Langlois, Economic Institutions Part III

We continue with our review of Professor Richard N. Langlois July 2009 "Economic Institutions and the Boundaries of the Firm: The Case of Business Groups". Today's post will deal with similarity and complementarity as they relate to gap filling. In the example provided by Langlois, LG Groups former chairman cited how the need to have "gaps" filled launched new lines of business to fill a need "At the time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastics business". And the new lines of business were then used to expand into areas that were related "This plastics business also led us to manufacture electric fan blades and telephone cases".

It has been suggested in my recent blog posts that the capacity to "gap fill" is non-existent in the oil and gas industry. The collaborations between suppliers and oil and gas companies is best represented by BP blaming TransOcean and Halliburton for the problems in the Gulf of Mexico. To move forward based on innovation and further development of the sciences will require the oil and gas producers to begin to work together with the service sector. Blaming them and calling them greedy because the cost structures are escalating are symptomatic of the bigger issues. These all stem from the fact the oil and gas companies are only reaping what they've sowed. And I would also suggest that these costs are increasing due to the limited, if any, real innovation being conducted at each and every Joint Operating Committee. People are unwilling to offer any suggestion for fear of the repercussions. Why bother doing anything above and beyond when the status-quo will be accepted.

Management of the bureaucracies have reigned over the service sector with the grace of a Roman Emperor. Putting thumbs up or down on an innovation on the basis that they have immediate need for it or not, and expecting solutions to spontaneously exist when problems do arise. This entire process of development has devolved to the point where little is being done and ranks on par with the oil and gas companies suggesting to the service industry to "let them eat cake."

The point I am trying to make here is that the ability to change from this type of mindset is difficult if not impossible. After all where are the Romans today? The transition in cultures that will build on the gap filling similarities and complementarities is under way, in my opinion. What this process needs is to develop the market supporting infrastructure that will support these types of innovation. That means the Draft Specification is the crucial first piece of infrastructure.

Langlois notes two important points. 1) "Economic historians, especially those of what we might call the Stanford School (David 1975, 1990; Rosenberg 1976), have long stressed the importance of such complementarities for the pace and direction of technological change and economic growth". 2) "But that doesn’t explain why and when other institutional structures like markets or multidivisional firms arise to solve the same kinds of problems".

So how do we analyze this and change it...

A satisfying explanation, I argue, will have to be a contingent one, an explanation that takes into account the facts on the ground of markets and institutions. With only a little oversimplification, we can think of the these contingent facts as falling on three levels.

• The level of markets. How extensive are markets for complementary resources? How easy is to marshal the necessary complementary capabilities (or their outputs)?

The creativity and innovativeness of the oil and gas industry is clearly missing in the Gulf of Mexico. Gone is the can-do attitude that built the business. Today one is more likely to overhear the management openly discuss their pension benefits. The oil and gas industry is a bureaucratic nightmare.

• The level of market-supporting institutions. How well developed are the institutional structures that help markets function well – that reduce the costs of coordinating complementary activities through relatively anonymous exchange among legally separate entities rather than through internal coordination within an organization? Such institutions would run the gamut from technological standards (Langlois and Robertson 1992) to legal and organizational innovations like double-entry bookkeeping (Rosenberg and Birdzell 1986) or the anonymous limited-liability corporation (Hansmann and Kraakman 2000).

Here we have seen the capacity of the industry to employ up to 11,000 people working on the well and the flow of oil in the Gulf of Mexico. Yet no one seems to have an idea as to what to do! The thinking for the solutions to cap the leaks is at its most basic level. This is representative as to why the companies cost structures have gotten out of control. Throwing more money is the first and only instinct of management.

• The level of political institutions. What is the character of the state, the organization with a territorial monopoly on the use of force? How well protected are property rights? In what ways does the government intervene in the economy? What is the nature and degree of corruption? pp. 11 - 12

Politics in oil and gas are at a truly global scale. These forces will undoubtedly increase as the pressures from consumers and environmentalists escalate.

I think these three institutions (markets, market-supporting and political) accurately captures the tone of business in the industry. It is a do-nothing, cover yourself and make sure you get lots of cash type of operation. Other then building the Draft Specification, what other market-supporting institutions are necessary and how do we build them? What type of organizations and institutions do we need to build? How far will the sciences advance in the next 10 years, and how will the industry keep up?

So when would we expect the problems of coordinating complementary activities to be solved by the emergence of market-supporting institutions (and thus by markets, broadly understood) and when by vertical integration? This is a crucial — and, in my view, under-researched — question. Clearly, issues of cost matter, as in the grain example. Such issues include neoclassical economies of scale; Williamson-style transaction costs; the costs of diversifying into activities requiring capabilities dissimilar from those one already possesses; and the costs of setting up and maintaining market supporting institutions (Langlois 2006). Once again, these costs are contingent: they depend on the nature and level of capabilities and of market-supporting institutions already in place. And this suggests two related hypotheses (holding other things constant, of course). pp. 16 - 17

The first is that the processes involved are likely to be path dependent and linked to the passage of time. p. 17

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

For the purposes of this post I want to exclude discussion of the first hypothesis. Since we are assuming that these bureaucratic nightmares are failing, we need not rely on them. The second hypothesis suggests that depending on the degree of "frontier of economic development" will determine the level of decentralization. The world produces 120 million barrels of oil equivalent per day. Dealing with an industry of this size on a centralized basis, as the bureaucracies are attempting to today, is foolhardy. What I am suggesting is that we not only pool the producers resources represented in the Joint Operating Committee (JOC), but include the service sectors in the definition of the market-supporting infrastructure. The solution that is being suggested is represented in the Draft Specifications Military Command & Control Metaphor, Resource Marketplace and Research & Capabilities modules.

If we go back to the Preliminary Research Report we will find the work of Professor's Wanda Orlikowski and Anthony Giddens on Structuration. We will find that structuration states the organizations, society and people move together or there will be failure. In Professor Orlikowski's Technological Model of Structuration, technology identifies and supports societies. Technology is both an enabler and an inhibitor. If society and people demand more from our organizations, which clearly they are demanding of the oil and gas industry. Then technically a failure has occurred. And particularly we can see the current situation in oil and gas being inhibited by the technologies that are employed. Therefore to change organizations and culture, structuration requires that we change the technology that identifies and supports the industry, to resemble the institutions that we desire.

To Langlois' point about the frontier. The industry is transitioning from a banking mentality of earning guaranteed returns on investments. This is born of the cheap energy era where survival was the key to financial success. Now as a scientifically based industry, the two cultures are clashing and the industry is not structured to operate on this frontier. Expectations that this transition will happen naturally is incorrect.

Langlois also notes Gerschenkron's backwardness as a precursor to the second hypothesis. In The Capitalist & the Entrepreneur (Free download available here.) by Professor Peter Klein, I find this quote that better exemplifies the current status of the energy industries efforts.

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Lanlgois Capabilities Development Leadership Management Failure Orlikowski
 

Langlois, Economic Institutions Part II

Comparing the existing bureaucracies that operate the oil and gas companies to the industry standard Joint Operating Committee provides value to those that work in the oil and gas industry. This is not an exercise that compares two theoretical situations in a vacuum. Both organizational constructs (markets and firms) exist and the examples provided in this blog reflect today's issues. As frustrating as it is for me to deal in the context of what "could" happen in the future, I would prefer to be working on building that future, I can console myself on the fact that these arguments are not theoretical in nature and have a strong academic foundation. Langlois notes:

The set-up here is an instance of what Coase in his later writings (Coase 1964) would call comparative-institutional analysis. Rather than comparing the world we observe against an abstract theoretical model (a practice Coase derided as “blackboard economics”), we should set two real-world institutions side-by-side and compare their respective costs and benefits. From the point of view of prescription or policy analysis, Coase’s plea amounted to a salutary attack on the doctrine of “market failure.” It is meaningless to compare real-world institutions against a blackboard standard of perfection, and dangerous to imply (often tacitly) that government intervention is in order without specifying the precise institutional form of that intervention and scanning it thoroughly for “government failure” (Coase 1964; Demsetz 1969). But the doctrine of comparative-institutional analysis also operates at the level of explanation. Implicitly in Coase, and explicitly in Williamson, one explains an observed organizational form by comparing that form with hypothetical discrete alternatives in order to show that the observed form minimizes transaction costs. The thought experiment is to compare “the market” as an organizational structure with “the firm” as an organizational structure. pp. 2 - 3

Suggesting that the Joint Operating Committee be the key organizational construct of the innovative oil and gas producer has a rich substance in that it is the legal, financial, cultural, operational decision making and communication framework of the industry. To move forward as an industry requires retirement of the bureaucratic ways of the hierarchy and recognition that the industry is based on partnerships. It is these partnerships that are summarily ignored in all of the ERP systems that are operating today.

The Draft Specification defines the boundaries of the firm with clear "market" and "firm" organizational structures. In September 2007 I prepared this chart of the Primary (P) and Secondary (s) roles and activities to take place in each of these organizations.

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control (Governance)	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	s
Routine, compliance and accountability	s	P
Research	s	P
Development (the D in R&D)	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

To the majority of people who have worked for a period of time in oil and gas. Will notice that these boundaries between the firm and market is a conceptual model of how the current industry operates! The difference is that the ERP systems that define and support the market and firm institutions only adopt a firm definition based on some theoretical example of a manufacturing firm (SAP). What is needed to fully explore and support the necessary innovation within the industry is that the ERP systems adopt these frameworks within the systems. A task that People, Ideas & Objects is providing with the Draft Specification. As Langlois stated above "we should set two real-world institutions side-by-side and compare their respective costs and benefits". Imagine how much better the industry might operate if our systems adopt the table above in comparison to SAP's determination of what a manufacturing firm might look like.

If we look at the table of how the Draft Specification defines the firm and market, we can ask how and where will the "gap filing" occur. Drawing on our example of a few days ago, in Transaction Design, we saw that the enhancement of some drilling technologies was the desire of some producers. Noting the needed capabilities were unavailable in the marketplace, the producers were able to approach a group of engineers who had done some extensive research into the problem. It was then incumbent on the producers to engage the engineers and fund and support the development of the capability. To who's benefit are these actions taken?

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

Based on the understanding put forward in yesterday's post. That Intellectual Property (IP) resides with those individuals, groups or firms that conduct the difficult work of solving problems and creating science & innovation. In yesterday's example the engineers will earn the IP and be able to market their skills and the developed capability to other producers that may have similar needs. The producers have benefited by either enhancing their reserves, increasing their technical capability, reducing their costs or increasing their production. Gap filling is a means of enhancing the division of labor.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Langlois Capabilities Firm Market Community
 

Langlois, Economic Institutions Part I

Next up in our review of Professor Richard N. Langlois work is a paper he wrote in July 2009. "Economic Institutions and the Boundaries of the Firm: The Case of Business Groups". This paper provides another interesting perspective on how businesses within an industry can be organized. In our review of "Innovation Process and Industrial Districts" we learned of the close approximation of Langlois "Industrial Districts" (ID) and Professor Carlota Perez' Small Knowledge Intensive Enterprises (SKIE) to People, Ideas & Objects Community of Independent Service Providers (CISP). How ID's, SKIEs and the CISP were a direction that the industry should move toward building and supporting. In this paper we learn of Business Groups and their application. Business Groups are more common in the developing economies, however, I think that they have some important attributes that we can learn from. These Business Groups are best described in this paper by Koo Cha-Kyung a former chairman of the well known LG Group:

My father and I started a cosmetic cream factory in the late 1940s. At the time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastics business. Plastic caps alone were not sufficient to run the plastic molding plant, so we added combs, toothbrushes, and soap boxes. This plastics business also led us to manufacture electric fan blades and telephone cases, which in turn led us to manufacture electrical and electronic products and telecommunication equipment. The plastics business also took us into oil refining, which needed a tanker shipping company. The oil refining company alone was paying an insurance premium amounting to more than half the total revenue of the then largest insurance company in Korea. Thus, an insurance company was started. This natural step-by-step evolution through related businesses resulted in the Lucky-Goldstar group as we see it today. (Aguilar and Cho 1985, p. 3.)

Notice that the “natural step-by-step evolution through related businesses” involved both spreading excess resources over similar activities and calling forth dissimilar complementary activities. p. 10

The process being described in the LG example is one of "Gap Filling" as is described below.

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

In the example that I posted on Friday entitled "Transaction Design" it was noted the need to have the producers work with a group of engineers to bring about an innovation to enhance the industries capabilities. How the oil and gas producers, with 100% of the revenues of all industries associated within oil and gas, need to develop and maintain the industries capabilities within the ID's, SKIEs or CISP. This is "Gap Filling" as described in the paper.

Oil and gas is certainly a sector that is undergoing systemic change. And we are witnessing the oil and gas companies expectation that field level innovations will spontaneously exist, yet expend none of the money necessary to bring those innovations to market. In their opinion that is the responsibility of the investment capital groups. Well let me be the first to explain to the oil and gas companies management, the investment capital groups became tired of the thumbs down they received for any and all efforts that they undertook. They have left the industry, and I would suggest will not be back. Expecting others to fulfill your needs when you need them, without financial support, just isn't going to work.

This same issue is the paramount issue that People, Ideas & Objects is facing. With no support from the industry, how and why would anyone get behind this project on a speculative basis? Management have made their opinion known and are clearly uninterested in sponsoring a competitive means to manage the industry. What is clearly necessary in 2010 is not only the ID's, SKIE's and CISP. But also the market supporting software necessary to identify and support the market. Without People, Ideas & Objects any attempt at organizing the development of further capabilities will be futile. And that is why management have refused to fund these developments.

The underlying assumption, normally unspoken, is that relevant background institutions — things like respect for private property, contract law, courts — are all in place. Whatever transaction costs then arise are thus the result of properties inherent in “the market” itself, not of inadequacies in background institutions. There is generally a tacit factual or historical assumption as well: that the relevant markets exist thickly or would come into existence instantaneously if called upon. p. 3

In thinking through the points of discussion that have been raised in the past few weeks. I notice that something is missing that is critical to making the ID's et al work. What is the motivation in spending the time and effort necessary to make producers reserves and production more prolific? There has to be something in it for the one that is developing the science or innovation that will sustain them above and beyond the producers desire to have the capabilities. That is the Intellectual Property belongs to the individual or group that developed it. In the example that I provided on Transaction Design, the IP would be the property of the engineers. This is the manner that the Draft Specification in the Knowledge & Learning, Resource Marketplace and Research & Capabilities modules provides.

I have implied this handling of IP in many of the previous posts. I am now stating it explicitly. The only way that the oil and gas industry is going to solve the scientific and engineering problems that it faces is through those with the ideas earning the rights to those ideas. I have consistently argued that the producer firms are focused on their competitive advantages of their oil and gas assets and the necessary earth science and engineering capabilities applied to their assets. This applies to where ever those capabilities are located. How a firm may manufacture drill bits is of absolutely no concern to the producer firm that purchases or rents drill bits. The same can be applied to all aspects of the industry.

This management of Intellectual Property is counter to the attitudes present in the oil and gas industry. Until, and only when, those that do the hard work of solving the problems in oil and gas, earn the rights to their efforts, will we move forward from here. Intellectual Property rights must reside within the firms and individuals who make up the Business Groups, ID's, SKIE's and CISP.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Langlois CISP Community Innovation IP

Langlois' Comment on Technology Revol...

Continuing on with our review of Professor Richard Langlois work. We pick up a "comment" that Langlois published sometime in 2008. His comment is in response to comments that were made by Professors' Dosi, Gambardella, Grazzi, Orsenigo and Lazonick on Langlois' 2003 "The Vanishing Hand" paper. There is a clarity in terms of how Langlois sees his vanishing hand theory evolving.

My 2003 paper and subsequent efforts (Langlois 2004, 2007) did not make the claim that Chandler’s visible hand has been fading away. Rather, I took this phenomenon as a widely agreed-upon starting point. The last few decades have witnessed a widespread “deverticalization” of production in the United States and other advanced economies. My objective was to explain the phenomenon, which I attempted to do not by rejecting Alfred Chandler’s original account of the rise of the large vertically integrated corporation in the late nineteenth century but rather by showing how Chandler’s account might be fitted into a larger framework that could admit of forces both for vertical integration and for disintegration. (I will say a bit more presently about the nature of this explanation.)

Langlois states the two issues he has with the points made by Dosi et al. For the purposes of this post we will ignore the first issue.

Thus there seem to be two issues: (1) what is the nature of the empirical evidence against the phenomenon of deverticalization? And (2) does the New Economy (however we understand that) imply less — or more — “organization” within the process of production? I will take these points in order.

I have consistently argued that oil and gas is in a transitional period in which substantial change will alter the makeup of the industry firms. The Draft Specification moves many of the operations within the industry to a greater market definition. In this post I want to describe my point of view regarding the survivability of the large oil and gas producer. Throughout corporate history firms evolve according to the changes in the marketplace. Our review of Chandler showed the one time that the hierarchy did fail was during the great depression. Professor Carlota Perez has also shown us that this is not a unique event, but one that has a consistent rhythm over the past 300 years. Professor Perez has defined these major transition periods as installment and deployment periods in which the transitional period in between them can lead to financial difficulties. We are experiencing those financial difficulties today which places us at a unique point in time in terms of economics. The changes currently taking place are 1) the financial crisis has not fully developed, and 2) we are at the very beginning of the deployment period, a time when the new technologies positively affect all industries.

The oil and gas firms that exist today are subject to the forces that are in play in the greater marketplace. People, Ideas & Objects is taking these forces and applying them to the industry in a manner that unleashes the full potential of Perez' deployment period. The oil and gas industry as represented by the large producers have chosen not to participate in People, Ideas & Objects and are therefore opting out of the deployment phase. I see this as a form or corporate self selection (suicide) by these large organizations. They have chosen not to participate and that is their decision. I believe they will be challenged by their inability to function, much like BP is in the Gulf of Mexico, and particularly when the full scope of the current debt crisis hits them. To summarize the challenges that I see them facing in the near future would include:

• Sourcing capital.
• Higher rates of interest on existing debt.
• Escalating cost structures.
• Stable commodity prices.
• Declining production.
• Greater scientific complexity.
• Negative political environments.

Langlois makes his argument.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

For the large oil and gas firms to continue to ignore the difficulties in the industry will lead to further disorganization. The expectation that the market will spontaneously provide is an extension of the ways and means of managing the industry for the past 50 years. Muddling along, as I would refer to it, is the systemic culture of the current management. This culture needs to be broken by actively planning and organizing the market, as in People, Ideas & Objects Draft Specification, or face further disorganization by the firm.

People, Ideas & Objects software development identify and support the industry standard Joint Operating Committee (JOC). The legal, financial, operational decision making, cultural and communication frameworks of the oil and gas industry. The JOC is in essence a thing that is generated as a result of an agreement between multiple producers. The JOC is what is effectively used to conduct any and all types of field operations. Most of these field operations are conducted with third party suppliers. The contract is a natural extension of the oil and gas JOC and producer. Langlois notes;

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jennejohn 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi-unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.

It is difficult to see how the current administrations within the large firms could change their culture and begin the active planning and development of Industrial Districts. I don't happen to believe that its possible. Change of that scope can only be introduced through revolutionary organizational restructuring. Such as what we propose in People, Ideas & Objects by defining and supporting the industry standard Joint Operating Committee. And the destructive forces of both the current debt crisis and management's laissez faire attitude. On Friday Nouriel Roubini made the following comment,"...the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage." reflecting the time for action will soon be at hand.

I see this transition as inevitable and one that will be orchestrated by the shareholder / investors taking action to protect their interests. Whether these are formed as small or large firms is unknown at this time, the Information Technologies enable a proliferation of smaller firms to be organized, and that seems the most reasonable way that the industry will re-organize itself. We have appealed to the investor / shareholder to support these software developments as that is the necessary precursor to any future form of the oil and gas industry.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Langlois Community Economics Management Failure Dosi
 

Dan Pink on Motivation

Here is a remarkably entertaining and interesting YouTube video of Dan Pink talking about motivation.



Technorati Tags: People's Video
 

Transaction Design

The Accounting Voucher Module of the Draft Specification provides a unique and valuable way of Designing Transactions. Based on the theories put forward by Professor's Richard Langlois and Carliss Baldwin, automation of the design of transactions is the next frontier in increasing productivity. As I mentioned in Mondays post, transaction design has been undertaken in oil and gas for many years. Specifically in the determination of who will provide which services on a drilling contract. Using this example this post will deal with the elements of transaction design that are captured in the Accounting Voucher module of the Draft Specification.

Stepping back a moment to include the discussion of Transaction Cost Economics (TCE). TCE involves the determination of where, the firm or market, transactions could take place. With the move to the Joint Operating Committee and the enhanced Information Technologies, transactions are best positioned in the marketplace. Therefore we need to be concerned about the variety of costs associated with transactions and that is a matter for another post. Using the software development capability provided by a fully funded People, Ideas & Objects helps to mitigate these transaction costs and bring a level of automation not otherwise available today.

So the question becomes, how do we automate much of the transactions costs is through transaction design. Taking the example of the drilling contract, an example of which can be seen in any well-file if you have access. One of the appendixes to the contract will be a summary of which services are provided by which firm, the producer, driller or third party. This overall task of selecting who provides the service is what I mean when we discuss designing transactions. The natural extension of this is to include high levels of automation to the bidding, negotiation, execution and transaction processing.

This is the logical "next" step in making these types of contracts and other processes more efficient. The question therefore is how is this done in the Draft Specification and Accounting Voucher. Recall the User Vision of the Draft Specification includes the Project Wonderland interface that enables avatars and virtual avatars. Project Wonderland is an element of the Draft Specification and an attribute that enables synthetic and virtual interactions and processes carried out between producers and suppliers.

If your still with me you might appreciate that this interface's capabilities provide a natural way of interaction between producers and the various communities of practice that are organized as Industrial Districts. If you wanted to tender a contract for bidding, you could release the tender to the Resource Marketplace through a virtual avatar for suppliers to submit a bid. Once the bids were in, you could select the winning bidder and start the process of synthetically negotiating and executing that contract.

Assume for a moment that you are drilling a well in a semi-remote region that requires a technical capability that is above and beyond what the specifications of any current supplier provides. Review of the Resource Marketplace module shows that a group of engineers are interested in testing their development of the otherwise unavailable capability. If the capability proves to work it would enhance the reserves of the drilled well. The producers will need to sit down with these engineers, fund and build the capability deliberately. Producers earn 100% of the sales of oil and gas production. It is therefore imperative that they develop the capabilities that they want and need to enhance their reserves and production profile. Otherwise they will be left to sit and watch their production spill out into the Gulf of Mexico like BP is. The futile nature of BP's efforts show that they are reaping what they sowed, nothing. Blaming Transocean and Halliburton is only the latest act in this comedy of errors.

And none of these capabilities will exist until such time as People, Ideas & Objects is fully funded. Oil and gas needs to deliberately go about developing these types of capabilities in order to benefit from them. Before they can be deliberately built they need to be organized and that is what People, Ideas & Objects has sought to do. Once built they need to be sustained and supported through their multiple iterations. The enhanced role of Information Technology (IT) doesn't spontaneously occur. Producers need to be active members in the Industrial Districts and People, Ideas & Objects Community of Independent Service Providers.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Management Failure Voucher Baldwin Langlois Capabilities Community Development
 

Langlois, Innovation and Process Part V

This is our final post of Professors Richard Langlois', Paul Robertson and David Jacobson's January 2008 paper "Innovation Process and Industrial Districts". Our review of this paper, in which Langlois et al introduced the concept of Industrial Districts (ID). A term which is similar in many ways to the concept put forward by Professor Carlota Perez of Small Knowledge Intensive Enterprises (SKIE). Both SKIEs and IDs contain many of the same attributes that People, Ideas & Objects user communities and specifically the Community of Independent Service Providers (CISP) are designed to provide. 

One of the benefits in reviewing Langlois et al paper is our ability to reflect upon how the Draft Specification captures the natural or cultural ways and means of the Joint Operating Committee. Monday's discussion of the way a drilling contracts transactions are designed and implemented was introduced. Simply by selecting which firm will provide which services, the producer or drilling contractor. What hasn't been captured is the full extent of the Draft Specifications application in the act of designing, monitoring and managing "transactions". I will post a detailed review of this tomorrow to help better understand the scope of this "transaction design" thinking.

In many ways the CISP would be considered sub-sets of either SKIEs or ID's. They, with the assistance of the Draft Specification, would provide the innovative oil and gas producer with the means to effectively manage and operate their assets . An innovative oil and gas producer would be focused on the core competitive advantages of their unique asset base and the scientific and engineering capabilities that are made available to them. The dynamic nature of the ID's would be enabled through the Draft Specifications Resource Marketplace, Accounting Voucher, Knowledge & Learning, and Research & Capabilities modules and the Military Command & Control Metaphor (MCCM).

Two significant developments in the application of ID's to oil and gas. Are the risks associated with too high of embeddedness are minimal due to the scientific nature of the industry. The logarithmic decline curve and scope of the sciences involved will provide a check and balance against any over confidence. This will be the case particularly in the sense that the demand for energy is insatiable. The second development is the application of the MCCM to the ID. Having a governance model and structure available to the ID will have a direct effect in assisting the search and discovery of ideas and solutions.

5. Conclusion: Innovation and The Future of Industrial Districts. 

Langlois et al note in their conclusion the value of the concept of ID's to innovation in oil and gas.

As we have shown, much of the attractiveness of compact, highly-localized areas of production results from their ability to reduce search costs, but this is accompanied by the risk that the knowledge available in any given district may be substandard. But new information and communications technology (ICT), may make it possible for firms to draw more cheaply and effectively on diverse sources of knowledge and therefore to increase their access to innovative ideas (as well as their ability to market their own innovations if they wish) (Langlois, 2003; Christensen, 2006). This may not undermine all aspects of the operations of IDs because differentiation and specialization retain their importance, and proximity is useful in just-in-time and other lean ways of organizing production. For innovation, however, an ability to tap wider sources of knowledge quickly and cheaply can reasonably be expected to allow firms all along supply chains to consult more broadly than in the past. Improvements in ICT and new search techniques, many of them associated in one way or another with the Internet, not only increase access to knowledge but may force innovation on firms that in the past could shelter in IDs. Because their customers can be better informed, firms in IDs need to keep up to date in order to maintain competitiveness. p. 20

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Langlois Innovation Community CISP
 

BP, Transocean and Halliburton

In the May 2004 Preliminary Research Reports Abstract I wrote:

Oil and gas is entering a phase of complexity, risk and reward particularly in:

• The mature Western Sedimentary Basin.
• The Artic, a harsh and remote area.
• Heavy oil.
• Offshore operations, Pacific and Atlantic.

The scope of operations of an oil and gas concern is geographically, politically and scientifically diverse. The hierarchy limits the detail and focus to deal with the political and technical difficulties of each facility. Expecting an organization with the constraints to innovate is foolhardy.

The hierarchy has created "information overload", which in turn has created a paralysis in decision-making, directly affecting the capacity to change and or innovate. The hierarchy's bureaucratic, complex and conflicting lines of authority have muddled accountability. The ability to identify success / failure, to share those experiences, and to learn from them has diminished and is not progressing. Calgary, as a collective group of independent producers is discovering constraints to its ability to drill wells in the prairies. How can an industry with these constraints consider the complexities of the geopolitical, technical and operational concerns in the frontier areas of oil and gas.

The identification of this problem was not the purpose of the Preliminary Research Report. There was strong general consensus that the problem was correctly identified. What the Preliminary Research Report provided was the proof that by identifying and supporting the Joint Operating Committee, as the key organizational construct of the innovative oil and gas producer, was the solution to this problem. Proving the JOC was the solution was the controversial aspect of the report, and the reason that management fought to have it eliminated from the marketplace. It conflicts with managements interests.

Management has had their turn and chose to do nothing regarding solving the identified and agreed to issues. Six years have past and they have contributed nothing to the development of these ideas. In a reasonable world one would assume at least some support. Based on our first quarter funding drive and the fact that management are now running around with their hair on fire, no funding will be forthcoming. Investors and shareholders must take this opportunity and seize the active management of the industry from the current bureaucracy. Or watch as their holdings are destroyed by the actions of BP and other producers.

Clearly they can't deal with today's complexity. And here, as reflected in this Wall Street Journal video of testimony by BP, Transocean and Halliburton, they cant even determine who's fault it is, comical.



What I wrote in 2004 was summarily rejected by management. They clearly had their own ideas. Those ideas have now failed and are on display to the rest of the world. Blaming management was what we were entitled to do then, it doesn't solve the problem and at some point managements failure will become obvious to the world. Then the shareholders and investors will be expected to have acted, therefore the time is now to fund People, Ideas & Objects.

Technorati Tags: People's Management Failure Ownership-Community
 

Langlois, Innovation and Processs Part IV

Today our review of Professor Langlois' paper "Innovation Process & Industrial Districts" will look at part 4., the negative effects of embeddedness. Embeddedness is defined as "the degree to which individuals or firms are enmeshed in a social network". Langlois "investigates the effects of social embeddedness on innovation". Noting that;

Furthermore, there may be a relationship between the degree of embeddedness in the industrial district and innovation. It has been suggested that innovation increases as embeddedness increases, up to a point, and that beyond that point further embeddedness results in reduced innovation performance at the firm level (Uzzi, 1997; Boschma, 2005).3 Thus, depending on circumstances, participation in an industrial district can either encourage or impede innovation.

Therefore certain levels of embeddedness in each community of practice is necessary. These communities of practice would consist of local, regional, national and international communities. With access and participation in each by those that work within oil and gas and the service industries. What Professor Langlois explores in this section of the paper is the extent that embeddedness can be under / overdone.

4. Negative Effects of Embeddedness

Oil and gas' difficulty is the escalating earth science and engineering effort contained within each barrel of oil. With finite human resources, the Preliminary Research Report suggested that the industry turn away from its "banking" mentality of providing fixed returns on investments, and focus on its scientific attributes to generate value. These scientific difficulties are understood through out the industry. Much is being learned by everyone by BP's actions in the Gulf of Mexico. It is this learning and sharing of information in each of the communities of practice that Langlois refers to as embeddedness.

Much of impetus behind innovation may nevertheless derive from events outside a district - as a result of innovations developed elsewhere and of shifts in consumer demand. The survival of firms, and of entire IDs, therefore depends largely on their ability to adjust to external development. Indeed, Piore and Sabel's (1984) championing of industrial districts was based largely on their contention that small firms with generic equipment are more flexible in responding to shifts in demand than large, capital intensive firms with substantial investments in dedicated equipment. p. 14

BP's current failures will benefit the industry as a whole. Many will ask why the Gulf has to be exposed to such environmental risk? Here I think that Langlois intimates at where some of the problem may lay.

Nevertheless, the factors underlying successful innovation in some industrial districts may turn out to be weaknesses depending on the broader innovation environment within a trade or industry. Firms in an ID may simply be slow to notice changes arising outside their district because they do not have good external channel of communication. As Marshall (Loasby, 1990) recognized, close relationships among firms and their workers could reduce their access to knowledge developed outside the district and their willingness to consider ideas from unfamiliar or distant sources. p. 15

and

Paradoxically this failure of firms is possible after their IDs have had a period of market leadership. they become over-confident and suffer from what Alberti (2006) calls "success myopia". The result is that trends in innovation (and not just innovation per se) in an ID tend to suffer from inertia - that once tendencies develop, they are harder to stop or to reverse than might be the case if knowledge were generally collected far and wide and if new knowledge were not generated to accommodate implicitly standardized local interfaces. this can lead to severe, perhaps fatal difficulties when the district is not at the leading edge or when consumer tastes have changed. p.15

Definitely sounds like the Gulf of Mexico. Those that are not familiar with the oil and gas industry are frustrated by the efforts of BP. Why not just turn the well off? Why didn't someone think of these problems and have them solved in case of this type of event? Why are actions being taken at such a slow pace? It seems so elementary and yet the industry never considered the possibility of a blow out preventer failing in 5,000 feet of water.

In defense of the industry, the science has become pre-eminent. The Gulf of Mexico shows exactly the extent of these difficulties and tomorrow will not be any easier. Looking at the logarithmic decline curve of a reserve report focuses the mind and in my opinion limits the risks of the possibility of overconfidence. However, the scope of the overall sciences is too great for the means of organizational structures being currently employed. The scientists are working as hard as they can, it's the organizational constraints of the bureaucracy that are causing these problems. Then I could be biased towards building systems to identify and support the Joint Operating Committee in a fashion as described in the Draft Specification. Langlois would suggest that the level of embeddedness is "not enough" for the situation in the Gulf of Mexico.

Boschma (2005) argues that "too much and too little proximity are both detrimental to learning and innovation. that is, to function properly, proximity requires" just the right amount of distance between actors or organizations. geographic proximity, for example, may enhance inter-organizational learning and innovation though in the absence of geographic proximity other forms of proximity may substitute for it. On the other hand, too intense proximity, geographic and otherwise, can result in lock-in. Proximity / embeddedness can evolve over time too, from not enough, to just enough, to too much, suggesting a link between the issues of embeddednesss and life cycle considerations. p. 15

I am not suggesting that a free-for-all of ideas being thrown at BP would have helped. Ideas developed without structure and governance are useless to any of the firms residing in any community of practice. This is an area where the Draft Specifications Military Command & Control Metaphor (MCCM) would enable the right type of ideas to percolate to the top. For example, if, the MCCM was in play in the situation in the Gulf of Mexico. Having everyone in the global oil and gas and service industries designated with a "name, rank and serial number" (etc.) would allow those ideas from participants who work in offshore oil and gas, who are senior engineers, who are intimate with sub-sea operations, be found instantly. In addition if there was a community of practice that existed with the MCCM implying some structure, would the social embeddedness of these individuals have thought of and possibly thought through some of the issues that would have arisen? I think so, but then again I am biased.

For instance, decentralized systems of innovation ( including industrial districts may be at a disadvantage in generating genuinely systemic innovations (Teece 1986), that is, innovations that require the development of new components as well as new ways of integrating components In such a case, the location of much of the relevant knowledge within a tightly coupled systems is likely to facilitate innovation. This need not mean a single vertically integrated firm, but it does mean that lead or coordinating firms - in modern terminology, systemic integrators - must possess a wise range of knowledge or capability and must indeed "know more than they do' (Bruisoni, Prencipe, and Pavitt, 2001). They also need to be powerful enough to force other firms to follow their lead. p. 16

Seeing who has been designated as the "Red Adair" in offshore blowouts would have helped before and after a situation like this. And maybe this individual foresaw the difficulties in offshore blow out preventer's. And allocated a small budget of his engineering firm to research the idea that these could fail. And maybe they would have been well on their way to solving the problem when the incident happened. The alternative today is that the engineering firm would have had to fully developed the solution and marketed it throughout the industry for the oil and gas firm to turn their thumbs down on the idea. As we see in the Gulf today, we can't work this way anymore. Langlois notes;

In addition, their reliance on local standards can impede efforts by firms in an ID to indigenize innovation form outside, again raising the costs of adjustment and the time required. Finally, firms with a mature ID that do develop innovations may not only find it difficult to generate interest within their ID but are poorly placed to market their innovations externally. p. 16

Without these communities of practice in place, where is BP today? The costs of this disaster may seriously impede the firm. BP could face costs in the range of $10 billion with additional damage to the wells reserves. All because management didn't foresee that the innovations of offshore drilling moved ahead of the science. In the scenario that I provided before, where the engineer proposed a solution to what he saw as faulty offshore blow out preventer's. In today's marketplace management will thumb its nose at these ideas. In the future it may solve the problem and eliminate these costs.

People, Ideas & Objects asserts in the Draft Specification that the oil and gas producer is concerned with their asset base and application of the scientific and innovation capabilities of the marketplace. This is represented in the Resource Marketplace, Knowledge & Leaning, Research & Capabilities, and Accounting Voucher modules and the Military Command & Control Metaphor being extended to the communities of practice. If BP adopted this strategy of focusing on their assets and capabilities, where would they be today?

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Langlois Failure Management Community Innovation Science Military-Command Offshore
 

Professor Thomas Malone on Organization

Taking a quick break from our review of Professor Langlois' paper "Innovation Process and Industrial Districts" we have a quick article and video series from MIT Professor Thomas W. Malone. We covered another video of Professor Malone's back in February of 2006, in both instances he is promoting the ideas that are part of his book "The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life".

MIT Sloan Management Review are providing this article and video series entitled "A Billion Brains are Better Than One". One of the first points that is made is it's not about the technology.

Well, sure, executives and everybody else knows about the new kinds of technologies that keep popping up. But there’s a key perspective that a lot of people don’t really get yet, which is that these new technologies change the essence of organizations.

Moving to the Joint Operating Committee (JOC) is only possible through the use of the new Information Technologies. But the real value resides in the interactions that can occur between people and organizations. When we structure the Joint Operating Committee with the Draft Specification is when we begin to generate that value.

There is also the scope of these changes. Through our review of Professor Carlota Perez we have been able to map the impact that technologies have on the long term economy. Creative destruction is the term that best describes this process of renewal. The Information & Communication Technology Revolution (ICTR) provides the equivalent impact of the industrial revolution. And people within the oil and gas industry can fully participate in this by joining People, Ideas & Objects here.

To a greater degree than any technologies since those that enabled the Industrial Revolution, we’re now in the midst of a transformation in how businesses are organized. And the changes are not in production technology, but in coordination technology.

This is not a short term one off type of arrangement. This is a permanent change in the way that the oil and gas industry will operate and organize itself. I see a 40 year cycle of innovation and iterative development being generated by these communities. That is the scope of the possibilities. Malone notes;

You don’t think the corporate world understands the distinction you just made?

No, I don’t. Most people still think of technology as something that we use to do the same old things, not as something that changes the things we can do in the first place.

and

The change to more decentralized businesses is well underway. I think there’ll be ups and downs. Some companies will go up, down, backwards and sideways. It’ll be a complex process, something that will take place over decades. But it is one of the most profound changes that we’ll see in the first half of the 21st century.

Being part of that change is what gets me up in the morning. We stand at a point in time in which we can participate in positive change. Where the scope of what can be achieved in the next few decades is unimaginable. This can only happen as a result of the full deployment of Professor Carlota Perez "Small Knowledge Intensive Enterprises" (SKIE) or Professor Richard Langlois' "Industrial Districts" or People, Ideas & Objects Community of Independent Service Providers (CISP). Only then can we optimize what Professor Malone says are the benefits of this type of organization.

I go into a lot of the details about this in my book The Future of Work (Harvard Business School Press, 2004). But the short version is that I think we’re likely to see these changes first in the places where the benefits are most important. The benefits of having lots of people make decentralized decisions are that people are more highly motivated, they work harder, they’re often more creative. They’re willing to be more inventive, to try out more things. They’re able to be more flexible when they can adapt to the specific situation in which they find themselves rather than having to follow rigid rules sent down from on high that may or may not apply in this particular situation. And often, they just plain like it better.

and

But in a knowledge-based and innovation-driven economy, in high tech, R&D-oriented industries, the critical factors of business success are often precisely those benefits of decentralized decision making: freedom, flexibility, motivation, creativity.

The question is how do these changes come about. First by becoming a member of this community. Second we secure the necessary funding to support the communities in the long term. These are the themes of which we are writing about here. The current management of oil and gas will not participate in this revolution in which they are not a part of. They have chosen a form of organizational self-selection. These communities appeal to the investor / shareholder in oil and gas. And collectively the People, Ideas & Objects and associated communities provide these investors with the means in which to organize and manage their oil and gas assets.

I actually think the changes will happen more often from new companies, new organizations that are started on a different basis right from the beginning. They won’t always work. It’s not always a good idea. But in the cases where a decentralized way of working actually works better, those new companies will have an advantage. They’ll grow or be replicated by lots of other similar companies. And eventually, the old companies that haven’t figured out how to change themselves will either be acquired or go out of business or belatedly imitate the new ways of doing things.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's MIT Video Change Innovation Community CISP
 

Langlois, Innovation and Process Part...

Today in our third installment of Professor Langlois paper "Innovation Processes and Industrial Districts" we discuss Transaction Cost Economics (TCE). Which are an important element of the Draft Specification. In 2009 Professor Oliver Williamson of Berkeley won the Nobel Prize in Economics for TCE, reflecting the heightened importance of this topic. Wikipedia defines the term here. Of note, once we have completed our review of Professor Langlois we will be moving on to a review of Professor Oliver Williamson. [Professor Williamson has the majority of his material behind pay walls and therefore are not freely available. I therefore will not be able to provide access to the documents.]

Professor Langlois talks about his concept of "Dynamic Transaction Costs" which he describes in his paper "Transaction Cost Economics in Real Time".

This paper attempts to place the theory of the boundaries of the firm within the context of the passage of time. More precisely, it resurrects and places in a modern frame some of the insights of the classical and Marshallian theories of organization. The modern reinterpretation of those theories centers around the 'capabilities' view of the firm. Taken together with governance costs, the capabilities of firm and market determine the boundaries of the firm in the short run.

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firms capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them.

Indeed, in cases in which systemic coordination is not the issue, the market may turn out to be the superior institution of coordination. In general, the capabilities view of the firm suggests that we look at the firm and market as alternative -- and sometime overlapping -- institutions of learning. p. 99

This discussion of Dynamic TCE is important to the oil and gas industry. At today's energy prices the average upstream employee generates approximately $4.1 million in annual revenue. (Based on Total's production of 2.34 mboe / day, 16,005 employees and today's prices.) Oil and gas is a capital intensive industry. The number of people that are employed in the global oil and gas industry is small compared to most industries. It is this nature of the oil and gas business that brings the relevance of Langlois' theories. To be innovative, will be costly, to employ the style of marketplace dynamics discussed in this paper will also be costly. However, the ability to increase the productivity of the employees and Industrial Districts (ID) will require these investments, and the funds will not necessarily be a large percentage of the costs incurred in the oil and gas industry.

3. Life Cycle Considerations

To help us recall the terms of the discussion Langlois brings in this excellent summary.

Inspired by Adam Smith’s discussion of the benefits of the division of labor, a number of classic accounts of the life cycle have associated the development of decentralized production systems with an increase in the extent of the market (Young 1928; Stigler 1951). In Stigler’s version, for example, firms start out vertically integrated because small markets do not permit specialization. An increased extent of the market permits the spinning off of those stages of production that benefit from increasing returns, thus generating the potential for an industrial district. As an industry ages in Stigler’s account, declining demand for the industry’s output would lead to an eventual reintegration. It is the central insight of transaction-cost economics since Coase (1937), however, that production costs alone cannot determine whether the division of labor will be coordinated through markets (as in an industrial district) or internally within vertically integrated firms. Transaction costs also matter. And technological change is one important source of transaction costs. p. 10

The oil and gas industry is not subject to a decrease in demand and therefore provides no opportunity for reintegration. I would argue that the scientific demands of energy exploration and production are poorly served by the "integrated" bureaucracies. Moving to a greater market orientation, as in the Draft Specification, will marginally affect production costs, and materially enhance the value in designing transactions as the Accounting Voucher module provides.

I want to reinforce these points by pointing out that the majority of field operations are conducted by third parties. Designing transactions is currently done in standard oil well drilling contracts where the chairman of the Joint Operating Committee selects each element of the wells drilling will be provided / conducted by the oil well drilling firm or the producer. Designing transactions are not foreign to the earth science and engineering resources in oil and gas, they are foreign to the administrative or ERP systems that the producer uses. I consider the Draft Specification is aligning the systems to the culture of the industry. Langlois notes that this leads to.

Because ID's do not comprise an entire market, their role in the generation of technical standards is complex. The relatively close levels of association between firms in an ID can ease the setting of standards within the district because much of the agreement may be achieved informally and the limited number of firms within an ID makes it easier to bring the interested firms together. Furthermore when there are only a few integrators who are determining overall design, less discussion may be needed to achieve commonly accepted interfaces between components. The effects of concentration on overall industry standards are less clear-cut and an industry may fragment into a number of groups dominated by local standards without agreement being reached on an overarching set of standards because there is sufficient volume of output within each ID to allow for self-sufficiency. As a result, while ID's may accelerate innovation along certain trajectories, they may also encourage myopic behavior in the gathering, generation and use of new knowledge. pp. 12 - 13

In this discussion I hope that I have highlighted the nature of how the Draft Specification enables the greater market orientation. By moving closer to the cultural influences of the business, increased dynamic transaction costs will be minimal. That is to say the major impediments to the ways and means of the industry operating in a more innovative fashion. Is 1) management who are focused on the firm, and 2) the ERP systems that are designed from other industries or early stage technologies [SAP]. People, Ideas & Objects provides the industry with the opportunity for a greater innovative footing. By identifying and supporting the industry standard Joint Operating Committee and its culturally systemic ways.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

Technorati Tags: People's Langlois Capabilities Management