Framing the Business Problem

The current approach to software development and implementation is based upon a closed source model where software products are implicitly generic to effectively target the widest market reach. But since the end product is proprietary, licensees often expend many an “integrating” dollar to customize generic products. This integration effort is almost never trivial despite the fact that the proprietary product may be “open” (not open source). That means the vendor has explicitly exposed built-in “hooks” to connect its software to other “open” (prevailing industry standard) vendor products. The closed source model has made companies devote from 35 percent to over 55 percent of IT budgets on systems integration activities.

While large-scale systems integration may be vital in certain IT implementations, it is hard to justify the fact that IT customers cannot escape unnecessary integration efforts associated with relatively smaller-scale in-house IT implementations where closed source products are utilized.

When traditional value-added (VA) assessment is used to examine the closed source model, the result, in some cases, makes for a less than compelling business case in favor of expending IT integration dollars. If VA reflects the theoretical increase in value over the original cost, then VA should be greater than the accumulated costs added along each stage of the production process. Since value is defined from the customer’s perspective, the goal is to maximize required activities directly meeting customer requirements, minimize activities that indirectly meet customer requirements, and eliminate activities that are neither required nor add value. Typically, the customer’s perspective on IT integration costs falls within the latter two categories. Hence, an opportunity to reduce both costs and cycle-time by redirecting efforts from integration activities to activities such as unique business-rule and creative application development.

The Opportunity for Open Source

An underlying question is whether multiple attributes of the closed source software model are under-serving the customer. The inability to obtain quick bug-fixes, the implicit “lock-in” to the strategy of the vendor, the resulting barriers to switch, the inability to optimize the product beyond the capabilities of vendor-provided tools and the high dependence of interoperability between the various “open” vendors are only some of the problems that may have emerged.

Hence, the theoretical prospect of a “disruption” could exist. As such, the Open Source Initiative (OSI) possesses the potential to disrupt the current approach to software development and implementation.

The most intriguing concept of the OSI model remains its sustained ability to tap into a loosely-knit and dispersed volunteer development community to attain a global-level of innovation. And while this development model accrues the full benefits of global innovation, it is not incurring the typical costs and overhead associated with global outsourcing of software projects.

The OSI is a functioning “customer-led” model. Indeed, customers of open source software are also participating developers who can immediately implement particular functionality when they find it missing from the product. Because customers themselves make notable contributions to the design and development, there exists the potential to reshape or reconfigure the conventional definition of “product-management” and “customer loyalty” to take on new scope and meaning.

Issues and Risks with Open Source

While open source has gained considerable exposure in recent times, the future is not without its share of impediments. As with any innovation, it takes a concerted effort over time to build a critical mass of converts. IT customers are highly adapted to the closed source model, and their decades-old development and implementation habits will be hard to break.

Furthermore, most open source products tend to lack the high levels of “commercial finish” found in comparative closed source offerings. In addition, most open source software (excluding leaders such as Linux, Apache, SendMail, etc.) is viewed as relatively less mature and hence riskier in implementation. These risks stem not from technical performance but from areas such as support, ownership (to mature the offering) and permanency. A basic premise of open source — “providing software without charge” — makes it seem at first glance like a superficial revenue model. IDC data indicates that Linux represented 30 percent of operating system server license units shipped in 1999, but accounted for only one percent of server license revenues. The current economic downturn has brought pronounced scrutiny upon business models built around the OSI.

In the world of Linux providers, for example, companies such as VA Linux, Linuxcare, Red Hat, and Turbolinux have been hit hard and feel an accentuated pressure to turn profits, given the state of the tightfisted capital markets. Yet, it may be vital to keep up needed spending levels to cultivate open source business models.

Clearly, the financial viability of open source vendors is a function of their ability to generate revenues and profits from exceptional value-add combinations that can be wrapped around the open source offerings to create compelling business technology propositions. For open source offering providers, the challenge is devising and executing on creative non-traditional software revenue models. For IT customers, it means understanding and accepting the new revenue models as the more desirable options.

Unfortunately, the current economic downward spiral seems to have taken a big toll on the software industry. Given the state of the beleaguered sector, it compounds the challenges of open source to quickly build upon its credibility — this makes the entire concept especially vulnerable.

For the time being however, both closed and open source software providers are bracing themselves for the current economic storm. Thereafter, it will be interesting to see the impacts of market/provider shakeouts, the survival of market enthusiasm, and the reconciled level of hype and outlook on the customer acceptance of the open source model. But when this storm will roll away is anyone’s guess.

Sunny Kapoor is CEO of Biz Piranha