacy in related domains. Control over group territory further enhances a sense of group efficacy by assuring groups of ready access to resources that can facilitate their accomplishments. p. 14

Finally a positive attribute of the times that we find ourselves in is the long term shortage of people in oil and gas. This is providing a level of job security that I have not experienced in the 30 years that I have worked in oil and gas. The authors point out that a secure environment is a precursor to dealing with issues.

When a group feels secure in its environment, it can more easily develop expectations of and predictions about its environment, which can facilitate the planning and execution of activities. p. 14

"Poor Negotiations Across the Organization"

This next topic would be something that is totally new to me. I will leave it to the authors to define the issue and their solution and then I will comment at the end.

The final barrier to effective cross-boundary information sharing we discuss involves the poor strategies used by members of different organizational divisions when they negotiate with one another. p. 15

and

Nevertheless, both parties commonly focus only on the claiming aspect, and destroy value for themselves and for the broader corporation. These failures are due to both faulty cognitive assumptions and to the failure to follow insightful prescriptions about how to negotiate more effectively. Perhaps the three most important cognitive errors are the myth of a "fixed pie" in negotiations, the failure to carefully consider the decision processes of one's negotiation partner, and the failure to recognize opportunities to negotiate in the first place. As parties enter into a negotiation, they too often assume that their task is to divide up a fixed pie of resources. Researchers have described this tendency to view competitive situation as purely win-lose as the mythical-fixed-pie mindset. p. 15

and

Related to the myth of a fixed pie is the cognitive failure to fully consider the perspective and decision processes of the other party. Though many people recognize the importance of "putting yourself in the shoes of others", ample research shows that most of us fail to do so. The price we pay for this failure is weaker negotiation outcomes. The key to creating value in negotiations is to identify areas where mutually beneficial trades are possible. p. 16

and

A last cognitive barrier to effective value creation in cross - divisional negotiations is that the parties fail to recognize that they are involved in a negotiation, thus missing the accompanying opportunity for value creation. pp. 16 - 17

This last point being the key from an administrative point of view. My perspective of being in accounting, audit, and systems has been skewed by wanting to provide the best services to the operational areas. I would suggest that many of the earth scientists and engineers can better appreciate the point of view of the authors.

"Leading Emergent Collaboration"

The challenges to effective emergent collaboration have a number of implications for effective leadership in decentralized organizations. Accordingly, we focus this next section on three key recommendations leaders may explore in order to overcome the threats of intergroup bias, group territoriality, and poor negotiation norms. p. 17

"Link Group Interest to Super-ordinate Interests."

They attacked competition as the root cause of the bias, and simply presented the groups with tasks that each group could only achieve through cooperation with the other. Faced with necessary cooperation, the groups began to exchange help, information and resources, they willingly shared the spoils of their achievements. While this demonstrates the power of the super-ordinate cooperative goals to facilitate cooperative behaviour, the result depended on the replacement of divergent group goals with the common goal. p. 18

Just as actual competition is not necessary to promote intergroup bias, more recent research suggests that actual cooperative goals are not necessary to resolve it. p. 18

In decentralized organizations, however, it can be important to retain and even emphasize the salience of distinct group goals and identities, so as to facilitate the efficient discovery of related resources and expertise. Focusing group members exclusively on a superordinate organizational identity may also distract members from thinking and acting in ways that are consistent with their group membership, diminishing their ability to provide the localized focus, perspective, and actions on which a decentralized organizational structure depends. pp. 18 - 19

It should be made clear that no one group can achieve the superordinate goals, nor can one group give the organization sufficient richness and depth. Group members can thus be encouraged to see themselves as fundamental linked to out group members while remaining cognizant of the fact that the link itself depends on their ability to contribute localized expertise to the others. p. 19

"Frame Collaboration as the Solution to Group Needs."

The underlying drivers of group territoriality are the groups needs for a sense of identity, efficacy, and security. the natural impulse for groups and their members is to satisfy these needs by becoming inwardly focused, by utilizing group territory to meet these needs, and by engaging in territorial behaviours to protect their ongoing ability to continue utilizing the territory for those purposes. p. 19

The key underlying issues here is that groups often seek to satisfy their needs by turning their attention exclusively to their own members and territory. They ignore or fail to recognize opportunities to satisfy their needs through, rather than in spite of, interference from other groups. p. 20

Raising the profile of eagerness to collaborate as a dimension of identity can thereby create a self-sustaining meaning and salience in the organizational environment, as it encourages groups to refer to each other not only in terms of their territory proper, but also in terms of their approach to sharing and exploring territory. p. 20

With the increasing popularity of cross-functional teams, it seems like it should be especially easy to sell collaboration to organizational group members as a way of developing new competencies and enhancing their sense of efficacy. However, because people are often drawn into collaboration across functional or disciplinary lines, group members may instead feel that they have been chosen to primarily "represent" and advocate for their group's ideas and approaches in the interaction. pp. 20 - 21

By thus highlighting the prospect of substantial losses, leaders can capitalize on the groups need for survival and increase the willingness of groups and their members to accept the security risks posed by information exchange and collaboration. p. 21

"Enable and Encourage Effective Negotiation Behaviours"

The second aspect of getting organization members to negotiate effectively across the divisional boundaries is to establish strong explicit norms (especially during times of change or transition) that support information gathering, disclosure, and constructive criticism. p. 22

This underscores the critical point in maximizing organizational value-creation during cross-divisional negotiations: optimal outcomes demand that a leader instill, and reinforce, norms that promote information sharing and discourage information hoarding. pp. 22 - 23

Some might argue that a norm of information sharing and collaboration would destroy "constructive conflict" within an organization. We do not agree. We think that it is fine for divisions to compete along many fronts, including value claiming once the total value of the pie has been maximized. But, such competition should not destroy value. Just as organizations have norms against lying, deception, fraud, and hiding defects in products, we argue that organizations could also have strong norms about optimal collaboration across units. p. 23

This last section of their document providing many of the solutions the authors have found to the group dynamics. I am unable to comment constructively on many of the points. I will however note that during my "online" studies for my MBA. I found it particularly difficult for most of the other students to offer or accept any constructive conflict in the discussions. The initial feeling is that conflict is something to be avoided and if anyone raises it they are not cooperating appropriately within the group. I tend to disagree primarily out of my type "A" personality, but also because I feel fundamentally that the contradictions and conflicts in life are the best means in which to identify and resolve issues. If the groups approach is to avoid conflict, then I feel that the groups approach is to get along and go through the exercise without any real debate. (Or argument.)

These last two blog entries have dealt with some of the personal issues that we will face in these developments. How best to proceed from this point, I think, is to establish this area with some real research that provides us with key understandings of the unique involvement here. With this research we should be able to identify many of the tools necessary to mitigate the problems and maximise the opportunities. Tools such as a comprehensive code of conduct that adopts these principles and research findings, and I am certain that most of the real issues remain undiscovered as we proceed down this road.

Technorati Tags: Genesys, Research, People, Productivity

The constraints of code and customers.

I have commented many times about how this project is a clean slate approach to systems development. This may simply be a diplomatic way of stating its obvious vapor-ware status. What I mean is that the software development business is unique in that constraints of code and customers eventually become impediments to instituting any change. This may be ideal for companies such as Microsoft but for an Enterprise Resource Planning (ERP) vendor, and particularly for the oil and gas industry, nothing could be further from the truth. The two constraints of code and customers are also related and affected by the motivational and cognitive paradoxes of the users of the system.

I consider these constraints of code and customers to be unacceptable to the best interests of the users of this system. The motivation has to be for the users to influence the development that they need and want. (Using software such as this enables the community.) If it is necessary to rewrite some code, or the users decide to archive an entire module, then it will be done. The primary focus of the developments should be accuracy and increasing the productivity of the users of the system. Productivity increases are not static. How can an industry continually increase the capability and functionality of their systems on a constant basis? This blog entry will show how I think these software development should be done.

Firstly let me try to explain what I mean by better defining these constraints.

• Code: With the progressively increasing size of installed computer code, the costs to the software developer to change and innovate become increasingly more difficult to justify.
• Customers: With progressively greater numbers of clients using the software developers code, the costs to upgrade the installed base of customer’s code and associated support revenue, do not support change and inhibit innovation.

My findings also show that the ability for producers to secure the necessary ERP systems, irrespective of the software development method used, is contingent on the active involvement of their money, time and people. These are the resources necessary to develop systems that specifically fit the producers' needs. Over the past 20 years we have seen how the speculative model of software development, either international or local in origin, has failed to provide the oil and gas industry with optimal systems. I attribute these failures to the inability of any of the software development projects to be influenced by the users. Without user involvement, no quality systems will be built. This blogs purpose is to start the conversation among users, get them involved, and ensure the developments are what are necessary to function in the exploration, exploitation and production areas of oil and gas.

Using the Web Services paradigm, users will access People, Ideas and Objects systems any time and anywhere. A producer's specific software installation is not part of the design specification, however, it may be an option that can be accommodated. The data and information integration costs will be borne by the individual producers and be offered as part of the users domain of business service offerings. The total costs of this development and its associated costs will be shared by the producers that use it. Bringing the costs of software development to a small percentage of what has been incurred in the past. A method of assessing these costs has not developed at this time, neither has the community of users or their business offerings formed as of yet. This being a classic chicken and egg proposition that I have to resolve.

In noting that there will be a variety of user based business offerings developed as a result of this software development. I am attempting to eliminate some of the associated user based impediments to active involvement and participation to the software's development. These impediments are known as the cognitive and motivational paradoxes. A brief introduction of these is as follows:

• The "motivational paradox" arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning, and consequently productivity suffers. Carroll and Rosson (1998)
  
• The "cognitive paradox" has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions. Carroll and Rosson (1998)

What is of concern here is the quality of the development may be directly related to the users and contingent on the level of training they receive and understanding of the process, capabilities etc. Adopting this clean slate approach to systems development will take them time to adapt. Therefore, payment for these services is a given. Asking people to sacrifice their free time will sustain the developments only for a short period of time. Would some users consider it a full time job? Yes, I think that is possible and may occur, or users will develop their own businesses offering integration, training and associated services for the software. This community will need to be self-sustaining and possibly involve hundreds or thousands of individual businesses.

As can be seen in this description the solution that I am proposing is not just the software development, which is the domain that I am concerned with, but all aspects of the user community and day to day administration of the oil and gas producers. An entire re-alignment of the industry based on the needs of the producers as specified in the module definition and the joint operating committees. However many independent business that are needed in order to undertake these tasks is defined by the needs of the producers. This community or "market" is part and parcel of the market definition of the boundaries of the firm. Contact me here if you would like to join me.

Technorati Tags: Genesys, User, Development, People

They're here...

Sun Microsystems Sunspots and Intel Motes.

To help in understanding the impact of the technologies that are to be introduced through this software development project, I have created a vision of why certain technologies will have a dramatic effect on the people operating in the energy industry. This vision encapsulates four key technologies, Objects, IPv6, Asynchronous Process Management and Wireless. I have written in detail about these technologies here, here, here and here. These four technologies enable a proliferation of devices to be connected to the Internet for data capture and remote control. What could be developed in these devices is limited to the imagination of the people that are involved in the oil and gas industry. A world with these types of devices needs to be approached differently in order to capture the volume of data, information and control that will be available.

It is this vision that is captured in Sun Microsystems "SunSpots" programmable, experimental gadgets to test and implement in new and innovative ways. From my point of view this is the beginning of the ability to develop new and interesting devices that will help increase people's and producers productivity.

We've created a platform that greatly simplifies development and experimentation with small wireless devices, and we've opened it up to the development community, said Roger Meike, research director for Project Sun SPOT. There will be tremendous opportunities to apply and expand this technology in all sorts of new and exciting ways.

Why would these SunSpots and Motes be used in oil and gas? Time, physics, pressure, location, and temperature just to name a few classifications of the many possible reasons. Soon these devices will be certified for RoHS (Restriction of Hazardous Substances) compliance. How many of these types of devices will be embedded in the operational day to day of an oil and gas producer? How many of these remote devices will be involved in the process of commerce, or more specifically the beginning, middle or end of a transaction? How will the limited human resources involved in the industry manage with this level of data and information? And who will be the first to employ these devices in a commercial setting, the producer, investor or user of the software development capability that I write about in this blog?

Technorati Tags: Genesys, Sun, Vision, Capabilities

Institution, Inertia, and Changing Industrial Leadership

Paul L. Robertson
Department of Economics and Management, University College, University of New South Wales, Australia

Richard N. Langlois
Department of Economics, The University of Connecticut, USA

March 1994,

Back into our working paper review, this next document is one that was co-written by Langlois in 1994. We have been able to learn many positive things from his works, and this article predates most of the review we have done so far. Application of his theories to the energy industry has helped in defining the boundaries of the firm, and given us a clear separation of the optimal market and firm definitions. We have also been able to specify the software modules that will best provide the oil and gas producer with the ability to be fast, innovative and profitable. Another key finding from Langlois involves the analysis of transaction costs and how the information technologies have reduced the overall costs of transactions. Enabling them to reside within their optimal area of either the firm or market definition.

I am extremely pleased with the progress made through our review of Professor Langlois. Framing the perspectives of the industries history, it's current environment and future makeup. The clarity of his thinking resonates with its application to energy and the time frame we find ourselves. We have also briefly discussed the economic cycle and how it may affect the energy industry. This has included the discussion of Professor Carlotta Perez' works in defining the transitional point in time we currently find ourselves. It would be a difficult argument to assert that the energy industry is in a static state. Many of the changes being faced by the industry are fundamental in their origins and contain threats and opportunities to each and every producer, individual and society.

Introduction

Langlois and Robertson start this paper by framing the effect of economics over time; and ask if the pace of change in economics is incremental or revolutionary.

One of the most persistent debates surrounding economic change is whether it is incremental or revolutionary in nature; whether, for instance, a period of change that lasted anywhere from seventy to one hundred years may be properly termed an Industrial Revolution. (Landes, 1991; Cameron, 1985). Unless we abandon standard models of causality and are willing to invoke an occasional deux ex machina to explain change, the incrementalists are of course correct in insisting that, in the end, any event represents a change in the existing framework in the sense that it flows from (can be explained by) antecedent events and conditions. This however begs the question of the rate of change since it is still entirely conceivable that there are periods when change accelerates or slows relative to other periods. Moreover, even a moderate rate of change may be consistent with significant discontinuities in that some economic agents (individuals, firms, or other institutions such as the regulatory system) may drop out altogether and be replaced by others. In this case, seeming stability on a macro level may mask compositional effects that have a great impact on the various components of the economy. p. 2

Recall that the time frame in which this paper is written. I remember 1994 as a time that existed in an era of relative calm in comparison to today. Thirteen years has brought us Cell phones, the Internet, Globalization and many others. What will the next thirteen years bring? The Chinese proverb of "may you live in interesting times" comes to mind when we foresee the changes we have traversed, and will be challenged with in the very near future. I believe peak oil is possibly the largest challenge ever faced by mankind. Our current situation therefore has a definitive point in which change will be forced upon us. We need to be pro-active and deal with these challenges in a more constructive manner then denying that they exist. Our first priority should be to re-organize the energy industry so that it can face these difficulties. Inherent in that priority is the need to define and support the new organization with the software that will enable the organizational performance.

Several features of punctuated equilibrium stand out. Firstly, it is a lengthy process. Even the revolutionary or transitionary phase, in which two or more alternatives vie for success, may be prolonged for decades, or eons in the case of speciation. Secondly, the process, like Schumpeter's: creative destruction," is one of replacement. When there is punctuated equilibrium, the extinction of a species or discrediting of a scientific theory are not enough; there must be a new species available to take over the territory or a new theory to account for the phenomena that the old theory was once thought to explain. Thirdly, each period of punctuated change requires a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents. This shift might be accomplished internally, if the old agents adapt their behavior to meet the new conditions, or externally if they are supplanted by a new group of agents. Finally, inertia plays a central role in punctuated equilibrium by ensuring that change proceeds by fits and starts rather than smoothly and evenly. pp. 2 - 3

So there we have a definition of why change seems to be slow. There needs to be a competition in essence for which systems should prevail. This force is the inertia that the bureaucracy maintains and the ideas that I have written about here. I assume, or indeed hope, that the time where these two opposing ideas are competing considers the necessary time for these technologies to be assembled. I believe we have many years ahead of us before this true comparison of the two alternatives can be adequately evaluated. In theory the Joint Operating Committee has been assembled by the oil and gas industry to deal with the partnerships that are its founding. The tacit understanding that this blogs theories are sound are exactly that. Theories, vapor ware, unknowns and unproven. Yet hold elements of promise that should be evaluated by this greater competition between the bureaucracy and the ideas articulated here.

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia result from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3

I may seem melodramatic in how I perceive the problem and hence the need to begin this project. The bureaucracies are currently enjoying success while the energy reserves of which society depends are depleted. It is not the corporation's problem. It is the society as a whole that should be standing behind these ideas and moving them forward. The corporations are profitable and their production profile and reserves continue to climb. Theirs is a commercial pursuit that is working just fine.

Here we concentrate on explaining the part played by inertia in causing economic displacement. We argue that inertia is often a rational response for firms or governments even after an important innovation becomes available, and that changes in economic leadership, whether on the level of the firm or the nation, may be inevitable when there is significant innovation. p. 4

Institutions and Inertia.

The corporations that I speak of will probably be replaced to a large extent by the oil and gas investor actively involved in exploration and production. Relying on the collective market resources contained within the Joint Operating Committees they participate in. This is a rather far-reaching statement that can't be supported at this time. However, the replacement of the corporation may involve the investor being more involved in the day to day of the operation. The strong separation between ownership and management is the area where much needs to be addressed. It is my read of the management mindset in oil and gas that they are not going to approach any large and difficult problems before their individual retirements. They have spent twenty plus years in working to build what exists today and have no vision, motivation or capability to deal with the future. And this is the reason for the early prevalence of Peak Oil. In this scenario the management are the odd men out and the investors may have to be the ones that make the change towards the systems I write about here. In the past few months we have heard many groups resonate the concern for Peak Oil. The prescriptions are all remarkably alike, yet the bureaucracies are deaf, dumb and blind, cheered along by Dr. Daniel Yergin's promises of an unprecedented 16 million barrel per day capacity increases.

There is a range of explanations of inertia. One set is the "real" or, in the narrow sense, "economic" explanations that look to abstract variables like demand levels, factor endowments, and relative prices to justify the failure of some organizations to change. A second reason for inertia is simple incompetence, when managers are either too stupid or too idle to adopt desirable new methods. p. 4

and

Here, we concentrate on the influence of institutional variables on inertia. Institutions may either retard or encourage innovation. If the institutional structure is unsuited to a new technology and inert, change will be difficult to implement. When existing institutions are flexible or well adapted to the requirements of an innovation, however, change will be accomplished relatively easily. p. 5

and

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

and

In this paper, we restrict ourselves to pointing out that no single form of organization is appropriate for all, or even a majority of, cases in which innovation is desirable. p. 7

On routines and capabilities.

From what I can discern in conversations with people within the industry. It appears that the companies have become encased in concrete. Nothing is happening in Calgary other then a slow and steady march that replicates itself each day. It would be all right if this march was able to generate some movement in the long run, but I cannot determine that is the case. The proliferation and prevalence of the executive assistant and phone mail have provided safe havens for those that have no desire to fight the inertia that remains within the business. Feeding the printers with paper seems to be a most productive effort in the overall scheme of things. People are thinking that their retirements are soon to arrive, and then this will all end.

Maybe it is the individuals that see the peak oil situation that are the ones that need to adjust their expectations. What do they expect from a firm that has survived the 1980's and 1990's, through the long and difficult times of the cheap oil era. These individuals and companies are the survivors, for it is the survivor skill set that was necessary in order to exist. Expecting anything greater then survival would have been difficult to ask, or implement or change to meet the challenges of today. Professor Langlois writes that a similar situation to this scenario is the effective long term advantage of the firm.

Overall, then, inertia exerts two principal influences on the ability of firms to cope with innovation. Inertia is often a product of successful adaptation to earlier innovation, as a firm develops ways of operating that appear to be so well suited to its internal and external environment that it sees no reason to change. In many instances, this adaptation may prove so effective that the firm can retain a total cost advantage for a prolonged period despite using an outdated technology because it can still capitalize on its master of compatible support and ancillary operations, while firms adopting a new, and technically more efficient technology, are still wrestling with the expensive process of acquiring the endogenous and exogenous institutional backup necessary to gain full value from the innovation (Hannan and Freeman, 1989). p. 7

This last comment being particularly valid as they control the budget and therefore no new ideas will be sponsored that would challenge their existence. Leaving society with the legacy and challenge of peak oil to itself.

When inertia retards the learning process necessary to deal with a subsequent important innovation, however, firms that are otherwise in a position to make the eventual transition to a new technology may be so slow in coming to grips with change that dominance shifts to new entrants who are unencumbered by prior developments, learn new adaptive procedures more quickly, and are able, therefore, largely to appropriate the market by the time the established firms have learned to cope with the innovation. The obstacle in this case is may be termed "lockout", as leaders using the old technology find that they cannot successfully make the transition when there is a significant innovation (Cohen and Levinthal, 1990, p. 137). pp. 7 - 8

And hence, the wonderful sound of the term creative destruction. I have long given up on expecting the corporations will do anything to move these ideas forward. I think in this article Langlois and Robertson are being prescient in their thinking that organizations would not survive.

I continue to think back to Langlois' slides of his presentation at the ESNIE conference. The first slide documenting the market activities of the gun makers in the 1800's. It is the market that will be the form of organization that will rise to the challenge of peak oil. The market in oil and gas is in many ways runs parallel to the Joint Operating Committee. And what I think one of the most important attributes of a market is that it is made up of individuals operating in their own best interests. And this may be the key in having this software development project be successful. The culture of the Joint Operating Committee is a key foundation of the global energy business. What activities that I am recommending that we pursue here are 100% in alignment with the culture of the oil and gas industry. The corporations have regressed to a self serving model of compliance and summarily ignore the JOC. And as time passes, they will be less and less able to influence their inevitable demise.

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. 9

From my point of view SAP provides the bureaucratic system that identifies and supports the inflexible organization. An oil and gas company should never have purchased SAP. I have seen in many instances that the system is unable to deal with the associated gross and net distributions of working interest partners. Developers have prepared a derivative work-around that uses the budget and actual costs to account for the partners shares. These types of activities that are ingrained in the organization are inconsistent with the culture of the industry. The JOC is the natural form of organization and have never seen any recognition of it by SAP or Oracle. I am not so much fighting the ingrained culture of the industry as it is a bureaucracy supported by heavily reworked systems. I would assume that if this software would be developed, its explicit recognition of the legal, financial, operational decision making and cultural frameworks of the industry would flow naturally through the cultural manner of the industry. Therefore I am not proposing any wild rework of systems thinking upon the industry. I am bringing the technologies under the control of the user to accurately match the culture.

Nelson and Winter have formulated an economic analogue of capabilities, including organizational culture. "Routines," as they put it, "are the skills of an organization." In the course of its development, a firm acquires a repertoire of routines that derives from its activities over the years. To the extent that these routines are efficient and difficult to come by, they are a most important asset, but they also induce inertia because they are difficult for the firm to change once in place. p. 10

What I am suggesting here is that the fight between the current installed base of systems and their associated culture will pale in performance to the organization that is optimized and supported around the JOC. This is how the industry was conceived to operate, and therefore will win over the bureaucracies current installed inertia. What we recently learned from Professor Paul Romer is that ideas are the life blood of economic growth. How many ideas are wasted as a result of the inability of anyone to assert the "better way." Where the systems and inertia stop all manner of thinking and eliminate the desire for change.

Teece... fails 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. 10

So where is this analysis of Langlois and Robertson taking us. If we add the element of time that peak oil brings to the current conversation, the sense of urgency to deal with these issues demands immediate action. And if there were ever a clarion call to action that encapsulated my opinion as to the validity of these concepts, it would be the following.

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competences of existing firms. p. 11

Expecting someone else to fix this is not working. It is now time for each individual to stand up and take hold of these opportunities and make them real.

Learning and Inertia.
Langlois and Robertson have some additional key points that appear to me to be self-evident. I would also assert that the discussion about learning has affected the energy industry. The effect being that it has enabled the firms to remain blind to the issues associated with peak oil.

Firms that do not make the correct decisions (that do not know how to learn what they specifically need to learn) may lose irrevocably. In the words of Cohen and Levinthal (1990, p. 138):

A firm without a prior technological base in a particular field may not be able to acquire one readily if absorptive capacity is cumulative. In addition a firm may be blind to new development in fields in which it is not investing if its updating capability is low. Accordingly ... firms may not realize that they should be developing their absorptive capacity due to an irony associated with its valuation: the firm needs to have some absorptive capacity to value it appropriately.

If the innovation is competence destroying, the inertia generated by mastery of an older technology may preclude the rapid acquisition of knowledge that will permit the transition. Competence enhancing innovation, on the other hand, can benefit either existing firms or new entrants depending on whether the competences that are strengthened are related to or distinct from those associated with the old technology. p. 13

Conclusion

I find the conclusion the authors provide in this document to be good advice for those that work in the energy industry, and therefore will leave with their policy recommendations.

Institutional factors, especially those embodied in capabilities and routines, can both improve the ability of a firm to exploit an existing technology and make it more difficult to innovate by generating an inertia that is hard to overcome. p. 25

When this is true, a change in industrial leadership is probable, with the hitherto dominant firms becoming either followers or leave the industry altogether because they are no longer competitive. p.25

A number of policy implications flow from this analysis: p. 25

1) It may be highly rational for a firm to cling to an old technology, even if it has a limited life span. The return to harvesting may be greater than that to innovating for a firm that has strong routines and capabilities relevant to the old technology but has fewer capabilities suited to the innovation than other firms. p. 25

2) Governments should be wary, however, of propping up firms that do not have the necessary capabilities to cope with change. Too little attention is sometimes given to the "destruction" aspect of creative destruction. It can be very expensive to help firms to cling indefinitely to outdated technologies or to pay them to acquire capabilities that other firms have gained more cheaply. to the extent that some firms are encouraged to persist with obsolete technologies longer than they otherwise would, the adoption of an innovation by other firms with better capabilities may be retarded, causing a long term cost to society. p. 25

3) If it is nevertheless felt, either by private firms or governments, that they need to obtain a foothold in the innovative technology despite a high degree of rational inertia, it is best to begin adjusting as soon as possible. Otherwise, competitors may have acquired so much experience with the innovation that late adopters will be hard pressed to catch up in the acquisition of tacit and proprietary knowledge. p. 25

4) One way of handling innovation when a firm has good reasons to remain inert is through "tapered adoption." In this way, through pilot projects it will be possible to acquire knowledge and avoid falling too far behind despite the probable losses that the innovation will bring in the early stages. The experiments can then be gradually expanded to replace the old technology as the cost advantage shifts towards the innovation. If an industry is believed to be of great strategic or economic importance, governments may wish to encourage firms to embrace tapered adoption. pp. 25 - 26

5) The analysis also offers evidence that in fact industry arguments can make sense if a nation whose firms have been followers under an old technology believes that there are sufficient capabilities available to support an innovation. In such cases, there could be a substantial long run payoff to providing tariff protection for domestic innovators so that they can develop capabilities while inertia technology encourages overseas competitors to continue to use the old technology. p. 26

I believe the solution is to join me here in developing these software applications to identify and support the Joint Operating Committee as the organizational construct of the oil and gas industry.

Technorati Tags: Genesys, Lanlgois, Call-to-action, Change

Professor Carlota Perez on Cisco Thought Leadership.

The title of this entry will take you to Cisco's "Thought Leadership" page. There you will find a variety of information and podcasts from a number of speakers. Specifically I wanted to point out Professor Carlotta Perez has a podcast about her long wave economic theories. Professor Perez is able to lay out where we are in the "transition" from "installation" to the current "deployment" periods. Providing the listener with some insight as to how the Information and Communication Technologies will affect them in the very near future.

Professor Perez did an interview (approximately 2005) with Strategy and Business entitled "Carlota Perez: The Thought Leader Interview" available here. (Subscription required). There she is able to draw on the "5 great surges" and apply this history to our current situation. Surprisingly, much of what is occurring in 2007 fits the previous surges progress and profile. A few key excerpts from the document show the strength of her analysis.

• When a new set of technologies is ready to emerge into widespread use, it needs the force of freewheeling investment capital to give it momentum. This period which Professor Perez calls Installation, might take 20 to 30 years to develop; then, there is another 20 to 30 year period called Deployment, when the potential of those technologies for improving quality of life comes to fruition.
  
• According to Perez, the industrialized world is still in the middle of its painful transition from Installation to Deployment.
  
• We may have a jolt or two in the near future, and then a great boom probably lies ahead. But the NASDAQ collapse of 2000 was not big enough to force the changes necessary to get there.
  
• The collapse has to be disastrous enough to make it clear to everyone that the time when the stock market drives the growth of the economy is finished.
  
• You and I both have seen the changes wrought by information technology, and we think it is uniquely momentous. Yet previous technological revolutions made equally momentous changes.
  
• Our present, fifth, surge, the age of information technology and telecommunications, began in 1971 with Intel's microprocessor. If the historical pattern holds, this surge still has 20 to 30 years left to realize its potential.
  
• S+B: And organizations are different as well?
• Perez: Yes, each surge brings with it a new organizational paradigm, new best practices, a new common sense.
• S+B: What happens next?
• Perez: Well, in an ideal world, we would smoothly enter a golden age of expansion and growth in the global economy - a time when the amazing, wealth-creating information technology paradigm lifts all boats and produces global welfare. Instead, as in every previous surge, there is a difficult interim period: a time of uncertainty, instability and economic recessions or even depression. In my book, I called this interim period the turning point.
  
• S+B: How does that come about?
• First, every time some forward-looking CEO tries to implement a three year plan, he is ousted in three quarters.
  
• Second, prices have to come into line. During Installation, there is always strong asset inflation (both in equity and in real estate) while incomes and consumption products do not keep pace. This creates a growing imbalance in which the asset-rich get richer and the asset poor get poorer. When salaries can by houses again, we will be closer to the golden age.
  
• Third, as Deployment gets closer, you will see increasingly stable industry structures. Look at the mad price wars of the airline industry; it has a lot of restructuring to do to segment its markets and develop a sustainable set of practices.
  
• Fourth, there need to be innumerable investments and business innovations to complete the fabric of the new economy. Here's one example: Millions of self-employed entrepreneurs work from home with uneven sources of income.
• Finally, I'm not sure we've understood the causes of fraudulence at companies like Enron, nor how to avoid them by means other than excessive bureaucratic controls. The key decision makers, in government and business, do not seem ready to make the changes that could get a golden age under way.
  
• S+B: Then why not simply wait for it to emerge?
• Perez: Because left to itself, it might not happen. Historically regularities are not a blueprint: they only indicate likelihood. We are at the crossroads right now. It is our responsibility to make sure that the enormous growth potential of the next golden age will not be lost.

Reviewing the podcast and reading the document are highly recommended. Professor Perez also has a book entitled "Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages." ISBN:1843763311. I would reassert the time and place to be conducting these types of software developments is now.

Technorati Tags: Genesys, Perez, Change, Research, Trends

Professor Paul Romer on Growth

Click on the title of this entry to be taken to a podcast from www.econtalk.org. Once there you will be able to download Professor Paul Romer's paper and listen to the podcast.

Stanford Professor Paul Romer is also a Senior Fellow at the Hoover Institute and one of the many academics that I follow. He is the author of the theory and ideas contained within the "People, Ideas and Things" as the three key attributes of economic growth. Recall that this was the initial idea that I used in calling this software development "People, Ideas and Objects."

At approximately 16:10 into the podcast there is a discussion that is very pertinent to the energy industry. And that is ideas need to be discovered to maintain growth. As we learn more, knowledge becomes more important in the enabling of growth in economies. And as economies increase in size, more ideas are required more frequently. In turn economic progress has enabled more people to be engaged in the discovery process. Knowledge building on prior knowledge, and more and more people engaged in the discovery process. Professor Romer notes over time, these two factors are why we are able to attain higher rates of growth.

The oil and gas industry is of course built on ideas. The industry has achieved its current levels on the basis of the ideas that have been generated over its 140 year history. To move forward will require more ideas, and at a faster pace. So not only is it an application and development of the earth sciences and engineering disciplines, it is a never ending escalation of knowledge. Tell me how, and explain to me why we expect the current bureaucratic corporations will ever attain this acceleration in idea generation and application? These concepts also imply that if we do not re-organize the industry, we will never attain anything greater then what exists today. We are organizationally constrained.

Professor Romer is asked during the podcast about securing intellectual property. As we have learned through the writings of Professor Langlois markets are made up of individuals. I believe that the tie-in of ideas and markets is a key attribute of the energy industries future. The motivation to pursue our own ideas is monetary. Once you have secured your rights by publishing them, then and only then are they used for the greater benefit of all. This is the dual role of copyrights, that they are earned through publication and the source of value generation in the future economy.

Meta ideas or idea discovery systems are an inherent part of this systems module definition. A definition that includes both Research and Capabilities, and Knowledge and Learning modules. Only when the organizational key players (the JOC) are recognized in the legal, financial, operational decision making and cultural frameworks will the ability to generate and use ideas come about. Elements of these two system modules will include the functionality of tracking and valuing the intellectual property. Professor Romer states that ideas lead to change which leads to growth. Bureaucracies can't change fast enough for the markets growth needs.

These comments of Romer's provide a clear understanding of how the energy industry will increase or maintain its productive capacity. Ideas, and their discovery process are the life blood of the earth scientists and engineers, and more importantly the future of this industry. Oil does indeed exist in the minds of oilmen.

Technorati Tags: Genesys, Romer, Ideas, IP, Productivity

All the Canaries have stopped singing. (Click here)

I have followed Matthew Simmons for over 10 years and his message has been constant throughout. The need for the industry to move forward to meet the demands for energy in the future is a necessity for our way of life. Simmons has weathered the storm of criticism by focusing his message and double-checking the facts. I would suggest that he might have the most accurate read of the pulse of the peak oil situation. Defining in many practical ways what the effect will be to the energy industry and society as a whole. I have always considered Simmons the anti-Yergin, honest, factual and with no apparent agenda other then sustaining our way of life. Apparently in his spare time, Simmons has also closed over $50 billion in industry investments.

I ran across this recent podcast that captures and summarizes his ideas in a concise manner. Simmons' suggests three important points;

1. Producing countries will soon learn it is in their interests to choke back production, increasing prices and extending the life of their reserves.
   
2. Consuming countries need to take some sort of coordinated effort.
   
3. This is an energy industry related leadership failure.
   

A few select quotes from the podcast.

@ 21:45 - The urgency of this could not be any higher, and yet the complacency among our energy leaders is just astonishing.
@ 30:45 - (Peakoil) is a religious debate.
@ 38:45 - (Talking about solutions to peakoil) Throwing billions of dollars at a problem is the easiest way in the world to waste money.

The time to organize ourselves and deal with these challenges is now. Going in with the classic bureaucratic command and control is the most illogical choice. To a large extent, it is the inability of the bureaucracy to keep up, and understand the energy business that has brought us to this point. The Joint Operating Committee (JOC) is the natural form of organization of the industry, first and foremost we need to build the software to identify and support the JOC. Unleashing the brain trust of the industry to mitigate peak oil impacts and realize the full potential of the globalized economy. Contact me here if you also believe we need to start these developments, and lets get started.

Technorati Tags: Genesys, Call-to-action, Peak-Oil

A call to action for those in the energy industry.

I'm sensing that the time in which we start software developments is near. I took the better part of the past month to evaluate many of the technologies that we propose to use, and upgrade my skills to the current technology offerings. This started off with Sun Microsystems offerings of Java 5.0, GlassFish and NetBeans 5.5.1 Integrated Development Environment (IDE). The new "Open Source" development models and associated products are maturing, and they will have remarkably positive effects on the quality of the software built from this point forward. Many small changes that will have a revolutionary impact in the next 10 years.

I also am sensing that these tools have changed to now include an inherent addition of "the user" in many of the underlying concepts. The ability to communicate with the user is enhanced, bringing an expectation that the users will be more technically savvy then they may have been in the past. Not that the users will be the ones to write the commercial code, but are the key to software quality and effective designs. Excluding them is responsible, in my opinion, for the failure of most of the past software development projects. Open Source access can enable the user to better understand what is being done and this will demand a very strong understanding of the Java programming language.

And this is the opportunity for those with the business, engineering, and geological understanding of the energy industry. To apply their current skills to the development of their software. The developers are involved in their own science and need to focus on that, the more that we as users can understand of their information technologies, methods, processes, terminology, syntax and computer science, the better off we all will be. I would predict that in ten years the average user will be as intimately familiar with the JDK and other tools as they are today with email and Office applications. It is a software development revolution that is being facilitated through the technologies that I've mentioned and the users as its core. The next 10 years will come to be known as the golden era of software development. If I needed 1,000 developers I could easily attain those resources from the large pool of enterprise capable Java developers. And this will be easily done with the resources of the energy industry, a $2.5 trillion industry. What I will not have and will desperately need is the 8 to 1 volume of users-to-developers ratio for research, definition and overall direction of the developers.

There is a much faster pace of progress in the development of these technologies then in the very near past. I think it is that we are no longer constrained by the pace of "Windows Innovations." (An oxymoron as far as I am concerned.) Anyone with a good idea can have them easily implemented with in the technology stack for the benefit of everyone. And the ideas are coming from everywhere. The changes that I see in NetBeans over the past 18 months are truly shocking. Java as well and Glassfish was barely a concept then. There is one technology that adds a new element to all these technologies and that is Sun Microsystems Dtrace. Dtrace is a tool that can evaluate and analyse the interactions of the application's code. Taking the idea of a debugger to a level that previously would have been barely able to comprehend. Errors, bugs and other nasty side effects of the development are exposed immediately. Many of the bugs identified by Dtrace were not even known to exist 18 months ago! Dtrace brings the level of application code quality to the level of a pure science.

I have always been a fan of the three leaders in the industry today. Sun, Apple and Google are very much alike in their approach to business. They are also the ones that are primarily responsible for this golden era that I speak of. Buying their stock has always been a given to me. I am also very impressed with the fit and finish of the "Google Apps for your domain" services that I have decided to begin to use for www.people-ideas-objects.com. Having the users, developers and any others who need to access this future software service will soon begin to learn and appreciate the far-reaching vision of Google. I cannot imagine what these three companies offerings will be like in ten years from now. The capability of implementing the vision that I have articulated for this project is a given, for that I am now very certain. There is no technical risk associated with the large objectives that I have set out here in this blog.

Lastly Web Services seems to be passing as the last great technical fad. I can assure you otherwise. Web services will be the way that almost all industries, business and people interact commercially in the next ten years. Although I have no evidence of this, the technical infrastructure is in place and there is nothing to stop it from becoming "real" in the very short term. One company that I did find that holds out much of the promise of web services is David Duffield's www.workday.com offering. Mr. Duffield's previous company, PeopleSoft, provides him with a level of very high credibility. Our use of his web-services for General Ledger, Accounts Payable, Accounts Receivable, Payroll and Human Resources provides us with an api and a small fee for each transaction we process using their technology. Enabling this community to focus on the truly unique needs of the energy industry. The promise of web-services will materialize in the next 18 months. For that I am certain.

It is also interesting to me that www.workday.com have implemented "Ram Resident Databases". This method of running a database of course is not new, but provides a performance kick to the tune of 100,000 fold over disk-based databases. With the relatively low cost of a TeraByte of Ram, this is an innovation whose performance is very cost effective.

We need to get moving on these ideas and concepts today. Time is wasting and the technical revolution has begun. Peak oil is not a flawed theory. If you are someone in the oil and gas industry who knows that this is a better way for Information Technologies to interact within the industry, please write to me here, and lets get started.

Technorati Tags: Genesys, Call-to-action, development, Collaboration, Ideas, Open-Source, User

A Variety of Upgrades

Some very good news, we now have a "presence" in the three main cities that I see this software development application appealing to. Calgary, Aberdeen Scotland, and Houston in Texas.

To contact me call;

• Calgary 403-467-7971
• Aberdeen 44-122-467-6304
• Houston 713-965-6720

We also have a new domain name and it is "www.people-ideas-objects.com". This will be the domain that is used by all of the users of this proposed application. The "front end" of the application will be "Google Apps" which provides each of our users with the basic collaborative environment. This environment will include 10GB of email, collaborative "Google Doc's and Spreadsheets", calendar, contacts, chat, voice, SSO (Single Sign On), home page and hosting of each users content for information, marketing or whatever they may need or want from a web page. (Think what Intellectual Property you have today, and may have tomorrow. And then consider how your intelectual property may augment your retirement income.)

As time passes and we complete the proposed software developments, users will be able to interact with other users of this application. Software developers and other people interacting in the markets and / or firms of the industry. Google provides us with this virtual environment, and then through the Google API (Application Programming Interface), users will interface to the modules I have described here, as well as, the transaction and processing or "back end" of this business application. A virtual environment that will be available anywhere and at anytime. Readers of this blog may find these software developments maturing around the same time most are collecting their gold watch! So get involved today!

I chose this domain name for a very particular reason. To have the potential users of this application begin to think how each of us in the industry will operate in the Peak Oil era. In the "old" economy it was believed that to expand you needed one of three basic building blocks. Capital, Transportation and / or Communication. University of Stanford Professor Paul Romer coined the following comments. (See also here). In summary he has restated the basic elements of the new economy are People, Ideas and Things. My twist on this is the fact that as object oriented software developers, (including those developers that may be working in the industry now), objects are our perspective. A small play on words but I think the potential users of this system should get some good ideas what their efforts may involve after 5:00 PM local time, or for that matter, anytime.

Some select quotes of Professor Romer's.

As one of the chief architects of "New Growth Theory," Paul Romer has had a massive and profound impact on modern economic thinking and policy making. New Growth Theory shows that economic growth doesn't arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress. Along the way, it transforms economics from a "dismal science" that describes a world of scarcity and diminishing returns into a discipline that reveals a path toward constant improvement and unlimited potential. Ideas, in Romer's formulation, really do have consequences. Big ones.

and

reason (magazine): New Growth Theory divides the world into "ideas" and "things." What do you mean by that?

Romer: The paper that makes up the cup in the coffee shop is a thing. The insight that you could design small, medium, and large cups so that they all use the same size lid -- that's an idea. The critical difference is that only one person can use a given amount of paper. Ideas can be used by many people at the same time.

reason: What about human capital, the acquired skills and learned abilities that can increase productivity?

Romer: Human capital is comparable to a thing. You have skills as a writer, for example, and somebody -- reason -- can use those skills. That's not something that we can clone and replicate. The formula for an AIDS drug, that's something you could send over the Internet or put on paper, and then everybody in the world could have access to it.

This is a hard distinction for people to get used to, because there are so many tight interactions between human capital and ideas. For example, human capital is how we make ideas. It takes people, people's brains, inquisitive people, to go out and find ideas like new drugs for AIDS. Similarly, when we make human capital with kids in school, we use ideas like the Pythagorean theorem or the quadratic formula. So human capital makes ideas, and ideas help make human capital. But still, they're conceptually distinct.

reason: What do you see as the necessary preconditions for technological progress and economic growth?

Romer: One extremely important insight is that the process of technological discovery is supported by a unique set of institutions. Those are most productive when they're tightly coupled with the institutions of the market. The Soviet Union had very strong science in some fields, but it wasn't coupled with strong institutions in the market. The upshot was that the benefits of discovery were very limited for people living there. The wonder of the United States is that we've created institutions of science and institutions of the market. They're very different, but together they've generated fantastic benefits.

When we speak of institutions, economists mean more than just organizations. We mean conventions, even rules, about how things are done. The understanding which most sharply distinguishes science from the market has to do with property rights. In the market, the fundamental institution is the notion of private ownership, that an individual owns a piece of land or a body of water or a barrel of oil and that individual has almost unlimited scope to decide how that resource should be used.

In science we have a very different ethic. When somebody discovers something like the quadratic formula or the Pythagorean theorem, the convention in science is that he can't control that idea. He has to give it away. He publishes it. What's rewarded in science is dissemination of ideas. And the way we reward it is we give the most prestige and respect to those people who first publish an idea.

And lastly I have been working on a wiki that will be available to those that have registered as users of this collaborative environment. This wiki will codify much of what has been stated here in this blog, but in a more coherent format. The construction of this wiki should be completed by November 2007, and lastly if you find these ideas of interest do not hesitate to call, or preferably email me.

Technorati Tags: Genesys, Collaboration, Google, Software, Strategy, Wiki

Peak Oil, and what I think it means to the petroleum industry.

I have scrubbed this entry please see the information in the previous entry "A Quick Summary of Where We're at".

A quick summary of where we're at.

The concept of peak oil has finally attained the attention that it should. Now is the time that we do something about it. The National Petroleum Council's report provides the undisputed evidence of the situation that the energy industry faces. I think our first order of business should be to organize the energy industry to achieve greater speed and innovativeness. A new organizational structure based on the industry standard Joint Operating Committee (JOC). An organization that is able to address the issues of peak oil and retire the structured hierarchy from its 100 year reign. But how? In my research I have found that organizations are constrained and supported by the software that is used. This has prompted me to state that "SAP is the bureaucracy." And if a firm wants to change the organizational structure, it needs to build the software to support that new organizational construct first.

For too long the energy industry has suffered with the likes of Oracle Energy and SAP as their solutions providers. Applications that were built for the manufacturing sector, not for the oil and gas industry. What producers need is an application that ties the unique, and difficult, aspects of risk mitigation and the expanding aerial extent of their properties. In other words, the need to deal with other producers who share common interests in a property. If the producer had IT systems that recognized and supported the legal, financial, operational decision making and cultural frameworks of the Joint Operating Committee. And then combine the JOC's frameworks with the Compliance and Governance structures of the hierarchy, with today's collaborative Information Technologies, the alignment would provide the organizational speed and innovativeness that is needed. Innovations are especially needed in the earth science and engineering disciplines where they will lead to new science. Asking the current bureaucracies to keep up with the future changes in the sciences is asking too much in my opinion.

Speed and innovativeness are the highlighted benefits of identifying and supporting the key frameworks of the Joint Operating Committee. Now is the time for the industry to embark on a purpose built system, which identifies and supports the Joint Operating Committee. And unleashes the resources of the industry to solve or mitigate the effects of Peak Oil. Systems that can be used by the smallest to the largest of producers. Would anyone argue the bureaucracies of today will be the solution to Peak Oil?

What would a system based on these changes look like, how would it be different, and could it make the difference?

Lets start out with some fundamental re-thinking in how the problems could be solved. The world's first economist Adam Smith and his theory of the division of labor. What Adam Smith was able to prove in his reorganization of a pin factory can be implemented and provide similar benefits in the energy business. The theory identifies that economic growth is achieved through further divisions of labor and enhanced forms of organization. Smith's application of his division of labor theory increased production 240 fold at the pin factory. The energy industry can expand its capabilities and capacities through a more precise and enhanced division of labor. The other theory of Adam Smith, "The Invisible Hand" of the market will provide the industry with what it needs, when it needs it more effectively then the silo'ed hierarchy of today. A third element of this different thinking is today's Information Technologies (IT) can enable a virtual environment that supports the transactions and interactions of the producers and people involved in the industry.

In a comprehensive review of the theory of markets and firms. I have conducted research based on Professor Richard N. Langlois' writings into the boundaries of the firm and identified a new division between the market and the firm. Through the enhanced and modern information technologies, the market will provide the best solution to the problems that we face in oil and gas. The firm will hold the Compliance and Governance, Knowledge and Learning, Access Control, and Research & Capabilities modules. Whereas the market, or in this instance, the Joint Operating Committee will provide the firm with the necessary resources contained within my module definition of Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Partnership Accounting. Modules that make sense, where the average oil and gas user will inherently understand which module they should use to achieve their work. Gone are the generic categorizations of General Ledger, Accounts Payable and Receivable. These functions remain within the module definition, only as subsystems that support the user activity.

In order that 2030 achieves all that it has to offer. I propose we build systems on the basis of the natural form of organization of the energy industry, the Joint Operating Committee. It is my opinion that the era of cheap oil has allowed our exploitation capabilities to exceed our exploration capability. We need to rebuild the industries exploration capabilities back to the level where the resources and capabilities are able to sustain the market demand. Without these exploration capabilities we will not succeed in what the market demands of us.

The earth scientist and engineers are the key resources necessary to achieve our objectives. Much has been written about the current shortage and their future retirement. At the same time the hierarchy within the corporation has constrained these resources by building similar internal capabilities within each firm. We need to address how the organizations Compliance and Governance is addressed in any new system that we build. Innovation and speed are two attributes of the information technologies current infrastructure, and the module specifications I have described below.

I propose we build systems to solve these issues. Based on the Joint Operating Committee and organized in the following modules;

Petroleum Lease Marketplace

Consider a virtual environment that provides the firms with market access to public lease data and information in a search-able and transaction supported systems. To a large extent what is currently resident as a land departments functional domain would be managed by this module. Critically this is where the majority of lease, agreement and partner variables are captured in this system. Readers interested in further exploring this module can review it here.

Resource Marketplace

How a producer could find the right employees or contractors to assist in the work of the firm. How suppliers and contractors would have agreements recognized by the systems and have the appropriate accounts payable and transaction processing be a natural fallout of work that is done. Human resource and payroll functionality will also be subsystems of this module. This module will provide the firm with a window on the marketplace resources.

Financial Marketplace

A marketplace where users, producers and suppliers within the industry can source the capital and operating needs of the industry. Where banks compete for the producers business, brokerage companies providing their services to the people and firms that are operating in the oil and gas industry.

Partnership Accounting

Or as I am wanting to call it "the algorithm from hell". This module manages the unique characteristics and transaction processing of the Joint Account and the various stakeholder interest's in a property. Consider the differences in reporting requirements between Calgary, Houston and Aberdeen. Currency valuations in both accounting for income statement and balance sheet items, production measured in metric or U.S., daily and monthly production values, nominations, penalties, casing point elections, before and after payout and other related oil and gas accounting system requirements that are handled appropriately in each company. But lets now consider how the energy industry may need to operate, at the Joint Operating Committee level.

I think the redundant duplication of capabilities built within each firm will need to be addressed in order to solve the energy problems we face. And particularly the shortage and retirement of the brain trust of the industry. Instead of each firm building up what they need to operate the properties that they are designated as operator of, the industry will need to pool the resources necessary for the individual joint accounts. Each company providing the available resources they have to each Joint Operating Committee. This brings the difficulty of managing and reporting to a higher level of complexity. Where a JOC may now receive 8 seconded employees from 8 different producers. The costs of these resources being incurred, probably not in proportion to their interests, will need to be recognized in the costing structure of the joint account. Particularly since the earth scientists and engineering efforts necessary for a property may grow in terms of labor input per barrel of oil.

These are the types of issues that are addressed and managed through the Partnership Accounting module. Please read the entire entry that I wrote about Partnership Accounting here. The other 800 pound gorilla in the room is how these people interact. Who has the authority, and what structure is recognized from these 8 different companies, with different professional backgrounds. This is solved through the Military Command & Control Structure that is the Governance element of the Compliance and Governance module noted below.

Access Control

This application will be unique in that it is a software service. The application will be accessible anytime and anywhere which brings a significant level of security requirements to conduct properly. Key to the transparency of all aspects of this system, the source code for the systems will be available to any and all users of the system for their perusal. Taking the "Given enough eyeballs, all bugs are shallow" comment of Linus Torvalds about how source code should be reviewable by as many people as possible.

Compliance and Governance

Compliance being the sole reason of the bureaucracy today, the needs of the SEC and accounting for Sarbanes Oxeley have driven the organizations into making the organization all about compliance, in my opinion. The business of the business has been lost as a result. Companies have become reporting entities that have lost sight of what the energy business is. Compliance is a necessary part of any organization and this module will allow the management to maintain their status is in compliance of the regulations. The key differential is that the compliance is a fallout of the process of doing the business. I wrote about SEC Chairman Christopher Cox's introduction and development of a system that will mirror the companies compliance. This compliance framework will be built with the Governance mentioned below, and the financial, legal, operational decision making and cultural frameworks of the JOC.

Under the Governance module we need to approach the use of the scarce human resources in a more holistic manner. All member firms of a Joint Operating Committee should provide resources that are designated to specific properties. The concept of an operator can not last if we are to independently build and duplicate capabilities within each firm. The role of the Market has to provide some elements of these capabilities. Many of the accounting and land procedures will need to be amended to achieve this pooling of resources within the member firms of the Joint Operating Committee. How does a group of people committed to a JOC participate and recognize the order and structure of the people employed there.

I have proposed a solution for this by implementing an element of Military Command & Control structure. Where people are designated at a certain level within their profession and like a Captain in the U.S. Army may find himself reporting to a British Major with a variety of other NATO forces under his command. The effective pooling of all JOC participants resources can then enable the structure to be deployed, and each individuals role and responsibilities are assigned appropriately. The costing and associated issues are part of the Partnership Accounting Module noted above. I believe this is one of the critical means of addressing the National Petroleum Council's dual problems of the shortage and retirement of the industry brain trust.

Research and Capabilities

Innovation is a critical component of the capabilities of this reorganization. It is at the Joint Operating Committee level that these innovations are expected to rise. However, my research has discovered that the risks to the firms in terms of its capabilities will fall into jeopardy. That to capitulate all of the science and innovation to the JOC would be a mistake similar to the problems diagnosed of Chrysler. The scientific advances and the implementation of the new sciences and innovations have to be managed by the firm, otherwise it will fail in its ability to provide the overall direction of where it should be heading. Research in the firm will take on a new role in this type of organizational structure. I foresee most of the engineers and earth scientists being employed by the firms and accessing the most advanced tools and research capabilities. This is what will be required to build the exploration capabilities back to what they were prior to the cheap oil era.

Knowledge and Learning

This will be the repository for the firms capabilities and research. It will also be a window to the public data that is associated with the industry. Companies will search and discover what is publicly available by other firms and seek out the information regarding what is possible.

I am throwing another paradigm in here and am asking the industry to dispatch its secretive ways and begin to use the legal means of securing their intellectual property. Copyrights are earned through publication. Patents are the most sound manner to ensure your invention and innovation hold value in the industry. The ability to submit ideas in a safe environment benefits the firm in securing its intellectual property, and allows the rest of the industry to benefit from those ideas immediately. This module is for that purpose.

User Participation

I would recommend anyone who has an interest in these topics review the archives of my blog at http://innovation-in-oil-and-gas.blogspot.com or contact me at paul dot cox at gmail dot com if you would like to participate. Without active user participation, this project will never happen, so please lets get started.

This proposed application will of course be the largest, purpose built system for the energy industry. Costs are projected on a preliminary basis in the hundreds of millions. A very costly project, but one that only has to be paid for once. If we amortize the building and maintenance of this system over the entire industry, I believe the costs to each producer will fall within the single digit percentile of what producers are currently paying SAP and Oracle.

I am also asking if any producer or investor wants to donate or sponsor this project, please push the PayPal button on the website and make a contribution so that we can begin to make 2030 real.

Finally I would like to mention that over my thirty year career in oil and gas. I have found the industries resilience and ability to address tough issues has impressed me many times. Now is the time to take that inherent capability of the industry, organize it and make 2030 a reality.

Technorati Tags: Genesys, Peak-Oil, Ideas, People, Modularity