Capabilities as the Focus

Our first paper of Professor Langlois’ is “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” In this paper he introduces capabilities as a new theory of economic organization. Its primary concern, as it is here in the Knowledge & Learning module, is its focus on production.

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

The capabilities approach picks up and builds on the transaction cost approach that we have been discussing throughout the Preliminary Specification. It also builds on the boundary of the firm and markets.

One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research p. 7.

To build the capabilities of the oil and gas producer to conduct their own field operations is impractical and inefficient. Sourcing the field operations needs of the producer from the service industry is the only viable solution. Deployment of those capabilities becomes the issue in the innovative oil and gas industry. Particularly when the basis of competitive differentiation is on the earth science and engineering principles the oil and gas business is based. “What” and “how” those capabilities are developed and deployed are critical elements of the oil and gas producers competitive differentiation. The Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification organize these capabilities in a manner where innovation is the priority.

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behaviour but (also) of creating the possibilities for productive rent-seeking behaviour in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 6

Using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer is the first step to this innovative setting. The Knowledge & Learning module is a Joint Operating Committee focused module. There the participants in the JOC are able to review the capabilities of the various firms that are members of the JOC. Enabling them to make the operational decisions based on the right information at the right time with the right people.

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 31

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation Supported by a Software Development Capability

In both the Knowledge & Learning and Research & Capabilities modules producers are benefiting from something that may not be too obvious on the surface. That is the objective nature of the People, Ideas & Objects Preliminary Specification and the fact that it is not affiliated with any one specific producer. That is to say it is not an application that grew out of Exxon Mobil, BP or Shell and was used there first. It will be an application that was independently supported through the Revenue Model and will remain unbiased as to which producers perspective it takes. The same can be said for the Community of Independent Service Providers. This may mean more to some producers than others, however, from an innovation point of view it will also mean a few things.

People, Ideas & Objects is focused on providing the innovative oil and gas producer with ERP systems based on using the Joint Operating Committee as the key organizational construct. By having a software development capability present while working within the Knowledge & Learning module, the innovative producer will be able to deal with the many new possibilities in their business. The software that an organization uses is a “technology paradigm” that the oil and gas industry has to consider. And software puts the industry on a new “trajectory” just as we have discussed here for the earth science and engineering disciplines. Professor Giovanni Dosi notes.

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138
• Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

Which speaks to the attributes of software. However, would these technological paradigms and trajectories be available to the producer community if the software was owned and operated by ExxonMobil, BP or Shell? What motivation would they have in making the changes to the software to accommodate your business? The third party, objective nature of People, Ideas & Objects and the Community of Independent Service Providers is necessary for the software to become amenable to the needs of its user communities. If the producer is to rely on this third paradigm and trajectory as a key advancement in their business, then it must remain open to the needs of the community. Professor Dosi notes.

Similarly, new technological paradigms, directly and indirectly -- via their effects on “old” ones -- generally prevent the establishment of decreasing returns in the search process for innovations. p. 1138

Let me restate this for clarity, the indirect nature of ERP software via its effect on the earth science and engineering disciplines, will generally prevent the establishment of decreasing returns in the search process for innovations.

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. It is designed around the Joint Operating Committee, the innovative oil and gas producer, and includes the user community in determining its precise needs. This is the type of application that is needed for the 21st century oil and gas producer. A vision that focuses the people who work within the industry on the activities that people do best. Collaborating, researching, evaluating and deciding. And leaves the computers to do the things that they do the best. A software development capability designed to provide the innovative oil and gas producer with the means to provide all of their ERP software needs.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Deploying Innovations

It is important to recall that innovation is not research. Research is being conducted in the Research & Capabilities module and when the research is proven, added to the "Dynamic Capabilities Interface" which in turn is populated through appropriate criteria to the Knowledge & Learning module. We have also drawn the football analogy to how the development and execution of capabilities in the Joint Operating Committees are similar to the way that football teams plays are developed and executed. We want to use the analogy of the football coach who is motivated to win, selects the plays from a long list of possible plays of what the team can execute.

Professor Giovanni Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. For the purposes of this discussion the perception of some sort of opportunity is realized through the members of the Joint Operating Committee reviewing the capabilities that are presented to them through the Knowledge & Learning module. The listing of capabilities presented from the various producers that are participants in the Joint Operating Committee would provide a depth of opportunity that was previously unqualified and unquantified. The incentives would be performance based and focused around the possibility of increasing the trajectory of revenue per employee.

We’ve all seen the football coach on the sidelines with the list of hundreds of plays that can be called during the game. Selection of the appropriate play will help to move the team towards its goal of winning the game. To be presented with a list of hundreds of opportunities within a Joint Operating Committee has probably been the case for many in the industry. The ability to select and execute them in the manner that the football coach is able to, and have them communicated to the team members for precise execution in the half second that it takes is the rarity. There is no reason why each and every Joint Operating Committee should not have this type of efficiency. An efficiency in the ability to select and execute the capabilities that are made available to them.

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user is able to select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and resource it from the Military Command & Control Metaphor. Since the capabilities are listed from various firms in the Joint Operating Committees special considerations will need to be made in terms of the resource requirements. The “capabilities” that are selected are for company x, and available from company x, not necessarily for Joint Operating Committee xyz without the involvement of x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will be required. From there the execution of the capabilities can take place.

We have drawn the analogy of a football coach who reviews his list of plays, selects one, and calls it for the team to execute, to the “Planning & Deployment Interface” of the Knowledge & Learning module. The ability for a Joint Operating Committee to have this style of communication and understanding of what needs to be conducted may be necessary in the near future. With the insatiable demands for energy and the ever increasing demands of earth science and engineering work needed with each barrel of oil and gas produced. The amount of work required for the JOC will need to be conducted in a highly organized and controlled manner.

Adding to this level of increased workload for the Joint Operating Committee is the field and service industries are going through their own innovative cycles. The problem is that if each Joint Operating Committee is left to deal with each of these issues on their own, then there will be significant time and energy wasted on pursuing “things” that may or may not bear fruit for the property. This is something that needs to be avoided. However, the JOC needs to be deploying the latest state of the art proven technology in the most capable manner.

If we look over the previous discussion regarding the Research & Capabilities and Knowledge & Learning module we can see how these “things” are filtered out and dealt with. The Joint Operating Committee is being provided with the most up to date capabilities from the producer firms that have a financial interest in the property. It is those producers that are expending the research to expand their understanding of the earth science and engineering on behalf of all of their interests in all of their JOC’s. Taking the trips down the blind bunny trails once and only once on behalf of all the JOC’s. Not having each and every JOC discovery the blind bunny trail on their own. Then developing the capability to the level necessary for the inclusion in the "Dynamic Capabilities Interface" where it will be used successfully by all of the JOC’s they have an interest in.

This process helps the Joint Operating Committee to focus on the property. To eliminate the noise of what is going on in the larger oil and gas arena for the moment and deploy the innovations that are known to add value. It is as when the coach calls the play the only concern is to ensure that you execute your part of the play in the manner that it is designed. There may be times back on the practice field to fiddle with some changes, but for now it's time to run the play as it was designed. This is the business of the “Planning & Deployment Interface” in the Knowledge & Learning module.

Professor Giovanni Dosi asserts that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications. The first implication being the net benefactor of the cumulativeness, tacitness and technological knowledge implies that “innovation and the capabilities for pursuing them are to an extent local and firm specific.” Secondly, the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity." This is further defined by the technological and scientific capabilities, and “the advances made by suppliers and customers.” (p. 1137)

These implications that Professor Dosi notes are reflected in the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enabling the Joint Operating Committee to implement the “innovation and the capabilities for pursuing them are to an extent local and firm specific.” With the Research & Capabilities module providing the future with the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity.” Providing the producer with the best of both worlds.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Deploying Capabilities, Not Hoarding Information

It is best that we start this discussion of capabilities with a clear definition of what they are. These are some of the definitions that were published earlier in the Research & Capabilities module and are noted here for clarity purposes. The first is from Professor Richard Langlois.

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

As well we have Professor Carliss Baldwin’s “Knowledge begets Capabilities, and Capabilities beget Action.” There is also the quotation from Professor Richardson that capabilities are the “Knowledge, Experience and Skills” (1972, p. 888) to which we at People, Ideas & Objects have added “Ideas.” And this next quote from Professor Langlois helps to bring the clarity we need.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

With respect to information, we have all seen how information, and more specifically secrets, within the oil and gas industry can travel from one producer to another at a rather rapid pace. No one should be surprised to learn that what they thought was confidential to the firm, has somehow leaked and became well known throughout the industry. It is sometimes more difficult to communicate information through the organization then it is to get information across the industry. The question therefore becomes how is proprietary information, and more importantly these proprietary capabilities that are available within the producer firms, deployed on an as needed basis within the various Joint Operating Committees.

Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, yet has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another is not as easy, and may be not worthwhile doing. Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.”

Within the Knowledge & Learning module we are operating within the Joint Operating Committee. Populated with the capabilities from each of the participating producers through the “Dynamic Capabilities Interface" of the Knowledge & Learning module. It may be a concern to some producers that the publication of these capabilities to other producers representatives in the Joint Operating Committee would lead to the leakage of proprietary information or loss of knowledge or capabilities. That may be, however the nature of capabilities are such that they can’t be copied by a simple matter of recording the text. As we have discussed elsewhere, the development of capabilities is the results of research and application of the resources of the firm in a determined and purposeful manner to achieve an outcome. Copying the plans or instructions would not provide you with the means to achieve the objective. You can’t copy the “pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities.” What we have to make sure that we don't lose is the ability to deploy the right information, knowledge or capability at the right time and at the right place. Knowledge, information and capabilities need to be employed and deployed when and where they are needed and required. That is the competitive advantage, deployment of the dynamic capability, not hoarding of information.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Revenue Per Employee at the Joint Operating Committee

We want to discuss the publication of the specific Joint Operating Committee calculations of Revenue Per Employee, and particularly the trajectory that the factor is on. How this calculation could affect those that work within the property; and the use of this information contained within the Knowledge & Learning module of the Preliminary Specification.

First of all it is understood that not all people are necessarily assigned to work for one Joint Operating Committee. There are times when people might be assigned to dozens during the course of one month. Calculating the hours worked by the people within the Joint Operating Committee from the different companies is not going to be a difficulty for the People, Ideas & Objects software. With the Military Command & Control Metaphor within the Security & Access Control module the time and tasks that each individual will be doing is being recorded for these types of information purposes. Although most will only work part-time on a JOC, the factor will be converted on a full-time equivalent basis. Calculations of Revenue Per Employee for the property should be straightforward.

In previous discussions, the calculation of a comparison of the factor of revenue per employee from one period of time to the other, or trajectory, was raised. These trajectories were the real key in determining where the factors were heading. Was the property accelerating its innovativeness, or decelerating. We also broke down the trajectory into three different types of variances. The volume variance, price variance, and employee # variance. Each of these variances reflecting the reason why the trajectory might have changed. All of these variables should be shown on their own “Revenue Per Employee” interface within the Joint Operating Committee. Each member that is assigned to the property should have access to this page and be able to contribute ideas and suggestions on how to improve the factor. An open collaboration focused on Revenue Per Employee. In addition, this page could have a historical context of many time periods captured in a graphical format. Showing over the past many years how the revenue per employee at that Joint Operating Committee has performed.

We also learned that revenue per employee reflects the asymmetry (revenue per employee is widely variable) of the assets within the industry. That asymmetry would be very apparent in a comparison of Joint Operating Committees. And I am not suggesting that the comparisons are valid, just pointing out that the industry has a large asymmetry in their competitive makeup. The comparison of revenue per employee for the same property over time however, will have a significant impact on the people that work for that Joint Operating Committee.

One certain way to increase the factor of revenue per employee would be to fire all the employees. However, the best way to deal with the factor is described by Professor Giovanni Dosi when he states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Members of the Joint Operating Committee would be able to turn to the "Dynamic Capabilities Interface" which contains the capabilities of the producer firms that are part of the partnership. There the people would be able to see what the firms offered in terms of their earth science and engineering issue identification and resolution capabilities. It may then be realized that applying some formerly unknown capability to the situation in the JOC will yield greater productivity... or something along those lines.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Emulating the Small Producers Adaptability

This discussion will provide a focus on Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation." We also metaphorically move from the “practice field” of the Research & Capabilities module to “game day” with our football analogy in this the Knowledge & Learning module. In reviewing what has been written so far in the Preliminary Specification I was interested in this comment. The domain of the Joint Operating Committee is; “the ability to innovate will not only permit the oil and gas producer to find more oil and gas, increase the production of oil and gas from the field, but will also provide innovative ways in which to deploy its capital and reduce its costs.” Which seems to capture the focus that the Research & Capabilities and Knowledge & Learning modules provide the producer firm and Joint Operating Committee.

What we have so far in the Knowledge & Learning module is three interfaces. The first is the "Dynamic Capabilities Interface" which is the published version of each of the producer firms capabilities. These capabilities are sorted based on geological zone, and other criteria, and published based on those criteria. Therefore each Joint Operating Committee receives access to the capabilities that are pertinent to that JOC from each producer. Getting the right information to the right people at the right time. There is also a “Knowledge Area” that includes the policies, procedures, operational and management information for the property. This area also includes what is commonly referred to as the well file in terms of the information that is contained within it. Lastly there is the “Lessons Learned” interface where the people who work within the JOC record the information on the operations that did not follow the expected outcomes.

Let's review the three key factors of innovation Professor Giovanni Dosi notes:

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

• Capabilities and stimuli generated with each firm and within the industry of which they complete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Recall that these key factors are being funneled through the Research & Capabilities “Dynamic Capabilities Interface." It is there, in the producer firm, that the greater issues of the science, the capabilities, microeconomic trends and public policy, etc. can be centralized and dealt with on behalf of all of the Joint Operating Committees that the producer may have an interest in. To expect that each individual JOC would deal with these greater issues would be unproductive and disorganized. By dealing with these points, and codifying them in the Dynamic Capabilities Interface the producer firm is publishing the appropriate information to the JOC at the appropriate time. Then the JOC has only to deal with the issues and opportunities of the property and none of the noise that may or may not be arguing for attention.

One of the first items that we address in the Knowledge & Learning module of the Preliminary Specification. Is how the items within the various “Dynamic Capabilities Interfaces” of the many producers who are participants in the Joint Operating Committee are populated into the Knowledge & Learning module. As we have discussed each producer publishes the pertinent capabilities they have to the various Joint Operating Committees. Therefore the people who are working within the JOC are presented with a variety of capabilities that may be duplications and similar to others. That would be reasonable to expect. However, just as the football team's playbook may have similar looking plays, they may have subtle differences in the manner in which they are executed, etc. That would be the same case in the Knowledge & Learning module.

It would also be the case that company A who is a member of the Joint Operating Committee have developed a capability for XYZ operation that is considered state of the art in the industry. This capability is one of several that are listed in the Knowledge & Learning modules Dynamic Capabilities Interface for XYZ operation. However, the Joint Operating Committee has operational decision making authority, and it is decided to execute the capability of company B for XYZ operation through the Knowledge & Learnings modules fourth interface the "Planning & Deployment Interface" instead. The JOC is the operational decision making authority who have the choice as to how the day to day operations are implemented. Their motivation is based on performance and they are most familiar with the property. In the football analogy this would be the quarterback calling an audible.

As technical paradigms are introduced, Joint Operating Committees will accept and use these innovative capabilities at different rates. This rate of acceptance can be classified as early innovators, imitators and fence sitters. Thus a satisfactory understanding of the relationship between innovation and distribution of JOC’s structural and performance characteristics implies an analysis of the learning and competitive process through which an industry changes. Professor Giovanni Dosi notes these behavioral attributes.

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157

We have seen over the past twenty years an interesting trend that has created significant differences in the stratification of the oil and gas industry in terms of the size of the producer and their associated innovativeness. The small organization was able to purchase reserves and facilities from the open market only to substantially increase the inherent value through increased production and / or performance. We can conclude that the bureaucracy inherent in the hierarchy had stifled the innovativeness in the larger organizations and most disturbing is the lack of concern or identification of this as an issue over the past number of decades.

With this structure and arrangement between the Research & Capabilities and Knowledge & Learning modules, focused around the Joint Operating Committee, replicating the small oil and gas producer and focused on performance. The probability that the lumbering bureaucracy has been defeated is significant.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Learning Through Markets

It's important to point out the context of what the Joint Operating Committee will be learning. To do that we turn back to the definition of where the boundary of the firm and market is defined. The Joint Operating Committee must rely on the market for a majority of the work that is done in the field. I understand that this depends on the size of the facility and it will vary based on the types of operations and a variety of other conditions. In Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” he notes the following constraints will be imposed on the Joint Operating Committee as a result of their dependence on the market.

The firms learning ability will depend on its internal organization. And the learning ability of the market will depend on technical and instructional factors, as well as on the learning abilities of the firms it comprises, considered both individually and as a system. The remainder of this paper is devoted to considering these two learning systems in slightly more detail. More specifically, it will set out some preliminary generalization about how the level of capabilities in the firm and the market - and the nature of change in those capabilities - affects the boundaries of the firm. pp. 111 - 112

What the contractors know, and what they think they know may be not relevant to your property. We discussed the fact that the general rule is that the operations being conducted are reduced to the understanding of the least experienced individual on the crew. How do we avoid the general rule being applied to any detailed operation? And how do we avoid what are called the motivational and cognitive paradoxes from becoming the “mindset” of the contractors on this or any of the Joint Operating Committees operations?

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

To add an extra layer of complexity to this process. Recall that we have changes that are being made in the marketplace as a result of the gap filling process seen in the Research & Capabilities and other modules. This being an application of the division of labor and specialization process that deals with the overall organization and efficiencies of the industry. This will have a direct effect on the makeup of the contractor and the learning processes in this module.

These issues become the concern of those users of the Knowledge & Learning module of the Preliminary Specification. In an innovative oil and gas industry change will be the constant variable that needs the attention of everyone concerned. How do we maintain the awareness and attention that is necessary of everyone to learn what is needed? Within Langlois’ paper I think we see the answer to the problem detailed within this discussion and in the review of Langlois’ definition of Dynamic Transaction Costs.

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

The answer is, there will be large, in comparison to what is incurred today, Dynamic Transaction Costs expended by the Joint Operating Committee through the Knowledge & Learning module of the Preliminary Specification. This is a strategic necessity whose alternative is for the producers to move all of the operations in-house and manage them internally. Not a viable alternative. If we identify what these Dynamic Transaction Costs are (not having the capabilities available when they are needed) in the process of incurring them and record them as such, then we can deal with them and learn from them. That may be the first step in learning what to do with the learning costs in this high change and high cost era of oil and gas.

In the end the choice of whether to use the market or to vertically integrate is a purely academic exercise. In oil and gas the choice to depend on the market is a given and there is little practical application in the alternatives. What our discussion has been about is more to learn from the discussion of how we can establish processes of learning from using the marketplace. In a period of rapid change with high levels of innovation we are going to be stretched in terms of our capabilities, knowledge and capacity to learn. These areas are the focus of the Research & Capabilities and Knowledge & Learning modules. As the business of the oil and gas business is managed through the interfaces of these modules, the People, Ideas & Objects application will need to identify the point when Dynamic Transaction Costs are about to be incurred. Then they can be controlled, effective learning put in place and the capabilities necessary to strategically mitigate these issues developed or implemented to avoid these costs. And provide the Joint Operating Committee with the successful operation. As noted in Langlois’ paper “Transaction Cost Economics in Real Time”;

How would learning proceed in a system of decentralized capabilities? As I have already suggested, progress would take place autonomously within the decentralized stages. There would be no need for integration unless a systemic innovation offering superior performance arrives on the scene. Indeed, as we have seen, fixed task boundaries and standardized connections between stages might make innovation difficult with the existing structure, requiring a kind of creative destruction. (Schumpeter, 1950). p. 121

and

Ultimately, the costs that lead to vertical integration are the (dynamic) transaction costs of persuading, negotiating with, coordinating among, and teaching outside suppliers in the face of economic change or innovation. (Teece, 1986). pp. 115 - 116

and

But in cases in which systemic coordination is not the issue, the market may turn out to be the superior learning engine because of its ability to generate rapid trial and error learning. p. 124

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Dynamic Transaction Costs and Capabilities

What is it that the people who work for a Joint Operating Committee know? Where does a person that has just been assigned to the property learn what is important about it in terms of how its run? Where is this history kept, who maintains it, and how is it accessed? We have discussed the knowledge area of the Knowledge & Learning module of the Preliminary Specification, I want to shift the discussion now to the learning area.

Let's first review Professor Langlois’ definition of Dynamic Transaction Costs.

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. p. 99

Our efforts in the learning section of the Knowledge & Learning module must be to reduce the Dynamic Transaction Costs of the Joint Operating Committee. That is to adapt to change efficiently. Change is the one constant, learning to adapt to that change is critical. Recognizing the high costs associated with Dynamic Transaction Costs, or change, therefore has to be handled from a strategic point of view. This will initiate the discussion and begin documenting how the learning section of the module is configured to capture this data and information.

We now turn to a quotation from Professor Sidney Winter in his paper “Deliberate Learning and the Evolution of Dynamic Capabilities” to define some of the risks we face in the changing environment of the innovative oil and gas producer.

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

We need to strike a fine balance between these two somewhat opposing goals. Strategically control the Dynamic Transaction Costs and maintain an environment of dynamic capability for change and organizational learning. Note one of the capabilities of the Preliminary Specification will the ability to “tag” a transaction. Included within those tags will be a tag “Dynamic Transaction Costs” which will identify these costs when they are being incurred for further investigation.

The first component of the learning module will include a wiki styled information repository that contains the operational, policy and management of the property. This will be managed by the Security & Access Control module so that only those that are assigned to the property are able to access the wiki. Within the wiki will be the life history of the property in terms of the information that has been collected. Well files, schematics, reports, agreements, etc. Everything and anything, indexed and referenced electronically. Recall too the Knowledge area contains the “Dynamic Capabilities Interface” of the producer firms affiliated with the Joint Operating Committee.

Another section should be set out for “Lessons Learned” in which to document where decisions were made based on actions or activities that occurred of interest. These have a dramatic influence on everyone in terms of their learning and understanding about the property. As these occur these items should also be published to each person in the property as well as being posted in a central location. As with the Research & Capabilities module the ability to act on these items in terms of right clicking on them and generating an AFE, a Work Order, a Purchase Order, prepare a new Capability or any of the other documents in the People, Ideas & Objects application modules should be possible based on the users needs. More will be discussed about lessons learned in the Compliance & Governance module.

Again it might be argued or asked, why is the ERP vendor so involved with the operational concerns of the oil and gas producer? The simple answer is that it's the business of the business of oil and gas that needs to be supported by the ERP system. And that is the Joint Operating Committee, for both the oil and gas business and the People, Ideas & Objects Preliminary Specification. It's not just about debits and credits anymore, it's about identifying and supporting the business of the innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Getting to the Business of the Business

Throughout our discussion of the Research & Capabilities and Knowledge & Learning modules. We have been discussing the earth science and engineering research, developments, innovations and thinking of the oil and gas producer and the Joint Operating Committee. Many of you may be wondering what exactly does an ERP system have to do with these activities? Simply these activities are where the business of the oil and gas business are being conducted. It is imperative that the systems that manage the commercial aspects of the firm define and support the people and activities that occur in these areas.

The final look and feel of these two modules will ultimately be the result of the user input and their involvement. These modules are where the business of the oil and gas business are happening. It will be within these modules that the engineer or geologist will never have to leave. If they find an idea within the research area of the Research & Capabilities module they should have the opportunity to right click their mouse to have a list of options to prepare a Work Order, Prepare a Budget, Raise an AFE or Resource a Project. The ultimate list of actions would include the supporting activities of a user defined commercially focused ERP system.

Today there are significant financial resources available for innovation. The commodity price increases are an allocation of capital to fuel innovation. The reorganization of a producer to facilitate innovation is the purpose behind the research that People, Ideas & Objects conducted. That research was the basis of the Preliminary Specification of which the Research & Capabilities and Knowledge & Learning modules are critical parts of. These modules are the two key points where innovation occurs. Within these modules there is a flow of “knowledge, skills and experience” and ideas from the service, and oil & gas industries, through to the producer firm, and then those capabilities are sent to the Joint Operating Committee where they are applied and specific learning occurs.

There will be many ideas and there will be a lot of money spent in the coming decades. Successful innovation is not cheap. Unsuccessful innovation is terribly expensive. The difference is as stark as Apple’s iPad commercial success vs. HP’s Touchpad lasting only seven weeks. What we do know is that innovation can be reduced to a defined and replicable process. And although just having the innovation processes in place will not guarantee innovation. I can guarantee that innovation will not arise without the defined and replicable processes, such as People, Ideas & Objects Preliminary Specification, in place.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Introduction to the Knowledge & Learning Module

The title of the Preliminary Research Report was “Plurality Should Not Be Assumed Without Necessity." This of course being Occam’s Razor which in its simplest form means - the simplest explanation is most likely the correct one. Very appropriate when we are talking about using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. However, I also noted in the Preliminary Research Report that Occam’s Razor was referenced as “Its not what you know that you do not know that hurts you. It's what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” Knoop & Valor (1997).

Imagine we are now in the Joint Operating Committee with full operational decision rights with respect to the course of action to take. Thanks to the work that is done at the participating producer firms we know what we know from their work in the Research & Capabilities modules. Those capabilities are populated into the Knowledge area of the Knowledge & Learning module. Now the rubber hits the road and the theory comes to practice.

We now move onto the Joint Operating Committee focused Knowledge & Learning module of the Preliminary Specification. This module shares many similarities to the Research & Capabilities module, and in fact is populated with the capabilities from that module as its base of information. Recall that the objective that we are working to achieve is to move the knowledge to where the decision rights are held, the Joint Operating Committee.

As I noted the Research & Capabilities module should be organized based on geologic zones and other criteria. This is so that the capabilities that are pertinent to each zone can be separated and populated within the Knowledge & Learning module. Additional ways in which the capabilities may be sorted in the Research & Capabilities module might include geographical location. Where all the vendors who operate within a certain geographical location are referenced only in those regions in the Knowledge & Learning module.

With each Joint Operating Committee being concerned with one or a handful of geologic zones. The focus of the Joint Operating Committee will be limited to just those specific areas. What is particularly different about the Knowledge & Learning module, however, is that the information that is contained within the module is aggregated from multiple producers. Any of the participating producers who have capabilities contained within their Research & Capabilities module will have those pertinent capabilities for those geologic zones populate the Knowledge & Learning module for that Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Preamble Part VI

Our Value Proposition

It is People, Ideas & Objects claim that we provide the most profitable means of oil and gas operations. The final aspect of our claim is that our Revenue Model provides the lowest cost of obtaining an ERP system in the industry. And that is by charging for the costs of software development, plus an element of profit as our fee structure. Therefore the industry is only paying for the one time costs of ERP software development. A fundamentally more efficient value proposition than any of our competitors.

We can do this because we are not focused on the traditional software company concerns of code and customers. As a cloud computing provider we are oriented to the changing business dynamics of an innovative oil & gas, and associated service industries. This highlights the different motivations of the software developer over the long term. In People, Ideas & Objects instance we generate revenues on the basis of the changes that industry desires. Our motivation becomes the constant improvement of the software. In the traditional software vendor’s case they are motivated by their code and customer bases. The larger their code base the more difficult it becomes to change, which coincidentally does not generate revenue. And the larger the customer base the more costly the changes that need to be made to each customer. Which coincidentally these changes to the customer software do not generate any revenues. Hence, their age as a firm paradoxically leads to increases in their overhead burden. What you have is a contrast in the dynamic nature of the software itself. In terms of its cost to the industry and the motivation behind the developer.

Within our Revenue Model we have an annual fee and penalty structure for those who have not participated on a timely basis. Isn’t the penalty, when paid, a benefit to the software developer above their regular fees? No, it is not. The penalty structure is designed so that each producer pays an equal share of the total costs of all of the development. There are no free riders in this program. If a producer were to wait until the fifth year to start to participate in the user community and use the software that was built by others; then they would have to pay the fees for those past five years plus the associated penalties as well. These fees and penalties would then be used to offset the following years costs before the calculation of the next years fee assessment. So the next years fees would be proportionally less the amount of any fees and penalties that were paid by producers who decided to join the community and use the software. We call this the participation bonus.

Each year we specify the amount that each producer's share of costs will be based on a fixed charge per boe. These will be on the basis of estimates of our understanding of what is required to maintain and develop the software to meet its competitive advantage. So there is an inherent level of trust in the work that is done through the community, and the financial support that is provided. The research and software development necessary to make this happen can be significant and needs to be undertaken in a timely fashion. With today’s tools it can be done in a commercial fashion with remarkable speed. The real inhibition will be the communities ability to think fast enough. The producers are a critical part of the community. What can not happen is to have the funding for this development terminated as a result of a lack or fading interest by the producers. It is therefore inherent upon me to provide a compelling reason for that funding cut never to happen. And that is through the fact that we provide the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Preamble Part V

Earth Science and Engineering Resources

We now move on to the fifth component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operations. Our focus is on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model employed by the bureaucracy. There are many aspects of this component of our competitive advantage, however, they all generate their profitability for the producer through innovation, specialization and the division of labor.

In the area of innovation we look to the Research & Capabilities and Knowledge & Learning modules to highlight the processes that are managed within those modules. Focused on the development, documentation and deployment of capabilities within the Joint Operating Committees. It is there that the research and development of those earth science and engineering capabilities are funnelled into the Joint Operating Committee for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables the innovative producer to participate and sponsor working groups to research and study various earth science and engineering based projects. Designed to eliminate the bureaucracy and the inherent difficulty in managing the accounting logistics for the ad hoc nature of these groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next couple of decades the demand for these resources will outstrip supply due to retirements and the inability to bring on any increase in the numbers of new recruits. There just isn’t that percentage of the population that has the aptitude for geology or petroleum engineering. The need therefore to deal with the resource constraints is a problem that the industry must resolve and the Preliminary Specification has used specialization and the division of labor to do so.

One of the key difficulties is what I call the hoarding issue. Each producer is building the capabilities within their firm to deal with any contingency at any time. This hoarding of earth science and engineering resources, when taken across the industry, builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities necessary for their producer firm, these critical resources are unnecessarily constrained. The solution that is provided within the Preliminary Specification is what is called the pooling of technical resources. Each member of the Joint Operating Committee commits the technical resources, based on their unique specialized capability, to the property. Any deficiency is made up from service providers or outside producers who provide the additional earth science and engineering capabilities for a fee.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter aspects of geology and engineering work. Much of this work can be turned over to service providers who are organized on the basis of providing a specialized service to the industry. Organized around a process or skill that is common or generic and could be specialized to a high level if the scope and scale could be brought into the picture.

It is reasonable to assume that industry will turn to specialization and the division of labor to deal with these resource restrictions. However, without the pooling concept being a critical element in the solution, the scope and scale of the producers domain of earth science and engineering capabilities, because of the enhanced specialization and division of labor, will most certainly create further shortages in the resource base due to the hoarding issue. And lead to chronic unprofitability due to the enlarged scope and scale necessary to cover their operations.

In a few years having each producer conduct all the earth science and engineering necessary for all of their properties will seem like a business model from the dark ages. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the limited resource base. It is the earth science and engineering capabilities that form a critical part of the innovative oil and gas producers competitive advantage. The Preliminary Specification enables the firms resources to focus on the specialized research and development of “knowledge, skills, experience” and ideas, and the deployment of those in the properties that are held by the firm. This is the appropriate posture for a profitable oil and gas firm, and the fifth component in how People, Ideas & Objects provides the oil and gas producer with the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Preamble Part IV

Lower Costs of Exploration and Development

We now come to the fourth component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operation. It is the lower costs associated with any field work done for exploration or development. This would also include the field operations on producing properties that were covered by a workover or an AFE.

There have been many complaints from the oil and gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct these. Everyone would agree that a more productive environment needs to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This can begin by developing the Preliminary Specification and implementing the changes within it to start the ball rolling.

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry. These collaborative interfaces are designed to deal with the one issue that is systemic throughout the oil and gas industry. That issue is the manner in which the oil and gas producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to their own best interests. What has happened is that those that know the time and effort necessary to develop a new idea will not take the effort because the oil and gas industry will not respect their efforts, and therefore they don’t bother developing the idea. No new ideas are coming into the service industry at a critical time when the science in oil and gas is becoming paramount. And to add to the problem the oil and gas producers will not hire anyone for field operations that are not of a certain size and scope to handle the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations?

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil and gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. By having the oil and gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. As I indicated, these are what are necessary for both an innovative oil and gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. Its a simple matter for the oil and gas industry that you reap what you sow. Recall in the quotation of Professor Giovanni Dosi that investments in innovation is for the purpose of profits. That reasoning applies in this instance as well in that the innovation will reduce the time, effort and costs of field operations by finding a better way.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Preamble Part III

Innovation for Profits

As the third element of our competitive advantage, of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the scientific basis of the business, is the successful perspective for the 21st century oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification has been designed to capture the “what” and “how” of innovation within the software that will be used by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated into the software. Our research included the works of many but most particularly Professor Giovanni Dosi and his key paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). It was there that we learned many of the fundamental aspects of what is necessary for the oil and gas producer to focus on innovation. Recall that it was in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process.

To highlight a few of Professor Dosi’s key points on innovation, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

and

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

• Capabilities and stimuli generated with each firm and within the industry of which they complete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Innovating for profit is the third element of People, Ideas & Objects key competitive advantage of being the most profitable means of oil and gas operations. It is within the DNA of the Preliminary Specification how the processes of innovation are identified and supported that enhance the ability of the innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A New Hypothesis

Throughout our writings and particularly in the Preliminary Specification there is the understanding that organizational change will only occur after the software has enabled the changes first. That we are dependent on software in our organizations and as defined in Professor Anthony Giddens Structuration theory, we are enabled and constrained by these structures. Our hypothesis takes this understanding and extends it across the economic horizon. And concludes that as a result of the inability, or lack of capability, to amend the ERP software in organizations today, economic growth has stalled. We are, or should be, wholly dependent on a deliberate and purposeful pursuit of specialization and the division of labor. That the concept of spontaneous order, which is necessary for specialization and the division of labor, is eliminated through the use ERP software systems.

It was in the Preliminary Research Report that we first discovered Professor Anthony Giddens Structuration theory and Professor Wanda Orlikowski model of Structuration. In terms of its definition we have this quote from Olga Volkoff

From the perspective of structuration theory, adaptation is the joint effect of the actions of individuals and the institutional structures which those actions take place. Structures such as business strategies, organizational culture, reward and control systems, patterns of communication, and professional norms both enable and constrain the daily activities of people, but do not wholly determine them. 

ERP systems, particularly those installed in the larger organizations, are the modern equivalent of pouring concrete into your organization. The ability to make even a small change in a process requires the dedication and sacrifice of several peoples careers. The importance of this is possibly lost on the following two quotations. First is Fredrich Hayek on spontaneous order.

It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the "state" of the termite ants, or some other altogether unimaginable type.

And this next quotation is from Professor Richard Langlois. It describes how specialization and the division of labor are expanded.

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

People, Ideas & Objects provide a software development capability to the innovative and profitable oil and gas producer. Our revenue model is structured to support change. To avoid the difficulties that are evident in the economy today. To provide solutions to the issues that occur in the oil and gas industry. Solutions in both the administrative and in the operational domain. Operational issues such as our decentralized production model which provides the oil and gas producer with 2012 opportunity costs in the area of $94 billion. The decentralized production model can not be achieved in any manner other than by programming the industry through software. It is that simple, and that matter of fact, that we rely to this extent on software today. It is the same situation in other industries.

Within several modules of the Preliminary Specification there is the “Gap Filling Interface.” It enables users of the software, from the service and oil & gas industries, to publish areas where they sees gaps in the offerings being provided. This will open up communication and collaboration on the types of services and products that can be developed that are needed to fulfill those gaps. In addition with the software development capabilities of People, Ideas & Objects the software can be amended to deal with any change in the process to accommodate the gap filling process.

Spontaneous order brought us to this point. Unfortunately software systems have put a roadblock in its way. We now have to consciously workaround this roadblock and work to expand our economies deliberately and purposely. Our hypothesis suggests that today’s slow growth economy is severely constrained by the software and systems that are in use today. We need to fight to overcome these constraints. We also need to fight the bureaucracies who find comfort that their franchise is unchallenged by simply keeping the software intact.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Preamble Part II

The Decentralized Production Model

It's been several years since natural gas prices have declined. And its not that the prices that were being realized before then were all that spectacular. With the costs associated with exploration and production, and particularly shale reserves, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in pricing. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, makes their operation a high cost operation even at full production. At lower production volumes it skews their earnings and overhead costs appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. This model has been defined by Professor Richard Langlois as:

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

All of the administrative and accounting service providers that we discussed in the previous section charge for their services directly to the Joint Operating Committee. This makes for the conversion of the producers fixed administrative and accounting costs into the Joint Operating Committees variable administrative and accounting costs. Therefore, if there is no production, there is no charge for the administration or accounting item and neither the producer or the Joint Operating Committee is incurring any overheads during times of shut-in production. For example no charges would be made for Production, Revenue or Royalty Accounting to the Joint Operating Committee. Therefore the only costs that would not be covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time when they will be produced profitably. And keep that production off the market until the commodity prices rise to the point where they cover the marginal cost. Putting an effective floor on the prices of the commodity markets.

If producers across the industry follow this process by subscribing to People, Ideas & Objects Preliminary Specification then prices would not have the significant declines that we have experienced in the last several years. If the downswing in natural gas prices were averted by way of a fifteen percent reduction in natural gas production volumes, therefore increasing average prices to $6.70. We projected total revenues (and profits) of the North American natural gas industry would have been $94 billion higher than what they have been. And those are just the opportunity costs for 2012. Making all of the production under this scenario exceed the marginal cost and be profitable. And for any shut-in production, no loss on operations would have been incurred because there would have been no overhead or production costs.

Adding the ability to shut-in production on marginal operations to the ways in which People, Ideas & Objects provides the innovative oil and gas producer with the most profitable means of operations is a substantial part of our competitive advantage. Shutting in production is the logical thing to do but producers refuse to do it due to the impact on their performance. The method used by People, Ideas & Objects would actually improve the profitability of the producer, retain the reserves for the future when prices rise, reduce the costs of operation and remove the excess production from the marketplace.

Whereas today’s continued unprofitable production maintains high cost operations, adds the losses on operations to the cost of the reserves to be recovered from future operations, requiring even higher prices and depresses prices. Instead of doing what it needs to do, the bureaucracy will continue to do what it know’s how to do, particularly when it lacks strong leadership. Which based on past history is nothing. But lets be honest, maybe their strategy of hoping for a cold winter will come through this year.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Preamble Part I

I thought we would take a break between the Research & Capabilities and Knowledge & Learning modules to review the Preamble to the Preliminary Specification. There are six sections which will be published in six separate blog posts over the next three days. Each section deals with one aspect of the value proposition that People, Ideas & Objects provides the innovative and profitable oil and gas producer.


People, Ideas & Objects competitive advantage and value proposition is that we provide the oil and gas producer with the most profitable means of oil and gas operations. We do this by providing the software that supports a business model that defines the following characteristics.

Specialization and the Division of Labor

Our focus on the areas of specialization and the division of labor and how these tools will be highly effective in reducing all of the costs incurred in the producer firm.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Today everyone in oil and gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct very select and highly specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would be a failure. At the same time, with the corporate model proving to be unsustainable, the focus will be on cutting costs. Cutting too deep could have greater implications than what were intended. The point is to move to a higher level of specialization and division of labor will not be done, and can not be done without significant forethought.

Secondly we have to consider the role of software in our society. If we intend to move to a higher level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we are not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability of People, Ideas & Objects.

If we review the Preliminary Specification there is a defined restructuring that takes place throughout the modules based on a higher level specialization and division of labor of the industry. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal, land and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized and specialized across the industry. So for example there would be a lease rental payment service provider that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment service provider is billed directly to the appropriate Joint Operating Committee. Not to the individual producer. Eliminating the fixed nature of the producers administrative and accounting costs, and replacing them with the variable nature of the Joint Operating Committees administrative and accounting costs.

What are the advantages of moving to a system or methodology such as this. Cost and efficiency are the reasons. The costs associated with the lease payment service provider would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments the service provider would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process and other processes in the industry subject to this type of analysis, complete with the software development capability of People, Ideas & Objects, similar results in productivity could be attained. All economic growth is a result of specialization and the division of labor.

When we consider the current corporate model attempts to provide the producers administrative and accounting needs for all that falls within their domain. And the understanding that is necessary to support those administrative and accounting tasks. The ability to build that administrative and accounting capability is costing each and every oil and gas producer their profitability. What will become to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable. And a more effective and efficient business model based on a higher definition of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industries survival requires it. What we are in essence doing is moving from a reliance on the producers administrative and accounting capabilities to a reliance on the industries administrative and accounting capabilities. And this assures our targeted market, the oil and gas investor, that we do indeed offer the most profitable means of oil and gas operation. As without the software to define and support this higher level of specialization and division of labor, it will not happen.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Conclusion to the Research & Capabilities Module

The Research & Capabilities module documents the earth science and engineering “capabilities” of the innovative and profitable producer firm. Capabilities have been defined as those “knowledge, skills and experience” of the firm. People, Ideas & Objects have added “ideas” to that list. Capabilities have also been defined as “knowledge begets capabilities, and capabilities beget action.” These are the cornerstone of an innovative and profitable oil and gas producer in the 21st century. These capabilities are developed here in the Research & Capabilities module for publication in the pertinent Joint Operating Committees through the Knowledge & Learning modules.

The Research & Capabilities module enables the producer firm to structure a division of labor between those that will develop the research and innovations within the producer firm, and those that will deploy the innovations within the Joint Operating Committees. This is one of the major processes that is carried out in the module. Another major process is that it provides the innovative oil and gas producer with the ability to move the knowledge and capabilities to where the decision rights are held, the Joint Operating Committee. This module is at the core of the innovative oil and gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires.

Lastly bringing new knowledge and capabilities into the organization are what provide economic growth. Deployment of that new knowledge to the right people at the right time is the challenge that the producer faces and the role that the Research & Capabilities module undertakes in the producer firm.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.