McKinsey Financial Crisis, Past and Present

Providing an analysis of previous recessions and depressions, McKinsey gives clarity to the economic situation we find ourselves in. The public discussion is beginning to recognize that this is both a financial crisis and a recession. Most would agree that this environment is more toxic then previous events.

Living through the economic decline of the early 1980's, the Canadian governments much loved National Energy Policy and the decline in oil prices to single digits caused Calgary to become pretty much a ghost town. We had sections of the papers classified ads dedicated to the mandatory foreclosure announcements. You could fire a cannon down the downtown streets and never hit anyone. And that was during lunch. 

McKinsey have identified the early 1980's recession as fairly severe. The Canadian situation was exacerbated by the discriminatory policies of the Liberal government against the Western Provinces. And the politics of the Saudi's and the U.S. creating a decline in pricing that eventually did bankrupt the Former Soviet Union. This recession was amongst the longest. The two depressions that occurred in the 20th Century, the great one, and the lost decade of the Japanese. 

The way that I see this downturn is very much through the lens of Professor Carlota Perez' long range economic analysis. Citing five previous "depressions" that occurred in predictable fashion, all of these events were significant in that they were the means of initiating fundamental change in the key economic drivers. My opinion is we are moving from the inefficiencies of the bureaucracy, to organizational business models that exploit the full value of the Information and Communication Technologies (ICT).

What we can learn from this McKinsey paper might be valuable, so lets dig in. We see two groups of industries that are suffering as a result of the downturn. Auto's and manufacturing appear to be significantly over built with a capacity overhang of monstrous size. How government policies can overcome this "cost" is difficult to see. The decline of the U.S. based manufacturers to mere shadows of their current selves is what is needed to effect the changes that are needed in the economy. How the political leaders deal with this is unknown, and potentially dangerous as the natural forces are attempted to be stopped. 

On the other side the American economy is the high tech engine of the world. Companies like Apple, Google and Intel are global leaders with cash balances of up to $30 billion. These are the new economy preparing to lift all boats and make society more prosperous and efficient. Other then higher taxes that will be assessed to pay for the auto and mortgage bailouts, how will these companies attain the value add to make up the difference from the auto companies. Most people would agree that reorganization of firms holds the possibility of leveraging the talent in these organizations. 

From a company standpoint, the critical issue is the impact such shocks and subsequent downturns can have on the availability of credit—and the impact of a credit shortage on the real economy and on consumer and corporate confidence. The downturn after the S&L crisis of the 1980s and ’90s, when bank write-offs equaled some 4 percent of GDP, lasted about two years. GDP ended up about 4 to 5 percent lower than it would have been given the pre-crisis trend line. After the bursting of Japan’s asset bubble, the country’s economy grew by less than half a percent a year in real terms for a decade, and GDP ended up around 18 percent lower than it would have given its pre-crisis trend line. We estimate that the present credit crisis will cut real GDP by around 3 to 7 percent from trend growth. If the US economy were to follow the same path it did in the more severe crises, the total lost GDP could be two to three times greater than that estimate. pp. 1 - 2

Up to a 21% decline in U.S. GDP is a serious hit. A hit that would have to be ranked in the depression category. What is unique about a depression is the length of time that the declines occur and the lost opportunities of the economy during these protracted periods. Glossing over the problem, as the U.S. monetary and fiscal policies are attempting, is the wrong way to make the time shorten. Focusing on the strengths, job retraining and letting the social system kick in for those effected is where they should be focusing their efforts in my opinion. You have Toyota, Honda and Ford that are going to make it in the long term, lets leave it to them to work out the problems. A better fiscal stimulus may be tax cuts that provide the consumer with additional cash to use in their own transitions.

But the fallout from the past century’s two worst crises did considerably more damage. In the countries hardest hit by the 1990s’ Asian financial crisis—Indonesia, Malaysia, the Philippines, South Korea, and Thailand—GDP shrank by an average of 8 percent in 1998 in local-currency terms. Since their currencies halved in value, on average, in US dollar terms the damage was catastrophic—bankrupting many companies and causing widespread social unrest. And during the Great Depression, from 1929 to 1933, 28 percent of real GDP was lost. p. 2

Organizational changes would reduce the impact of these declines and enable the economies to grow well beyond what the current bureaucracies have established as possible. Acceptance of the scope of the difficulties that we are in seems to be the major impediment to thinking constructively as to our collective future. The pain is here, lets not wallow in it.

Equity markets are the most visible and dramatic indicators as crises unfold. At the end of October 2008, the S&P 500 index had fallen by 46 percent from its peak a year before (October 9, 2007, to October 27, 2008). By late November 2008, the US equity market had given up almost all of its gains since the 2001–02 dot-com bust. Although nobody knows if the market has reached bottom, the fall so far isn’t unusual by historical standards. Japan’s Nikkei 225 fell by 48 percent from peak to trough (December 29, 1989, to October 1, 1990) during the banking crisis, though the market has subsequently fallen still further; at the end of October 2008, it retained less than 20 percent of the peak value reached in 1999. During the Asian financial crisis, the equity markets of Indonesia, South Korea, and Thailand fell by 65, 72, and 85 percent, respectively, in local-currency terms. In the United States, the S&P 500 index fell by 49 percent from March 24, 2000, to October 9, 2002, after the tech bubble burst. pp. 2 - 3

The Japanese stock market remains at 20% of what it was in December 29, 1989! Lets not go down that road, where people choose to ignore the problems they are in, the cost is too high. Now with the aging population of Japan becoming a significant issue, their inability to address the scope of their problems in the early 1990's threatens to remove their economy from the global system. All as a result of high real estate valuations.

Since the peak, housing prices have fallen by 18 percent, as measured by the Case–Shiller housing index, whose futures imply a further fall of 19 percent from the peak. Losses in the housing and mortgage markets, when realized, could considerably exceed those in the stock market as of early December 2008. p. 4

McKinsey provides sound analysis of how companies should approach this downturn. Here are some of their recommendations. 

What should companies do?

We do not yet know how the current crisis will evolve. The confidence of consumers, corporations, and investors—a key factor—cannot be forecast. Nor can government policy. Yet research shows that in past recessions, companies pursuing a purely defensive strategy fared less well than their more active counterparts. As the economy enters what will probably be a difficult downturn, companies should prepare to seize their opportunities. p. 5

And for oil and gas, they should turn to this community to begin the process of building the software necessary to define and support the innovative oil and gas producer. A software application that is based on using the Joint Operating Committee as the key organizational construct of the industry. One that aligns the Joint Operating Committees communication, legal, financial, cultural, and operational decision making frameworks with the bureaucracies sole purpose, compliance and governance. A software application that eliminates the bureaucracy and replaces it with the Compliance & Governance Modules Military Command & Control metaphor. With this alignment the conflict and contradictions between the JOC and the bureaucracy cease. The Military Command & Control Metaphor governance methods of the People, Ideas & Objects Draft Specification provides a sound vision of the possibilities of what this community could build and support in terms of a more innovative oil and gas producer. 

Please, join me here.

Technorati Tags: People's McKinsey Perez Military-Command Economics

McKinsey Leading through uncertainty

This article was highlighted in McKinsey's Global Institute. Although it is part of McKinsey's  "The Crisis: A new era for management" and would be included in our review of those 19 standout papers. This article is co-authored by Diana Farrell, Director of the Global Institute and one of my favorite authors. This document, of all the McKinsey documents, will stand as a critical part of any oil and gas workers toolbox. It is an absolute must read and one that is on target in terms of what we should be doing in these economic times. (Click on the title of this entry.)

These times are different. It is clear that this is different when we can point to the large number of events that have not occurred before. For example, when was the last time Chrysler shut down all of its plants in North America. Although for only 30 days, I would ask how do you restart a car company? Or, the long list of retail operations that soon will be shuttering stores with no 30 day deadline.

I want to simply highlight the following four quotations that relate specifically to this project for oil and gas, and ask you to please join me here to start building the software that is necessary for rebuilding the oil and gas industry.

Most companies acted immediately in the autumn of 2008 when credit markets locked up: they cut discretionary spending, slowed investment, managed cash flows aggressively, laid off employees, shored up financing sources, and built capital by cutting dividends, raising equity, and so forth. While prudent, these actions probably won’t produce the short-term earnings that analysts expect, at least for most companies. In fact, it’s time they abandoned the idea that they can reliably deliver predictable earnings. Quarterly performance is no longer the objective, which must now be to ensure the long-term survival and health of the enterprise.

Professor Carlota Perez says the only way that we can move to a higher performing economy is by changing the basis of the economy. We can't do that on a prospective basis, only by keeping the preceding ways, the bureaucracy, until the point to where it collapses upon itself.

More resilient

A crisis is a chance to break ingrained structures and behaviors that sap the productivity and effectiveness of many organizations. Such moves aren’t a short-term crisis response—they often take a year or more to pay dividends—but are valuable in any scenario and could help a company survive if hard times persist. Although employees may dislike this approach, most will understand why management aims to make the organization more effective.

McKinsey is the number one consulting firm in the world. It has been for many years and have an established pedigree that others should aspire to. This next quotation should be taken with that in mind and the opportunity you have to join People, Ideas & Objects .

This may, for example, be the time to destroy the vertical organizational structures, retrofitted with ad hoc and matrix overlays, that encumber companies large and small. Such structures can burden professionals with several competing bosses. Internecine battles and unclear decisions are common. Turf wars between product, sales, and geographic managers kill promising projects. Searches for information aren’t productive, and countless hours are wasted on pointless e-mails, telephone calls, and meetings.

There is a clear vision of how an oil and gas producer could be more effective using the Joint Operating Committee. That vision is reflected in the Draft Specification.

Experience shows that streamlining an organization to define roles and the way those who hold them collaborate can greatly improve its effectiveness and decision making.

Technorati Tags: People's McKinsey Change Perez Economics

McKinsey IT Global Survey

McKinsey have published their third annual Information Technology Global Survey. This survey was taken during a time of economic stress, and as such, I feel it necessary to comment on the state of economic affairs as I see them. Yesterday we saw Federal Reserve Chairman Ben Bernanke essentially capitulate to the power of this economic decline. Moving the interest rates to 0% and stating he will do what he has to do to solve these problems, there is a tacit recognition of the scope of this depression.

I have been referring to this downturn as the mother of all depressions, and I think I would get a consensus on that. The only remedy to this is to eliminate the inefficiency within the economy. That means radical organizational changes supported by powerful new IT systems. As I state on occasions "SAP is the bureaucracy" and to change the organization requires first and foremost a change in the systems used by the firm. It is within this economic backdrop of this survey that I make these comments. The survey respondents are generally the ones that will be fairly quickly losing their jobs. Click on the title of this entry to view the survey results.

It may be considered optimal or ideal to have IT lead the organization in term of innovation and competitive advantage. A competitive advantage that would be attainable by a fundamentally different system like the Draft Specification of People, Ideas & Objects could provide.

CIOs and other senior executives agree that ideally these capabilities should, for example, promote innovation and better enable companies to seize new opportunities. Still, they continue to see a gulf between these aspirations and the value that IT currently delivers. p. 1

Existing demands of IT and performance requirements show that the pressure to just stay afloat becomes more difficult.

The global economic downturn complicates matters. Respondents cite continuing pressures to deliver on existing IT projects and services at a time when they expect spending to fall. So they are making trade-offs: reducing IT operating expenses so they can maintain high-priority new investments that support broader business goals, such as improved sales force or supply chain management. p. 1

I suspect these types of decisions are being made throughout the oil and gas firms highlighted in our piggy series. Failure, despite the belief that the government can save everyone, is not an option. It is what is needed for society to move forward.

I have to reiterate the value that McKinsey Consulting is providing here. They are consistently showing the right direction for firms to move too. For the past number of years (3 by my count) they have shown that they are concerned about the economic consequences and are actively moving their firm and clients to the new model they preach. This survey is no different. As I have said before, I have allocated a sizable budget for their consulting to this project when we begin. Precisely for comments such as this.

Unprepared for disruption

Nearly two-thirds of respondents say their organizations are at risk from information- and technology-based disruption. Ranking highest among disruptive forces are potential shifts in customer expectations for better products or differentiated services enabled by information- and technology-based capabilities. p. 2

To add insult to injury, it is the other C class executives that are looking at their own internal IT groups with what sounds like the greatest of disappointment.

IT’s value to the corporation

The survey found aspirations for IT are substantially unmet: respondents see a large gulf between their IT organization’s current priorities and what IT could contribute. p. 3

Makes me think that there may be a spot for People, Ideas & Objects yet! And McKinsey reflects a strong intent for businesses to improve in this area. However, based on my experience with the Canadian producers I have highlighted as the Piggies, they are only concerned with their retirement and ensure their activity level remains low enough not to strain themselves. The point that I am trying to make is that saying this is the "intent" may make it through their budget processes, but we know it is mostly, if not all, BS.

This year’s results show an area of notable improvement: the way IT strategy is developed. Fifty-nine percent say that their companies develop multi-year IT plans, up from the 52 percent response last year, and 56 percent say that their IT strategies include technology-driven business innovations, versus 42 percent last year. Still, two-thirds of executives say further improvements are possible by integrating business and IT strategy more closely. They favor a process where IT strategy and the “art of the possible” in technology influence the development of business strategy, closing the loop in strategy development (Exhibit 3). This joint development of strategy by business and IT would reduce risks of surprise disruptions and better involve IT in bolstering competitive advantage. p. 3

The remainder of the document discusses the budget allocations of these managers. This I perceive as an academic exercise since none of it will come about. The economy will be acting swiftly against those that are unable to bridge the gap from the old to the new. And the new begins here with People, Ideas & Objects and the Draft Specification. Please join me here.

Technorati Tags: People McKinsey Pig Economics Survey

McKinsey's Innovation Lessons From the 1930's

In their series dealing with the current economic crisis. McKinsey have published a short but interesting article on innovation in the 1930's. They have subtitled the document.

History suggests that even the deepest downturns can create huge opportunities for companies with money and ideas.

As part of their "Crisis" series, this document can be downloaded from here. Highlighting the efforts of DuPont in April 1930 and how they discovered and developed Neoprene. With low commodity prices and abundant research talent, they were able to discover and conduct their research over the course of the dirty thirties. They also highlight the successes of Hewlett-Packard and Polaroid during these times.

Their conclusion is one that should be considered carefully. We now have a situation where the governments around the world are attempting to stop the natural process of renewal. Instead of looking forward to the benfits of hardware, software, physics, nano-technology, bio-tecnology, genetics and a variety of new and promissing opportunities. We are proping up carcasses like GM, Fanny, Freddy and a long list of poorly run firms that don't want to face the music.

The experience of the 1930's also illustrates a broader point. Although deep downturns are destructive, they can also have an upside. The depression-era economist Joseph Schumpeter emphasized the positive consequences of downturns: the destruction of underperforming companies, the release of capital from dying sectors to new industries, and the movement to high-quality, skilled workers toward strong employers. For companies with cash and ideas, history shows that downturns can provide enormous strategic opportunities.

In oil and gas we have a variety of challenges that need a new approach. The approach I have suggested is documented in the Draft Specification, please join me here.

Technorati Tags: People's McKinsey Economics Innovation Schumpeter

Cisco's John Chamber's on MIT video

Subtitled "Building the Next Generation Company: Innovation, Talent, Excellence."

And we are back once again. I have not solved all of my technical issues, but I should be able to post every business day.

Outside of these technical issues my biggest problem is that it has become obvious to most people that addressing the organizational structures of companies is needed. The economic difficulties we are experiencing are providing the opportune time for the future leaders to implement the changes in their industries. The sheer volume of analysis being conducted on this topic has grown exponentially. Not only has the quantity increased, but the quality of the ideas being generated has improved. Much of this thinking is directly applicable to the work that I suggest we undertake in the oil and gas industry.

This current video from MIT promises to provide some valuable input to those people that are interested in this project. I previously reviewed an MIT video of Cisco's Chambers a few years ago, and was very impressed with this man's communicativeness, if that is a word. He is a truly impressive and articulate presenter. So lets dig in.

Not willing to hedge his bets and mitigate the consequences of what he says. Chambers fires his first comments with this sweeping declaration. Show me a leader in oil and gas that has the gumption to say these types of things.

What is exciting is what has changed and at the same time what has not. When you look at the future of companies, I think we are going to see the most fundamental changes in business and government. Moving from command and control to truly collaboration and team work.

Noting the recession is definitely taking hold, Chambers states that this is the opportunity to make the necessary changes. At around 6 minutes he states the following 3 points as his economics 101 prescription for addressing the economic impacts on your firm. 

1. Understand the effect on your company. Was the problem the consequence of your own actions.
   
2. How long do you think the recession will last and how deeply will it affect your firm.
   
3. The first action that should be taken is to prepare for the upturn.
   

Chamber's states governments role in the economy will be expanded. Something that I have noted in the business model of People, Ideas & Objects. Governments, and particularly those that have oil and gas production as part of their economy, have a vested interest in making this software development project go forward. The second point relates to all industries. Governments need to support the software industry much in the same manner and mindset in building the "Eisenhower Interstate". Software is the future's infrastructure, without it the future will not be as efficient as it could. 

Chambers goes on to comment that creating a change mindset scares people. Providing a vision  helps people to understand and to support the changes that are necessary. The vision I see for the oil and gas industry, as reflected in the Draft Specification, provides an understanding of how, by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer, it will provide the producer with the mindset and higher performance necessary of the future economy.

@ 12:30 Chambers talks specifically about business model innovation. Throughout this time he talks about the volume of productivity growth. That the Information and Communication Technologies would provide the ability for economies to exceed the expected productivity performance of most economists. From Chamber's perspective IT is not a cost, but an investment that provides real returns.

@ 16:20 Chambers recalls a discussion he had with Alan Greenspan of the Federal Reserve. Talking about the possibilities of heightened productivity from IT he notes that Greenspan stated "A new generation of innovation would be around the corner". Chambers I think has been one of the largest proponents of using IT with new business models and organizational changes. I only state this to square the circle of how these enhanced productivity volumes are achieved.

@ 18:28 Chambers notes that Cisco has moved from 1 or 2 major initiatives up to 26 initiatives in a single fiscal year. Reflecting the volume of work that is truly possible by innovative firms. Might I say that the oil and gas industry needs to up its performance in a manner similar to what Cisco has achieved. 

@ 29:00 Chambers begins to talk about the way that he works today. He blogs. And that is how he communicates. Wikis are proliferating through the organization. And the majority of his meetings are held virtually through Cisco's use of their own "telepresence" products. I had previously wrote about these products here. Chamber's reflects on the dramatic impact Telepresence has made on his travel schedule compared to three years ago. 

To participate in building the types of systems that are needed for a highly productive future in the oil and gas industry. We need to build the software that identifies and supports the Joint Operating Committee in the manner that the Draft Specification describes. We can begin that by readers joining this community by following these instructions.

Towards the end of the video Chambers begins to sell the Cisco Telepresence product line.  I am one that certainly has drank the technological kool aid and include the value of face to face virtual meetings as a critical part of this software development project. But there is a larger point that I would be missing if I did not state the value of face to face virtual meetings of the representatives of the different producers sitting at the virtual Joint Operating Committee. If, in addition, these people were supported by the kinds of business tools that are discussed in the Draft Specification, then I think we can see how the industry could expand the number of initiatives it undertakes and the society as a whole be able to depend on the energy industry to fuel their imaginations of what is possible. 

Please, join me here.

Technorati Tags: People's Video Innovation Economics User

Technical difficulties...

Have precluded me from posting. With the loss of my third and last computer, posting will be light.

McKinsey, Strategy in a structural break.

I can see this is going to be an all McKinsey month. McKinsey have undertaken a comprehensive revision of their website, and have now followed on with an increase in their sites content. This series appears to consist of 19 articles and I will be highlighting the pertinent ones in a series of blog posts this month. Our first document, as typical of McKinsey documents, is topical to the work that is being done in oil and gas, innovation, and People, Ideas & Objects. The subtitle or introduction begins within the context of our current economic situation;

During hard times, a structural break in the economy is an opportunity in disguise. To survive—and, eventually, to flourish—companies must learn to exploit it. p. 1

The world is quickly realizing the depth of the current economic difficulties. Whether we are in a deep recession or depression is the debate currently taking place. We certainly have much to be concerned about and will need to be mindful of the economic difficulties. We also have a variety of opportunities. If we look at this time as a clean slate, our opportunities are magnified substantially. Now is the time to ask, "what can we do", with corporate accountability, organizational performance, innovation and a brighter future being what is possible. An opportunity that we can call ours, if we take the opportunity. That is what this McKinsey article is about.

By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan. p. 1

The author rightly criticizes the "strategy" term to describe anything that may be happening with the firm. In that context this quote puts the strategy much clearer in my opinion. If we took the times that we are in and formulated a "real" strategy; and approached this depression from the viewpoint of a diagnosis of a challenge. We begin to see the People, Ideas & Objects software development project in line with this thinking of now being a great opportunity. The results of which will be going to winners and losers in the oil and gas game.

A structural break.

As I have stated here before, and based on the writings of Professor Carlota Perez, we are in a "turning" based on the developments brought on by the Information and Communication Technologies (ICT). Why do we get in the car to sit in the long line ups to get to work. It's not necessary, yet we are required to do so by the bureaucratic management of most firms. Is this sustainable? Or should we approach this structural break as an opportunity to make the changes to the oil and gas industry. Eliminating the structured hierarchy and replacing it with the Joint Operating Committee is what the 600,000 words on this blog are about.

A corporate crisis is often a sign that the company’s business model has petered out—that the industry’s underlying structure has changed dramatically, so old ways of doing business no longer work. In the 1990s, for instance, IBM’s basic model of layering options and peripherals atop an integrated line of mainframe computers began to fail. Demand for computing was up, but IBM’s way of providing it was down. Likewise, newspapers are now in crisis as the Internet grabs their readers and ads. Demand for information and analysis is increasing, but traditional publishing vehicles have difficulty making money from it. pp. 2 - 3

I point to the fact that the production and reserves of the oil and gas companies are in steep decline. The transition from the banking mentality of managing 10% returns on oil and gas investments has failed. The new basis of the innovative oil and gas firms business model is science. Where the earth science and engineering disciplines are enabled to fully exploit the current understanding and move the science and understanding forward. We know that a structural break has affected the production profiles of the producers, but did not create the corporate crisis that McKinsey suggests. The management of the producer firms were enabled in their ability to report record profits from higher prices. Therefore the corporate crisis that is needed is not as a result of the production and reserves decline, sad as that may seem, but the temporary 12 - 18 month decline in energy prices that we are currently experiencing. As it turns out I am frankly surprised at the scope of the decline in energy prices. Since this software development project was not developing the traction necessary for the producers to act, maybe now the oil and gas investor, who has been affected the most, will.

Based on the prior quote, the business model of the oil and gas producer has failed and a corporate crisis is what is necessary to clean out the industry. Here's hoping that I may find work in the oil and gas industry once again.

The wrong way forward in a structural break during hard times is to try more of the same. The break and the hard times are sure indications that an old pattern has already been pushed to its limits and is destroying value. p. 5

Here, here as they say in politics. Most of the producers have lost the ability to generate the profits their management needed to reward themselves, and their managements motivation is in question. The firms are in a state of crisis and are having most of their projects scaled down to preserve cash, something they should have a bounty of. However, are cash poor in the majority outside the international super majors.

Consider an analogy. When oil is cheap and plentiful, we create a vast infrastructure that works well if oil remains cheap and plentiful. When it becomes expensive, we wish we had a different infrastructure. Similarly, when economic opportunities abound, we invest in a management infrastructure that harvests them very well. When the field of opportunities becomes less verdant, we must change our management infrastructure. A system that requires companies to spend at least $300,000 a year in wages, benefits, support personnel, and systems to enable one educated person to do his or her job could be unsustainable in a less luxuriant world. p. 7

Doing things differently.

Enough discussion of what is plainly obvious to most outside the rarefied air of management. What do we do about this crisis. The second major point of my thesis was that software has taken on a much more important role in defining and supporting organizations. That to change anything, must first be reflected in the software. Coining the phrase "SAP is the bureaucracy" shows this thinking to be valid, and at the same time shows what would be necessary to make any changes.

So during structural breaks in hard times, cutting costs isn’t enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to simplify and simplify again. Since companies must become more modular and diverse, eliminate coordinating committees, review boards, and other mechanisms connecting businesses, products, or geographies. The aim of these cuts is to provide lean central and support services that don’t require business units to spend time and energy coordinating their activities. Break larger units into smaller ones to reveal cross-subsidies and to break political blockades. You may think that coordination costs will rise if you fragment the business, but you must do so to expose what ought to be streamlined. p. 7

By adopting the Joint Operating Committee (JOC) as the key organizational construct solves all of these objectives. Review of the Draft Specification shows the effect of simplifying the business to its JOC culture has the effect of providing the innovative oil and gas producer with the means to move to the science based business model.

But these changes require more. Software has been around for several generations in the oil and gas industry. None of it has fully satisfied the needs of the industry. Primarily because of the rapid changes that are reflected in the base business. What is needed is a software development capability to ensure that the innovative oil and gas producer can move and benefit from the many industry changes. A systems development that puts the users in the forefront of defining their needs. One that addresses the high failure rate of software development projects, where project and development risks play a significant part of those failures.

In ordinary hard times, the traditional moves are reducing fixed costs, scope, and variety. But in hard times accompanied by structural breaks, you must rethink the way you manage. Companies that survive and go on to prosper look beyond costs to the detailed structure of managerial work. Several new issues come to the forefront:

• How much extra work results from the way incentive and evaluation systems relentlessly pressure managers to look busy and outperform one another?
  
• Which information flows can you omit? Information that doesn’t inform value-creating decisions is a wasteful distraction.
  
• Which decisions and judgments can you standardize as policy rather than make in costly meetings and communications?
  
• How can you work with customers, suppliers, and the government to simplify their processes so that you can simplify yours?

Recessions are neither good for the economy nor morally uplifting. But since we are diving into a period of neck-snapping change, we had better start the process of reformation before it’s too late. p. 8

For oil and gas that means People, Ideas & Objects, please join me here.

Technorati Tags: People's Change Economics McKinsey Perez

Information and Communication Technologies (ICT).

Change is over estimated in the short term, and underestimated in the long term, so the saying goes. Technology had a number of days of reckoning in the early part of this decade. A time when the elevators were projected to fail, for a day, and the creation of technologies that appeared to solve the source of all the worlds dog food problems. I was still working in management in the oil and gas industry, and had no compelling reason to join these hysterical technological projects. This software development project is not about the technology for technologies sake.

Today our economy is going through the necessary transition to enable society to move to higher performance metrics. Much of these economic changes will be focused around the elimination of the bureaucratic processes and replacing them with new and more innovative business models and organizations. This transition is driven by the inefficiency of the old ways in which to organize and is contrasted to what is possible in applications like People, Ideas & Objects. Structural organizational changes with today's Information Technology (IT) provide real value generating capabilities and efficiencies.

The economic news continues to surprise on the downside. It now appears that the economy is actually going to slow quite substantially, with many people uttering the D word. If there is a depression, and that is what is necessary to instill the changes in the industries, we are looking at a 5 year turn around. The necessary time to make the changes to the industries to enable the more efficient means to be built and become operational.

The stimulus that governments are now applying is a covert "Quantitative Easing" by the Federal Reserve. This policy, I think, has been put into place to eliminate the possibility of deflation coming into the picture. The Fed has pumped cash, straight from the printing press, into the economy in an unprecedented fashion. The best reading on what is happening is provided by Rebecca Wilder (not her real name.) Her blog post provides two graphs that show the money multiplier is collapsing, and the bank reserves are surging. The latter appears to me to be attempting to make up for the loss of economic activity due to the multiplier effect's decline.

Many people have already been affected by the market meltdown. Reliance on a good job, your pension, mutual funds, stocks and your home now seem to be the wrong strategy. The safe road now seems to have been the most risky alternative. What should someone do in order to deal with this situation. Hedge your bets. If the economy does complete the expected transitions it will be in a new form. One that optimizes the potential of ICT. Where systems like People, Ideas & Objects are built to enable the new economy to prosper. Like this project, none of these applications are built at this time. In many industries there is not even a comprehensive vision of what is possible in the future. I believe I have provided a strong and coherent vision of how the energy industry could operate in the future. And have led the charge to make the systems available to the marketplace at the soonest possible moment. I am unaware of any other alternative to turn too at this time.

For people to change requires that they be disrupted in this violent of a fashion. If we could all realize and act to make the transition seamless we would, but we can't. We must be disrupted to the point where the decision is made not to go to work, and what to do next. For that is the only means of comprehensive change that can be put in place. The reason people will stop going to work is because they know there is nothing there for them. Their next question is "what will I do now." And that is where this project comes into play. People, Ideas & Objects is the future for the oil and gas industry. A place where you will log into work as opposed to drive to the office. A place where the systems based on the vision of the Draft Specification provide the means and manner in which people can do their job in the industry.

These are the facts of the situation today. It would be better if we didn't have to go through these changes but that is not an option. The bureaucracies are unable to provide us with a sustainable way of life. Therefore we must move to build higher performance organizational structures. The upside is that these new ways of doing business will provide for substantially better standards of living then what we were accustomed to in the past.

So we can either hide from the difficulties and ignore that they are happening, or proactively make the transition as seamless as possible by accepting that this is and will happen. And govern yourself in a fashion to optimize the upsides. For oil and gas it is as simple as following the procedure necessary to join People, Ideas & Objects, and limiting the damages to your world. Please join me here.

Technorati Tags: People's Change Economics Organization Software

Bloomberg is reporting

A little off topic but the scope of the economic difficulties is coming into focus. Bloomberg is reporting the Fed and Treasury are prepared to provide unlimited financial resources to the market to offset the threat of deflation. If you have read the Preliminary Research Report that I wrote in May 2004 I expressed a concern that if left unchecked, the economy could slide into a deflationary period that would be particularly brutal. It would seem that the Fed is in agreement that this must be avoided and is willing to spend up to $7.4 trillion to eliminate the risk. 

Are we not pushing on a rope? Having the value of money erode in the market is one thing. Having the governments contribute to its further erosion by dropping interest rates and bailing out potentially failed organizations just seems wrong. People need higher interest rates in order to encourage savings. The more logical solution to this problem is to get people motivated to invest by giving them a decent return for the risk they are taking in their investments.

We can generally agree that the source of this problem was the low interest rates of the early part of this decade. (See my entry on mis-allocation of capital.) When capital provides little to no returns, with high risks associated with those returns, money is considered cheap. If money had a cost, would it not allocate financial resources to the projects with the highest return. When money is worth little investments have little to compete with. When the government guarantees every and all transactions, a sloppiness in the capital allocation process starts us down the road to moral hazard. 

I know this is contrary to current economic thinking but I have to ask are we only making this problem greater by further diluting the already sloppy capital allocation that has been carried out? It seems to me to be the case.

Our current policies of expansive money supply were created in the great depression. They are assumed that these are the means in which to have the economy return to a normal operating environment. But is this assumption, which is based on the lone event of the great depression interpreted incorrectly? Stuffing the banks full of cash does not make them want to loan it out. Handing money to consumers does not make them want to spend. What motivation is there to take a risk?

One unforeseen consequence of this over-stimulated economy is the demand for energy was obviously significantly overstated. The current price declines are a reflection of the influence of deflation in a market and the long term capital deflation appears to be right around the corner.  To make matters worse, the decline in reserves and production are only exacerbated by the energy industries long term capital projects being shelved. How many times have we seen these big projects stopped and never return. It will be a gutsy investor who stands up and says their building a new offshore drilling rig. Making our future production horizons even more constrained.

There are serious distortions being introduced into the marketplace for energy. I think the dynamics of the industry are accelerating at a pace that many of us, and certainly myself, are only now realizing how fast paced this environment is. One last link to Bloomberg shows them suing the Fed in order to determine if the Fed has made an unannounced change in their policies and are targeting inflation; to eliminate the deflation by flooding the market with "printed money." If we already have the recession, why doesn't the Fed invert the yield curve to force the market interest rates to rise. Throwing cash around in a panic is only making everyone nervous.

Technorati Tags: People's Friedman Research Energy

The three Applications of the Preliminary Specification.

I thought that I would mention the design of the three applications that will house the modules of the Preliminary Specification. These three Applications have been determined to be the applications that the users, the producers and the Joint Operating Committee's will access. Essentially different views of the data, different views of the modules and different application processing contained within each Application. Each Application will contain different perspectives of the different modules as defined in the recently completed Draft Specification.

This work of identifying the Applications needs to be done in the Preliminary Specification and is a critical part of the People, Ideas & Objects deliverables. I have left the design and development of these modules to the greater community, as it is the community who will be best able to design these applications. The remaining work that needs to be done is too comprehensive for one individual to comprehend, understand and implement. Recall the budget, which has not been finalized, may contain the B, as in Billion dollars of development costs.

My role, as I have mentioned before, is to remove myself from any further design and development of the applications and modules. This is for my own sanity and the fact that I could really end up getting in the way with a number of my own preconceived notions that don't have any bearing on the performance of the innovative oil and gas producers. I have committed myself to ensuring that the resources and needs of the community are provided for the business end of these software developments.

I have a sense, and I have not done any research in this area, that the design and implementation of these applications will need to have significant research and development of new and unknown attributes. Just identifying what these attributes are will be a difficult and exciting area of research. I am calling for 100 individuals to participate in the Preliminary Specification. Researching the Applications will be a critical area where I suspect much value can be added. Please, join me here.

Technorati Tags: People's Specification Community Development

The next 30 years.

I frequently watch the video's from FORA.tv for the surprisingly good content contained on that website. Think of it as the YouTube for the thinking. It is a compilation of videos from a 115 governments, institutions, universities, and leading publications. One can be lost in the sites content for weeks.

I was watching an Australian Broadcast Corporation (ABC) broadcast of Rupert Murdoch, Chairman and Chief Executive Officer of News Corporation. His Boyer Lecture entitled "A Golden Age of Freedom." During the broadcast he states in the next 30 years the world will welcome an additional 2 - 3 billion people joining the ranks of the middle class.

I am an optimist, although my recent rants on the economy may make it seem that I am pessimistic, I can assure you that there is nothing further from the truth. As I mentioned yesterday, the future holds new disciplines, new opportunities, new ways of organizing and living in a far better world with a much higher quality and quantity of life.

I leave you with the thought as to what the world will be like in 30 years. With a design of the People, Ideas & Objects Application and Modules fully operational in the marketplace for many decades, how the energy industry will have developed. The work that is being done in physics, nanotechnology, computer sciences, bio-chemistry, robotics, space and many other areas. Conducted on a global basis with the greatest possible number of people living a middle class lifestyle.

Our one impediment to making this happen is the ways and means of how we have achieved what we have to date. The bureaucracy or its more antiseptic name the structured hierarchy is the reason we are being held back. Change is violent and upsets too many things to be undertaken in a constructive manner. We know we should have moved away from the bureaucracies many years ago. The reason that we didn't is that bureaucracies still provided enough value as to not attract the necessary attention to there inefficiencies.

Now we have entered a time in our lives where everything happens so quickly. Our organizations, which can not accommodate any change, especially at today's pace of change are failing. Failure is what eventually happens, and we see that failure happening in business today. And we should welcome this change and move to the new forms of organization that will optimize the next 30 years. Please join me here in designing and developing these applications.

Technorati Tags: People's Specification Market Failure Change

McKinsey Power Curves

This article discusses the distribution of an industry dynamics. An interesting topic that I have not studied too much of in the past. I think, as the author of the article asks, there are implications here that may need to be discovered.

In the Preliminary Research Report I discussed the performance of then laggards against those of higher performance oil and gas companies. I used Revenue Per Employee as the manner in which to determine these firms performance. I then discussed the ability of laggards to catch up to higher performing firms; and noted the ability to do so was almost impossible due to a the following two factors.

• Influence of the firms asset performance based on its historical cost, infrastructure and industry distribution. Noting that putting lipstick on a pig makes no difference to the pig.

• Secondly the ability to catch the leaders is difficult. Today I would suggest that the Chinese have a long and very hard climb to match the growth and performance of the U.S. economy. And that is the same type of difficulty that firms face in each industry.

It is possibly ironic that the high performing firm that I used in the Preliminary Research Reports analysis was none other then our stellar pig, Canadian Natural Resources Ltd. How times have changed. And it is in that example I think I have found that the dynamic of change is not so much in the hands of those that want to challenge the established leadership, but in the hands of the leadership to make the big mistakes. CNRL has proven they have the capacity to ruin what was considered a leader in the Canadian oil and gas industry.

The McKinsey author closes the discussion with the following quotation.

Unlike the laws of physics, power curves aren’t immutable. But their ubiquity and consistency suggest that companies are generally competing not only against one another but also against an industry structure that becomes progressively more unequal. For most companies, this possibility makes power curves an important piece of the strategic context. Senior executives must understand them and respect their implications.

Clarifying the nature of how industries change. And this is where I see this situation becoming doubly dangerous for those that are active in any industry. Your ability to compete has little to do with the competition. Focusing on the competition will provide you with products that look and perform very similar to what GM produces. The need to pursue your own strategy of how you will optimize the performance of your assets should be in the forefront of your companies focus. The risks are associated with the mitigation of tangible and intangible threats to your firm, and the upside is through optimization of your opportunities. But is this optimization and mitigation able to provide the firm with any ability to sustain a higher performance "Power Curve"? This question also takes on needed and important discussion about the role of re-organizing the oil and gas producer on the basis of the Joint Operating Committee (JOC).

The first implication that I see in applying Power Curves is that doing nothing becomes one of the most difficult and dangerous strategies. We have all used the do nothing alternative in most of our decision matrices and that is not what I am talking about here. But doing nothing from the point of view of not taking the enhanced risk in this high paced change business environment.

It may have been prudent to sit back and wait until the competition in your industry to explode and you reap all the rewards. However, that is not what I am thinking of in this discussion. What I am thinking is the pace of change will render a status-quo strategy to the dust bin in the quickest time frame. A company must be actively attempting to move up the Power Curve in order to ensure they are progressing.

If we think about the times that we live in today. It is easy to see that we are heading into a time period where man will progress the furthest and fastest. In the next 50 years, biology, physics, chemistry, bio-chemistry, molecular biology, economics, robots, computer performance, software capability will fundamentally change society. Not one of these scientific categories is outside the realm of the innovative oil and gas producer.

How can a firm sit and watch what is historic in terms of discovery, almost every day. Clearly the ones that will win in the future will be those that are able to match the demanding changes that society will dictate. Look closely at the environmental movement and I think we begin to see the societal demands of our organizations accelerating. Can China continue to asphyxiate their population in the long term? Of course not, but they appear to do very little about the problem. Therefore how long will China be able to compete?

I take great pleasure in highlighting the failures of the companies highlighted in the piggy series of blog entries. Considering the scope of the discussion in this entry so far, it is easy to see how the greed and satisfaction of oneself has become the prime focus of companies today. Is this sustainable? I'm not sure, either way. Should we wait and see if today is the time in which we should have acted? Of course not. You don't wait until you can determine if someone is going to get themselves out of a burning building. You do everything possible to get them out. And like Treasury Secretary Paulson's failed TARP program, without trying, you'll never know if it worked or not. This is a key discovery, just as if the TARP program would have worked beyond everyone's expectations.

These are the dynamics that we face in the business world today. I suggest we critically analyze the performance of the oil and gas industry based on these metrics. I fail to see how the structured hierarchy and their bureaucratically identifying and supporting relatives, SAP and Oracle, can be expected to exist in this future environment. Please join me here.

Technorati Tags: People's McKinsey Ideas Innovation Leadership

Two groups who need People, Ideas & Objects.

AP is reporting that the large and small producers in the oil and gas industry are experiencing some systemic difficulties. The large producers are able to generate large cash flow, and indeed have large bank balances. However, recent declining and negative reserve trends are now causing their production to decline. These accelerating decline curves are a direct reflection on their ability to find and produce more oil and gas.

On the other end of the spectrum the small producer is challenged by the inability to generate or raise any cash to begin to address their growing needs. This of course is as a result of their small asset base and the current low oil and gas prices. On the positive side, reserves are able to be increased at will. The reverse of the situation of the larger strata of the industry. To me this is not news, but a reflection on the way things have operated in the industry for many decades. The scope and severity of the problem comes down to the large producers declining production profiles.

Another issue that the entire industry faces in the short term is the size of the asset write downs caused by the today's lower prices. Based on the prices of the commodities it is fair to assume that producers were able to capitalize 100% of their costs associated with exploration and production since 2004. These costs are now subject to the auditors testing of value, based on the reserves. Potentially we may see the industry reflect large losses on their write downs to fair value.

Over the past 20 years the small producer has struggled to keep the doors open. Just as many small enterprises in other industries experience. Testing the risk profiles of small producers would result in the conclusion they are at stratospheric levels. Leading to the skill and courage of the investors and management, just to survive. Small producers have the inability to provide any returns for their investors for many years. The simple act of building a producer has to consider the many millions of dollars needed to increase the production profile. Many of these millions go to the simple act of keeping the lights on. The overhead of the firms is notorious for getting in the way of the investors expectation of receiving some value from the firm. Granted their will always be the capital gains that the investor could make over the life of building the firm. But their capital gains are not that spectacular and they should expect and receive more of the value they provide.

I have always marveled at the discussions that are made around the companies reserve reports. Reports on the field activities that have no concept or consideration that those operations have to support the administrative and management of the firm. In a public company this discussion takes on a much larger concern as the overhead costs of a public firm push the administrative costs well beyond what is possible for the management of the firm from an engineering and earth science point of view. The Private Equity movement that began in the last decade is symptomatic of the huge compliance and governance costs that a small public producer has to offset before there is anything left for anyone else. Please review the Compliance & Governance module of the Draft Specification for further information in how the compliance and governance is handled.

How is it that People, Ideas & Objects can help in this area? From the perspective of a large producer I see the problem as an issue of focus. The firm needs to simplify their strategy to something that will make money for the shareholders. This blanket strategy may not be appropriate for all of the properties or Joint Operating Committee's (JOC's) they have an interest in. (I attribute this as the source of the firms lack of "focus.") To say that there is conflicting strategies of the producers representing the JOC is obvious, and one of the sources of how problems get resolved is through identifying and resolving these contradictions and conflicts.

One of the advantages of moving to the People, Ideas & Objects system is that the JOC is able to set the strategy irrespective of the individual producers "global" strategy. Enabling each and every JOC to be optimized for their best operating and performance strategies and tactics. Providing the much needed focus that the large producers can not find. This strategy optimization in the JOC is a direct benefit of aligning the legal, financial, operational decision making, cultural and communication frameworks with each of the producers compliance and governance frameworks.

The banks, investors and money markets may have an interest in the producer or the JOC itself. Securitization of the individual interests in oil and gas will be necessary to fully optimize the innovative stance and increasing reserves of the industry.

Therefore the mix of producers in the JOC will help to mitigate the producers size issues for the entire industry. The large producer can partner with the smaller producers to balance out the needs of the property. Recall that the Partnership Accounting module in the People, Ideas & Objects system is based on the contributions of the individual firms represented. If a firm has a specialty in a certain regional geography, it can then agree with the partnership that the costs of those specialties goes towards satisfying some of the commitment from the company to secure their interest. In other words. The small and large producers are able to earn their interest in the property through their contribution of capital, expertise and / or land position on an all in valuation basis. If a geologist were to prove their value in the marketplace by finding commercial volumes of reserves. Then their ability to secure elements of the interests in the producing assets he / she is directly involved in creating.

The last point of the previous paragraph violates the first order of all oil and gas managements oath of allegiance. (I'm trying to be funny.)  Recognizing Intellectual Property (IP) is the exact opposite of the situation that exists in the energy industry today. Particularly the large firms do not want anyone to hold any form of IP as it conflicts with their needs to find people to employ and is (incorrectly) believed to be a leakage of value from their organization.

This is the 21st Century. We have the manner of all economics being re-aligned on the basis of new and more effective organizational structures. Those that believe in the bureaucracy, of any industry, are effectively being cut down to nothing in this market. The current economic climate is the same situation that affected the Former Soviet Union in 1989. The methods of organization could no longer sustain the demands of the people and failure was the result. Our system of organization has reached its limits of growth based on the bureaucracies inefficient efficiencies.

So the sooner we say good bye and good riddance, the sooner we can achieve the multiples of our current standard of living. As Jonathon Schwartz at Sun Microsystems says, you have to stop to change direction. These points are addressed in the Resource Marketplace and Research & Capabilities modules. If we expect to deny people the rights they earn in thinking through the big problems of how we can solve the oil and gas industries problems, then we are eliminating ourselves from the entire economic equation of the future. Our choice, and those that don't want the People to hold the trademarks, patents and copyrights should research which way is the best for the oil and gas industry to continue. We're going this way.

This issue is also addressed in the People, Ideas & Objects system. The competitive advantage of a producer is their physical producing assets, land base and scientific and engineering capabilities and capacities. Ownership of the capabilities and capacities, (the current situation) I don't think provides the industry with the value they think they attain. Building huge, mutually exclusive capabilities in each and every producer has increased the level of redundancy in the industry to a ridiculous level. Note also the large producers effectiveness of using these capabilities and capacities in finding and producing oil and gas. People, Ideas & Objects is the better way.

The producer who researches, develops and manufacturers their own drill bits is at a distinct disadvantage to the other producers who have manufacturers providing drill bits based on a collective need across all producers. I don't see too much difference in this example from what a firm is doing today with their geological talent. The alternative is hiring from a pool of highly qualified and talented scientists for application to a specific issue in one JOC. This has advantages that are directly beneficial to the future oil and gas producer. Once the geologist has completed their work, there may be no more work from that JOC in that area for his specialty again. He will have to keep thinking of how better to get the oil or gas out of the ground, (his job) which will form the basis of his new, and far more valuable to him, IP. Why employ him for 35 years and promise a retirement benefit that Wall Street will only take away from him.

The most effective change that the People, Ideas & Objects system provides the industry is an alignment to the cultural basis of the business. The JOC is the business, and the business is the JOC. Recognizing these facts in the IT that identifies and supports the JOC is a necessary realignment of the industries interests. A realignment that will fuel the innovation and further development of the critical sciences that are underlying the business of oil and gas.

With respect to the large and small producers that I started in this post. The alignment removes the conflict that the industry has with the development and ownership of Intellectual Property. It enables the large producer to use their cash flow in a manner that is more consistent with the needs of their JOC's producing properties. And the small producer has the ability to sell more of the talent and capability that is a necessary part of the industry makeup to financiers and investors. Both sides appear to me to be winners.

From the investor point of view, the fact that the systems will be supported through the levying of a fee on the basis of $ / BOE / year means that the larger producers will be paying the largest part of the freight in terms of the People, Ideas & Objects software development costs. Producers that are small and have no production would be use the system for free and have the Community of Independent Service Providers, that are a key part of the People, Ideas & Objects community, available to help mitigate the large associated costs of running a start up oil and gas concern. Please see the Compliance & Governance module for further clarification of how this is implemented in the system. And recall, that ideally the investor is the one representing the ownership interest of his / her share at the virtual JOC table.

Now is the time for these ways and means of operating be adopted. What we are witnessing is economic history. Producers MUST become more efficient and begin the process of rebuilding the industry from a more efficient and effective means of organization. To say the industry is collapsing is best reflected in Canadian Natural Resources Ltd impending demise. Please join me here.

Technorati Tags: People's Summary Trends Innovation People

The New Economics of Computing.

Professor Nicholas Carr is a Professor in the business faculty at Harvard. He is probably most famous for his controversial article "IT Doesn't Matter" and the follow on "Does IT Matter, an HBR Debate". June 2003. Since these publications he has written a few books on the topic of IT and writes a blog about the way he sees technology and technology trends influencing business.

He has been talking about the implications of "Cloud Computing" and what the paradigm change means to business, both technical and other businesses. In his recent post he makes some comments about the significance, and an example of how cloud computing does provide real value. (Recall the People, Ideas & Objects application will be accessed through the "Cloud Computing" method.)

My favorite example, which is about a year old now, is both simple and revealing. In late 2007, the New York Times faced a challenge. It wanted to make available over the web its entire archive of articles, 11 million in all, dating back to 1851. It had already scanned all the articles, producing a huge, four-terabyte pile of images in TIFF format. But because TIFFs are poorly suited to online distribution, and because a single article often comprised many TIFFs, the Times needed to translate that four-terabyte pile of TIFFs into more web-friendly PDF files. That's not a particularly complicated computing chore, but it's a large computing chore, requiring a whole lot of computer processing time.


Fortunately, a software programmer at the Times, Derek Gottfrid, had been playing around with Amazon Web Services for a number of months, and he realized that Amazon's new computing utility, Elastic Compute Cloud (EC2), might offer a solution. Working alone, he uploaded the four terabytes of TIFF data into Amazon's Simple Storage System (S3) utility, and he hacked together some code for EC2 that would, as he later described in a blog post, "pull all the parts that make up an article out of S3, generate a PDF from them and store the PDF back in S3." He then rented 100 virtual computers through EC2 and ran the data through them. In less than 24 hours, he had his 11,000 PDFs, all stored neatly in S3 and ready to be served up to visitors to the Times site.


The total cost for the computing job? Gottfrid told me that the entire EC2 bill came to $240. (That's 10 cents per computer-hour times 100 computers times 24 hours; there were no bandwidth charges since all the data transfers took place within Amazon's system - from S3 to EC2 and back.)

My experience with "Cloud Computing" has involved renting processors on Sun Microsystems network.com and Amazon's Web Service offerings. You should set up an account on one of these services to understand the full scope of the power that is offered to the user. If you have a processing problem that can take 100 hours of processing on your computer, hoisting it up on one of these services will not only allow you to process the problem far more cost effectively as Professor Carr points out. But you would also recieve the results for this 100 hour job within a matter of minutes. To me this was the intoxicating aspect of cloud computing.

Go ahead and try one of these web services. If you need help figuring out what type of problem to solve, use this Princeton University book. (Download the first chapter, its free.)

Technorati Tags: People's Interests Knowledge Learning

Why at $3.27 it's a buy.

Sun Microsystem stock at today's prices represents the easiest and most cost effective manner in which to make money. At $2.42 billion (Friday November market cap, the company is trading below its cash value. And this post is to show how far they are ahead in providing the types of services applications such as People, Ideas & Objects need.

I have specified an architecture of Sun technologies for the People, Ideas & Objects applications to be run in. (See the July 2008 post here.) Sun has published a white paper that captures the extensibility and flexibility of their products in terms of how the can be configured. For those that are technically challenged I would skip this post now.

Downloading the .pdf is available to those with a Sun account. The configuration discussion talks about the performance and configuration advantages available for the deployment of GlassFish on Solaris. Making the post I made in July 2008 look like the optimal solution that Sun has to offer. This is why Sun will make money in the software future. No other vendor can provide our application with the support and low licence costs. Running GlassFish in some of the configurations using IBM and Oracle would be prohibitively expensive. Not so with Sun.

So their choice was to ensure the developer and user of their software services were able to operate their technologies in the optimal configuration without first having to bankrupt them. Taking the hit in current revenues for the long term. In today's myopic market of this quarter Sun doesn't fit in. In this go forward environment Sun and Apple are the only two companies that I can see making money in the future on technology.

The only change that I would make to the blog post in July is the need to build our own data centres. Using network.com provides us with the resources of a service based offering of processors and support. Processing is too critical a resource not to be under our influence and control. With the majority of the support for our data centers remaining with Sun.

Technorati Tags: People's Sun Software Specification

"Almost" two down and two to go.

Management of the Piggies, our nickname for Encana, Canadian Natural Resources, Nexen and Petro Canada have had a really bad quarter. Since July of 2008 when they had $3.3 billion of "in the money" stock options, they've lost a bit.

First it was their options which quickly evaporated when the market meltdown started its Tsunami like roar. Now it seems to have turned more personal. First was Charlie Fisher to announce he is leaving Nexen as its CEO. Now the focus seems to be on Petro Canada.

Our local paper The Calgary Herald is reporting that the "Fort Hills" heavy oil project operator, Petro Canada is now "deferring development". But that's not the key point of the article. (If you listen carefully you can hear the ghosts of Arthur Anderson's staff using their shredders.) It seems some people who own Petro Canada are not particularly happy with the management, stating:

Part of the stock's downdraft Monday was due to oil prices falling to their lowest levels since January 2007, but another reason offered for the absence of market support was a lack of confidence in the company's management. The most-often asked question among the investment community of late-- behind closed doors, of course --has been around when the company's chief executive, Ron Brenneman, might be stepping aside.

So lets mark this one as a "half way" through the door. Careful guys don't let the door hit you on the way out. Leaving us with only Encana and Canadian Natural Resources. What's that saying about the bigger they are the harder they something or other. Lets predict that CNRL is the next to loose the top echelon of the firm. Remember, they thought strength in numbers would provide good cover when things got hot. But with 45 different individuals with Chief or President in their titles, it just might be best to get a forklift.

Technorati Tags: People's Pig Management Failure

And the transition begins.

Creative destruction in its purest form is beginning to operate in the oil and gas industry. I'll start with the destruction aspect of this phrase. The transition from the structured hierarchy to the new science based producers has begun. In Canada we have the majority of oil and gas companies failing. This will become more and more obvious in this next phase of the market meltdown. The preliminary symptoms of the transition are evident today. Here is the CEO of mid-sized producer Anderson Energy Ltd.

"We have seen significant, unprecedented changes in capital, equity, commodity and currency markets in the past few months and ongoing concerns about the global credit crunch," said president and chief executive Brian Dau in a note released with third-quarter results.

As a result of these events Anderson Energy is reducing its capital expenditures, and financing some of the remaining expenditures through the sale of some properties. Expect to hear a lot of companies beginning to do these types of things for the next two years. As these firms continue to slide in their organizational performance, aggravated by the decline in commodity prices, producers are faced with the ultimately difficult decision of what to sell to make the next quarter.

The creative part will come into play when the new and innovative science based producer will be able to purchase these assets at very large discounts. Comparing the metrics of the bureaucracy to the performance metrics of the innovative oil and gas producer will make the assets far more valuable in the hands of the innovative producer. Innovators will be able to purchase these assets based on the poor performance of the property. Turnaround the property and make the asset more valuable through applying new science and ideas to the property.

Recall the competitive advantage of the innovative, scientific based oil and gas producer is in their land base and their technical capabilities. Having anything more in terms of an in-house capability should be considered overhead. These firms are defined and supported through the software we should be building here to ensure this transition is conducted in the most positive manner.

Clearly I don't expect any existing producer will want to use this software to run their organization. They have made it clear they don't want anything to do with the changes that are implemented in this new way of operating the industry. Which is fine, theirs is a road that ends quickly in a brick wall. Nonetheless the ability for these firms to hang on by implementing this software I don't think is possible. Therefore they will cannibalize themselves in a very short and desperate process.

And in related news, Penn West Energy Trust also made news as it's the largest royalty trust organization of the Canadian industry. It too is having financial challenges that lead the management to state:

"With the number of opportunities that everybody anticipates coming up in the next little while, the key is going to be discipline and maintaining focus in terms of what our acquisition appetite looks like," Foulkes said.

Even having the CEO going out as far to say the following:

"I don't want to hang my hat on any number," chief executive Bill Andrew said during a conference call. "But we wouldn't continue to operate in a position where we were borrowing money from the bank to distribute to the shareholders."

I'm sure their shareholders are enlightened by their CEO's assurances. If these producers are in such need of capital. After several years of high prices, and are unable to survive without cannibalizing themselves, you know that the transition is near. Particularly when it is someone who has been able to successfully put together companies in the range of multi-billion market capitalization's such as J.C. Anderson has done in the past. Cutting at a critical time as this is obviously the wrong thing to be doing. You can not change the spots on a Leopard either.

If you find yourself in the position of being severely affected by the market meltdown. I would be pleased if you gave some thought to joining this project. I am looking for 100 people to take the Draft Specification and enhance it to the level of the Preliminary Specification. This is a ground floor opportunity for those that may find they have lost a lot, and don't know where to turn in the future.

I believe the only sustainable competitive advantage for an individual is to have some Intellectual Property owned or accessible. Such as this project is. This is the key value proposition that an individual has to offer a producer. I would encourage you to review this blog as much as you need, find an area where you are familiar and have some ideas on how to improve these areas in the application. Please join me here.

Technorati Tags: People's Trends Change Energy Management