Enterprise Software Open Source Business Model

For companies looking to break away from the traditional enterprise sales model, open source does provide some interesting and more importantly compelling opportunities. Recently, I had the opportunity to attend a luncheon where an executive from a successful Open Source software company laid out the business model with great clarity. Here is what he had to say...

The traditional enterprise sales model is based on a well-oiled lead generation machinery that feeds a direct sales force. The formula is based on Total Revenue = Quota/salesrep * Number of salesreps. While this maybe an oversimplification, this is what it really boils down to. If you look at the Open Source business model, especially for an enterprise software company, the lead gen source are the downloads. The inside sales and eventually direct sales teams have to take these leads and convert them to sales. The big difference and reason why most of us are excited about Open Source is that for the first time emerging software companies are able to get a large volume of leads from successful Open Source communities. However, the conversion rates are low, perhaps as low as 1% over a reasonable period of time from download to deal close.

So, having said this, there is a play here if one has a very successful Open Source project that has thousands of downloads. If you don't have such a community, believe me, building one is not that easy. You are probably better off buying one if you can. Its an added risk especially for companies switching from a traditional enterprise sales model to an open source model.

For the more established players, this creates a new threat as now start-ups can start to spread virally (in a good way) in their installed base. Given the tens and thousands of customers they currently have, I would think that their strategy should be to emulate the open source model and offer low cost, low friction products and solutions that their customers can try and adopt. Once they are ready they can sign-up for support etc., the way one would do with an Open Source software company. On-Demand apps certainly address some of the issues being addressed by Open Source and a whole lot of issues that are not addressed by Open Source.

I hope this provides clarity to software execs looking for business reasons for adopting an Open Source strategy.

Attracting "outside developers" to your Open Source project...

During a brief discussion with some folks who work at Actuate, it became apparent that several open source projects in fact have little or no participation from "outside developers". I'm referring to "outside developers" as those who are not employees of the sponsoring organization. An "outside developer" could be an end user, an employee of a customer using that software or someone who just has time on Sunday mornings to exercise his/her programming brain cells for no particular financial gain.

Having said that, it is interesting to note that some projects such as BIRT, which is being sponsored by Actuate, were created to counter open source software such as Jasper's reporting software. However they have been unable to attract adequate open source developers. Given the size of Actuate's customer base, one would have thought otherwise. Just take a look at the their bug list.

From what I can tell, there maybe several reasons for the lack of "outside developers" including the following:

a. First mover advantage - Given that there is a limited pool of independent "outside developers", its likely they have already flocked to the likes of JasperReports. The remaining set of "outside developers" has not developed probably for some of the reasons described below.

b. Complexity - The complexity of the code is an important factor for someone to contribute. For those of us who have been developers, the more complex the code, the harder it gets to make changes to it.

c. Barrier to contributing - If there are a lot of instructions and the time and effort required to start contributing code is high, its very likely to turn off potential "outside developers".

c. Incentive - For someone to contribute code, there has to be reason to do so. If I work for a company that uses some of the open source code and I uncover some bugs, I am clearly incented to contribute the fix. Similarly, open source developers provide enhancements if they feel they will be useful for others in the open source community.

The bottom line is that one has to address the above issues in order to leverage "outside developers". If that does not happen, one needs to invest in the development activity. This does not mean that a project without a large number of "outside developers" is entirely worthless (because there is value for the end users of the software to review bugs, fixes etc. from the project web site) but to put it mildly the value to the promoters of the open source project is marginal in the long run.

How does one move from a traditional software model to an Open Source model?

Recently, I had an opportunity to meet with Murugan Pal, founder and CTO of SpikeSource. We discussed various topics relating to Open Source. Two areas of particular interest were around Pricing Model and Migration steps. Murugan promised to summarize his thoughts in his blog, take a look at http://www.oreillynet.com/pub/wlg/8510.

At first glance the migration steps Murugan outlined seemed a little overwhelming especially if one has hundreds of thousands of lines of code, however, Murugan was quick to point out that the code need not be perfect. He is of the opinion that if you take the approach of being open, honest and willing to clearly document areas of code that need cleanup/work, Open Source developers will still embrace you. The steps as outlined by Murugan make a lot of sense. Anyone serious about the Open Source model will find his write up very useful.

In my next posting, I'll share my discussions with someone involved with Actuate's open source initiative, BIRT (http://www.eclipse.org/birt/) and perhaps someone close to SugarCRM and Alfresco. The next few weeks are really busy with travel to Bangalore, Chicago etc., but hopefully i will be able to get a couple of postings in before the end of the year.

Excellent perspective on benefits of Open Source...

Interesting editorial by Larry Augustin, founder and Chairman of the Board of VA Software, creator of SourceForge.net and board member of SugarCRM.

What really grabbed my attention is his comment that savings in sales & marketing could be closer to 75 percent. This is huge!!!

I was skeptical on how much core R&D leverage can be expected from an Open Source community. Larry's comment that there is little community leverage developing the core of the app addresses my question. It makes sense that the leverage tends to come from testing, bug fixes and interface/integration code. I would add internationalization to the mix as well.

The biggest benefit on the R&D side is the reduction in time to market. Companies with offshore development models have been able to squeeze out a lot of their R&D costs, however, the big drawback with offshore development is the long turnaround times. Startups using Open Source components have been able to quickly pull together applications (using onshore or offshore resources) in a much shorter timeframe. Given the pace at which innovation is occuring today, i think the reduced time to market benefit makes the Open Source model a natural fit for many startups.

I'll be tracking Larry's next piece on "The Next Wave of Open Source, why the application market is ripe for open source offerings - and which applications will gain traction the fastest." I'm really looking forward to his next article.

Shai Agassi & SAP on Open Source...

Interesting perspective on Open Source from Shai Agassi, SAP Exec Board Member in charge of Product and Technology Group . For those of you who don't have the time to read the entire article, Shai's has clearly expressed his commitment to the Open Source movement. He sees it providing openness of source code for customers, developers, partners etc.; enabling innovation while protecting the author's ownership of the source code and offering commodity component stacks such as LAMP.

Next, it will be interesting to hear the perspective from innovators involved with Open Source startups. Obviously they don't have to worry about existing customers as SAP does and are highly motivated to create disruptive changes.

Open source dilemma - Part II

Picking up where i left off regarding open source, the second big question is around the contribution of an open source community wrt fixes, enhancements and changes to core pieces of functionality of a business application. While the open source community has done phenomenal work in the infrastructure space, is it reasonable to expect the same level of contribution when it comes to open source business application software?

Recently, i came across Alfresco (www.alfresco.org), an open source content management community. To be honest, at first glance their product looks pretty darn good. I'm seriously interested in playing with it and perhaps even evaluating it for use inhouse. The functionality as described in the product management web page of Alfresco's commercial website is definitely impressive. Given the nature of a content repository and its similarities to a database system, it appears to lend itself to a open source development model. However, it also has several characteristics that make it somewhat similar to a traditional business application software, especially its features such as workflows, reporting etc.

In my mind, the real success especially for an open source business application software is in building a community of developers that not only contribute by internationalizing the software and checking in simple add-ons but in really extending the core system by adding additional modules and core functional capabilities. What would be even more compelling is if the community consists of members from organizations that are end consumers of the software, not intermediaries looking to resell the software for profit.

Now that i have laid it out, i intend to actually talk to some of the pioneers and share with you what i find out. Check back in a week to learn more!

Open source dilemma - Part I

With open source gaining widespread acceptance, the dilemma for most of us who don't clearly see a solid business model based on an open source model is really around risk and payback. The temptation of seeing a huge number of downloads of your newly open sourced software is enticing but not knowing how many real commercial opportunities and deals it would boil down to is where the real challenge lies. In the traditional direct or channel sales model, it is (to a certain extent) possible to predict the outcome of your sales efforts. In the new world of open source, especially when it comes to business application software, its unclear who would shell out dollars to upgrade from the free bee version to the commercial version. If any of you open source pioneers out there is listening, i would love to hear about your success stories. I'm not interested in stories from the Apache and JBoss types, i'm more curious to hear from those of you focused on business application software.

This is just one of the aspects of open sources that is intriguing. The other is the true benefit from the open source community. Well, i'm going to hold this topic for my next posting :-)