Financial Benefits of Open Source

Open source has become a serious contender in enterprise IT. Considering the opportunity for financial benefits along with the flexibility that comes through from the software's source code, the freedom from vendor lock-in, and the potential for improved security, reliability and performance, open source is rapidly gaining acceptance.

This report is a practical guide for understanding and calculating the financial benefits of open source. It will introduce the basics of financial analysis - concepts, processes and elements - and provide a tool to help identify and capture the costs (and potential benefits) for your project, whether you are an end user with a custom application, a system integrator (SI) considering an open source solutions offering, or an independent software vendor (ISV) looking at the embedding of open source in your software.

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Open Source Software Policies and Procedures Needed

Companies that use open source software need policies in place and resources devoted to monitor and maintain compliance with licensing requirements. Efforts should be directed at controlling how and when modifications are made to the software and how it is distributed to third parties.

This excellent and informative article from PLI's All-Star Briefing explains that a "best practices" opens source software policy should cover the following topics:

"Defining "Open Source": As an introductory matter, an open source policy should define open source in terms that can be understood by employees...

Choosing a Source:...An open source policy should... specify the sources from which such software may be obtained... A company should also require that its programmers go through an approval process before they can use open source...

Review of License Terms...the Company's open source policy should require that each open source license be reviewed using the same processes and internal controls as the company uses for proprietary software licenses.

Guidelines for Modifications...An open source policy should...require that, before any modification can be made, those involved in the programming process consider: (a) whether modifications will even be allowed; (b) whether the open source will only be used internally (in which case the source code to the modifications will not have to be made public); and (c) if the open source is to be distributed to third parties, whether the company is comfortable releasing the source code for its modifications...

Guidelines for Distribution...Companies need to establish careful guidelines as to how open source can be included in programs distributed to third parties, and make sure that control mechanisms are in place governing such use...

Contributions to the Open Source Community...If a company elects to go this route, it must make sure that it has very stringent controls in place for determining what software is released...that any copy of the software that is so distributed is linked to an open source license governing the permitted use of the software...

Tracking the Use of Open Source: Once a company has decided how it will use open source, it should implement a system for approving, monitoring and tracking how the company is actually using open source..."

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Open Source Guide Book

Innovation Happens Elsewhere is an online version of this book on Open Source as Business Strategy by Ron Goldman and Richard P. Gabriel. The authors have posted this outstanding resource online in the hopes that people will find it useful, stating:

"This book is intended for anyone considering using Open Source. It describes what open source is, discusses business reasons for using open source, and describes how an open source project works in a day-to-day manner. It will help you decide on whether open source is right for your project, and, if so, what steps you should take to proceed and some mistakes you should avoid."

An excerpt from the book will give you an idea of the types of useful information it contains:

“Deciding to manage a development project as an open-source project requires making a careful determination of the project's business goals...The following is a list of business reasons to support the use of open source for a project…

Visibility...
Training and Education..
Ubiquity...
Design Discipline...
Best Standards Development...
Conversations...
Design Help...
Guidance for Proprietary Products
Some open-source licenses permit proprietary products to be based on an open-source system, sometimes by adding features and sometimes by providing quality and support. The ability to develop the best such product can be improved by commentary and feedback from the community...
Build a Market for a Proprietary Product
When a company has a proprietary product built on top of a free, open-source version, the free version will bring in customers and increase the company's market share.
Development Help...
Internal Open Source Use and Reuse...
Support Help...
Facilitate Technology Transfer...
Limited Resources...
Improved Quality...
Time To Market
For open source, there is a time-to-market advantage, but it is a more complicated notion than simply getting a product into a space quickly. By using available open-source code in a project, a company is able to avoid re-inventing it. This can speed up getting to market, but the more important effect is that a company can get to a very good product quickly, especially one with a greater number of already proven features and better quality....
Better Way to Do Releases...
Better Relations with Customers...
Better Relations with Other Parts of Your Company...
Nurture Innovation...
Community Building...
Avoiding Lock-In...
Risk Reduction...
Appeal to "The Open-Source Community"...
Storytelling...
Statement of Vision and Terms of Engagement...
Statement of Values...
Get Brand Loyalty for Your Company's Hardware/Software...
Get the Hit Effect Working...
Create a Marketplace...
Commoditize Competition
Providing a no-cost offering can force a competitor to play a commodity game where small advantages and brand loyalty, for example, can play a stronger role than in a high-value game. OpenOffice is an example of this goal: Its free office-productivity software makes it more difficult for other companies, such as Microsoft, to charge large amounts for proprietary software with similar features. It transforms office-productivity software from a high-value, single-vendor product into a commodity..."

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Building an Open Source Business

"There are many great open source projects that have dedicated developers, users and admirers. But only a few have the possibility of becoming legitimate businesses. The trick is to figure out the market, the business context and the viability of sustained revenue...

Here is a short list of tips to consider when funding and building an open source business...

Get Your IP in Order...
Any open source company seeking backing has to be as clean as possible with its code ownership. This means knowing exactly what is in the product it distributes and who wrote it...

The intellectual property aspect is also very important in relation to an acquisition. No one wants to be negotiating terms of a buyout only to find that the code they have based their whole company on is in violation of licensing terms.

Leverage the Community...

Keep Keeping Costs Down...
Cost control can be accomplished through a variety of means, including community development and communications programs, but the underlying mission is to keep your cost of goods sold (COGS) very low. If you don't control your COGS then the whole open source model goes up in smoke.

Find the Right Price
Pricing remains one of the great mysteries of any business. Open source companies tend to look at the cost of their nearest competitor and price their offering at some percentage discount.

While this pricing method is helpful for marketing purposes, it doesn't build an effective business model. Pricing must be thought through and tested amongst friendly parties who will give honest feedback on the value of the service or software.

Get Help with the Never-Ending Legal Stuff
One aspect that continues to recur is the need for sound legal advice and contracts. Open source is still very unknown to many large and small companies. The best thing an open source business can do is find knowledgeable and trustworthy legal help..."

Read more in this excellent article from Sandhill.com by Dave Rosenberg, CEO of MuleSource, and co-author of InfoWorld's "Open Sources blog.

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