Showing posts with label Research-Capabilities. Show all posts
Showing posts with label Research-Capabilities. Show all posts

Thursday, July 30, 2015

"Implementing Effective Cost Control"

Another casualty of the downturn in oil and gas is the service industry. Just as the people who work directly for the producers, the service industry are dependent on oil and gas producers for their revenues. Oil and gas being a primary industry receives their revenues from the oil and gas sales. These oil and gas sales represent more than just the money that the bureaucrats are entitled to. It has been the experience of the past decade, when prices where higher, that these same bureaucrats were calling the service industry as being lazy and greedy for the prices that they charged to conduct field operations. Not realizing the difficulties these bureaucrats impose on the service industry by cutting field operations to the core one year, while the next two years doubling, tripling or quadrupling their capital expenditure programs. Feast or famine is how they have to deal with this in the service industry and that is how they have learned to survive in this environment dictated by the bureaucrats.

It’s 2015, is this the appropriate manner in which to operate the oil and gas industry? How is it that the service industry is able to innovate and provide for the ability to develop the technologies that producers are so dependent upon? Technologies such as horizontal drilling, multi-stage fracing, or to pick just one company Packers Plus. Based on the history of Packers Plus and my own here at People, Ideas & Objects. The declaration of war against the bureaucrats in oil and gas is a necessity. You really are treated like garbage if you have an idea. That’s because ideas belong to the oil and gas industry. In the bureaucrats mind that is. For you to secure an idea outside of the “legitimate” areas of ownership leads to punishment until one side in your war wins. This is how the industry is operated, surely no one believes the producers are actively working hand in hand with the service industry to develop new products and innovations? That’s a hollywood fiction.

It was Encana, the large Canadian natural gas producer that was calling the service industry lazy and greedy when prices were high. That was back when Encana’s stock was in the $90 range. With the recent announcement of their losses in their second quarter report. Their stock is performing well at around $7.50 but all of this decline has been attributable to the 1,400 people that they've laid off and the fact that the service industry is greedy and lazy. A company that has lost 90% of its market cap is a real life zombie. Two more years and they will be in receivership, with their assets picked away at by crow’s looking for a deal.

The fact is the service industry needs to be able to rely on the oil and gas industry for their revenues. In order for the service industry to perform in the best interests of the oil and gas industry, those revenues need to be stable and secure. The fact that oil and gas is a primary industry means that the responsibility for this falls on them. After all they are wholly dependent on the service industry and you do reap what you sow. This is the manner that the Preliminary Specification deals with the difficulties that we face in the future. The Research & Capabilities and Resource Marketplace modules provide for this environment to be created and managed. Is it so unreasonable, in this day and age. To expect that the producers will control themselves and not overproduce. By implementing the Preliminary Specifications decentralized production model they can do this. And make the prices that are necessary to support both industries in an appropriate manner.

As it stands now, with this downturn, people are leaving oil and gas and the related service industry for good. They've seen the character of the bureaucrats before and know that this downturn will be no different. What will be different is their actions. Instead of waiting for the next upturn. They're going to take what they may have been able to secure and are moving on to some other more secure industry. This is happening wholesale in the service industry, and to the people who work in oil and gas. Many of which I know are burnt to the core. Add on top of this the fact that the bureaucrats, when faced with the results of their own stupidity, always hightail it to greener pastures and you have to ask yourself. What and who are left?

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, May 12, 2015

Our Solution Part XV

Yesterday we stated that there had to be more consideration given towards the service industry in terms of the work that is done for the oil and gas producers. During the good times the bureaucrats are frequently expressing their dissatisfaction about the costs and availability of the service industry resources. During the downturn in the industry these same bureaucrats think of none of the consequences of slashing their budgets and ceasing all field operations. The flow of people into and out of the fields can cause severe traffic jams in the most remote areas. Bureaucrats need to begin to think a little more clearly at the real cost of turning the taps on and off in this manner. Calling out the service industry as leeches on their revenue streams doesn’t help to endear the service industry to the key role they provide.

After all if not for Packers Plus and coil tubing, to name a few, there would be no innovation in the oil and gas industry. Many of the bureaucrats are claiming that they are innovating at a tremendous rate at this point in time. The fact of the matter is that they are only conducting operations at lower day rates than they were when the rigs were fully contracted. The real innovations came years ago by these service industry providers who begged and pleaded for the bureaucrats to try their ideas, for free, to get an understanding of what could be done with coiled tubing, or what Packers Plus was providing. The ideas that started in the field were ignored and laughed at by the bureaucrats for many years, possibly a decade, before they were finally accepted by that rarified being, the oil and gas bureaucrat. You can also be certain that most of these people were funding their ideas themselves and found that most of their ideas eventually ended up in their competitor's shop as a result of a “technology transfer” that was hosted by these oil and gas industry bureaucats.

So why would someone fight these bureaucrats for decades to have their technology eventually adopted in the industry. Only to have their technology copied by their customer when it is accepted. And to generally be treated like a virus for the rest of the time? I can only speak for myself, and that is, we have a job to do. Without oil and gas, as a society, we are in a real mess. So we do the job that we are able to do, irrespective of the bureaucrats. The fact of the matter is it’s a very hostile environment. On the service industry side it's become work to rule. Collect your check and that’s it. I don't see anything positive being developed out of the service industry in the next decade. And the same would go for the bureaucrats. This is not how the industry should operate, particularly at a critical time such as now.

What is needed is the Resource Marketplace module of the Preliminary Specification. Within this and the Research & Capabilities module are a variety of interfaces in which the oil and gas producers and service industry representative can collaborate on future needs and desires of the producers. Respect for the Intellectual Property that is generated from the ideas that are raised is also provided in the module. No more will the bureaucrats be able to wash the ideas and innovations of individuals and service providers in the great ether of industry based knowledge. There has to be respect for the ideas that are developed in order for people to want to invest in them. If they continually see their customer poaching their ideas and handing them to their competitors. We will continue to see a hostile and unproductive relationship. Now we all know this is done in the field and in head offices of the oil and gas producers. And it has to stop. The victims of this “theft” is the producers themselves in that they are denied the prosperous and abundant marketplace of service industry innovations.

Review of the Resource Marketplace module of the Preliminary Specification provides the means in which to develop this prosperous and abundant marketplace. It is also where I place the blame for the breakdown in this relationship solely on the bureaucrats. Its what they do, blame others and cut costs in the short term. And as I said it has to stop if we are going to solve the problems that we will have to in the next 25 years in dealing with society's demands for energy.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, May 07, 2015

Our Solution Part XIV

With the Research & Capabilities module developing the capabilities for later deployment within the various Joint Operating Committees that the producer has an interest in. We need a module, the Knowledge & Learning module, that is used within the Joint Operating Committee that has a view of those capabilities and will enable the deployment of them. The significant point of the Knowledge & Learning module is that it will have a view of each of the producer participants capabilities within that Joint Operating Committee. Therefore enabling the selection of the best capabilities for the needs of the Joint Operating Committee. This is done with the understanding that each producer will be focused on developing their own specific earth science and engineering capabilities on a specialization and division of labor basis.

There are limited numbers of earth science and engineering resources available at any time in the industry. With the demands of more science and engineering effort per barrel of oil, these demands will not subside anytime soon. It is therefore necessary to resolve this mid to long term shortfall with the tools of specialization and the division of labor. That way more throughput can be achieved from the same resource. There are also demands for these resources from the way in which the producers are structured. Each producer firm is attempting to build the capabilities necessary to fulfill their commitments at any and all times. This requires them to cover off the entire scope and scale of earth science and engineering needs within the organization. With any further specialization and division of labor within the sciences and engineering professions themselves. The scope and scale of the demands on the producer to obtain and maintain their capabilities in the manner that they do today may exceed what is commercially obtainable. The size of their teams will exceed their budget capabilities. Therefore specialization within the producer firm itself is not an option.

However specialization and the division of labor when applied across the industry is able to solve this issue. What the issue is is that each producer has unused surplus capabilities resident within their organizations. These are used for just in time instances where a specific properties demands for resources may peak. Taken across the industry these unused surplus capabilities incur substantial unused and unusable resources. Therefore in addition to specialization and the division of labor being applied within the professions. It is also necessary to apply these principles to the producer firms themselves. Where one producer will specialize in one area and another producer covers off another area. Where the needs of the property can be obtained through a pooling of the capabilities from the members of the Joint Operating Committee. And if there are further shortfalls, other producers who have those capabilities can be hired to fill out those requirements.

This pooling requires that each producer is able to charge their resources to the various joint accounts. And that the producer firm has two distinct sources of revenues. Oil and gas revenues, and revenues from the development and deployment of their capabilities. It will be in this way that the industry can meet the shortfall in these critical professional resources. Specialization and the division of labor are the only proven methods to resolving resource shortfalls. Hoarding these resources within each of the producer firm only leads to further shortfalls on an industry wide basis. As the retirements of the brain trust occurs in these professions. An answer to the way in which the industry will deal with them has to be answered by the ERP system that the industry selects. By designating operatorship to one firm producers have been reliant on other producers capabilities from the beginning of the industry. Few companies will have the budget to fund the scope and scale of an operation that will support the full science and engineering capabilities that will be demanded in the future. The Research & Capabilities and Knowledge & Learning modules are the solutions provided by the Preliminary Specification.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, May 06, 2015

Our Solution Part XIII

For today’s post I went into the Research & Capabilities module to a get a quick refresher of some of the elements within that module. I have to say that I could not select which module is my favorite. Maybe my favorite will always be the last one I read. Anyways, the value that this module provides the dynamic, innovative and profitable oil and gas producer is not as quantifiable as the other areas. It will however have a significant impact on the performance of the oil and gas producer. The elements that I want to point out are the key issue that it resolves in the oil and gas industry. And the detail regarding the two major processes of innovation.

There are two material processes that the Research & Capabilities module controls. The first is to divide the labor between research and development and the execution of those resulting capabilities. This process is separated into the Research & Capabilities and Knowledge & Learning modules. The other material process is to move the knowledge to the area where the decision rights are held, the Joint Operating Committee. Professor Richard Langlois notes in the following.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

The Research & Capabilities enables the movement of knowledge to where the decision rights are held. The Joint Operating Committee is the operational decision making framework of the industry. There is a major conflict occurring in the industry when the Joint Operating Committee's decision rights are attempted to be moved to the producer firm by the bureaucracy. This conflict, or rights assignment issue, is unresolved in the current industry structure. By the Preliminary Specifications aligning the compliance and governance frameworks of the hierarchy with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. We resolve the many conflicts and problems, such as the rights assignment issue, that exist within the industry.

We also define what a “capability” is in the Research & Capabilities module. Professor Carliss Baldwin of Harvard University states that “knowledge begets capability and capability begets action.” Professor Richard Langlois defines it as the “knowledge, experience and skills of the organization.” To which we have added “knowledge, experience, skills and ideas.” It is the capture of the firm's capabilities that is achieved in the Research & Capabilities module. However, only the explicit knowledge, the tacit knowledge of the firm is deployed through the Job Order system that we will be developing.

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface” of the Research & Capabilities module. The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy the Research & Capabilities module is the practice field where the team is developing new and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface” which enables them to be deployed in all of the Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate the unnecessary “trial and error” learning from being repeated in each and every Joint Operating Committee. The learning can be done once, and limit the cost of the innovation by reducing the unnecessary repeated experimentation. As I stated this is the primary process of innovation.

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

These are the highlights of the Research & Capabilities module. There are many other aspects of the module that are of interest and more specifically the modules makeup in terms of its software configuration. With a revised organizational structure where the C class executives, earth science and engineering resources, some land and legal, and support staff are the stripped down, lean producer firm. They will be able to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Friday, November 21, 2014

"The Big Crew Change" and Our User Community

Some have begun calling the issue of the turnover in the earth science and engineering disciplines over the next few years “The Big Crew Change.” The difficulty of course is that it is expected that upwards of 50% of the existing technical resources will be retiring in the short term. This of course can’t be handled by the universities as there are only so many people that are oriented to petroleum geology and engineering and it takes at least ten years to effectively train an individual. Therefore the industry has a clearly identified issue however, with the bureaucracy, they are clearly able to see the issue, as in low commodity prices, but unable to think of anything to do about them or implement any plan to deal with the issue. This post deals with the Preliminary Specifications method of dealing with the “Big Crew Change” and the user communities involvement during development.

Simply in the case of technical resource restrictions of the like that the industry is faced with. The only method of dealing with the issue is through specialization and the division of labor. If we look at the configuration of the oil and gas producers as they are today we see that each and every producer is developing their earth science and engineering capabilities to deal with every contingency that they are responsible for as operator of the properties. Therefore they have to build in contingent resources in order to ensure that they are able to deal with the ability to meet the demands of what the makeup of their properties might require. This surplus capacity leads to unused and unusable surplus capacity that the producer incurs on a day to day basis in their earth science and engineering resources.

If we aggregate the unused and unusable surplus capacity of the industry we have a sizeable amount of resources that are made available to us if we reorganize the industry. If we dispatch the concept of operatorship to the scrap heap. And introduce the idea of pooling of the technical resources within the partnership represented in the Joint Operating Committee. We can effectively eliminate the unused and unusable surplus capacity within the industry.

In addition we can have the individual producer firm focus on areas of specialization and further provide a division of labor in the earth science and engineering disciplines that will enable us to deal with the “Big Crew Change.” If we assume that these technical disciplines continue with their current progress. The status quo requirement of a producer will require each producer to cover off each of these new technical specializations themselves. Rendering the producer firm uncommercial in the marketplace due to the overhead caused by the expanded earth science and engineering resource requirements. Approaching this issue in the pooling fashion of the Preliminary Specification, where each producer specializes and then pools with their partners, is the only reasonable manner in which to deal with the “Big Crew Change.”

The user community has a distinct role in the development of this solution. The pooling of these technical resources is handled in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. It will be there that the specifics of the producers capabilities are listed and promoted between the members of the Joint Operating Committee in order to be selected as the key member to deal with the specific technical demands as they occur. The software developments in these modules will need to have the know how and understanding of how to create and enable these new and innovative interfaces in the oil and gas industry and that will come from the user community.

It is the resolution of the big issues that the industry faces that the user community is addressing in the developments of their software. That is the importance of this user community in the industry. They are the ones that are able to make the changes in the makeup of the industry. To reorganize the resources in different ways in order to solve the problems that we face. And that is the power that is provided to you the user community through the user community vision. And this must be how the oil and gas industry develops from this point forward. As we can see the bureaucracy is failing on all major elements of the industries needs. And through People, Ideas & Objects, the user community and our service providers the bureaucracy needs to be removed and replaced.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, May 21, 2014

Pooling of Technical Resources in the Partnership Accounting Module

A few weeks have passed and its time to revisit some element of the Preliminary Specification to keep it fresh in everyone’s mind. Staying within the Partnership Accounting module and continuing on with the theme that we have been discussing regarding the technical resources of a producer firm. Today I want to discuss the pooling and charging of these technical resources to the Joint Operating Committee.

Recently we discussed the need for the members of the Joint Operating Committee to pool the earth science and engineering resources to make up the capabilities necessary for the property. This will be done due to the ability of each and every oil and gas producer to build the capabilities within their own producer firm. This will soon create excessive demand on the earth science and engineering professions that will extend beyond the existing industry resource base. With shortages in the numbers of earth scientists and engineers in the mid to long term. Alternative methods of organization, specialization and the division of labor are the means in which People, Ideas & Objects have chosen to deal with this issue.

When each producer is building the internal capabilities that are needed for their operated properties. They are required to build for every contingency for all of their properties. In doing so they are building capabilities that are unused and unusable when looked at from the industry perspective. These unused and unusable resources are trapped in the producer firm and are otherwise irretrievable. This current method will also discover difficulties as the underlying sciences continue to expand and demand that further specialization of the profession is necessary. Any further specialization, without the ability to reorganize these resources will cause the scope of what a producer needs to have on staff to expand further. Making the financial viability of the producer questionable at any production profile.

What People, Ideas & Objects Research & Capabilities and Knowledge & Learning module enable the producer firm to do is to specialize in their earth science and engineering capabilities. It will be in this way that the producer firm is able reduce the global scope of earth science and engineering capabilities within their firm. And take on a highly specialized capability. Something that the industry demands of the dynamic, innovative and profitable producer of the 21st century. Producers throughout the industry will be doing the same in terms of pursuing their unique specializations and capabilities.

As a result, the abilities and capabilities of the producers that make up the Joint Operating Committee will be diverse and quite probable to include what is required in order to cover off the global scope of the properties needs. A pooling of these capabilities will be enabled through the Knowledge & Learning module as its prime functionality. Additional capabilities, if required, can be made up from the marketplace of other earth science and engineering providers or producers.

Within the People, Ideas & Objects Preliminary Specification it is assumed that the earth science and engineering resources of the firm are not a cost centre but a source of revenue. Whether that revenue is derived as a result of direct charges to the Joint Operating Committee or to, lets call them customer Joint Operating Committees. The dynamic, innovative and profitable oil and gas producer has two separate and distinct revenue streams and lines of business within the lightweight footprint provided through the decentralized production model. This enables the producer firm to develop their earth science and engineering capabilities somewhat independently of their production profile.

The issue that is being resolved through the use of the Preliminary Specification here is the resource limitation of these critical professions. Using organizational methods, specialization and the division of labor are the appropriate means in which to approach the issue. The constraints of the Joint Operating Committee becomes an opportunity as it is the culture of the industry and therefore we are able to release the unused and unusable resources for use into the marketplace. Capturing this surplus capacity and employing it within the producer firms. Creating a second line of business within the producer firm helps to offset the costs of developing these highly specialized resources. Issues and opportunities that the dynamic, innovative and profitable oil and gas producer will need to address in the 21st century.

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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, April 24, 2014

When Innovation is Implemented

One thing that we have not mentioned for a while is that the Preliminary Specification is designed to identify and support innovative processes for the innovative and profitable oil and gas producer. It is within the Preliminary Specifications DNA that innovation becomes the focus and drive of the producer. Innovation is at its greatest value when and where it is needed. And in the People, Ideas & Objects system innovation is needed where shut-in production exists. The ability to return the property back on to production will require some innovation that either materially expands the reserves and reduces the capital cost of each unit of production, increases the throughput of production to reduce the operational cost per unit of production or reduces the operational costs per unit in a material way. It is in this way that the Preliminary Specification is structured to provide the oil and gas producer with the capabilities to operate in this manner.

With the decentralized production model, which reduces the producer to the C class executives, the earth science and engineering resources, the land and legal with some support staff. The producers remaining resources are reallocated permanently to service providers who are focused on the process or subprocess and use the industry as their client base. These service providers are then able to charge for their services directly to the Joint Operating Committee for the administrative and overhead costs of the various services they provide. Then if the property is shut-in these service providers will have no work associated with that specific Joint Operating Committee and as a result no billing for their services will be presented for that month the property is shut-in. Allowing the producer to incur a null operation on the property, no profit or loss, saving the reserves for a time when they can be produced profitably and reducing the amount of the commodity on the marketplace, therefore placing a floor on the commodities pricing. This is how the industry becomes a price maker as opposed to a price taker. No production, other than profitable production is produced. A reasonable and fair means of allocating production discipline.

Once the property has been inventoried as a non-producing property. That is when the engineers and earth science resources of the firm, and associated working interest partners are able to engage in any number of initiatives that any of these producer firms have developed the specialized capabilities for. Conducting a complete review on the property, its opportunities and issues and determining what the best course of action is to either lower the cost of production, increase the reserves or deliverability, or just keep the property in inventory. These actions are taken in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. It is there that these people can see what the capabilities are that are contained within the many firms that make up the Joint Operating Committee. Selecting the most promising and innovative plans and programs and applying them to the inventoried property with the anticipation of returning it to profitable production.

It will be this overall process of applying innovation to the inventoried properties that identifies and develops the key innovations in the oil and gas and service industry. This overall process will have the net effect of reducing the overall costs of the industry. Both in terms of capital and operating. The incentive to move production onto the marketplace is one of the strongest that the company faces. Holding capital assets or capacity offline is costly. Moving the firm to produce at 100% of capacity is the pressure that each firm will experience. However, there will be market discipline to ensure that any unprofitable properties remain off the market. The punishment will be in the form of the investment community looking elsewhere for their investments.

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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Wednesday, January 15, 2014

Joint Operating Committee User Budget Category Part VII

We move on to the implementation of the Research & Capabilities module. I have allocated a User Budget for this category of $7 - 14 million or 21 to 42 man years of effort. The Research & Capabilities module shares many characteristics with the Knowledge & Learning module however I have considered these in the allocations of their budgets and as a result there is no real crossover in terms of any opportunities for pooling of funds. That is to say that pooling of the budgets is expected and any savings that might have occurred have been reallocated to other areas. There will be some synergies however with the Service Industry, Earth Science and Engineering user group budgets to help defer some of the costs of the developments here.

One of the key objectives of the Research & Capabilities and Knowledge & Learning modules is to move the knowledge to where the decision rights are held. The operational decision rights are held with the Joint Operating Committee and the knowledge is held within the producer firm. We therefore have to move the knowledge to the Joint Operating Committee. This reverses the flow that is currently in place as the industry is moving the operational decision rights to where the knowledge is held. This current practice is in conflict with the culture of the industry and leads to a variety of issues that are inconsistent with the needs of an innovative and profitable oil and gas producer.

The actual process of capturing the capabilities and populating them within the various Joint Operating Committees seems to be rather simple when it is first introduced. However, it becomes incredibly complex when the proprietary nature of the capabilities contained within the module, and their security, are taken into account. This contrasts with the need to have the right information to the right people at the right time in order for it to have value. And that precision in the informations deployment is what we are seeking to attain in these modules.

If an engineer updates a capability within the Research & Capabilities module that is specific to their proprietary knowledge about fracing. And they know that the capability provides value to the firm when it is used. It is imperative that that capability is populated to the pertinent Joint Operating Committees that they are participating in that have a demand for that fracing capability. That it is released to those Joint Operating Committees and to only those Joint Operating Committees. Understanding also that there are partners within those Joint Operating Committees who will have access to those capabilities and will be able to vote to deploy those capabilities for that property.

This does not lead to any proprietary leakage of capabilities to the partnership. The capabilities that are developed within the firm are proprietary to the firm and are for its exclusive domain. Others can attempt to copy the capability from your firm however they will find that it is as costly and as difficult as it would be to develop the capability on their own. Capabilities are not transferable from one firm to another on the basis of copying. If you watch a surgeon conduct open heart surgery, or read his procedure, does that make you a heart surgeon? Having the knowledge within the Joint Operating Committee that one of your partners is capable of conducting extensive multilateral fracing, and the ability to review that capability through the Knowledge & Learning module opens up the “opportunity” to expand the horizon of what is possible.

In the hands of the user community we can achieve the precision that this module demands. Maintain the security and proprietary nature of the capabilities of the producer firm. Yet expose these capabilities to the properties that it owns to let it fully understand and appreciate what is possible and probable. And that is just one aspect of the module. There is also the research area where there are a variety of interfaces that lead to the further development of capabilities in 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. And don’t forget to join our network on Twitter @piobiz

Thursday, November 07, 2013

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.

Two Primary Processes of Innovation

We have been discussing the coordination of operations and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is one of the things that is carried out in the module, innovation another. To refresh our memory, the primary process in which innovation is carried out in the Preliminary Specification is as follows.

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy the Research & Capabilities module is the practice field where the team is developing new and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface” which enables them to be deployed in all of the Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate the unnecessary “trial and error” learning from being repeated in each and every Joint Operating Committee. The learning can be done once, and limit the cost of the innovation by reducing the unnecessary repeated experimentation. As I stated this is the primary process of innovation.

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

To preclude the opportunities to act upon these types of discoveries would leave the spontaneity out of the oil and gas industry. When faced with the knowledge that is provided to the user from the “Dynamic Capabilities Interface” some things may become obvious. Serendipity is a word that is used in economics. We should adopt it here to ensure that a dynamic and innovative nature of the industry is the result.

But there is more that we are doing in this secondary process. We are building on the already well established earth science and engineering capabilities of the producer firms of the Joint Operating Committees. This broadening of the scope of users occurs at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes.

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2

and

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

What is therefore needed is a means to capture innovations that arise from this secondary process. Whether they are in the domain of the service industry or in the earth science and engineering fields. A means to turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee were to field test their own innovations based on the ideas they may have heard elsewhere.

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.

Wednesday, November 06, 2013

Professor Richard Langlois on Capabilities Part IV

A Critique of the Bureaucracy

As I stated earlier, the culture of the industry also has an influence on the design of these modules. These cultural conditions reference the boundary of the firms and markets and determine the future changes that will be needed. Since we are dealing with the service industry, and all but the smallest number of producers practice sourcing their field operations from the market. We are consistent with the culture of the industry. Nonetheless Professor Langlois notes three factors are important. Application of this framework to the methods used in the Preliminary Specification provides an understanding of the choices that were made.
  • The pattern of existing capabilities in firms and market. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 360
  • The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 360
  • The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 360
The service industry is robust and dynamic. What is needed is for the oil and gas producers to build the interfaces described here. Once they have their capabilities documented and deployed in such a manner the natural evolution of the service industry will continue, although at a faster pace and with more competitive offerings.

The question that we have to ask ourselves is why should we focus on capabilities in the oil and gas industry? I think it is because we have lost the ability to respond to market signals and initiate new and innovative thinking. These next two points will ask the difficult questions that should be asked in terms of “what” and “how” the industry has been operated and what should be done to correct these behaviors. The Research & Capabilities module, along with the other modules of the Preliminary Specification enable the oil and gas producer, and particularly the Joint Operating Committee, to act in their best interests.

In the Preliminary Research Report I suggested that the oil and gas industry was not fundamentally different than the former Soviet Union in terms of its ways and means. Going through the motions and determining “best practices” shows a high level of stagnation present in the industry. We see the natural gas prices that everyone watches but no one does anything about. Everyone complains about the service industry, but no one does anything about it. Its as in the former Soviet Union where there was no bread because everyone was lined up at the bakery waiting for bread. The market system hasn’t existed in the oil and gas industry for so long, no one even knows what it would look like. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

To reinstate the market and the dynamism of the market system in the oil and gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. The Research & Capabilities module is designed to enable the systemic thinking that is necessary for the earth science and engineering capabilities of the producer and Joint Operating Committees to act in dynamic, innovative and market fashion.

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Langlois’ “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

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).

This is the one culture of the industry that we are moving against. It is also the most powerful. The bureaucracies control the budget and have exercised it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of research into oil and gas that the Preliminary Specification has, and there are none. They all get financed on relationships that maintain the status-quo with the bureaucracy. The fact that there has been no funding proves that the bureaucracy are too conflicted to do the right thing in this regard. The decision to proceed will need to be taken out of the bureaucracies hands and handed to the investors and the C class executives to fund People, Ideas & Objects. After all they have some concerns with the bureaucracy as well.

There is no denying that the management revolution has taken the oil and gas industry to a scope and scale that is impressive and productive. The question is where do we go from here? We currently stand on the shoulders of giants and have absolutely no vision, no plan and no means in which to approach the future demands of society's needs for energy. We not only have no plan for the future we run the risk of failure of the existing “management” infrastructure. We have far to fall. Bureaucracies have failed before, and when they do fail, they leave it for the bond holders and investors to clean up the mess, while they look for greener fields elsewhere.

Economic Growth Through Organizational Change

There is no question how economic growth will occur. That is from organizational change. But I think that it is intended to be as a result of constructive action not as a result of atrophy and inaction.

Institutions may be the ultimate drivers of economic growth, but organizational change is the proximate cause. As Smith tells us in the first sentence of The Wealth of Nations, 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 (Young 1928; Richardson 1975). p. 3

With the selection of ERP systems like SAP the bureaucracy have secured their future in a bureaucratic and stifling maze of paper. Change occurs in decades and centuries for an application that has no concept of a Joint Operating Committee or even what a partner is. In this day and age, when the organization is defined and supported by the software it uses it is critical that the organization be supported by a software development capability like that which People, Ideas & Objects proposes. Otherwise you set your organization in the proverbial SAP like concrete that only today’s bureaucracies are pleased with.

Economic growth is about the evolution of a complex structure (Langlois 2001). p. 6

It is in the Research & Capabilities module of the Preliminary Specification that the producer firm is able to exercise their opportunities for economic growth. By developing their capabilities and documenting them within the “Dynamic Capabilities Interface” they are able to populate these capabilities to the various Joint Operating Committees that they have an interest in. Reducing the costly experimentation of innovation yet opening up the assets of the firm to innovations.

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

This previous quote captures so much of what we should be concerning ourselves with. I think it also shows that by using the Joint Operating Committee, and structuring the development and deployment of capabilities in the processes of the Research & Capabilities and Knowledge & Learning modules achieves much of what is discussed.

To expand the economic performance of the oil and gas producer requires that you focus on their competitive advantages of their land and asset base, and earth science and engineering capabilities. The Research & Capabilities module focuses on the producers earth science and engineering capabilities and provides the means in which to document them, expand them, deploy them, and most importantly innovate off of them. Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27

As we have learned “knowledge beget capabilities, and capabilities beget action” and capabilities are the “knowledge, skills and experience” of the people involved. People, Ideas & Objects are working to bring these systems to the oil and gas industry. Systems that provide the computers with the work that they do best and with work that people do best, ideas. So that capabilities should be comprised of knowledge, skills, experience and ideas. The Research & Capabilities module enables the producers capabilities to be captured and deployed in innovative ways.

There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27

and

What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27

This next quotation is focused on a specific type of innovation. The type of innovation that People, Ideas & Objects is bringing to the oil and gas industry. However, the conclusion I think is universal in its application to capabilities of all types, and not just organizational capabilities. And that is “those capabilities were the result, not the cause, of the innovation.” This is the primary reason that Research was grouped together within a module with Capabilities, they have a strong interaction with one another.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

As we move to the Knowledge & Learning module we'll deal with the deployment of these capabilities in the 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.

Professor Richard Langlois on Capabilities Part III

What are Capabilities

We continue our review of Professor Richard Langlois’ research through the Research & Capabilities module of the Preliminary Specification. It is in the “Dynamic Capabilities Interface” that we are seeking to document the “what” and “how” of the earth science or engineering capability, or operation the Joint Operating Committee will undertake. It is important to note at this point that tacit knowledge can not be documented. The tacit knowledge will however be invoked through orders in the Job Order system. The depth of “knowledge, skills and experience” that is documented in the “Dynamic Capabilities Interface” includes the members of the Joint Operating Committee, their roles and responsibilities, and the field operations personnel. Detailing what and how they need to do their jobs in order to attain the objective of the operation. In a paper entitled “Transaction Costs in Real Time” Professor Langlois notes:

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.

That’s an effective way to state what it is that we are trying to achieve here. The “Dynamic Capabilities Interface” is a how-to database of capabilities the firm has for getting things done. Or;

'Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106

In this discussion as well as in any and all oil and gas field operations. The ability to do any of these tasks on autopilot doesn’t exist. And the implications of the next quotation is far reaching.

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

It will need to be the explicit instruction contained within the “Dynamic Capabilities Interface” that guides the field operation. The conscious attention necessary to follow the program is a necessity. However, this is also about innovation. If there is an opportunity for further innovation there is the Job Order system in which to invoke the change in orders.

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

It has been a long and difficult process to detail what it is exactly that we are capturing in this interface. Capabilities are a difficult concept to quantify and qualify. Add to that difficulty is the need to keep innovation at the forefront of the producers and Joint Operating Committees capability, and the challenge ahead is well defined. We continue on with our review of Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” with our focus on obtaining the earth science and engineering capabilities and those from the marketplace of the service industry offerings.

One thing that can be stated for certain is that the Preliminary Specification is consistent with the culture of the industry. No producer firm seeks to internalize the capabilities that are available in the free market. The capital nature of the equipment, the geographical range of operations and the skills of the people employed would require the producer to have such extensive operations that they would lose focus of the task at hand, finding and producing oil and gas reserves. Using the service industry as a market is the only choice and the manner in which People, Ideas & Objects is proposing in the Research & Capabilities module is to control the operation with what amounts to military precision.

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108

The “Dynamic Capabilities Interface” has never been conceived as a static repository of information. On the contrary it is a dynamic interface where the capabilities are constantly being updated as a result of changes in the market, the producer firm or Joint Operating Committee. These dynamic changes are reflections of the actions taken by these participants and are populated through a variety of inputs.

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. The mysteries of the trade become no mysteries; but are as it were in the air and children learn many of them unconsciously. good work is rightly appreciated, inventions and improvement in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its materials. (Marshall, 2961, IV .x.3, p. 271) p. 120

It is the job of the producer firm in some instances and the Joint Operating Committee in most instances to effectively and efficiently coordinate and control the operation. The capabilities available from the marketplace must be the most up to date. In an Information Technology environment in which we find ourselves, that is not the issue. Having the people involved on the same page, understanding the proper command and control structure, the means to execute the operation and the appropriate objective is the issue. And that issue is handled in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. Yet at the same time, because we are relying on the market, and are structured for innovation we can still rely on the benefits of both.

In this sense, the ability of a large organization to coordinate the implementation of an innovation, which is clearly an advantage in some situations, may be a disadvantage in other ways. Coordination means getting everyone on the same wavelength. But the variation that drives an evolutionary learning system depends on people being on different wavelengths - it depends, in effect, on out-breeding. This is something much more difficult to achieve in a large organization than in a disintegrated system. Indeed, as Cohen and Levinthal (1990a, p. 132) point out, an organization experiencing rapid change ought in effect to emulate a market in its ability to expose to the environment a broad range of knowledge gathering 'receptors'. p. 120

and

"Vertical integration, I argued, might be most conducive to systemic, integrative innovation, especially those involving process improvements when demand is high and predictable. By contrast, vertical integration may be less desirable - and may be undesirable - in the case of differentiation or autonomous innovations. Such innovations require less coordination, and vertical integration in such cases may serve only to cut off alternative approaches. Moreover, disintegration might be most beneficial in situations of high uncertainty: situations in which the product is changing rapidly, the characteristics of demand are still unknown, and production is either unproblematical or production costs play a minor role in competition. In such cases the coordinating benefits of vertical integration are far outweighed by the evolutionary benefits of disintegration." pp. 120 - 121

If running a successful oil and gas company was easy everyone would be doing it. We certainly are moving into a challenging time for a challenging business. Those that want to step up are going to need to have the organization defined and supported by the software the firm and Joint Operating Committee uses. Software that documents the capabilities of the earth science and engineering resources of the producer firm. And the capabilities of the service industries market offerings. Software like People, Ideas & Objects Preliminary Specifications Research & Capabilities module.

The Impact of Technology, 

We now want to discuss the “Dynamic Capabilities Interface” from a different perspective. One in which we are looking more high level at the attributes of what we are attempting to achieve. With this perspective it should be possible to see how the Preliminary Specification relies on the dynamic service industry marketplace, and defines and supports the framework to execute field operations with military precision. These two seemingly contradictory objectives are attainable when we realize the field operations are a temporary snapshot of the marketplace’s offerings. Once that operation is complete, that organization for the field operations and its capabilities will never exist again. That is not to suggest that the capabilities are deleted from the “Dynamic Capabilities Interface,” it's just that they do not exist in the organization that was used for that specific field operation.

We want to maintain all of the elements of a dynamic and innovative service industry. The Preliminary Specification has set out to provide for this by ensuring the service industry receives strong support from the oil and gas industry in the Resource Marketplace module. This is also necessary for the energy industry to ensure that the demands of society, in terms of energy, are met. Once this financial marketplace recession is over the demand for energy will resume a steady pace. In the Preliminary Research Report we discussed Professors Anthony Giddens and Wanda Orlikowski theory of Structuration and model of Structuration. That people, society and organizations must move together or there will be failure. It should be asked if these societal demands for energy can be met by the current oil and gas organizations? Technology will have a role in this. From Professor Orlikowski’s paper.

Interaction with technology influences the institutional property of an organization, and this influence is more likely to be reinforcing rather than a transforming one. (p. 235 The Duality of Technology: Rethinking the Concept of Technology in Organization). 

In order to achieve the organizational performance necessary to meet society's demands, it will require the technologies to be put in place first. This was one of the key findings of the Preliminary Research Report. We live in a time and a place where technology plays such a significant role in our day to day lives. That to change our organizations requires that we change the technology first. This same theme is picked up by Professor Richard Langlois in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3

So where are we? The People, Ideas & Objects Preliminary Specification is designed to support innovative and dynamic markets that will enable the oil and gas industry to meet the surging demand for energy. But neither the surging demand nor the software exists. More than 10 million cars were sold in China last year. Probably the same number will be sold this year and next. The point is that the markets for energy are developing and the demand will grow. The question will be who will be the first to volunteer to keep their economy stagnant due to a lack of energy? And just as the markets for energy develop the software needs to be developed as well.

As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999). Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5

There will be significant changes made to the markets during the times we are developing the People, Ideas & Objects software. Changes that will need to be captured in the software. There is never a best time in which to approach these changes, however, now with approximately $94 billion in annual opportunity costs, (please review the decentralized production model) the time has well past for the industry to have acted.

Tacit Knowledge

We are now going to reinforce the way in which the Research & Capabilities module captures the capabilities within the producer firm. In providing for the capture of these capabilities the Preliminary Specification is limited by the attributes of the different types of knowledge and the culture of the oil and gas industry. These two forces have formed the manner in which the Research & Capabilities module deals with the knowledge and its capture. It is in Professor Richard Langlois’ paper “Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History” that he states the following.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359 

We've discussed before that the tacit knowledge can not be captured within any written form. Therefore the “Dynamic Capabilities Interface” can only refer to the tacit knowledge held by others. The tacit knowledge is deployed in the Research & Capabilities and Knowledge & Learning modules through the Job Order system. Since it is knowledge that “normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use.” There are three critical elements for coordination of operations in these two modules of the Preliminary Specification.
  • The explicit Knowledge captured in the “Dynamic Capabilities Interface.”
  • The “Planning & Deployment Interface” including AFE’s and Job Orders.
  • The Military Command & Control Metaphor.
Therefore the interface elements of the “Dynamic Capabilities Interface” will contain knowledge of “what” and “how” regarding the earth science or engineering capabilities, production or operation of the concern. Times when the tacit knowledge needs to be documented will have to be replaced by rich media and references to the appropriate individuals for the operation to be undertaken. We should note that the knowledge is often “distributed knowledge carried out by multi-person tasks.” All of these tasks should be captured for one operation and included as one capability in the interface. Dealing with these different types of knowledge is how the Research & Capabilities and Knowledge & Learning modules “capabilities” are defined.

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.

Tuesday, November 05, 2013

Professor Richard Langlois on Capabilities Part II

Operational Control through the Job Order System

I have a few more comments to make on the coordination of markets through the “Dynamic Capabilities Interface” of the Research & Capabilities module. It might seem that we are contradicting ourselves when we criticize the bureaucracy yet put in place such extensive coordinating mechanisms to control an oil and gas operation. This discussion will show the differences between the bureaucracy and operational control is a matter of decision rights and authority. One of which, the bureaucracy, is redundant. I will also show the level of control that is implemented in the People, Ideas & Objects system is through the Job Order system. 

Multi-lateral and Multi-frac wells are rather large and expensive operations. For that matter drilling a conventional well is a large risk for most producers. The need for operational control is not a nice to have but a necessity. The need to have the software integration of the oil and gas and service industries to the level discussed here in the Preliminary Specification is a large and expensive undertaking. One that fits within the scope of the Preliminary Specifications budget. And also within the scope of the People, Ideas & Objects eleven module application in its initial commercial release. The scope of change that we are creating here is dramatic. To achieve the integration between these two industries needs to have this type of approach to make it successful. 

It is in Professor Langlois paper “Industrial Dynamics, Innovation and Development” that he strikes the right approach in terms of the issue of the Preliminary Specification and these software developments. 

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions. But few have thought about the choice of business institution as a competitive weapon. p. 1

In terms of operational control the “Dynamic Capabilities Interface” provides a means to have everyone on the team operating from the same hymn sheet. Everyone knows what the plan is and everyone knows what everyone else is doing. Now we need a means in which to execute the plan. In the “Planning & Deployment Interface” as throughout the Preliminary Specification users will have access to the “Job Order System” of the People, Ideas & Objects application. This will provide the ability for a member of the operational team, with the operational authority as designated in the Military Command & Control Metaphor, to issue a Job Order to execute any operation. Simply nothing is done during the field operation without the appropriate Job Order being issued. 

This next quote is from a Berkeley study and is dated in 1989, a time when the Japanese and the Americans were fighting over dominance in the microchip manufacturing industries. Apparently the two industries were configured quite differently, as Berkeley notes below. And it is the Americans that grew to dominate the industry at the Japanese almost total capitulation. The organizational structure of these industries is interesting to see a quarter century later. 

In one of the few contemporary academic examinations of this industry, a study by the Berkeley Roundtable on the International Economy concluded that; ... with regard to both the generation of learning in production and the appropriation of economic returns from such learning, the U.S. semiconductor equipment and device industries are structurally disadvantaged relative to the Japanese. The Japanese have evolved an industrial model that combines higher levels of concentration of both chip and equipment suppliers with quasi-integration between them. whereas the American industry is characterized by levels of concentration that, by comparison, are too low and [by] excessive vertical disintegration (that is, an absence of mechanisms to coordinate their learning and investment processes) (Stowsky, 1989) p. 3

My point in highlighting this is that we are relying heavily on the decentralized marketplace in the service industry to provide the oil and gas industry with the products and services it needs. We are however, also providing the Joint Operating Committee with high levels of coordination of any operation during the times it is employing the service industry. This is not a contradiction, one is a market, the other is an operation. The oil and gas industry depends on a highly innovative service industry and this will be expected from the marketplace. It also demands precision from the field operations that it conducts. Innovation will arise from both, however, not at the expense of control and coordination.

Thus in radio it was not the case that an integrated path of learning within a large firm gave rise to innovation; it was rather that innovation, channeled within a particular structure of property rights, contained the path of learning within a single large firm. p. 16

Modularity in Systems and Organizations

We have discussed modularity many times with respect to the Preliminary Specification. With eleven modules in the specification we have relied heavily on the principles of modularity to ensure that the user is provided with usable systems. We are now going to take modularity to a deeper level. We have been discussing the unique organization that is created to complete a field operation. These unique organizations are derivative of the Joint Operating Committee and include members of the service industry. They are authorized, controlled and operated in the People, Ideas & Objects system through the “Dynamic Capabilities Interface,” “Planning & Deployment Interface,” “Military Command & Control Metaphor,” “AFE,” and “Job Order” systems to name a few. These make up a modular system that are part of the “modularity” benefits that we are seeking to achieve in this temporary organization and the Preliminary Specification.

Looking at the operation in the field through the lens of modularity can help us to deal with complexity and to simplify the interactions between the different situations and people. From Professor Richard Langlois paper “Modularity in Technology and Organization.” 

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

Having difficult systems interconnections is a minor issue when compared to the real problems that people will have with systems that are too complex and too “different” each time they go to use them. As Professor Sydney Winter of the Wharton School of Business in his paper “Towards a Neo-Shumpterian Theory of the Firm” notes.

Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. (p.85) p. 9

It is therefore imperative that we apply modularity theory to the design of the temporary organization that makes up these derivative organizations. 

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

Remember we are spanning the oil and gas industry and the service industry. The marketplace and the firm. To achieve the efficiency and effectiveness of the interactions between the two industries will require this approach. To incorporate elements of modularity into the systems that we build we have certain design considerations to include. In terms of the temporary organizations that we are creating here for these operations, I think the key focus will have to be on standards. 

Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information) consists of three parts. 
  • An architecture specifies what modules will be part of the system and what their function will be.
  • Interfaces describe in detail how the modules will interact, including how they fit together and communicate.
  • And standards test a modules conformity to design rules and measure the modules performance relative to other modules.
These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 7

The Costs of Operational Efficiency

We move on from modularity to discuss “Dynamic Transaction Costs” in the Research & Capabilities module of the Preliminary Specification. We have discussed these costs in other modules and have dealt with them by establishing an account in the chart of accounts to specify these costs when they are incurred, where ever they are incurred. They are particularly relevant to the discussion in the Research & Capabilities module as Professor Langlois describes them as;

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's 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

Constructing a temporary operational organization that is derivative of the Joint Operating Committee and populated with the service industry representatives based on the capabilities established in the “Dynamic Capabilities Interface” of the Research & Capabilities module. May incur “Dynamic Transaction Costs.” We are looking for an increase in economic performance from the oil and gas industry. We expect the division of labor and specialization to be strong elements of how that increased performance is achieved. Having the coordination and organization constructed in the “Dynamic Capabilities Interface” is how the oil and gas producer will achieve these higher levels of performance. 

It is, Marshall says, a general rule, to which there are not very many exceptions, that the development of the organism, whether social or physical, involves an increasing subdivision of function between its separate parts on the one hand, and on the other, a more intimate connection between them. Each part gets to be less and less self sufficient, to depend for its well being more and more on other parts... This increased subdivision of functions, or "differentiation," as it is called, manifests itself with regard to industry in such forms as the division of labour, and the development of specialized skill, knowledge and machinery: while "integration," that is, a growing intimacy and firmness of the connections between the separate parts of the industrial organism, shows itself in such forms as the increase of security of commercial credit, and of the means and habits of communication by sea and road, by railway and telegraph, by post and printing press. (Marshall, 1961, IV.viii.1 p.241).

So in essence we have three major processes that will incur dynamic transaction costs. One is the move from the firm to the Joint Operating Committee as the coordinator of the operations. Secondly, the enhanced division of labor and specialization bringing a further “subdivision of function between its separate parts.” And thirdly the movement to a greater reliance on the marketplace. Therefore it is necessary to capture the role and responsibilities of everyone involved in the operation to ensure that the tasks are completed with the operational objective in mind. It will be this level of operational control that provides the Joint Operating Committee with the successful operations they seek. 

Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his 'law of increasing return,' which is distinctly not a law of increasing returns to scale: 'An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital' (Marshall, 1961, IV. xiii,2 p. 318) p. 101

I would argue that the lack of operational organization that is exercised by the oil and gas industry in today’s marketplace is resulting in the conflict between the oil and gas companies and the service industry. Leading to the cost overruns. And if Marshall is correct, of which he has over a century of proof, then the solution will require an advanced organizational construct. And in oil and gas that must involve the Joint Operating Committee the legal, financial, operational decision making, communication, cultural, innovation and strategic framework of the industry. 

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.