Carliss Baldwin - Mirroring Hypothesis

Carliss Baldwin - Mirroring Hypothesis

A series of 2008 Working Papers has been released by Harvard Professor Carliss Baldwin. (Click here to her page where all ten can be downloaded.) This first paper is "Exploring the Duality Between Product and Organizational Architectures: A Test of the Mirroring Hypothesis." This paper provides keen insight into many of the topics we need to better to understand in developing the People, Ideas & Objects application modules. As discussed in her paper we reviewed here, the mirroring hypothesis was a part of that paper, we now have the opportunity to review the mirroring hypothesis.

Before we begin I want to put forward the Cognitive & Motivational Paradoxes into the discussion as background for the discussion of the justification for radical change of the oil and gas industry, as considered in the Draft Specification. It is suggested in this paper that the rewriting of software applications from scratch has not been done. And I would suggest in the short period of time that software has been used in corporations limits the full scope of our understanding and experience of software. We have also not gone through a comprehensive market meltdown, as the one that we face today, an economic situation that I believe is the result of our inability to make the necessary, wholesale changes to organizations. And as such these changes are not only necessary for the economies to resume their positive attributes, but critical. If as I say in the above referenced blog entry, the constraints of code and customers are too large of a compromise in approaching this situation from an otherwise clean slate. These compromises are too significant to overcome the cognitive and motivational paradoxes. Now lets begin to review this very interesting paper. From a technology implementation point of view, the build up from a blank slate is the easiest approach to providing this value to the industry.

A variety of work has sought to examine the link between a product’s architecture and the characteristics of the organization that develops it. The roots of this work come from the field of organization theory, where it has long been recognized that organizations should be designed to reflect the nature of the tasks that they perform (Lawrence and Lorsch, 1967; Burns and Stalker, 1961). In a similar fashion, transaction cost theory predicts that different organizational forms are required to effectively solve the contractual challenges associated with tasks that possess different levels of uncertainty and interdependency (Williamson, 1985; Teece, 1986). To the degree that different product architectures require a different set of tasks to be performed, this work suggests that organizations and architectures must be aligned. p. 5

Alignment of the Joint Operating Committee's (JOC) legal, financial, operational decision making, communication and cultural frameworks with the compliance and governance which has been the sole domain of the bureaucracy, are what is achieved as a secondary benefit of this software development project. Our primary objective is to move the producer firm from a banking mentality to that which is based on the earth science and engineering disciplines; and to innovative off that base of knowledge. This is necessary in order to provide the energy consumer with the energy they demand. Referring back to the motivational & cognitive paradoxes, I would assert that the industry has been unable to meet the markets demands for energy, and almost all producers production profiles are in decline. This is further justification for the radical redesign of the oil and gas industry that is proposed in the Draft Specification.

While the studies above begin with the premise that a development organization must be designed to match the desired structure of a new product, a second stream of work adopts the opposite perspective. It assumes that a development organization’s structure is fixed in the short-medium term, and seeks to understand the impact on new product designs. This view was first articulated by Conway (1968) and is sometimes known as “Conway’s Law.” He states, “Any organization that designs a system will inevitable produce a design whose structure is a copy of the organization’s communication structure.” The dynamics of this law are best illustrated in Henderson and Clark’s (1990) study of the photolithography industry, in which they show that market leadership changed hands each time a new generation of equipment was introduced.

I italicized the quotation of Conway's Law to highlight the fact that communication in the oil and gas industry is through the JOC. As we have achieved this alignment in the Draft Specification with the JOC's communication structure, the alignment of the organization will be better able to serve the primary (enabling the earth science and engineering) and secondary reasons (the enhanced innovativeness and performance) from this alignment of the industry. This is a material change to the Draft Specification in that the Communication Structure will be added as the fifth framework that the JOC provides the innovative oil and gas producer.

These observations are traced to the successive failure of leading firms to respond effectively to architectural innovations, which involve significant changes in the way that components are linked together. Such innovations challenge incumbent firms given they destroy the usefulness of the architectural knowledge embedded in their organization structures and information-processing routines, which tend to reflect the existing dominant design (Utterback, 1996). When this design is no longer optimal, they find it difficult to adapt. pp. 5 - 6

Again I assert that the reason for the rewrite is that the bureaucracy is unable to make the necessary changes to ensure the producer firms remain innovative and profitable. The inability to adapt to the increased amount of earth science and engineering necessary for each barrel of oil, is the beginning of the end of these bureaucratic organizational structures. I can not see them surviving these changes in the greater economy. And I am certain that the economic meltdown we are currently experience will ensure their demise. That is why we must begin the process of developing the software as described in the Draft Specification.

2.1 Product Architecture and Measures of Modularity

We have purposely defined a modular design structure from the work of Professor Baldwin but more specifically through Professor Richard Langlois. These are accurately summarized as follows.

Modularity is a concept that helps us to characterize different product architectures. It refers to the way that a product design is decomposed into different parts or modules. While there are many definitions of modularity, authors tend to agree on the concepts that lie at its heart; the notion of interdependence within modules and independence between modules (Ulrich, 1995). The latter concept is referred to as “loose-coupling.” Modular designs are loosely-coupled in that changes made to one module have little impact on the others. Just as there are degrees of coupling, hence there are degrees of modularity. p. 6

There is a further rather profound reason for moving to a modular structure. The Java Programming Language is most efficient in a loosely coupled or modular fashion. These have been the design theories that make the language so useful to the business community. As is mentioned elsewhere the secondary advantage of a modular system is that developers are able to focus on one module, as opposed to having to know all of the aspects of the system. This compartmentalization helps the developers and users to deal with the complexity of the system.

6. Discussion

I am particularly proud of the size of this community. It has been many years in the building and each day I am pleasantly surprised by its scope and scale. The most important aspect of this community at this time is their vested interest in this system and particularly their understanding of the basic ideas and issues. When you have this many people following the ideas in this blog, it reflects that we are on the right track. One other important point that may be off topic a bit, but the size of this blog is well over 600,000 words and reflects the basic idea of using the Joint Operating Committee as the key organizational construct of the oil and gas industry. So many words for just one idea. I can not wait to see what this community does with these ideas when they get finished with it. In this next quote Professor Baldwin notes the products architecture is comprised of more then the functions. 

Our results make an important contribution to the academy in several ways. First, they reveal substantial differences in the levels of modularity between software systems of similar size and function. The pairs we examine vary by a factor of eight, in terms of the potential for a design change to propagate to other system components. This result has significant implications for those who must design such systems. It shows that a product’s architecture is not wholly determined by function, but is also influenced by a variety of other factors, including the characteristics of the organization within which development occurs. The space of possible designs within which solutions are sought appears to be constrained by the nature of the context within which search occurs. p. 20

This communities influence on the Draft Specification and the building of this system will be like no other we have seen to date.

We should note that the mirroring phenomenon is consistent with two rival causal mechanisms. The first is that designs evolve to reflect their development environments. In closed source projects, dedicated teams employed by a single firm and located at a single site develop the design. Problems are solved by face-to-face interaction, and performance “tweaked” by taking advantage of the access that module developers have to the information and solutions developed in other modules.

Even if not an explicit managerial choice, the design naturally becomes more tightly-coupled. By contrast, in open source products, a large and widely distributed team develops the design. Face-to-face communications are rare given most developers never meet, hence fewer connections between the modules are established. The architecture that evolves is more modular as a result of the inherent limitations on communication. p. 21

Once introduced to the ideas of this software development project people can begin to see how things fit in naturally. Using the JOC is a very natural way in which the industry operates. The technologies today provide the ability to mitigate the effects of location specific activities. The virtual JOC being the ultimate manifestation of the way in which oil and gas investors can manage their operations.

Alternatively, our observations may be a product of purposeful choices made by the system architects. For closed source products, the sole aim is to develop a product that maximizes performance at a point in time.

The benefits of modularity, given the competitive context, may not be viewed as significant. By contrast, for open source products, the benefits of modularity are far greater. Without a modular design, there is little hope that contributors can understand enough of a design to contribute to it, or develop new features and fix defects without affecting many other parts of the system.

Open source products therefore need to be modular to both attract a developer community and also to facilitate the work of this community. Our data can be explained by either of these causal mechanisms. In practice, both are likely to work in parallel. p. 21

By defining the modular specification we have what I consider the break from the "old way" of doing things. It is necessary for people to see how and where the system they are going to be involved in is going to be different. Without the overall vision of the Draft Specification we may have regressed into the "old ways" without thinking how this system could truly be different. I like to think that the design of the eleven modules makes it difficult to operate in the "old way" as its inefficiencies and frustrations are always in the way.

Our work suggests that managers of the innovation process must strive to understand the influences on their design choices that stem directly from the way they are organized. The challenge is that these influences are seldom explicit, but are a result of the complex interplay between a firm’s normal problem solving and information processing routines, and the space of designs that must be searched to arrive at a new solution. While a firm can look backwards and see what kinds of designs it is predisposed to produce, it is hard to look forward, and imagine what new designs might be possible. The commercial software managers we work with almost always think their designs are highly modular. When shown these results however, they realize how much more can be achieved. pp. 21 - 22

It should also be evident that the constraints (code and customers) and the motivational and cognitive paradoxes be eliminated from the mindset of the community. To do this I have established a very high bar in which participants in this community need to conduct. This does not preclude anyone from contributing, it only seeks to break the ties with the past so that the unencumbered and unconstrained methods of community involvement are optimized to the best solution. The up to 2,500 word essay expects the community member to apply their experience in the oil and gas industry to the specification in its current state. I believe that this is enough of an exercise to truly have the community optimize the solution. And for like minded individuals to find one another on the wiki. (Closed to the general public.)

Our findings have important implications for development organizations given the recent trend towards “open” innovation and the increased use of partners in R&D projects (Chesbrough, 2003; Iansiti and Levian, 2004; MacCormack et al, 2007). In particular, they imply that these new organizational arrangements will have a distinct impact on the nature of the designs they produce, and hence may affect product performance in unintended ways. In essence, our work suggests that R&D partnering choices, as well as the division of tasks that these choices imply, cannot be managed independently of the design process itself (von Hippel, 1990). Decisions taken in one realm will ultimately affect performance in the other. Managers must understand the implications of these organizational choices, in terms of the constraints they place on the solution space.

There is much to do and much to learn in this new project. I can't suggest strongly enough that the future does not include the structured hierarchy in any business operation. That is what is being eliminated in this market meltdown. Our first issue is related to the fact that new organizations are unable to form themselves in productive and efficient ways without the software being in place first. This is why the Baldwin, Lanlgois and others analysis is so necessary to find our way through this future.

Companies today have had the opportunity to change and build this system and they have chosen to ignore it. And that is the expected response. Bureaucracies do not change and it is foolhardy to think so. The change can not be implemented in the manner that is necessary without the complete destruction of the old. To change direction, you must first stop. Does anyone believe that the structured hierarchy will be used in 2025, what about 2015? I suggest it may be sooner then 2011 that we plan to have the retirement party of the last millennium in honor of the bureaucracy.

Our work opens up a number of areas for future study. With respect to methods, we show that dependency analysis provides a powerful lens with which to examine product architecture. While we focus on only a few types of dependency, our methods can be generalized to others, assuming that they can be identified from source code. With respect to studies of modularity, our work provides visibility of a phenomena which was previously hidden, and metrics with which to compare different products. This approach promises to facilitate the study of a variety of important research questions that have previously been answered only via purely descriptive or conceptual work. pp. 22 - 23

Professor Baldwin is on the right track here. Her analysis of transactions was the means in which the Accounting Voucher was developed. With the expressed intent to have transaction design be the area of real value generation in oil and gas. Transaction processing has developed to a reasonably high level such that the ability to differentiate ourselves based on transaction processing does not exist. It is a necessity, whereas using Baldwins analysis and tools provides the means in which to design transactions.

I close with two paragraphs of Professor Baldwin that put in perspective the context of this software development project. This is an opportunity that provides the community with significant ability to make the changes and increase the performance of the oil and gas industry.

Does greater modularity require trade-offs with other aspects of performance? Intriguingly, our work suggests that, in practice, many designs are not at the performance “frontier” where a trade-off exists, but lie below it due to architectural inefficiencies or “slack” (MacCormack et al, 2006). If this is true, there may be scope to improve a design along multiple dimensions without a performance penalty.

Exploring such issues via the measurement of architecture and product performance will help reveal managerial strategies for moving designs towards the frontier. And they will help us understand the trade-offs involved in moving along it. Herbert Simon (1962) was the first to argue for the systematic study of design more than 40 years ago, claiming, ‘…the proper study of mankind is the science of design.’ However, his ambitious vision for the field has proven elusive. The study of design has been constrained by, among other things, limited theory, methods and tools that can deal with the complexity of everyday designs, and more importantly, to make them visible, allowing us to compare their structures. The methods we have developed promise to open up a host of questions that, until now, were beyond our analytical capabilities. p. 23

Please, join me here.

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McKinsey The Next Step in Innovation

The creation of knowledge, products, and services by online communities of companies and consumers is still in its earliest stages. Who knows where it will lead

Hey that's us! McKinsey have prepared another article that shows they are in the lead in terms of what the future holds for business. This is number 41 in a long line of excellent articles that we have reviewed, and comes as a result of a major redesign of McKinsey's website. Check it out. 

Distributed cocreation is too new for us to draw definitive conclusions about whether and how companies should implement it. But our research into these online communities and our work with a number of open-innovation pioneers show that it isn’t too soon for senior executives to start seriously examining the possibilities for distributed cocreation or to identify the challenges, such as the ownership of intellectual property and increased operational risk, they face in adopting it.

Too late. This community has locked up the Intellectual Property (IP) of using the Joint Operating Committee (JOC) as the key organizational structure of the innovative oil and gas producer. This is to the benefit of all those who provide services to the industry based on the People, Ideas & Objects software. This also takes the point of view that many within the oil and gas industry, oil and gas companies and their suppliers such as accounting firms, have a date with destiny. That much of the ownership of the producing assets and the work done in the service industries will pass to new and faster service providers. What the current market meltdown is saying is that the bureaucracies are no longer able to sustain our way of life and are uncompetitive. They therefore will be forced to liquidate in rapid fashion leaving the People, Ideas & Objects community to pick up the pieces. The users will be the ones providing the human resources and service business, the investors will be able to take ownership of the oil and gas facilities and they will all run on the software designed and developed by this community. At least that is the way I see it with these new rose colored glasses.

While distributed cocreation does seem promising, it isn’t entirely clear what capabilities companies will need (or how they will organize those capabilities) to make the most of it. Many of the answers will become clear as companies gain greater experience with various open-innovation approaches, including distributed cocreation. But a few challenges are already apparent.

• Attracting and motivating co-creators.
  

We are seeing this challenge in many ways today. First its a chicken and egg problem. The financial resources are not in place to pay the people for their time. A critical issue, and one that has to be resolved for this first step. I have opened up the Preliminary Specification to 100 people who wish to contribute. These contributions will be critical in establishing these 100 people as the leaders in this community. A recognition that would provide substantial long term monetary value as their service offerings developed. The symbiotic relationship of everyone contributing to the IP under license, it aggregating in my hands, as I own the original ideas and their expression, and in turn license the whole of the IP back to those individuals who are members of this community. Those that are able to develop their ideas in this community will be able to prosper in their geographic region, no matter how large.

• Structuring problems for participation.

I think to myself at times that I have 50,000 man years of work ahead of me. The sanity soon recovers when I realize I can do it all, or I can do none of it. Since I would only stand in the way I have chosen to leave the entire development in the hands of the community. This is the best place for it and I need to concentrate on securing the resources and needs of the community. The financial resources, the infrastructure etc.

• Governance mechanisms to facilitate co-creation.
  

Communities are productive when they have clear rules, clear leadership, and transparent processes for setting goals and resolving conflicts among members. Sun Microsystems, for instance, developed its Solaris operating system, cocreated with a global community of software developers, in the early 1990s. The company established a board, including two Sun employees and a third member from the larger software community, charged with loosely overseeing the project’s progress. Even then, by the way, the community wanted Sun to relinquish more control.

The leadership must also maintain a cohesive vision, since there is always a risk that community members will “fork” intellectual property and use it to develop their own cocreated product or service. Mozilla, the online application suite distributed by the Mozilla Foundation, was cocreated by a software community. As the programs were being developed, two contributing engineers, dissatisfied with the project’s direction, used the Mozilla code to create the Firefox Web browser. Community leaders eventually made it the primary supported browser.

This needs to be dealt with as well. I am hesitant to suggest anything more then what has been stated in the Security & Access Control module. A governance structure will have to be built in order to make sure that the software product and the communities associated service offerings are developed in the best manner possible. This I think is a key area where McKinsey may be able to help in identifying the means and methods.

• Maintaining quality.
  

More eyeballs has proven to be one of the best methods of ensuring the software code is operational as it should be. How do we ensure that the services that are provided by the community are of a high quality. Well we could spend a lot of time trying to figure that one out, but I think you'll agree that the community service provider is ultimately rewarded through quality service to the producers. It is the producers that will ultimately be responsible for making sure their operations are handled in the appropriate and optimal fashion. The only other key difference is that the time of a community member is best spent 50% with the software developers and 50% with the producer clients. This is an iterative software development project where the innovation of the producers is the key. Therefore we can never stop developing. McKinsey states the following.

Many cocreating online communities assume that “crowds” know more than individuals do and can therefore create better products; as the open-source-software expert Eric S. Raymond has said, “Given enough eyeballs, all bugs are shallow.” It is far too early to know with certainty if this idea holds true across all kinds of products, but a growing consensus maintains that in software development, at least, distributed cocreation is a ticket to quality. A study published in the European Journal of Information Systems in 2000, for instance, noted that “open-source software often attains quality that outperforms commercial proprietary” approaches. What’s more, a December 2005 study published in the scientific journal Nature concluded that Wikipedia’s entries on scientific subjects were generally as accurate as those in the Encyclopædia Britannica. Still, some have questioned these conclusions and the accuracy or insights of the entries on which they were based.

I did mention that this was open source, but I don't think I stated why it is open source. The need for the producers to be able to ensure that their use of the application is as it seems. They need the ability to go to the code repository and review the actual code that does xyz for them to ensure that the software is done right. They cannot run the binary, only I can do that based on the license, the producer can only review the code.

Lessons from communities

Although it is still too early to develop useful frameworks for success with cocreation, they will no doubt emerge over the next few years. Meanwhile, some lessons about how to proceed are coming out of both the consumer and the professional online communities.

This area of communities and their development is new, and as a result of the Internet. How it develops and how to encourage that development will be something that we should consider taking on as a research project within the community. Just a suggestion. McKinsey has some interesting point of view in the following sections.

These numbers suggest that people are more and more willing to participate with companies online and that companies can tap into that willingness today.

Granted many people can contribute in the short term, but this is a long term permenant software development project. And the community itself will fill in the areas that are necessary for the producer to remain as profitable as can be. But the ability to sustain this in the long run is on the basis that the community is compensated for their time and effort in working with the developers and working with the producers. And I am on that job of raising the financial and other resources.

Even the most advanced businesses are just taking the first few steps on a long path toward distributed cocreation. Companies should experiment with this new approach to learn both how to use it successfully and more about its long-term significance. Pioneers may have ideas about opportunities to capture value from distributed cocreation, but fresh ones will appear. To benefit from them, companies should be flexible about all aspects of these experiments.

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International Energy Agency 2008 report.

The BBC is reporting the results of the International Energy Agency 2008 report contains a warning derived from the implications of the current credit crisis on investment in oil and gas,  and hence future production deliverables.

IEA is declaring the era of cheap oil is over. The cheaper prices we are experiencing today are attributable to the market meltdown as the world consumption of energy continues to tank. No one has any quality information as to the extent of the decline in demand, and as such is assuming the worst scenario and prices are collapsing. This is a temporary situation that may last for the full term of the markets meltdown, which may be the next five years.

The lack of investment is cited by the report as the reasons behind the warning. The geological aspects of peak oil, or declining production due to lack of reserves, is not the issue that the IEA is warning about. It is the lack of investment by the industry to ensure the market supply of energy is maintained. I would tend to agree with these assumptions that the lack of investment is a more dire and serious problem then peak oil.

This project does not have the financial resources to pay for the full report. However, the BBC coverage is providing us with the scope of the warning and the material information in the IEA's report.

But, they point out, field by field, declines in oil production are accelerating and more money will be needed in research and development to extract the oil there is.

While world oil supply will rise, the report's authors predict that massive investments in energy infrastructure will be needed - an eye-watering $26 trillion dollars up to 2030.

A significant amount of this money - $8.4 trillion - will need to be spent on oil and gas exploration and development.

Big numbers. I sarcastically assume that the structured hierarchy will be able to provide the industry with the appropriate organizational structure to 2030. It seems ridiculous to me to throw this type of money at the problem on the same basis as we have relied on in the past. Doing the same thing and expecting different results will be insane. The bureaucracy will fail, I would have 100% concurrence from those in the oil and gas industry and energy consumers in general. We need to begin the process of developing the software and building the organizations and systems necessary to undertake this critical task. A critical task that may materially affect our way and quality of life if we are not successful.

I suggest we develop the People, Ideas & Objects application based on the vision provided in the Draft Specification, please join me here.

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Times like these calls for...

In most business' the amount that management sell their products at is higher then its costs. In oil and gas we would only dream of such a concept as price management. In the Draft Specification I have included a price management capability on a fully automated basis.

The problem comes down to the designation of one producer as the operator. The operator has every motivation to keep the wells and fields producing to their fullest extent at all times. This is as a result of beliefs of competitive drainage, and the bank expecting their investment to perform. The fact of the matter is that the operator does not have the authority to shut in any production without the consent of the partners.

Recall that today, the Joint Operating Committee (JOC) meets on a relatively infrequent time frame and the majority of the reporting is standard fare statements and data. Any production volume reduction is not possible without the consent of the producers who hold x% as determined in the Operating Procedure.

Fast forward now to the day in which the People, Ideas & Objects system has been built and is commercially available. It is fair to assume that the volatility in the commodity prices remain and the variance in price is in the realm of + / - 20%, and somewhat determined by political factors and seasonality. This would make the majority of the production either very profitable, marginal or create a loss situation.

With the People, Ideas & Objects system we will have the ability to calculate the costs on a "live basis" based on the contributions of the partners involved in the JOC. This is the key change factor that enables the producers to use an algorithm to move production up or down based on the commodity prices and the actual costs of the operation. If at any time the required percentage of voting partners determine that the costs exceed the price received, production would be scaled back to 50% of the flow rate. If the loss exceeds 10% then another 50% of production would be reduced to the point where the production could be scaled back to the level that the partnership are satisfied the optimal reserves production and prices are optimized.

These operations are dependent on one factor, the collective decision of the producers representing the JOC. This is the type of capability that would be made available in People, Ideas & Objects. The standard bureaucracy can not make the decisions in fast enough time frames to make the decision valid. By the time the decision would be made, the prices may have risen dramatically just at the time the wells were being choked back.

After the decision from the JOC has been made. And this decision is based on the producers vote and desire to optimize the value of the reserves. This decision is therefore somewhat automatic in that each producer will be able to input their specific criteria that they would expect the changes in production to occur. The commodity prices fall below what the calculated actual costs are and if the production became marginal, the wells production would be reduced to the 50% I am using in this example. The prices subsequently, because their is a lack of production available for the consumer, increase and then the well can increase its production on any increment the JOC may have deemed appropriate for the reserves and their cost factors.

The ability to calculate the costs, determine the market prices, and the ability to slow the rate of production through telemetry. Are the technologies that are being implemented in this application. Please review the Technical Vision and specifically the IPv6 component. Other times during further price changes, the system would provide the opportunity to increase production for higher prices as well.

The interface to this capability would be the browser of those that are present virtually in the JOC. And I have suggested that these people are the actual oil and gas producer / investor / owners of the property. Imputing a reduction in the separation between management and investors is something that can be, and probably will occur in this current financial market meltdown.

Now I know that their are contractual commitments made to the firms that gather, deliver and market the commodities. The nomination process is how they monitor their business and these people will need to be involved in the decisions that are made at the JOC. That they have the right to demand gas production meet certain annual volumes could be accommodated by recognizing this price management capability and implementing it into their operation as well. I don't foresee an issue here, if there is it may be a simple matter that the producer declares Force majeure to reflect the operation is no longer commercial at current prices.

Irrespective of the ability to have these types of operations conducted I know two things. The bureaucracies are too slow to accommodate any price induced change in production. And the industry has to take responsibility for the prices that they need to realize. As we move the industry from a price taker to a price maker, the optimal use of the reserves and our endowment of oil and gas will be optimized, not only for the producer but also the energy consumer. This is achieved through the generally higher prices that will be realized, and hence the more financial resources that will be available for exploration and bringing on the more difficult production.

Please join me here.

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Canadian Natural Resources Questionable Financial Statements.

Here we go again, making representations that are not true. First of all CNRL's Third Quarter 2008 financial statements are designed to mislead so that reputable names like Forbes get the actual numbers wrong. This is intentional on the managements behalf and is a material issue in my opinion.

All one needs to do is look at page 17, 20, 21, 25, 40 of their financial statements and the "unaudited" revenues are qualified in the management discussion. Note (2) is appended to each instance of "Sales Price" and they have the following quote.

(2) Net of transportation and blending costs and excluding risk management activities.

So its, net of transportation and blending costs. And does not include risk management activities. Even written grammatically it leads the reader to confusion.

The problem comes down to the fact that the firm did not realize those sales prices. They hedged their production on a go forward basis. The real "market" prices for the commodities were what the firm sold them at, however they need to be discounted based on what the firm sold their production forward at.

This is how material of a misstatement this activity is.
    Reported Revenues = $4.583 billion.
    Risk(y) Management Activities = $1.715 billion (B as in billion)
    Real Revenues = $2.868 billion.

This is how the firm is able to report that earnings are $2.835 billion, and cash flow is $1.677 billion. Which doesn't make any sense does it. Particularly when the Changes in cash for the three months is a drain of $8 million. (M as in million).

On page 52, under Risk management, they come clean with the goods with the following comment.

The resulting fair value estimates may not necessarily be indicative of the amounts that could be realized or settled in a current market transaction and these differences may be material.

Why would a firm do these types of things. I think it is reflected in their third quarter announcement that they are reducing some of their capital expenditures. They stated that as a result of royalty changes in Alberta they were dropping their expenditures by 46%. This only shows that they have no money. Everything is being diverted to make sure that Horizon gets started. Well I predicted that Horizon start up was not going to happen in my post of August 25, 2008. And the prompting of my prediction was that the firm was $26 billion in debt with a $3.2 billion working capital deficiency and the...

Specifically I think that financial capital is in a state of seizure that is unlike anything we may have seen in the past. The impact of this credit crisis will be limited to those institutions that are involved in granting financial capital and those that need it. If you need financial capital don't bother knocking on the door, you won't know what the response will be.

That's correct the looming credit crisis did come, and I have to say that I underestimated it's size by a substantial margin. On page 59 I also find this tidbit interesting.

(2) Net expenditures for the Horizon Project also include capitalized interest and stock-based compensation.

Reflecting that the management have been reading some people's blogs! (Hi there.) And to be honest, making it to the top of the Piggies list in July 2008 must have been embarrassing. So why would they not hide these costs in their capital expenditures? I never would have thought that capitalized stock based compensation was legitimate!

On page 39 one could also discover that there are some legal troubles brewing with the contractors at the Horizon project.

The Company is defendant and plaintiff in a number of legal actions that arise in the normal course of business. In addition, the Company is subject to certain contractor construction claims related to the Horizon Project. The Company believes that any liabilities that might arise pertaining to any such matters would not have a material effect on its consolidated financial position.

I'll bet not, big project, big contracts, big contractors, nah that won't be material at all. Let me go out on a limb here and say that I think the project is in the middle of the process of being forced to close by the firms inability to pay the contractor.

I say we bring on Phase II of the market meltdown and clean these guys out, (oops these guys are already out of the money in their stock options), sorry folks I didn't mean to rub salt in those gaping wounds. Lets instead say, take them out of business. Take them out of their misery and let them get honest jobs. A sort of management rehabilitation exercise. I would suggest that it's 11:59 for this firm. And as a result most, if not all of management should will take the Charley Fisher (Former CEO of Nexen, another Piggie) route to redemption and quit.

Technorati Tags: People's Pig Management Failure

IBM CEO Sam Palmisano

We are in interesting times. That is what makes this project and the possibilities of what this community could do, so breath taking. I recently wrote why I felt the governments should be stepping up and funding some of the software development projects that will enable the global economy to perform at the level of expectation of our collective society.

Well it appears that I am not alone in that thought. IBM CEO Sam Palmisano delivered a speech to the Council of Foreign Relations yesterday. Essentially he has said the same things that I have noted in this blog. Also citing the work of President Eisenhower in building the U.S. Interstate. The New York Times article and the text of the speech should be read by everyone.

We have a job to do. And this will not be done without the efforts of those that belong to this community. From the point of view of an obscure idea on how to manage oil and gas assets more innovatively, this is a healthy sized community. One that is familiar with the ideas and concepts as they have been put forward in this blog. Now is the time to aggressively increase our communities size. Please join me here, and if you know of some other people who could help out, please send them the URL to this blog and encourage them to consider a role here as well.

Technorati Tags: People's Ideas Funding Innovation

For the next 20 years.

The title of this entry will take you to a McKinsey article, number 40 in the series, entitled "Why Baby Boomers Will Need to Work Longer". Seem they think there are some holes in some people's retirement plans, and as a result, we all will be working a bit longer then we thought. These are McKinsey's words, I'm only the messenger.

I can't think of anything better to be doing then building this software and its never ending improvements. 20 years is the time frame that Professor Carlota Perez has placed for the Information and Communication Technologies (ICT) based upswing. We can accomplish a lot in that time. And when put in its long term context the job does not seem that daunting. In 20 years I'll be 70 and now might be a good time to consider what McKinsey says. By the way, 50 is the new 30.

Focusing on short term goals provides the sense of urgency to get things done. We, especially me, need to step back from that short term point of view for a minute, and put the context of making this software over the next 20 years, not 20 months.

What we can do with the technology is unlimited in its application. When we consider the Draft Specification, and how it naturally fits with the majority of processes, functionality and culture of the oil and gas industry. The generic aspects will be easy to implement, that is easier then SAP, Oracle or IBM.

What I look forward to is the unique and undefined ways that people will come up with for new ideas on how to analyze data, implement processes and enable the oil and gas producer to advance the sciences and innovation they depend upon. And most important of all make the industry as profitable as it possibly can. That is what this IT project is about, that is what is possible and that is what we are going to be doing here.

So join me here, and lets spend the next 20 years in making this industry the most profitable that it can be. Participate in the development of this application. Build your service businesses based on the Intellectual Property that is developed here, apply it to the oil and gas producers, and prepare for that retirement that McKinsey suggests needs some attention. Join me here.

Technorati Tags: People's McKinsey Perez Science Innovation Development

The U.S. Election

It's early yet, but it looks like it is a clear win for President Elect Barack Obama. I hope that the U.S. press corps is happy with their selection, and are able to continue the strong spin they have been able to put on this very light-weight president. It should be clear that I have not drank the Obama koolaid. What is aggravating about this situation is that the direction that the U.S. is taking is totally against its history.

Hope and change are great things that all people should aspire to. And that is the Obama message. Nothing more, and there can't be much less. I see two possible scenarios for Obama. One he'll go back on all his promises and govern responsibly, (the Bill Clinton role) or maintain his integrity with the American people and run the country into the ground. We'll soon see which road he picks and as a result of his zeal for the White House, where he would say and do anything to win over a voter, he now has to deal with the responsibility of governing.

The press can't help him there. Governing is the tough part. Where tough decisions are made. Some of those decisions will actually make people unhappy. There is no voting present as the president. One thing that might keep President Obama from making any decisions is the do nothing Congress of Nancy Pelosi and the lunatic Harry Reid in the senate. That the U.S. has put the democrats in power in the house, the senate and the presidency is the American nightmare.

I have found the press coverage of the last presidency to be as wanting as the sales job on Obama. I think President George W. Bush was a great president, primarily and almost exclusively because of his leadership. That's what is needed in these tough times. Leadership on the war, the economy, and the world. Obama may find the herding of cats in Europe too be to his liking. I suspect he'll be spending most of his time making sure everyone gets heard. Nonetheless leadership is not a personality or popularity contest, and president Bush never wavered from what he believed in. We will see how long it takes for the press and their democratic troika to fall out of favor. Implementing a strategy of class warfare in an election is great, until the day you actually win the election, but I don't suspect anyone in the Obama camp has thought of that yet.

Technorati Tags: People's Leadership

Miss-allocated capital.

How did we get ourselves into this economic situation. Professor Perez suggests this a result of long term economic cycles. This will be the fifth "turning" that has happened in the last 237 years. We can see in each of these that the past methods of economic growth and prosperity are no longer able to carry the load of the economy on their own. This appears to be as a result of the inability to invest wisely in making the economy more efficient. And I would suggest that the old and tired bureaucracy, a 20th century innovation, is primarily responsible.

The new Information & Communication Technologies (ICT) provide new ways of organizational efficiency. The rebuilding of industries to make the necessary changes is the scope of the current economic crisis. The damages to the old and tired organizations is so comprehensive in these turnings that rebuilding makes them necessary. We have a particularly critical situation in this turning that we had not faced before. The globalized and highly sophisticated economy based on Adam Smith's theory of specialization and division of labor. We physically can't self organize anymore. 

By miss-allocating capital, firms have not increased the base of productive assets in the economy. Instead of reaping continued returns from each years investment, we see our real earnings decline from neglect and no new revenues being generated. As a result the majority of the capital in the past 10 years has been spent on consumers non-productive needs. Purchasing bigger houses and renovating them took on a heightened importance in the economy. Those that have purchased homes at these high prices have only valued the size of their mortgages.

A mindset that the government will "fix it" I think will fade after the election today. The government knows the size of the problem and are aware that one of the most competitive advantages of the American people is their ability to pick themselves up and start again. This characteristic is the key to why the American economy is the most powerful in the world. And will continue to be. When as I noted in yesterday's post Volvo lost 99.6% of their unit orders of heavy trucks, and the Baltic Dry Index had fallen by 90%. It is clear to see that no goods are moving in the world economy right now. So it no longer becomes a credit crisis but is a major economic event that will affect the entire world. The governments are powerless to resolve even these two symptoms.

The lives that we have led for the past ten years will be changed fundamentally. The time we spend in a depressive economic state is dependent on us as individuals. Picking things up brick by brick and stick by stick is the only manner in which we are going to get ourselves out of these problems. It will be tough but we need to begin today. What ever becomes of the oil and gas industry it will need new systems to organize the people in the productive and critical energy production.

Professor Perez notes in a presentation;

For the next two decades at least, Information and Communication Technologies Industries and Services are not just an important industry, they are the key to competitiveness of any company, of any country, of any region. The shape of ICT infrastructure is the shape of the future.

Please, join me here.

Technorati Tags: People's Perez Failure Government

Software, and Eisenhower's Interstate.

President Eisenhower started the Interstate and Defense highway system in 1956. Many have credited this system with providing a solid foundation of which the U.S. economy has grown. In 2006 President Bush noted:

Today, 50 years after the Federal-Aid Highway Act of 1956 was signed, the Eisenhower Interstate System has made our society the most mobile in the world and contributed to the continuing growth of our economy.

Progressive governments have always had a role in developing the infrastructure for their societies to prosper. This has established a clear line of separation between what is a capital works and private activities.

Today our economies are globalized and very sophisticated. The dependency on others to provide for our needs has never been greater. Most people would agree that the ability to survive on their own for the long term is not a skill that has been developed. Our dependence on one another has never been so great, and therefore, fragile.

I've been harping on a theme in this blog since the Preliminary Research Report was published. Suggesting that SAP is the bureaucracy and the heightened role of software in the oil and gas industry. At times I have felt that this message is not well received, and I attribute that to the Y2K fiasco. Y2K has made software, and the people in the technology business, less influential. Leading to what I would suggest is a patent disregard for the value and significance of the technologies.

I am only realizing myself why this is the wrong point of view for society to have taken. So many of our organizations are failing that we are unable to achieve the reliability that we had achieved and expected in the last 50 years. On Wednesday, I showed up at my regular Starbucks and asked for my usual Venti Mild coffee. They said they were out of coffee. Dumbfounded I said what and struggled to keep myself from waking too quickly.

The concern that I have is these events are happening too frequently to be a random or isolated event. The systems that we have grown to expect are in a state of failure that will only expand as the organizations that we depend upon face one financial Tsunami after another. We need to address these points by building the systems that are replacements to the current systems that are failing. Otherwise we are faced with the prospect of using our survival skills to make due.

The sense of urgency in which we approach the development of our replacement systems is accelerated by the storm clouds on the horizon. On Bloomberg this weekend I saw this commentary that in the day to day of the past fifty years we could never have imagined. Entitled "The Shipping News Suggests World Economy is Toast". Chronicling the slowdown at Volvo, the second largest truck manufacturer in the world, in the third quarter. In the third quarter of 2007 Volvo received 41,970 heavy trucks orders . In 2008 the number was 155. The article also documents how the shipping industries Baltic Dry Index has collapsed. Rendering revenues for ships at 10% of normal. These events were probably triggered way back in August 2007 at the beginning of the market problems.

This is after the world has pumped unknown trillions of dollars to prop up the systems. We need to start concentrating on these types of issues. Or the food and other necessities on those ships will never make it to the consumers that need them. This is a warning sign of bad things to come and we need to heed the call.

The Eisenhower administration was not faced with these dire situations in 1956. Peace had broken out and the depression had subsided from immediate memory. The role of government is to ensure that the systems and infrastructure are able to meet the needs of its people. That is why the governments, in addition to providing liquidity and interest rate relief should fund industry supporting software development projects.

The role of government has been discussed many times in Professor Carlota Perez' papers. In her Strategy + Business "Thought Leader" interview she stated:

Government needs to be reinvented, using as much imagination as it took to design the welfare state in the first place. It all seems impossible now, but things always seem impossible at this point in the surge. p. 7

Governments need to be involved in the financing of software development projects such as People, Ideas & Objects. Providing the software that enables local economies to function may be the new dividing line between have and have not.

Because left to itself, it might not happen. Historical 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. p. 7

We have a choice, be constrained by our current organizations and their poor performance, regress to manual systems and barbarianism, or build the software for tomorrow's organization today. Join me here.

Technorati Tags: People's Perez Call-to-Action Software Organization

Recommitting to Sun Microsystems.

Sun put out their third quarter earnings today. Those that have seen them probably share a concern that I have about the stability and durability of the company and its products. Clearly we are a Sun customer. Every product we are proposing to be used in the People, Ideas & Objects application modules is a Sun product first and foremost. I feel that they have "some skin in the game" and are therefore easily motivated to make their technology work, and they have.

We can't afford any of the finger pointing between vendors that we have seen in the past systems. That game is unacceptable to the users, developers, account managers, project managers and investors in the oil and gas industry. This expectation is also in line with the companies genetic makeup. They are an engineering firm, first and foremost with most of the technologies being far superior to the competitions. The only complaint I have of Sun is that I wish they would hire some people to take out the garbage. And what I mean by that is they have a tendency to solve the big problems and unfortunately the other less problematic tasks get overlooked. This is not a significant problem but one that shows up in their marketing at times.

Speaking of marketing, the open source initiatives the company has implemented are the reason that the risks in committing to them are minor. We would still be able to use and improve Java for our needs even if the companies receivers were hounding the researchers. Try that with an IBM or HP.

Jonathon Schwartz the President and CEO is an avid blogger and has been quoted in innovation in oil and gas many times. His blog post today provides a wealth of information that is more informal then the statutory reporting, and hence useful. Comments like these from Jonathon are the ones that make me feel that sticking with them carries little to no risk.

What went well within the quarter?

The biggest highlights were the performance of our Solaris based, chip multi-threading (CMT) systems, which again grew a whopping 80%, year over year. These systems leverage awareness of Solaris/Opensolaris and our outstanding ISV portfolio, and are driven by extreme energy
efficiency and virtualization - attributes we just multiplied with the launch of our newest CMT system: the T5440.

Simultaneously, our Open Storage systems also delivered a great quarter, up 150+% year over year. These systems, known by many as Thumpers, are amplified by the awareness of our open source ZFS file system, a technology at the heart of Sun's storage business. You'll be hearing more about Open Storage at a launch event we're holding on November 10th. If you're technical, and you want some hints about what we're about to unveil, click here.

And finally, most of our software business grew - including MySQL, Java, alongside Solaris, management and our virtualization products. As we've been saying, open source is a great distribution model - and it feeds a great revenue model.

Now, how is Software growing if you give everything away?

We make our software freely available to enable its distribution to the farthest reaches of the market - which we then monetize with commercial subscriptions and services, alongside optimized hardware systems (like Open Storage, above). We continue to reach customers that have already settled on our software - the process of selling to them is simplified by the fact they're already using our core products. And unlike most university students (who typically have more time than money), our paying customers view downtime or administrative complexity as more expensive than a software subscription (that is, they have more money
than time).

Thus, customers will pay, and continue to pay for access to enterprise grade features, along with mission critical support and maintenance - the Software business is both a license, subscription and services business.

To understand the total size and value of Software at Sun, you need to look at billings alongside our multi billion dollar support streams - remembering that a lot of our software is sold as a subscription service (remember, it's open source). In addition, you have to recognize that how much a "Systems Service" support contract is attributable to software is entirely subjective (we don't price them separately to customers). It's like asking how much revenue a mobile phone manufacturer should attribute to their operating system - you're not charged separately at the point of sale.

Wait, you make money off Java?

Yes, it's among the most profitable technology products at Sun - and improving. Java's one of the most popularly distributed pieces of Software on the internet, we distribute over a million Java run times a day to users across every OS and geography on PC's. That helps us reach a very broad community of users and, more importantly, developers. We have some exciting news coming up around these distribution volumes - and their value to us, and others.

Noting the importance of the customer in their product offerings...

What is Sun focusing on?

Strategically, we continue to focus on two core areas - creating the world's largest, and fastest growing developer communities - for whom we build the products, services and technologies on which they'll build their products and services. With brands like MySQL, Java and OpenSolaris - we measure and drive their adoption very aggressively.

And secondly, we deliver compelling commercial offers to those deploying applications - across a diversity of industries - through commercial subscription, services and optimized system products. That is, we sell data-center systems, software and services.

We're focused on today's customers with our current products and services, and tomorrow's customers with our investments in freely distributed software.

Operationally, we're focused on execution - in the field, in the labs, and on behalf of our shareholders. Innovation loves a crisis, even when the stock markets don't - and Sun's positioned very well to supply the platforms on which the next generation of clouds will be
built.

When I look at the firms offerings and see the stock's price, a mere $4.0 billion market cap, I shake my head. I think Sun has put themselves out in front of the competition. And I think that the firm is dedicated to doing the right things right, which makes them particularly difficult to understand. Open source and proprietary systems are the tools of building a strong firm for the long run. The problem for people investing in the firm is that the story doesn't necessarily fit into a $4.0 billion package. Given time the firm will be able to better articulate their story. This will only happen after the general public can better understand the difficult concepts that the firm operates with.

Technorati Tags: People's Sun Market Management Trends

The State of the Energy Industry.

Quotes from ASPO-USA.com

The price of oil and natural gas have both tanked as a result of the market meltdown. What is most impressive about this changing marketplace is its speed. The rapid decent has caused the commodities to be brought down with the rest of the market. For oil and gas that spells more trouble down the road. What we lose in terms of capacity to conduct operations may turn out to be substantial. The further we get behind the natural decline curve, the harder it is to reclaim lost positions.

I continue to believe one day within the next five to ten years we will see oil at $600.00 / barrel. When demand does return, the product lag may be severe with investors committing to long term projects on much much longer lead times. The Canadian oil sands will be seen as the white elephant that it is, with most projects being scaled back in order to mitigate the losses.

This market is much more dire then I suspected. Professor Perez suggests the turning is necessary to institute the changes between the old economy and the new economy. What we forget is the reality of the situation when we are in it. What I suspect will happen is the stock markets to drop more in the next two years. The liquidity crisis is contained and the markets will ease into a steady decline. Now the tough bit comes. Choosing who stays and who goes. The solvency of companies in all industries will be as brutal a drop as we have seen in this liquidity drop.

Canadian Natural Resource Ltd will be announcing their third quarter results on November 6th. This may be the end of the firm as we know it, I can't even see how they've been able to make payroll this month. There will be the need to address the credit crunch and their Mickey Mouse approach to financing. For the firm to make money will be as a result of the valuation of mark to market coming on September 30, a time when energy prices were lower, therefore lowering their unrealized loss on commodity sales. The point will be made very clear to them that they can't finance a $3.2 billion working capital deficiency and $26 billion in total debt. I am sure the Horizon project is sinking beyond the horizon of what is possible. The ability to have this project propped up is next to impossible. CNRL is insolvent and needs to be shut down.

The ability to have a partner come in and take over the remaining development will be difficult. The heavy oil plant is generally an overall strategy of the firm, companies need to dedicate natural gas for fuel and condensate for diluent. A company coming in can't create this situation and as such getting into the Horizon plant will be difficult.

Nonetheless the following quotations are from the ASPO USA weekly bulletin. The first item is very disconcerting in that I am not aware of any attempt to deal with the difficulty mentioned, the retirement of the human resource in the industry. We know that the retirement of the brain trust is going to happen in the next five years. Weather this market meltdown stops many from retiring is too optimistic to suggest. This problem must be dealt with, and in the Draft Specification I have proposed that building redundant capabilities in each company is the source of the problem and its ultimate solution. The producers need to pool their capabilities in order to mitigate this problem. Pool them on the basis of their interests in the JOC. Using the Military Command & Control metaphor to provide the governance mechanisms that the producers need.

Despite falling costs for steel and other materials, the oil and gas industry again finds itself confronting a shortage of people with the skills and experience to lead new developments. If efforts to plug the skills gap don't succeed, senior industry executives say oil companies' ability to tap new and challenging hydrocarbon resources fast enough to meet demand may have already have reached its limit. (10/23, #17)

The speed and ability of the industry is in question, imagine that, someone should have suggested a new organizational structure for the industry to follow. Please excuse my sarcasm, I really can't help myself.

This next article / quotation is from Jim Gray who had built up a strong natural gas company that is now buried somewhere in Connoco Phillips. He and his partner, John Majors were able to solve some difficult geological problems in the late 1980's building up a firm by the name of Canadian Hunter. Here he suggests there is more at stake then just the money issues that are in the news headlines.

“I’m strongly of the opinion that we’re on the cusp of a global liquid fuels crisis. The forthcoming energy crisis, should it develop, could result in economic, political and social stresses, and turmoil on a scale not experienced for half a century.”
-- Jim Gray, former CEO of Canadian Hunter Exploration

As the Canadian industry moved towards its ultimate strategy of "me too" and we have 10 or so heavy oil projects. The rest of the industry has waned substantially. Natural gas production is down 12% and as our former Governor General stated, Canadian conventional oil production is in steep decline as well.

Ed Schreyer in the Q&A, Ed noted that tar sands are now 50% of Canadian oil supply, as conventional production is declining steeply. With the current financial crisis and very high capital costs for tar sands development, turbulent times are coming for the oil & gas industry in Canada.

So here we are faced with an impossible situation in an impossible financial meltdown. What will these boy geniuses think of to make this problem workable. Fund this development? Not on your life. They want nothing to do with working for a living.

The funding has to come from the two previously identified sources. The disgruntled shareholders who are fed up with the management and can see the vision as it is layed out in the Draft Specification. And the various governments who have royalty regimes in place in oil and gas producing regions. And are able to see that society is too complicated for Hayek's Spontaneous Order to occur. And realize that the "new" economy after this meltdown has had all its fun, needs to have the software built first before we can reorganize based on specialization and define a new division of labor. Please join me here.

Technorati Tags: People's Energy Call-to-action Vision

The Economist on Cloud Computing.

A "special" report has been written and is being distributed by the Economist magazine. The download is being provided through sponsorship from AMD. The Cloud Computing paradigm is the method that will be used to host the People, Ideas & Objects application. The Economist starts with the following quote.

Information Technology is turning into a global cloud accessible from anywhere, says Ludwig Siegele. What does that mean for the way that people conduct business? p. 1

Google is the best example of a firm that has all of their applications delivered in this fashion. People, Ideas & Objects has been using Google Apps for our Domain for over one year now and have found this model of application delivery provides real value. I recently noted that we also evaluated SalesForce.com and will be implementing that application into our organization to better manage the producers involved in this software development. The cloud model is sound and provides some unique attributes that are not available in other Information Technology architectures.

The rise of the cloud is more than just another platform shift that gets geeks excited. It will undoubtedly transform the information technology (IT) industry, but it will also profoundly change the way people work and companies operate. It will allow digital technology to penetrate every nook and cranny of the economy and of society, creating some tricky political problems along the way. p. 1

This can seem to be much of the same claims about technologies influence in business. To suggest otherwise is difficult to prove. I would argue that our current market meltdown will be comprehensive in its elimination of the manner in which we conduct business. For it is the large bureaucracies that have failed in meeting the needs of society. If we are to re-build our organizations brick by brick and stick by stick, the use of new IT architectures will be necessary. Bureaucracies have had their day. The following quotation shows how difficult it is to foresee our way through our current difficulties by using an application like SAP.

Corporate IT has  always promised to make companies more agile. In the 1990s many companies re-engineered their business processes when they started using a form of software  called  enterprise resource planning (ERP), which does things such as managing a firms finances and employees.  But once these massive  software packages were in place, it was exceedingly difficult to change them. Implementing SAP, the market leader in ERP, is like pouring concrete into your company, goes an old joke among IT types. This  helps  to  explain  why  in  many firms IT departments and business units have traditionally been at loggerheads. In recent  years  tensions  have  worsened. Companies must grapple with ever changing markets and regulations, yet IT budgets are being cut. Many firms now have a huge backlog of IT projects. pp. 11 - 12

Why would People, Ideas & Objects using this new architecture be successful? I think the primary reason we would be successful is that our approach is not based on these technologies. That is to say we are not focused on the cloud to make the changes and provide the value to those that will use our application. Using the Joint Operating Committee (JOC) as the key organizational construct will bring into alignment the cultural, financial, legal, compliance & governance and operational decision making frameworks of the industry. This will also have the effect of bringing those participants in the JOC closer in terms of conducting joint operations, which is the global and systemic way of the industry.

Again, the software industry has been promising this for some years under the banner  of  service oriented architecture, discussed  in  an  earlier  chapter.  Yet  the adoption of SOA has been slow and many projects have failed, says Chris Howard of the Burton Group, a consultancy. The reasons are not just technical but cultural; for example, some business units are not used to sharing data. Cloud computing will help resolve  some  of  these  problems.  Many web based services are built to be integrated into existing business processes. p. 12

Adam Smith proved the theory of division of labor and its impact on production and productivity. Economically we have taken division of labor and specialization to substantial levels. To take it to the next level will require alternate means of organization and a much finer level of how work is performed.

In the Draft Specification it is also assumed that the oil and gas producer will be focused on their core competitiveness. The innovative oil and gas producer will concern themselves with their reserves, land base and most importantly their earth science and engineering capabilities. Providing hardware and software in which to operate the firm is about as distant to their competitive advantages as one can get.

What eff…ect will all this have on the nature of the firm? If IT systems really allow companies to become more modular and flexible, this should foster further specialization.  It  will  become  even  easier  to outsource business  processes,  or  at  least those parts of them where firms do not enjoy a competitive advantage. Companies will increasingly focus on their "core" and shed the "context", in the words of Geoffrey Moore, managing director of TCG Advisors. p. 12

This makes the approach to how the industry operates change fundamentally. The need to have different ways of operating, ways in which we can align the culture of the industry, is what the Cloud provides. These means of operation are a natural and necessary part of the oil and gas firm. People, Ideas & Objects should be considered the "industry operating system" of the oil and gas industry.

Both trends could mean that in future huge clouds which might be called  "industry operating  systems" will  provide basic services for a particular sector, for instance finance or logistics. On top of these systems will sit many specialized and interconnected firms,  just  like applications on a computing platform. Yet this is only half the story. The cloud changes not only the plumbing and structure of firms and industries,  known  as  the  "transactional layer", but also their interactional layers, a term coined by Andy Mulholland, chief technologist of Capgemini, a consultancy. He defines this as the environment where all  the  interactions  between people  take place,  both  within  an  organization  and with its business partners. p. 12

In the Accounting Voucher of the Draft Specification. It specifies the move away from transaction processing as the key functionality. Transaction processing is to a large extent expected in any system, and is not a competitive differentiation of the People, Ideas & Objects application. What is necessary and is built into the module is the transaction design that will enable the analysis of costs and the manner in which the work gets done.

Companies may not have much choice but to open up, says Mr Mulholland. Employees will increasingly resist constraints on their use of technology, and they will have a growing need to reach beyond the corporate firewall. Twenty years ago, he argues, 80% of the knowledge that workers required  to  do  their  jobs  resided  within their company. Now it is only 20% because the world is changing ever faster. "We need to be open to new and unknown connections with people and content," he says. p. 13

This last point shows cloud computing may become more of a main stream technology. Microsoft announced on Monday October 27th their Azure platform. Ray Ozzie of Lotus Notes fame said:

"We are in the early days of a transformation to services across the industry," said Ozzie at the conference.

Technorati Tags: People's Trends Collaboration Development

Why would accounting firms survive?

In the Draft Specification, I had documented the need for accounting firms to be heavily involved in a number of areas. Audit, compliance, consulting and technology implementation, training etc. In retrospect this was an oversight on my behalf and these activities should be handled by the community of users of the People, Ideas & Objects application.

Recall we have a situation where ideally the oil and gas investor is sitting at the JOC virtual table. It is the investors who are best able to represent their interests. Who they choose to ensure they meet compliance and governance is of importance. Asking once more, why would an oil and gas investor hire an accounting firm to handle their compliance audit and technology consulting?

These firms are a big part of the breakdown in the separation of ownership and management that led to the missalocation of capital and our current meltdown. They are the ones charged with the duty that management be held accountable and were on the front-lines throughout the last 70 years. In a nutshell they have failed. Not only have they failed, but they are also co-conspirators in creating the bubbles that have been built up in the last 10 years. These accounting firms should be treated as if they are radioactive. And that is how they will be treated in this software development project.

This might have become a fatal error on my part. So I am throwing this problem back to the community for resolution on how the investor can be assured that his compliance and governance is achieved. This specific issue should be resolved in the Preliminary Specification. And I would suggest that a clean slate approach be taken in line with the developing ideas of Carl Icahn.

The sad part of this episode is that I only realized my mistake when the accounting firms I contacted treated me like toxic waste. I must remember these accounting firms work for the management, and should therefore be dispatched to the garbage heap, pronto!

This is also why the 100 people needed to complete the Preliminary Specification should follow this process and join me here. To make sure that no more mistakes are made, and yes I do apologize for this.

Technorati Tags: People's Preliminary Specification Management Community

Professor Carlota Perez Respecialisation Part II

As promised here is the second and final installment of Professor Carlota Perez Respecialisation document.

GLOBALISATION, MARKET SEGMENTATION AND THE NATURE OF THE ICT PARADIGM

In this section Professor Perez makes a comment that I don't think I have heard before. It is also one in which we have to admit is an important aspect of how we do move to the economic prosperity that is promised in the "turning". She also draws a parallel to the "third surge" that occurred during the 1870's and continuing onto WWI.

One of the basic features of this paradigm is the trend towards globalisation, which is a consequence of the characteristics and the potential of information and telecommunications technologies.

Concluding with somewhat of a warning about investing too far abroad and neglecting advanced production systems at home.

Historical parallels do not lead to predictions; every paradigm and every set of circumstances is unique. They merely provide a useful frame of reference which points to aspects that may merit attention when analysing the corresponding period in another surge. The experience of the third surge shows that a powerful set of technological and infrastructural conditions facilitating worldwide expansion can function as an irresistible driver for global investment and trade. It gives a precedent showing that some well-endowed countries with appropriate policies can experience intense processes of catching up or forging ahead in connection with globalisation and the new technologies. It may also serve to warn that building finance-based empires abroad while neglecting advanced production investment in the home economy could later bring very unfavourable consequences.

Professor Perez goes onto to state that the British lost their dominant economic position to Germany and the United States as a result of not maintaining their infrastructure at home. I have heard many people say that the U.S. is a consumer based economy, and that is true. This does not mean that they have not invested internally to the detriment of their competitiveness. The characteristic I see the Americans having in this market meltdown is the capacity to accept change. To admit their downfall was their own fault, pick themselves up and get moving again. This remains undiminished in my opinion, and a key in their future competitiveness.

The ICT paradigm and globalization

How fast can a firm react. Today with Information Technology it is much faster then at any other point in time. Perez notes the costs of using the network are relatively small. The real costs are in the areas of research and development. That is what I have focused on in this blog for the past five years. We need to now build the application modules from the Preliminary Specification to the final Release Candidate (RC).

Knowledge capital and intangible value added facilitate heterogeneity, diversity and adaptability. these in turn lead to -and interact with- the segmentation of markets and the proliferation of niches. Globalisation leads to the interaction of the global and the local, both in terms of comparative advantages for production and innovation decisions and in terms of adaptability of global products to local markets. Production is then conceived in a complex range that may go from “mass customisation” achieving economies of scope and scale to multiple niches geared to attaining economies of specialisation. p. 21

Globalization, due to its speed and innovation of decision making, is here to stay. Despite the consequences of the current market meltdown, we need to keep this fact clearly in our minds that the inevitability of globalization is what we should aspire to.

ICT and the hyper-segmentation of markets: Outsourcing and off-shoring

Professor Perez is a a long wave Shumpeterian economic theorist. Creative destruction is what the markets have traditionally used to make the necessary changes on a permanent basis. That is what we are seeing in today's marketplace, the destruction of the old ways of doing things. We need the new globalized, IT enabled organizational structures that are able to increase the productivity of their workers and meet the markets demands for more. How this comes about is a part of what Professor Perez is suggesting.

As the processes of disaggregation and diversification become more and more complex and as the various competition factors in each segment become defined, so the relative advantages of the various regions, countries and companies become clearer for outsourcing and off-shoring. Thus, a feedback loop is generated intensifying the advantages of those initially successful in certain activities or segments, so that the assessment processes undertaken by various global companies favor them even further. This concentration eventually overshoots the mark and is, in turn, likely to generate new disadvantages that open opportunities for those discarded in the early rounds. p. 24

What is clearly being stated in this article is that the majority of the ways of doing things are going to be iterative over the life of the process. As new opportunities are discovered and implemented the firm will be able to increase the level of specialization and enhance its productivity. This is all enabled and facilitated by the Information & Communication Technologies. But how will this come about, and how will it be implemented? That is the question that I am attempting to suggest is a key criteria for proceeding with this software development project.

If we are to expect a dynamic and iterative marketplace for service and oil and gas production we are going to need an iterative and comprehensive oil and gas system that can adopt the changes. An Information Technology development capability for the future of the oil and gas industry. That is what People, Ideas & Objects is about, providing that change enabled IT capability using the Joint Operating Committee as the key organizational construct of the industry.

POLICY ACTION TOWARDS A SUSTAINABLE AND COHESIVE GLOBALIZATION

Professor Perez says something interesting that I don't think I completely subscribe to. And that is that markets may, as a result of unregulated financial markets, produce bubbles and collapses that affect the real economy and can lead to social unrest. It is certainly easy to see who has created the economic problems that we have today, (financial capital) and the risks of social unrest is very high.

As discussed in section three, the collapse of the bubble leaves three tensions acting in the economy: that between paper and real values, that between potential supply and effective demand (or premature market saturation), and that within society between the richer rich and the
poorer poor.

Since these three tensions define the conditions under which markets operate, free markets will only aggravate them. In the absence of conscious regulation and policies that will create conditions for redirecting investment towards a truly positive sum-game and a virtuous feedback cycle of global growth, the instabilities underlying the present performance of the various economies may produce collapses that could bring the world economy into recession or intensify the social tensions to the point of generating serious social unrest. p. 32

and

In the present Turning Point it could be said that excess free markets are as obsolete and represent as much of an obstacle to maximize growth in Deployment, as excess State intervention was seen to be during early Installation. p. 35

Where this discussion heads is uncertain at this time. I am surprised at the number of people who would normally shriek at the action of governments in the last few months, just accept them as necessary. Regulation of free markets may be the net result of this collective understanding that Professor Perez is suggesting is necessary.

The ‘other’ globalization, fully compatible with the paradigm and capable of unleashing a worldwide steady expansion of production, markets and well being, is waiting to be formulated. It would be production-centered and -led; pro-growth and pro-development; with dynamic, locally differentiated markets, enhancing national and other identities. But it will not be the creation of any invisible hand; it will work with the market but will require plenty of human imagination, ample participation, intense negotiations, much determination and collective political will. p. 35

I have asked a related question on this blog before. How will a globalized industry organize itself. Markets used to be created between face to face interaction. Now the ICT and globalized marketplace are able to achieve significant value add through the development of markets. This can not be and will not be through the standard face to face interactions that we are used to. I would also add the further adoption of enhanced regulations would best be handled in software.

Software defines and supports the organization. This was researched and determined in the Preliminary Research Report. We have to set out to build the software first and establish the infrastructure and market connections before they will happen. If globalization, as Professor Perez suggests in this paper, is enabled as a result of the Information & Communication Technologies, we need to focus on ICT as the key to instituting the change, ensuring that we become as innovative as possible for today and tomorrow. Please join me here.

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