Coase, the Nature of the Firm, 1937

Professor Ronald H. Coase, a Nobel Laureate in Economics has been referenced in many of the papers that Professor Richard Langlois has written. Since Professor Langlois' work has provided the bulk of the thinking that went into the Draft Specification, I thought it would be worthwhile to go back and look at some of the papers that Professor Langlois has cited as influences in his papers.

The paper that we are reviewing is the Nature of the Firm which Coase wrote in 1937 and captures much of the thinking that won him the Nobel Prize. There is a follow on article to this entitled New Institution Economics written in 1998. I acquired both papers through JSTOR and they are available there to those with access.

Langlois' key attributes in the Draft Specification were the defining of the boundaries of the firm and market, and transaction cost economics, particularly "dynamic transaction costs" which he defines as;

The need to bring otherwise decentralized knowledge together & co-ordinate it especially in circumstances involving learning and the generation of new productive knowledge. Langlois

A Joint Operating Committee (JOC) is represented by many different producers. If we are to eliminate the excess demand for human resources that exists in the marketplace today, and is projected to become much worse with the pending retirement of the brain trust. Then we need to eliminate the redundant duplication that exists from each producer aspiring to conduct all the operations that are necessary within their organization themselves. Specifically what resources are available if we pool the resources of the working interest partners in the JOC.

Implementing the Military Command & Control metaphor that assigns the roles and responsibilities across the organizations in much the same manner that NATO does; the JOC adopts a governance structure that is workable. This is particularly important as the expected volume of engineering and earth science applied to each barrel of oil is increasing each year and is the reason the bureaucracies costs are escalating and their reserves are declining. Based on Langlois dynamic transaction costs, there will be additional costs associated with these activities.

This post being a follow on post of our review of Professor Sidney Winters. In which the definitions of what is necessary for a firm to approach both the short and long term horizons of the business environment. A clear separation of the types of work being conducted on either side of that dividing line or boundary between the firm and market. Coase notes the following with regard to the topic at hand;

Our task is to attempt to discover why a firm emerges at all in a specialized exchange economy. p. 390

I wish to highlight an area of conflict that currently exists in the industry. That is the capital and operating cost escalation in oil and gas is attributable to the "greed" of field suppliers and contractors that want to earn their due when the sun is shining. This may be the case, however, I would suggest that the companies inability to work with the suppliers and treat them as extensions of their organization is the root cause of this cost escalation. The people in the field should be extensions of the producers organizations, they are how the firms can acquire the necessary "local knowledge", by using the market.

The main reason why it is probable to establish a firm would seem to be that there is a cost with using the price mechanism. The most obvious cost of "organizing" production through the price mechanism is that of discovering what the relevant prices are. The costs of negotiating and concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account. pp. 390 - 391

Lets take a look at the business of the metaphorical widget factory. Most of the widgets are manufactured or assembled in-house with staff that are applied efficiently on the basis of their specialization. Their domain of operation is essentially contained within their four walls and they are able to see and realize the obvious and not so obvious. This is somewhat of a static situation throughout the term of the life of the firm. Oil and gas operations are scattered. They are short term operations based on some form of geological theory that is being applied, tested, and some of the time, rehabilitated. The daily production of oil or gas is a 24 hour operation that provides strong cash flow and earnings with little if any human supervision during the production period.

The oil and gas business would seem based on this description to employ the resources of the market on a contract basis using the full extent and value of the price system. To do otherwise is beyond the scope and scale of the producer company. These costs are inherent in the business and as such we should optimize the energy firm in the use and processing of transaction costs. These elements of the Draft Specification are detailed in the Accounting Voucher module.

Adam Smith explained that the productivity of the economic system depends on specialization (he says the division of labor), but specialization is only possible if there is exchange-and the lower the costs of exchange (transaction costs if you will), the more specialization there will be and the greater the productivity of the system. p. 73

All economic growth is achieved through greater levels of specialization. That is a known fact. For oil and gas producers their enhanced productivity will arise as a result of the effectiveness of implementing this higher level specialization. A tall order when the activity levels and scope of the sciences being applied to producing properties are so high. This is the point that I am trying to make. If an enhanced level of productivity is to be achieved in the industry, the field operations will need to implement and host a greater division of labor. That also applies to the JOC, where the pooling of resources from the participant firms will increase the division of labor at that level.

I now want to focus on the group of individuals that make up the long term view of the operations group contained within an oil and gas firm. These people are actively looking for better ways in which to conduct their operation. Focused on the sciences, they innovate and develop the means and methods for enhanced oil and gas exploration and production. Using the market to implement these, the firm needs to be actively involved in the business development of that market. Such that a speed and innovativeness is attained based on the understanding of the underlying sciences.

How the Draft Specification deals with this particular issue is through the publication of generic data of the producers planned capital expenditures. This interface of the Petroleum Lease Marketplace provides the market with an understanding of what and where the industry will need to be doing in order to achieve their goals. Suppliers are then able to better read what it is that they are expected on a long term basis. Producers on the other hand are able to see through the Research & Capabilities module those ideas of interest. And then engage the marketplace to develop and build those capabilities.

The alternative is to continue along in the muddling sort of way that has brought us to this point. The companies today telling the market place that it is greedy is only making the situation worse. The companies expect the market to read their mind and build the capabilities for the future. To continue to have this being done on speculation is going to further retard the growth of the industry. Holding 100% of the industries revenues and doling them out as dog bones provides a lot of power to the industry. With that power comes the responsibility to effectively ensure that the markets they use are operating correctly. It is my opinion they are not.

It is commonly said, and it may be true, that the new institutional economics started with my article, "The Nature of the Firm" (1937) with its explicit introduction of transaction costs into economic analysis. p. 72

How this of course is implemented is through detailed software applications built specifically for this purpose. This is one of the many opportunities available to the industry from this software development project. Some may say that I am reaching here in terms of the ambition of this module, I believe Coase supports these with the following comments.

In effect it is the institutions that govern the performance of an economy, and it is this that gives the "new institutional economics" its importance for economists. p. 73

and

Economists often take pride in the fact that Charles Darwin came to his theory of evolution as a result of reading Thomas Malthus and Adam Smith. But contrast the developments in biology since Darwin with what has happened in economics since Adam Smith. Biology has been transformed. Biologists now have a detailed understanding of the complicated structures that govern the functioning of living organisms. I believe that one day we will have similar triumphs in economics. But it will not be easy. Even if we start with the relatively simple analysis of "The Nature of the Firm," discovering the factors that determine the relative costs of coordination by management within the firm or by transactions on the market is no simple task. p. 73

Information & Communication Technologies (ICT) are not the solution as much as the means in which new organizational structures are able to resolve and provide these features.

This is what I said in a lecture published in Lives of the Laureates (Coase, 1995 p. 245): "The costs of coordination within a firm and the level of transaction costs that it faces are affected by its ability to purchase inputs from other firms, and their ability to supply these inputs depends in part on their costs of coordination and the level of transaction costs that they face which are similarly affected by what these are in still other firms. What we are dealing with is a complex interrelated structure." Add to this the influence of the laws, of the social system, and of the culture, as well as the effects of technological changes such as the digital revolution with its dramatic fall in information costs (a major component of transaction costs), and you have a complicated set of interrelationships the nature of which will take much dedicated work over a long period to discover. But when this is done, all of economics will have become what we now call "the new institutional economics." p. 73

The alternative is to continue doing the same things with the same organizations with the same results.

This change will not come about, in my view, as a result of a frontal assault on mainstream economics. It will come as a result of economists in branches of economics adopting a different approach, as indeed is already happening. When the majority of economists have changed, mainstream economists will acknowledge the importance of examining the economic systems in this way and will claim that they knew it all along. pp. 73 - 74

Please join me here for this difficult but worthwhile task.

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Edith Penrose on the development of oil and gas.

I am reviewing a paper that was written by Professor Edith Penrose. The title of the paper is "Limits to the Growth and Size of Firms." This paper was published in The American Economic Review in May of 1955. Her papers are available through the various Journals that published the articles. Unlike most of the current research these papers are accessible only through paid services. In this case I was able to download them from JSTOR.

While I was at JSTOR, I ran across two very interesting Penrose papers regarding the oil and gas industry. I highly recommend that you pull down a copy and read them both. They reflect the dynamics of oil and gas pricing on a global basis.

The two documents are entitled:

Middle East Oil: The International Distribution of Profits and Income Taxes. Published in Economica, New Series, August 1960

and

Importance in the World Oil Industry. Published in International Affairs January 1979

Anyone suggesting that our current high energy prices are a result of speculation should put these two papers on their must read list. The depth of analysis, the lucid and objective discussion of how energy prices were established during the industries "easy era" is impressive.

One of the key conclusions she makes is that OPEC was a necessary mechanism for the market to function correctly. It is difficult to recall the days when the abundance of energy conspired to ruin the business at any moment. Articles like the 1999 Economist cover story "Drowning in oil" when commodities were in surplus, just created more long term problems for the industry.

Although written in the early 1960's and late 1970's Professor Penrose' articles show the complexity of the information inherent in the pricing of oil. The articles also intimate the power that OPEC has in these times of reduced supply and very high demand, however, this week saw the Saudi's somewhat turn their back on the cartel.

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Professor Robert Shiller

"Shiller Sees Subprime Crisis as Opportunity for Change"

Bloomberg has some of the best PodCasts about the economy. Particularly Tom Keene's "On the Economy" is a must for everyone that participates in the economy. The guests provide the show with depth and analysis that I don't think is available anywhere else. Truly original and informative, make sure you also check out the "Best of On the Economy". This particular PodCast is with Professor Shiller.

Professor Shiller's fame is partly attributable to the S & P / Case - Shiller housing index that is widely quoted today. He is also the Arthur M. Okun Professor of economics at Yale University. (Check out his new book "The Subprime Solution".) What he sees in this current economic malaise is

...an opportunity for change, for fundamental change. Where the financial crisis is a systemic mis-allocation of capital, and we can do better. We want to go forward, we can think creatively.

Obviously he is talking about the sub-prime and housing related issues, but I think in his comments we see the same information that Professor Carlota Perez has been suggesting for the last few years.

Perez has researched the previous economic cycles and has mapped out how the long wave economic cycles impact the day-to-day economy. She has suggested that due to Information & Communication Technologies (ICT) we have a 25 to 30 year economic up-swing ahead of us. In her writings she stated that the .com meltdown was not substantial enough to mark the end of the previous long range cycle. (Autos) Projecting that a housing bubble may be the beginning of the end of the old economic cycle and the commencement of the ICT based economic upswing. A projection she made before 2004.

Perez has also claimed, and is confirming Shiller's assertion, that the financial capital markets should be re-regulated. And she suggests that product capital markets will be the new drivers of value. Anyone looked at Apple's stock recently? Shiller takes this one step further and suggests that our reliance on the Efficient Market Hypothesis is flawed. Neither of these professors is suggesting the end of markets. What they are saying is that it is necessary to have broader regulations to ensure leverage is not enabled again through innovations in the financial marketplace. Both Professors are quick to point out that highly engineered financial innovations are good and necessary, but regulations are needed to stop the over the top leveraging of wealth.

These ideas resonate with me, and as a result Professor Perez' theories have made a substantial contribution to the Draft Specification. But are they right? And here we see the beginnings of the resolution to the decline of the auto phase, and the beginning of the ICT stage in the current productivity numbers.

We are rocking, economically that is. The annual U.S. productivity was revised upwards to 4.3% in the second quarter of 2008. Based on most of the comments on that page it is assumed that this level of productivity growth is due to people being told to do more with less. I think they show that ICT is having a substantial, and predicted, effect on the economy. Perez suggests these "golden age" attributes are systemic through the various economic cycles that she has studied.

In terms of re-regulation Professor Shiller points out the Blueprint that Treasury Secretary Paulson published in March 2008. Therefore all the parts are in place for this golden age to begin and carry us for the 25 - 30 year life.

A lot is happening in the economic world. Opportunities are difficult to focus on, however, I think we have to look beyond the current and looming train wrecks to see where the world is heading. These two Professors help to identify the direction. A direction where People, Ideas & Objects is moving to. If you wish to participate in this development please email me. If you wish to donate please use the PayPal button in the left hand column.

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Professor Sidney Winter, Deliberate Learning and the Evolution of Dynamic Capabilities. June 2002

I have seen first hand the effects of blogs and wiki's in the development of this software application. These two technologies are transmitting the ideas contained within these pages throughout the world to like minded individuals. The effectiveness of this communication is intoxicating. Everyone that has an interest in this project can be metaphorically and literally on the same page. The communication of these ideas in any other medium would be impossible.

I feel my effectiveness and productivity are enhanced substantially by so many people reading and learning so much about these ideas. The beauty of these technologies is that the people who join this community will immediately find their effectiveness and productivity enhanced as well. As individuals join the community they're able to contribute and build off these ideas. Which brings us to this article by Professor Winter.

Professor Winter has been a valuable contributor to the establishment of the ideas contained in this development project. The label on this web log has 10 entries attributed to his papers. Winter's special area of expertise has been organizational learning and knowledge management. What he describes in this paper is directly applicable to this project, and therefore can help us to define the many pitfalls and opportunities we may encounter.

In his introduction he is very specific as to the type of organizational learning and the dynamic capabilities that an organization can attain.

This paper investigates the mechanisms through which organizations develop dynamic capabilities, defined as routinized activities directed to the development and adaptation of operating routines. It addresses the role of (1) experience accumulation, (2) knowledge articulation, (3) knowledge codification processes in the evolution of dynamic, as well as operational, routines. p. 339

The discussion therefore is not just about the knowledge repositories that we have, but also the speed at which organizational learning occurs. Professor Winter provides a framework in which we can analyze these attributes, defining them as;

Operating routines; Learning processes geared towards the operational functioning of the firm (both staff and line activities).

Dynamic capabilities; as the firm's ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments. p. 340

Dare I ask if it is possible to have this dynamic capability and operating routines inherent in our wiki within the first or second iteration of the Preliminary Specification? That is to say, can we capture the substance of the industries operating routines within the very initial work. And then, have the performance of the activities in our wiki actually impact the way in which the industry operates. Is it possible that, even before we commence the coding of software that these knowledge repositories are the key element in moving the industry understanding forward? I think that is what is being suggested here by Winter as he states.

Beyond theory building, we hope that the present paper provides useful guidance for future empirical inquiry into the role that articulation and codification processes play in creating dynamic capabilities. That is its principal purpose, and although the existing empirical base is thin, we consider that there is already good reason to believe that significant progress in that direction is quite possible. p. 350

and

DEFINITION. A dynamic capability is a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness. p. 340

Based on my understanding of the nature of the idea of using the Joint Operating Committee and those contained in the Draft Specification, our opportunity is not to just document the business within our knowledge repositories, but the ability to travel at a speed and understanding that is in excess of the earth sciences and engineering demands of the producers. Where the difficult questions are asked and with the collective intelligence of this community we are able to move the industry, build the software to support those organizational definitions and provide the producers with these dynamic capabilities.

Professor Winter defines the characteristics of the Learning Mechanisms and their influence on operating routines.

• Experience accumulation.
• Knowledge simulation.
• Knowledge codification.

In the Draft Specification we have enhanced the role of the producer firm by adding two separate and distinct types of work carried out by those that work for the firm. Determining their focus as being either long term or short term is the definition between the two types of workers. These categorizations are contained within the Knowledge & Learning, and Research & Capabilities Modules of the Draft Specification. Whereas the Knowledge & Learning is focused on the operational efficiencies of the JOC and the Research & Capabilities focused on the long term and strategic development of the necessary attributes to expand the "Dynamic" capabilities of the firm.

In addressing why this is done, Professor Winter states:

In a relatively static environment, a single learning episode may suffice to endow an organization with operating routines that are adequate, or even a source of advantage, for an extended period. Incremental improvements can be accomplished through the tacit accumulation of experience and sporadic acts of creativity. Dynamic capabilities are unnecessary, and if developed may prove too costly to maintain. But in a context where technological, regulatory, and competitive conditions are subject to rapid change, persistence in the same operating routines quickly becomes hazardous. Systematic change efforts are needed to track the environmental change; both superiority and viability will prove transient for an organization that has no dynamic capabilities. Such capabilities must themselves be developed through learning. If change is not only rapid but also unpredictable and variable in direction, dynamic capabilities and even the higher-order learning approaches will themselves need to be updated repeatedly. Failure to do so turns core competencies into core rigidities (Leonard Barton 1992).

In the future the oil and gas producer is competing based on their land base, engineering and science based understanding and application, these are the critical skills to have. An innovation based producer that is dynamically generating changes needs to separate the research and implementation of ideas. Idea generation does not need to be present in the JOC. Confusion and mistakes would arise if the two functions were joined. Change and innovation are the constant that will drive the dynamic capabilities in the producer firm. Where the more dynamic the firm, the more innovative and successful.

To somewhat get back to the topic at hand. I started this entry on the basis of the collective understanding and application of knowledge in this blog and the wiki that holds the Draft Specification. This latter information shows how these same principles apply to the development of the systems in oil and gas. The 11 module draft specification is to the oil and gas producer as the blog and wiki are to this community. Winter discusses an important element of how these are achieved.

Opportunity Costs. Conducting debriefing sessions and updating tools after the completion of the task cannot be done too often without diverting attention away from day-to-day operations. A balance between explicit learning activities and execution activities, between thinking and doing, is essential (March 1991, Mukherjee et al. 1999). March et al. (1991) argue that with highly infrequent events, organizations can learn from quasi histories (i.e., "nearly happened" events) or from scenario analysis. Both mechanisms entail a substantial amount of investment in cognitive efforts and, most likely, rely on the creation of written output or on the use of electronic support systems to identify and make all the assumptions explicit.

Making the analogy between the wiki and blog of this software development project, and, the Research & Capabilities and Knowledge & Learning Modules for the producer firm. These are the higher value added processes that make a producer more competitive in the future. These tasks and activities are what would be considered incremental to what the energy companies are conducting today. Almost exclusively focused on the immediate quarter has achieved the optimization of the near term profits. However the focus on execution precludes the ability to generate and build value over the long term. This separation of roles and responsibilities is what the Draft Specification modules are providing the producer.

The point of this entry, I guess, is to suggest that these higher level learning processes are supported and enabled in today's technologies. Whether it is the blog and wiki used in defining the optimal organizational makeup of an oil and gas producer. Or the Draft Specification and understanding that underlays the firms ability to find and produce commercial quantities of energy, technologies role in enabling the higher organizational performance are critical, and I would suggest necessary. Winter suggests;

The framework introduced in this paper, particularly the knowledge evolution cycle and the relationships among learning, dynamic capabilities, and operating routines-constitutes, we believe, a significant clarification of the structure of the phenomena. This inquiry is, however, still in its infancy. We know little, for example, of how the characteristics of the organizational structure and culture interact with the features of the task to be mastered in determining the relative effectiveness of the various learning behaviors.

Basing much of the Draft Specification on the solid research of Dosi, Langlois and Winter provides sound academic founding for using the JOC. I believe I have also made the case that the bureaucratic companies are unable to make the transition to this type of system. As well as the case that the bureaucratic company is failing. The difficult task that is necessary to make the People, Ideas & Objects application modules real is the investors money, and the oil and gas worker. Please contribute to this by selecting the PayPal button to provide the much needed revenue, email me your information so I can send you an invoice, and join me here.

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What can we learn about Fannie and Freddie.

A) Shareholders are toast.

B) The management get off easy for running the companies into the ground.

Is this a reflection of the times that we live in, or are the risks associated with the business environment too high to be left in the hands of bureaucratic managements? What is shocking to me is the ease at which people can just walk away from the mistakes they made and let the owners and investors take a bath. Am I wrong or is this the newest form of "moral hazard" that we face.

In oil and gas we see the management have taken the opportunity to issue more stock options then can be imagined. It is clear this has diverted their attention from running the company to gunning the stock. Retirement planning has never been so easy or profitable.

Fannie and Freddie are showing the justification for a more active investor class. The opportunity to do something about it for those investors in oil and gas, is documented in this software development project. Join me here, and use the PayPal button to make this project real, and lets get developing.

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Long-Term Funding Concerns.

This entry attempts to describe how I see the current and long term funding of this project. What roles individuals may play in this project and how this application ultimately gets built.

The name of this software development project is People, Ideas & Objects. These three attributes are what are necessary to solve the worlds demand for energy. Innovation based on the principles established is captured in the Draft Specification; are supported through identifying and enabling the Joint Operating Committee (JOC) as the key organizational construct of the industry. The JOC is the legal, financial, cultural and operational decision making frameworks of the industry. This is on a global basis.

This development is not a small task. In May 2004 I quoted the cost to the Canadian producers of this application at approximately $78 - $85 million over a four year period. These costs did not include the producers cost of providing people to define and support what the application should be. The scope of the application is now global, as defined and based on the users needs, which include multiple currencies, languages, royalty and compliance frameworks. These frameworks have conspired to increase the budgeted costs substantially. Another component of the cost increase will be the 36 hour work day that we will be in development. Increasing the intensity of the work being undertaken creates a similar budgetary effect. Lastly expecting the companies to forward the money to compensate the users will not happen. We therefore need to raise the necessary funds to compensate our user base for their ideas and leadership. How much this application will cost in the long run is unknown at this point, and it should not be a concern. The oil and gas industry is moving to a $4.7 trillion annual turnover and that is the point. The producers General and Administrative costs of building and using this application will be incidental to the impact it will have on their innovativeness.

Continuing to wait for the oil and gas companies to fund these development will be both fruitless and long. They can not transition from what they are, to what is described in the Draft Specification. If they could change their stripes they would have done so by now, as this software development opportunity was presented to them in September 2003. Expecting them to put money where they can not use it is a short, vain and career limiting activity.

Who else, other then the People who work in oil and gas, are motivated to build and iterate on the concepts described here? What is the motivation? Do People own their own industries? Yes, but indirectly. The future will be the same only direct ownership will be enabled through the Information & Communication Technologies (ICT). Intellectual Property (IP) is collectively held within the People, Ideas & Objects code, blog and wiki's. The license in use here grants an irrevocable license to use the IP in any manner other then the compilation of the code to its binary, and hosting of said binary on a service basis. Everything else is limited by the knowledge, skills, experience and education of the People who use the People, Ideas & Objects application in their day to day work for their oil and gas clients / employers.

How does this application get developed? People from beginning to end. People who are oil and gas investors, that are of a like mindset and realize the bureaucracies can do nothing to transition to this new innovation based environment. People who are developers who want to tackle a difficult project and work hand in hand with the applications user base. People who are involved in defining this application and tailoring it to the needs of the users and producers. People who are the producers of oil and gas who need systems and organizations that are able to meet their challenging engineering and earth science demands.

These are the People that will make this happen. What we need now is to establish our revenue from this investor class. The sooner that they are able to see the make-up of this marketplace, and the need for the bureaucracy to accelerate its pace, and how futile that expectation is, the better. After all they will be the first to be affected by the bureaucracies slow pace, and therefore they are the ones that need to start funding these developments. Funding them so that they, the producers, have competitive options in how they'll manage their oil and gas assets.

Next I feel that the affected governments need to carry some of the financial load. They have an interest in accessing the mechanisms used to calculate their royalty income. After the government has stepped in to carry some of the freight. That is when we will see many of the investors become the producers. Simply by eliminating the bureaucracy and the corporate mechanisms that developed over the last century. Mechanisms that keep the management and legal professions well ensconced. That is when the investors will be able to pay to support this community through sales of oil and gas commodities. A community based on providing the needed software application, and the associated service based offerings of the People who work in oil and gas.

This is how I foresee the nature of the oil and gas industry developing. The only alternative has these same bureaucracies using the same applications producing the same results. Not something that society can afford to let happen. The ability to proceed and build off of the Draft Specification at this time will accelerate the opportunities for all those associated with this community. I ask that if you are able to pass this information on to an investor that fits this definition, I would appreciate it. We have to make this project "real" and the only missing ingredients are the funds and the People that will join this project. Please, join me here.

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Strategy and Business on Innovation

This article was written by A. G. Lafley the chairman and CEO of Proctor & Gamble, and has many valuable features and information regarding how innovation was implemented into P & G. I highly recommend the article, it can be downloaded from here. The article is introduced by Ram Charan who co-authored a book with A.G. Lafley entitled "Game-Changer: How you can drive revenue and profit growth with innovation". I am only going to review the opening comments of Ram Charan

The opening paragraph captures the relevance to this software development project and the need to enable the innovative oil and gas producer.

THE HEART OF A COMPANY’ S BUSINESS MODEL should be game-changing innovation. This is not just the invention of new products and services, but the ability to systematically convert ideas into new offerings that alter the very context of the business.

The cheap energy era has passed. This much is understood and agreed to by the consuming public and the energy producers. The earth science and engineering disciplines; which are at the heart of the industries value proposition are accelerating in speed and complexity. It is also agreed that the volume of earth science and engineering per barrel of oil is increasing and that it will not become easier to produce. From reviewing Professor Giovanni Dosi's paper in the preliminary research report, we know that innovation generates new science, which produces new innovations and so on. How can a firm based in the oil and gas industry compete on such a dynamic and changing field of knowledge?

One aspect of building an innovation culture deserves more attention than we could give it in The Game-Changer: designing a social system that would spark new ideas and enable critical decisions. In the article that follows, A.G. explains the human factors that fostered innovation at Procter & Gamble. It could be thought of as the “missing chapter” to The Game-Changer; a vital component that isn’t always obvious, even to experts, precisely because it is so fundamental.

And for oil and gas that has to be the user-based development of the People, Ideas & Objects application, based on the Draft Specification. This project has to find new sources of money and leadership to fill-in the many voids of the overall vision. If you know of someone who could help to financially support this project please do what you can to bring their attention to this. Ninety-five percent of the ownership of the oil and gas industry is held by individuals. Individuals who are the investors, users and developers of the People, Ideas & Object application. Join me here and lets build this software.

The PayPal button on this website will gladly take donations that can further us along in the road we are headed. Even if you can only contribute $10.00 we will be that much further ahead.

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A Budget and a Plan.

More and more I feel the case for proceeding with this software development project has been made. I need to move-on from griping to the more constructive activities of budgeting and planning for this projects development. So lets start slow and see what develops.

This is what I have come up with for year six.

• I would like to see up to 100 individuals contributing to the Preliminary Specification. Google charges $50 / user for the collaborative environment. ($5,000)
  
• Preliminary testing of the MySQL database with the PPDM data model on Sun Project Hydrazine. (approx $25,000)
  
• Hardware and software. Define technical architecture. ($50,000)
• Overhead. ($60,000)
• Contingencies. ($40,000)
  

A budget of $180,000.00 for the entire year does not seem like a bold move. I agree, however, we have no idea where the revenue will come from to make that possible. So instead of projecting an unworkable demand in our first year of development, I want to ensure that we aspire to perform and begin the difficult process of generating revenue; while also starting the comprehensive work of defining the Preliminary, Detailed and Final Specifications.

Some of the initial projects that I have established in the wiki include:

• A1) Develop a user-based definition of Security & Access Control requirements.
• A2) Develop User Archetype's with Military Command & Control Metaphor
• A3) Develop and test the Security & Access Control Module using Sun's Federated Identity and Project Hydrazine.
• A4) Go live with Security & Access Control with Single Sign On of People, Ideas & Objects
• B1) Algorithm research. Establish resource requirements for comprehensive algorithm research.
• B2) Determine the languages People, Ideas & Objects should have.
• B3) Develop global standard chart of accounts for upstream industry.
• L1) Preliminary testing of MySQL database with Petroleum Producer Data Model.
• L2) Determine the interface elements with Java WebStart and JavaFX.
• L3) Client, Producer, and JOC Client Side Application design and build interface framework.
• L4) Can Google Translate API dynamically convert language attributes in application modules.

These are only to start the process. The list of projects are open for all users to participate and post new or other projects. These projects are part of the Project Management Office that will develop in time with the Specifications. The process to begin your participation is as follows:

User and Developer Task List

Users and Developers are compensated for their time involved in this development. (Please note that with no revenue large enough to compensate the potentially 100 users. This policy is amended for year 6 only. The first 100 participants will have the advantage of establishing their own service based offering in their geographical location, and therefore will not be compensated until the beginning of year 7.) To initiate your involvement in this community please review the following.

- Review the Preliminary Research Report, the archives of the innovation in oil and gas web-log and Draft Specification. Gain a strong understanding of the differences of using the Joint Operating Committee. How the nature of the differences of this system contrast to traditional ERP systems. How these differences are captured in the module specification of which the Performance Evaluation™, Analytics & Statistics ™, Research & Capabilities Module™, Knowledge & Learning ™, Compliance & Governance ™ Financial Marketplace ™, Resource Marketplace ™, Accounting Voucher ™, Partnership Accounting ™, Petroleum Lease Marketplace ™ and Security & Access Control ™ Modules. How the division, or boundaries, of the firm and market definitions allocate roles and responsibilities. How the JOC provides the ideal "Market" solution to the oil and gas industry. And the changes in the firm definition and its somewhat expanded role and focus. Additional focus on the way that people interact through these systems and how accountants capture the changes in the business through the Accounting Voucher™ Module. Ideally reading the papers of Dosi, Langlois, Winters, Baldwin and Williamson (on the innovation blog) should be reviewed by Users in this application.This would only help in better understanding what needs to be done in this applications modules.

- Sign the Copyright License. (E-mail me paul.cox@people-ideas-objects.com ) I am the beneficial owner of the copyright of the ideas expressed in the blog, wiki, and software development. This intellectual property must be maintained and held in pristine condition for these ideas to help the industry, and be available to all the participants in this community. Therefore it is necessary that everyone involved in this software development project have unencumbered access to all of these concepts. Both for software development purposes and their own service operation. The Copyright or End User License Agreement provides for this, and, assigns the copyright for the work done by each User back to me where it remains available to everyone. As mentioned earlier in this specification, the users are compensated for their time and should consider this software development project as a cornerstone of their future revenue and income. And to particularly those Users that wish to generate their service businesses based on this software offering! Please consult a lawyer if you have any questions.

- Submit up to 2,500 words on how and what you could provide to this developing community. What are your experiences in oil and gas, where do you think the industry could be more innovative if it had the software to enable it. What would that software look like and how you could contribute to its making. These User and Developer summaries will be posted in the People's wiki and enable user search and discovery of like minded people and resources.

Ideally having 100 people sourced from Texas, Aberdeen and Alberta would provide the coverage to take the Draft Specification to the Preliminary Specification stage. If you have an interest in this software please start this process today.

This project has to find new sources of money and leadership to fill-in the many voids of the overall vision. If you know of someone who could help to financially support this project please do what you can to bring their attention to this. Ninety-five percent of the ownership of the oil and gas industry is held by individuals. Individuals who are the investors, users and developers of the People, Ideas & Object application. Join me here and lets build this software.

The PayPal button on this website will gladly take donations that can further us along in the road we are headed. Even if you can only contribute $10.00 we will be that much further ahead.

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The brilliance of Google's G:Drive

Regular readers will know that I have waited for Google's mythic G:Drive service to arrive. Well the good news is its here. And apparently, I have been using it for a number of years. This product launch shows me that Google remains innovative, and how it is able to keep ahead of the competition.

Google's G:Drive provides not only the hardware storage, but also the applications the user wants. Documents, spreadsheets, presentations, .pdf's, and standard forms and templates. Recall that Google Docs is the standard collaborative environment for this software development project. The method that Google uses here makes a lot of sense to me, but that is only the beginning.

When using Google Docs, the user is provided with one version of a document located in the "cloud" as the only copy that you need. You can access it from anywhere that you have an Internet connection. Collaborators contributions and content readers are easily added through a simple interface. There are also multiple opportunities to publish the content on the web. For example I use Google Docs in my @people-ideas-objects.com account to post to this blog. 

Why is this important to this software development project.

We use Vouchers as has been described in the Accounting Voucher Module's Draft Specification. Vouchers are the catch-all phrase of accounting to represent an accounting document. Processed by the systems, these documents are a critical part of any organizations accounting records. The treatment of these Vouchers in People, Ideas & Objects applications are essentially the same things as documents in Google Docs. People collaborating on one version of the Voucher with multiple versions being recorded as the voucher develops. Multiple versions that can be used to establish an audit trail.

Recall that each voucher is access enabled to the authorized personnel in each producer company represented in the JOC. Stored in the cloud, the people with authorized access have only one place to look for the right, or most current, version of the Voucher document. And that one version is not bound in the physical world, many people can view and edit it at the same time. One major difference is the act of closing a voucher to further changes is something that will be built within the standard general ledger interface.

This also applies to for A.F.E.'s, Agreements, Leases, Mail Ballots, Truck Tickets etc. Any and all documents that oil and gas producers' use to document their business transactions will be included as documents within the People, Ideas & Objects applications. This functionality is based on the Security & Access Control Module that ensures no one has access to documents they are not authorized to have access to.

There are three applications in the People, Ideas & Objects specification. One each for the People, the producer companies and the JOC's. I can see the interface for the Peoples application emulating many of the characteristics of the Google Docs interface. I will therefore be adding components of this post into the Accounting Voucher Draft Specification.

The last bit of brilliance from Google shows us the way in which their developers provide value to their users. Through innovative uses of fairly common digital storage medium, and other technologies, users are provided with interfaces that satisfy their needs.

This has been a hard learned lesson for me. To expect the user to better understand the technologies that are involved in this application is never going to happen. A point that I have tried to make here many times before. What Google has taught me is that users and developers need to work together, more then they ever have in the past. Why this is so innovative is that they have been purposely separated through a variety of management layers that will no longer exist in this software development project. And that is how the systems are developed appropriately. Innovative users and developers working together to solve the industries problems.

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

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Five years and counting.

As of September 1, 2008 I have now been working on this project for over five years. Time flies when you're having fun. We have much work to do to build this application. Unfortunately with the publication of the Draft Specification, the type of work that needs to be done has changed. The heavy lifting needs to begin and none of this will happen unless we begin the process of generating revenues and acquiring the resources to make this application real.

I have recently focused on four Canadian producers in an attempt to make the case that these companies are failing. Their failure is also documented in this Statistics Canada report which states the oil and gas industry is the worst performing industry in Canada. Not housing or auto's, oil and gas.

Although receipts for energy production are higher, the countries overall production is down. Companies have realized commodity prices that are far in excess of their "plans". Yet even with the record prices these companies report losses, declining reserves and production, increased debt, cost overruns and project schedules that are constantly slipping. To expect more from these companies will only lead to disappointment.

The time to do something about this is now. I don't know if the Draft Specification is the solution to these problems. I only know that on paper they work, and that is the proof that is necessary to show that the ideas are workable. I know that with the input of the users, the People, Ideas & Objects application will address the issues and opportunities that the People within the industry are faced with.

What we learned in the preliminary research report was that developments in science lead to knew innovations which lead to new developments in science and so on. This is the road that needs to be taken in order for the industry to address the declining reserves and production. The bureaucracies were built to deal with the cheap energy era, we need new organizations to take us to the next level.

This project has to find new sources of money and leadership to fill-in the many voids of the overall vision. If you know of someone who could help to financially support this project please do what you can to bring their attention to this. Ninety-five percent of the ownership of the oil and gas industry is held by individuals. Individuals who are the investors, users and developers of the People, Ideas & Object application. Join me here and lets build this software.

The PayPal button on this website will gladly take donations that can further us along in the road we are headed. Even if you can only contribute $10.00 we will be that much further ahead.

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What would an Anthropologist do.

In reviewing Professor Klein's paper on Entrepreneurial definitions and their impact on the oil and gas industry. I was asking myself, what types of jobs are going to be developed and necessary in the future. Is it reasonable to expect that by changing;

• The key organizational construct of the industry,
• Enabling the entrepreneur,
• Using the Accounting Voucher module to provide a more defined division of labor,
• The impact of Information & Communication Technologies (ICT).

Will the jobs that exist today in oil and gas be the same as in the future? It would seem a terrible waste if the users and developers came up with defined roles and responsibilities that essentially replicate what exists in an oil and gas firm today. I asked a similar question in a post entitled "Who would Henry Ford hire?"

How would they parse the "future" oil and gas worker's roles in the prospective oil and gas organization. What careers would develop, what careers other then management would recede, and would any role remain consistent from the current to the future era of the industry.

Today the study of Anthropology is asking these types of questions and in many cases, large software companies use Anthropologists to provide the answers. One of the definitions of Anthropology that I found is provided here.

Socio-cultural Anthropology is the study of cultures of living human populations, usually through ethnographic research. Socio-cultural anthropologists often study contemporary societies by observing human behavior while living and working in those communities. This is called "participant-observation". Traditionally such field work was conducted in rural, agrarian, or forager communities. Anthropologists now might also be found working in urban and "western" societies.

The nature of the research questions asked varies widely, but usually involves an attempt to understand the socio-political and economic structure of the community, relations within and between families, and also the relationship of the community to the physical environment within which it operates. Modern cultural anthropology might involve studies to address community socio-economic development, political empowerment, or social dislocation. This sort of anthropology may contribute to community development, or the alleviation of social inequity.

If we are to-do-more-with-less, as the retirement of the boomers suggests. The division of labor is the one proven method of increasing the output per worker. That is to say that all additional economic value is generated through the reorganization of people. These are the concepts that will enable the industry to meet the market demand for energy.

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

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Professor Peter Klein on Entrepreneurship

We have an interesting paper that deals with the topic of entrepreneurial leadership. I am of the belief that entrepreneurship will be a much larger component in each and every individuals makeup. People's careers used to span their working life at a single firm. Careers now span the working life of an individual within one industry. In the very near future, we may see careers span multiple companies as well as multiple industries.

To achieve this level of dynamic working environment, an individual will be relying far more heavily on their entrepreneurial skills. What does that mean, and what exactly are entrepreneurial skills and entrepreneurial leadership. This paper offers the opportunity to better define these difficult to quantify and qualify terms. These entrepreneurial definitions are also key attributes of making this software development project successful.

This web-log has never reviewed any of Professor Peter Klein's work. I have however subscribed to the Organizations and Markets (their Feed ) web-log of Peter Klein and Nicholas Foss' for over two years and as such have either highlighted individual posts through the Google reader interface, or commented on them briefly through Professor Langlois' writings.

It was through Organizations and Markets that Professor Langlois was introduced as a guest blogger. Professor Langlois had just received the Schumpeter prize and was writing as a guest. He now frequently writes as a regular contributor to Organizations and Markets and his research was a foundation on which the Draft Specification was built.

The topic of Entrepreneurship has become more and more a part of the mainstay of the business environment. This has particularly been the case since the 2000 .com crash. The entrepreneur has since become enabled through the Information and Communication Technologies. Technologies that are real in comparison to what was hoisted as innovative in the pre-2000 era. So lets find out what we can learn in order to assist the understanding of the users and developers about these somewhat vague terms.

Professor Klein sets the stage of how critical the entrepreneur has become.

"Entrepreneurship is one of the fastest-growing fields within economics, management, finance and even law. Surprisingly, however, while the entrepreneur is fundamentally an economic agent -- the "driving force of the market," in Mises's (1949, p. 249) phrase -- modern theories of economic organization and strategy maintain an ambivalent relationship with entrepreneurship." p. 1

I would be at a loss to further define the role of the entrepreneur importance in this software development project. I have selected the name of this project based on Professor Paul Romer's new growth theory that involves People, Ideas & Things. Whereas "Things" is replaced with the software "Objects" that we use to capture the oil and gas business understanding in the software. Professor Klein also discusses some of the difficulty in defining what an entrepreneur is.

"It is widely recognized that entrepreneurship is somehow important, but there is little consensus about how the entrepreneurial role should be modeled and incorporated in economics and strategy. Indeed, the most important works in the economic literature on entrepreneurship -- Schumpeter's account of innovation, Knight's theory of project, and Kirzner's analysis of entrepreneurial discovery -- are views as interesting, but idiosyncratic insights that do not easily generalize to other contexts and problems. p. 1

Why this is important. I think every business user has been faced with the near impossible task of making changes in the reports and analysis of their systems and data. Many are forced to use the interfaces that are provided by an SAP or Oracle application. Interfaces that the users could improve upon with some minor data, processing or alternative changes. However, knowing the difficulty in making these changes has silenced any and all initiative in the corporate world.

Asking for change will require too much effort and political skill to make the changes worthwhile. It is through the users ability to discuss their information processing requirements in this project, and subsequently see and incrementally improve upon the software applications that they use. This is what People, Ideas & Objects is providing, a place where users and developers can work together to make the oil and gas worker more enabled, innovative and entrepreneurial.

Making the working environment more user friendly may have been a goal prior to the web. Now users demand higher quality applications that they can make changes to. This is an important concept and Professor Klein states the reason why.

More recently, the Austrian economist Israel Kirzner has popularized the notion of entrepreneurship as discovery, or alertness to profit opportunities. p. 2

If change is the constant, and we are to enable the entrepreneurial spirit of the individuals that work in the industry; to discover, be alert and to most importantly implement profit opportunities. These are the primary motivating factors of these individuals. Why would they need to file a change request, fill out the forms, estimate the costs, seek budget approval, and have the signing by four authorized individuals to benefit the company? These changes need to be able to be implemented in a more efficient manner through the natural interaction of the users and the developers.

Innovation has at its core certain trial and error elements. Approving the bureaucratic change request that ultimately leads to an error will ensure that user is never authorized again. However, what we have learned about the innovative oil and gas producer is that failure is the critical part of learning. An error should not mean that the individual has no credibility for future changes. It should mean exactly the opposite. Who therefore should be the one to make the decision on what changes the users want? Particularly if the individuals compensation is at stake.

Opportunities are essentially subjective phenomena (Foss, Klein, Kor, and Mahoney, 2008). As such, opportunities are neither “discovered” nor “created” (Alvarez and Barney, 2007), but imagined. They exist, in other words, only in the minds of decision-makers. p. 2

Recall in the "Secrets of Successful Execution" blog post, "Execution is the result of thousands of decisions made every day by employees acting according to the information they have and their own self interest." And...

By contrast, the classic contributions to the economic theory of entrepreneurship from Schumpeter, Knight, Mises, Kirzner, and others model entrepreneurship as a function, activity, or process, not an employment category or market structure. The entrepreneurial function has been characterized in various ways: judgment (Cantillon, 1755; Knight, 1921; Casson, 1982; Langlois and Cosgel, 1993; Foss and Klein, 2005), innovation (Schumpeter, 1911), adaptation (Schultz, 1975, 1982), alertness (Kirzner, 1973, 1979, 1992), and coordination (Witt 1998a, 1998b, 2003). p. 4

I would think that attempting to source these qualities from the management of a firm would be futile.

By focusing too narrowly on self-employment and start-up companies, the contemporary literature may be understating the role of entrepreneurship in the economy and in business organization. p. 4

It bears asking, is the entrepreneur the prototypical employee of the future? Klein now focuses on the profit motive of the entrepreneur in their optimal situation. Suggesting that the competitive and profit motive are the reasons that workers in the oil and gas industry will be motivated to make these changes. If the user has a vested interest in their own profits as a result of their actions, does that also imply that the producers interests are well taken care of by the user?

Judgment is distinct from boldness, innovation, alertness, and leadership. Judgment must be exercised in mundane circumstances, for ongoing operations as well as new ventures. Alertness is the ability to react to existing opportunities while judgment refers to beliefs about new opportunities. Those who specialize in judgmental decision making may be dynamic, charismatic leaders, but they need not possess these traits. In short, in this view, decision making under un-certainty is entrepreneurial, whether it involves imagination, creativity, leadership, and related factors or not. pp. 5 - 6

and

Mises’s point is that a socialist economy may assign individuals to be workers, managers, technicians, inventors, and the like, but it cannot, by definition, have entrepreneurs, because there are no money profits and losses. Entrepreneurship, and not labor or management or technological expertise, is the crucial element of the market economy. As Mises puts it: directors of socialist enterprises may be allowed to “play market,” to make capital investment decisions as if they were allocating scarce capital across activities in an economizing way, but entrepreneurs cannot be asked to “play speculation and investment” (Mises,1949, p. 705). Without entrepreneurship, a complex, dynamic economy cannot allocate resources to their highest valued use. p. 7

Entrepreneurship as opportunity identification.

Is it in the best interests of the oil and gas firm and industry to permit the individual to be more entrepreneurial? And lets be candid, they will as a result of this freedom be better able to earn much higher wages and profits then they would qualify for in today's organization. Although the costs of employment may be higher for firms within the industry, the ability of the industry to move further and faster is the net result. And with prices for energy commanding ever larger revenues, this sharing of the value is of the best interest to all concerned.

The most important exception is the literature in management and organization theory on opportunity discovery or opportunity identification, or what Shane (2003) calls the “individual–opportunity nexus.” p. 7

and

Shane and Venkataraman (2000, p. 220) define entrepreneurial opportunities as “those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production.” p. 8

Klein seeks to parse what an entrepreneur is in terms of a classification based on type. Defining a "Discovery" and "Creation" approach. A mix of these two classifications of entrepreneurs would work hand in hand in developing new sources of value for the oil and gas producer.

Entrepreneurship research may be able to realize higher marginal returns by focusing on entrepreneurial action, rather than its presumed antecedents. Alvarez and Barney (2007) argue that entrepreneurial objectives, characteristics, and decision-making differ systematically depending on whether opportunities are modeled as discovered or created. In the “discovery approach,” for example, entrepreneurial actions are responses to exogenous shocks, while in the “creation approach,” such actions are endogenous. Discovery entrepreneurs focus on predicting systematic risks, formulating complete and stable strategies, and procuring capital from external sources. Creation entrepreneurs, by contrast, appreciate iterative, inductive, incremental decision making, are comfortable with emergent and flexible strategies, and tend to rely on internal finance. pp. 11 - 12

As with sharing in the profits of their entrepreneurial actions, losses that are incurred in the discovery and innovation process would be shared as well. This also provides the entrepreneur with the knowledge that risk is inherent in their actions and they should be mindful of the consequences.

Likewise, realized entrepreneurial losses do not fit naturally within a creation framework. Alvarez and Barney (2007) emphasize that “creation entrepreneurs” do take into account potential losses, the “acceptable losses” described by Sarasvathy (2001). “[A]n entrepreneur engages in entrepreneurial actions when the total losses that can be created by such activities are not too large” (Alvarez and Barney, 2007, p. 19). However, when those losses are realized, it seems more straightforward to think in terms of mistaken beliefs about the future—expected prices and sales revenues that did not, in fact, materialize—then the “disappearance” of an opportunity that was previously created. Entrepreneurs do not, in other words, “create” the future, they “imagine” it, and their imagination can be wrong as often as it is right. p. 13

Opportunities as a black box.

Here is where Professor Klein gets into the topic of why a firm needs to compensate the entrepreneur for these actions. Why can't the people employed by the firm determine these opportunities as a nine to five salary based job? Klein identifies the key characteristic that is necessary to make the entrepreneur, and not the salaried employee, motivated. These characteristics are also necessary characteristics in the future oil and gas industry. An industry that has unlimited potential when the resources of the industry are released to earn profits in their chosen field. And I am not talking about just the engineers and earth scientists, all those are critical, but also the people that are involved in the business of the producer and are able to optimize the profit seeking potential through other professions such as Accounting and Administration.

Although some researchers argue that the subjective or socially constructed nature of opportunity makes it impossible to separate opportunity from the individual, others contend that opportunity is as an objective construct visible to or created by the knowledgeable or attuned entrepreneur. Either way, a set of weakly held assumptions about the nature and sources of opportunity appear to dominate much of the discussion in the literature. pp. 13 - 14

and

Do we need a precise definition of opportunities to move forward? Can one do entrepreneurship research without specifying what, exactly, entrepreneurial opportunities “are”? Can we treat opportunities as a “black box,” much as other concepts in management such as culture, leadership, routines, capabilities, and the like are treated (Abell, Felin, and Foss, 2007)? p. 14

and

The creation approach treats opportunities as the result of entrepreneurial action. Opportunities do not exist objectively, ex ante, but are created, ex nihilo, as entrepreneurs act based on their subjective beliefs. “Creation opportunities are social constructions that do not exist independent of entrepreneur’s perceptions” (Alvarez and Barney, 2007, p. 15). In this sense, the creation approach sounds like the imagination approach described here. Still, like the discovery approach, the creation approach makes the opportunity the unit of analysis. How entrepreneurs create opportunities, and how they subsequently seek to exploit those opportunities, is the focus of the research program. pp. 14 - 15

and

An alternative way to frame a subjectivist approach to entrepreneurship, emphasizing uncertainty and the passage of time, is to drop the concept of “opportunity” altogether. If opportunities are inherently subjective, and we treat them as a black box, then the unit of analysis should not be opportunities, but rather some action—in Knightian terms, the assembly of resources in the present in anticipation of (uncertain) receipts in the future. p. 15

For the purposes of this post I think we risk losing the reader and the substantial value that Professor Klien has developed here. With a clear definition of the entrepreneur in the innovative oil and gas producer we can see how the dynamic nature of the industry can develop. What this display's in rather stark terms is the role of management. The management is substantially diminished in the innovative oil and gas producer firm. Although not completely eliminated, the roles of management, and particularly those skills that emulate much of the Soviet era "central planner" are eliminated.

Through the little piggies analysis of Encana, Petro-Canada, Nexen and CNRL. We see the capabilities of the current management is unable to understand;

• The business that they are in, selling production forward at substantially discounted prices.
  
• Unable to attain the speed in which they approach the business, announcing declining production levels.
• The level of innovativeness that is lacking. More of the same (particularly stock option compensation) offered as the solution.
  

Eliminating the level of management "planning" and their associated high costs are what the investor should seek to achieve through the development of this software.

Foss, Foss, Klein, and Klein (2007) show how this approach provides new insights into the emergence, boundaries, and internal organization of the firm. Firms exist not only to economize on transaction costs, but also as a means for the exercise of entrepreneurial judgment, and as a low-cost mechanism for entrepreneurs to experiment with various combination's of heterogeneous capital goods. Changes in firm boundaries can likewise be understood as the result of processes of entrepreneurial experimentation. And internal organization can be interpreted as the means by which the entrepreneur delegates particular decision rights to subordinates who exercise a form of “derived” judgment on his behalf (Foss, Foss, and Klein, 2007). pp. 19 - 20

It is critical to recall the key competitive advantage of the innovative oil and gas producer is their land base, physical infrastructure and capabilities in finding, developing and producing oil and gas. The entrepreneurial services necessary for the producer to achieve the maximum profit in this business are very broad and I suggest must be based on the markets (or JOC's) offerings. Klien also notes.

Here, as in Coase (1937), the employment relationship is central to the theory of the firm. The entrepreneur’s primary task is to coordinate the human resources that make up the firm. Foss, Foss, Klein, and Klein (2007), by contrast, focus on alienable assets, as in Knight (1921). They define the firm as the entrepreneur plus the alienable resources the entrepreneur owns and thus controls. Each approach has strengths and weaknesses. The cognitive approach explains the dynamics among team members but not necessarily their contractual relationships. Must the charismatic leader necessarily own physical capital, or can he be an employee or independent contractor? Formulating a business plan, communicating a corporate culture, and the like are clearly important dimensions of business leadership. But are they attributes of the successful manager or the successful entrepreneur? pp. 20 - 21

Of course there is always an alternative to what is discussed in this blog. That is to do nothing. If however, you feel that the time for these changes is now, join me here. If you know of like minded people, send them the URL to this blog and most importantly, click on the PayPal button to donate.

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The Secrets of Successful Strategy Execution

Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness -- decision rights and information flow. p.2

Difficult to ignore a paper with that sub-title. Harvard has prepared a database of over 1,000 companies with 125,000 survey respondents. These people were asked specifically if the "important strategic and operational decisions are quickly translated into action, the majority answered no".

Here is the reason why so many of the companies that I have highlighted in the stock option review are failing. Harvard states;

Execution is the result of thousands of decisions made every day by employees acting according to the information they have and their own self interest.

Harvard used the information in their database to determine four criteria for more effective execution. They are;

• Clarifying decision rights.
• Designing information flows.
• Aligning motivators
• Making changes to structure.

Now I may be biased but I think this software development project scores high on each of the four criteria. Here's why;

Clarifying decision rights.

The Joint Operating Committee (JOC) is the operational decision making framework of the oil and gas industry. Only in the very rare situation in which a firm owns 100% of the working interest does this not apply. Yet none of the ERP software vendors, SAP or Oracle, recognize this fact or even the existence of the JOC. The business of the business can not be separated from compliance and governance. Therefore to clarify the decision rights requires that the JOC be recognized, supported and enabled within the producer organization, and appropriate governance and compliance is placed around the JOC's.

Looking at this situation from the firm perspective. Whether it is the Compliance & Governance, Analytics & Statistics and Petroleum Lease Marketplace modules. The decisions between the market and firm are clearly defined based on the well established culture of the industry. Enabling the JOC with the Information and Communication Technologies (ICT) and supported by a software development capability will clarify the decision rights that are held within the JOC.

Designing information flows.

The purpose of this software development project is to build the systems to make the information flows in the JOC (or market) and Firm (producers) more natural. Users are the key to defining what and how they do their jobs. Their jobs span the collective understanding of the entire industry. To preclude them from being involved in a software development role is the continuation of the top-down, disconnected and failed developments we have seen before.

Aligning motivators.

There has been a number of points made in this web log regarding the alignment of motivators. The JOC is represented by producer companies that are motivated equally by the profit interest. This is why the culture of the industry has placed the necessary mechanisms for the JOC to make the operational decisions in this business.

Making changes to structure.

In defining the boundaries of the firms, the Draft Specification has a remarkable influence in the changes made to the structure of the market, which includes the resources of the service industry. These are represented in the JOC and enable the collaboration, transaction management, automated processing and decision making to flow as a result of the desires of the participants.

On the other hand the firms role is expanded by parsing the firm between the short term and long term views. Adding the Research & Capabilities module to the Draft Specification ensures that the mechanisms and means are available to the firm to pursue the long term focus by some of its staff.

Harvard notes that the changes made in the first two categories have dramatic effect. And also note;

In efforts to improve performance, most organizations go right to structural measures because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete. Such steps generally reap some short-term efficiencies quickly, but in so doing address only the symptoms of dysfunction, not its root causes. Several years later, companies usually end up in the same place they started. Structural change can and should be part of the path to improved execution, but it’s best to think of it as the capstone, not the cornerstone, of any organizational transformation. p. 2

They cite an example of how an anonymous firm restructured to reduce the volumes of layers of management. It was noted in the Harvard article, the same firm essentially had to redo the restructuring. By not defining decision rights and information flows in the first restructuring, the company implemented a temporary fix that was soon overridden by the management who reclaimed the former structure.

In a related article from Booz, Allen Hamilton "The Dominant Gene"

Unclear decision rights not only paralyze decision making, they impede information flow and precipitate work-arounds that subvert formal reporting lines. Blocked information flows result in poor decisions, limited career development and a reinforcement of structural silo's. p. 1

Sound like any oil and gas company you know? Think of this process next time you hear a CEO, COO or CFO promise an increase of X% over the production base. How is it that they are able to make these claims?

Redefining the role of the firm and market in the manner that the Draft Specification provides; is a move towards the culture of the oil and gas industry. Developing software to meet the demands of users provides the opportunity to have the entire scope of oil and gas operations and business handled in the most efficient manner. Then the producer can most effectively execute based on the criteria that Harvard notes here.

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

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