One area of the Accounting Voucher where the Preliminary Specification is different is the concept of designing transactions. We should spend some time on defining what it is that we’re speaking of. Where accountants will be spending their time in the future is designing transactions and leaving the processing, mostly through automation as a result of the design of the transactions, to the computers. If you’ve been reading the Preliminary Specification you’ll have an understanding of the methods of organization of the marketplace and the producer firm and how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transaction's makeup. From Harvard Professors Carliss Baldwin and Kim Clark’s paper “Where do Transactions come from? A Network Design Perspective on the Theory of the Firm.”
...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction. p. 15.
Let's use a scenario where a group of producers have several producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of implementing them into the Preliminary Specification. We begin by analyzing the production accounting elements in the Accounting Voucher with the related Production Accounting Service Providers. The Production Accounting Service Providers assess their fees on the basis of a unit of work incurred during the production month for any of the many processes involved and however our user community configures the software during the development of the Preliminary Specification. At each point they’ll assess a fee for their service based on transaction design principles. The transaction designs contained in the Preliminary Specification that our user community developed, provides the automation and the related service provider then goes through their billing process and at the end of the month, when profitable production has invoked that process, produce their invoice for their services to their Joint Operating Committee clients based on the work output rendered. This implies our user community designed their work flow from a transaction design point of view. Professors Baldwin and Clark.
The user and Producer need to deploy knowledge in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. pp. 17 - 18.
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Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p.22.
Again if there is no production there is no basis for the Production Accounting Service Providers billing. Fulfilling the Preliminary Specifications decentralized production model objective. This scenario shows how the Production Accounting Service Provider needs to design their transactions to produce the desired result, conduct their service and automate their billings. Additional transactions are designed from the process of gas production, sales of the natural gas, royalties and payment of the processing fee are all similarly designed into the Accounting Voucher. This is the role of the Accounting Voucher for the producer firm and Joint Operating Committee. Automation of the business processes of the innovative oil & gas industry through transaction design. The fact of the existence of production itself is creating an information unit that triggers the appropriate service providers to conduct their operations on the Joint Operating Committees behalf.
The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)
The Accounting Voucher has the “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process of analysis of how to break down these transactions and we will get into that as we proceed through the development of the Preliminary Specification. It is important to recall at this point that each Accounting Voucher is used as a template for subsequent months. So once a transaction is designed, it will be reused, and built upon through the implementation of it as an Accounting Voucher template providing the automation that is invoked each month of production which is supervised through the service provider organizations.
The role of the Accounting Voucher in determining the source of the market or the firm as the originator of the transaction is minimal. However, it has a role in ensuring the costs of these transactions are minimal and are a source of both the producers, as represented in the Joint Operating Committee and service industries profitable operations. If there was a simple way to describe this purpose of designing transactions it would be as a tool to coordinate the firm or Joint Operating Committees use of the market. This conceptually falls between transaction costs economics, capabilities and transaction design. All three are areas that Professor Richard Langlois has included within his area of research. We have also used Professor Carliss Baldwin for her work in transaction design. Professor Richard Langlois in his paper "Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."
However, a new approach to economic organization, here called "the capabilities approach," that places production center stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1
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One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as a complementary area of research. pp. 4.
The Accounting Voucher module of the Preliminary Specifications transaction design takes the accountant away from the benign scorekeeping role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements and provide the greatest value add to the firm or Joint Operating Committee. In Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"
A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 6.
And this is maybe one of the important considerations of the work that we do here in People, Ideas & Objects, our user community and service providers. Is the realization that each producer firm and each Joint Operating Committee are going to be unique. That due to their makeup they’re going to be different in material ways. Innovation will have a dramatic scale in how it is measured against each firm or Joint Operating Committee. Automation, specialization and the division of labor, other aspects of the changes being imposed on producers will demand a high diversity in terms of their makeup. The approach will be anything but cookie cutter.
Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of cooperating individuals. p. 13.
Therefore, according to the research of Professor Langlois the transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of standardization through Information Technologies. However the differentiating costs between firms and Joint Operating Committees will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm the most profitable means of oil & gas operations.
... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 16.
We have been discussing the Accounting Vouchers “Transaction Design Interface” and its purpose as a tool to coordinate the use of the market. We want to ensure that the efforts in coordinating the market are consistent with the objectives of the firm or the Joint Operating Committee and don’t conflict with the objectives of those who are initiating the work in the Research & Capabilities or Knowledge & Learning or other modules. As we can see coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transactions, not on the operational side.
The first question that most people will have is why are we concerned with the coordination of the markets in the Accounting Voucher? In a comment made to the editor of Capitalism and Society, Professor Richard N. Langlois wrote this comment in response to an argument made by Professors Giovanni Dosi, Alfonso Gambardella, Marco Grazzi and Luigi Orsonigo (2008).
Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).
In this day and age, with such large distances, geographic, size, language and other considerations between vendors and producers, leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil & gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved, automation, specialization and the division of labor will have an influence here. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions? From Professor Richard Langlois Economic Institutions and the Boundaries of the Firm: The Case of Business Groups."
As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6.
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Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1776, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7.
We’ve seen over the course of the past number of decades that the speed and capacity for change by producer firms is poor. People, Ideas & Objects have asserted this is attributable to the bureaucrats desire to maintain low levels of accountability through poor ERP systems. Today organizations are defined and supported by software, and most particularly their ERP software, and they are therefore constrained by them. The Preliminary Specification has chosen the market to deal with this issue as opposed to cultural difficulties of change and historical performance of the firm as the other choice. There needs to be a means in which to affect a new trajectory in the performance of the producer firms and it is automation, specialization and the division of labor which is the only proven method to build any economic value since 1776. This can best be accessed through the market which provides the added benefit of disrupting the producer firms bureaucratic culture. A culture that is counter to profitability and one that must be dismantled. The addition of transaction cost economics and these tools will augment the ability to enhance the transition and facilitate the performance trajectory necessary to achieve profitable energy independence in North America.
In the determination of the firm or market as a choice for the producer firms to use as the means of production, the question in oil & gas is academic. The geographic and technical diversity necessary to operate within the North American oil & gas marketplace, on the basis of the many levels and types of operations a producer could specialize upon, even in today’s market. The answer has and always will be the market. There is significant conflict and contradiction in the relationship between producers and the service industry as a result of the treatment the service industry has been subjected to over the past number of decades. It is suggested the producers will need to make a deliberate effort to remediate and rebuild the capabilities and capacities that are necessary in order to provide profitable energy independence in North America.
The starting point of this rebuilding process for our user community is as follows. If we recall in the Resource Marketplace module the vendors and suppliers are maintaining their own contact data. Within that data is their key personnel that include their field staff. They should also be including their key business personnel for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition, their billing information and banking data, as well as other critical data and information that will help the producer firm or Joint Operating Committee efficiently coordinate and process the transactions they’re involved in. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed and the template that is used by the specific vendor. Needless to say the involvement of our development of software for the service industry will begin here. Please see the Implementation page of this wiki to review the budget and more of the details.