Open Source Strategies

A blog about open source software and business models, enterprise software, and the opentaps Open Source ERP + CRM Suite.

Friday, June 09, 2006

Why Enterprises Are Adopting Open Source Applications

The following is based on a presentation given at the Enterprise Open Source Conference in New York City on June 6, 2006. You can download the slides for the presentation.

Good afternoon. My name is Si Chen, and thank you for coming to my presentation about the adoption of open source business applications.

It's a long of fun to be here alongside the developers and industry veterans who are shaping open source software today because, well, my background is a little different. I used to be a hedge fund manager and worked right up the street at the Met Life building on top of Grand Central, right here in New York City.

I'm here today because about six years ago, I helped start an online retail company named Gracious Style. Being a startup with very little money, we naturally went the open source route. As we grew, I wanted to help build an open source enterprise application suite that could suit the needs of our company and others like it. I did this because I fell in love with the whole idea of open source software, not just because of the cost, but because of the freedom it gave me, the user, to control my technology destiny. In that process, I met a lot of other people, from small business owners to decision makers at Fortune 500 corporations, who were all looking for the same thing—open source applications that could run their businesses.

This is our story of why we're all adopting open source business applications.

Our Open Source Projects and Why They're Significant

So first, a little background about the open source applications I'm talking about and why they are important. My talk today is based on my experiences with two closely related open source applications, Open For Business and opentaps. Open For Business is a Java business applications project that includes a framework and a set of applications ranging from ecommerce to warehouse management to manufacturing and even content management. It is developed by a global community of professional developers, of which I am one of the committers, and we are currently actively adding about 50 to 100 new features per week.

opentaps was a project we created on SourceForge a year ago to help further support the Open For Business project and our community of users. Whereas Open For Business is currently available through a Subversion code repository, we at Open Source Strategies created regular releases of the OFBiz project with upgrade scripts and professional support. We also added Financials and CRM modules which we developed to complement the core OFBiz applications so that users can get a full-featured ERP/CRM suite out of the box. Currently, opentaps is one of the top fifty projects on SourceForge.

What these applications do is give a company the ability to manage all aspects of its business, from customers to orders to inventory and manufacturing, all the way to accounting, in one application. There's no need to do integration and glue together different units of the business. Instead, it's all done with one application suite using 700+ tables that capture activity throughout the enterprise. The application is built around a very modular service-oriented architecture (SOA) which allows you to add new components or talk to other applications via web services easily. Finally, it can be deployed on either Linux or Windows and using either open source databases such as MySQL and PostgreSQL and commercial ones such as Oracle and Microsoft SQL Server.

The reason I think our project is a good barometer of what enterprises are really looking for in open source business applications is that we are the only major open source applications project that was built 100% from the ground up. We have no commercial predecessor product and no venture capitalist or investor funding. Instead, every feature you see was built by our community of mostly professional developers because somebody needed or wanted it. Thus, if you went out there all on your own and tried to start an open source applications project, you'd probably end up with something which looked a lot like our project.

Who Uses It?

So now, let's look at why enterprises are adopting applications such as ours by looking at a few organizations which are using it.

Case Study #1: Ameniti

Our first case study is a company called Ameniti Travel Clubs, which is a subsidiary of UAL Corp and a sister company of United Airlines. What Ameniti does is market travel club memberships, so for an annual fee you can get passes to the VIP lounge, the Red Carpet Club, as well as bonus miles, companion tickets, and other benefits. Ameniti uses our application to run their various travel club websites, including the Silver Wings Club, which I showed you earlier, for senior citizens. They also use it for their call centers, so when customers call to sign up, they can use it to process new applications. This can give them a fair bit of volume, since they send out 500,000 to 750,000 offers at a time in their marketing campaigns. They've done with a completely open source approach, using Linux, Apache, and PostgreSQL along with our application.

Most importantly, though, is that they're looking to our application not just for the current functionality, but as a strategic framework fot new business opportunities down the road. Indeed, when we asked them why they went with open source, these are some of the reasons they cited:
  • “We liked the model of cheaply acquiring adaptable technology infrastructure and customizing it for our needs.”
  • “Our business is very time to market driven and the framework of services provided by OFBiz greatly reduces our implementation timeframes.”
  • “Existing commercial solutions were older architectures, less open to customization, and encumbered from an intellectual property standpoint.”
Since what they wanted was to be able to respond quickly to new opportunities, it was very important that they be able to deliver solutions quickly and efficiently. As a reslt, they really liked the fact that they can start with a large set of features and customize it quickly and efficiently. Commercial solutions, in contrast, were not as well suited for their needs because they were harder to modify and adapt to new business needs.

Case Study #2: Snaidero

Our second case study is a company called Snaidero Engineering and Trading, and they are a subsidiary of the Snaidero Group, Italy's number one kitchen cabinet manufactuer. For those of you who have not remodeled or built a home recently, Snaidero manufactures some very high end and stylish kitchen cabinets which are also available in the United States. If James Bond had a kitchen, he'd probably have Snaidero cabinets.

Now, what Snaidero Engineering and Trading does is work with partners in countries such as Russia, Egypt, China, and Eastern Europe to help them design products and set up manufacturing facilities, and then they transfer manufacturing knowhow, or best practices, to their partners. As part of this package, Snaidero also provides their partners with manufacturing software.

What's interesting about Snaidero—and very fortunate for our project—is that they not only adopted our application but actually sponsored the manufacturing component of it. In other words, they sponsored the development of our manufacturing application and then made it open source for the rest of the community, and then they deployed the application on Windows with the MySQL database at client sites.

So why did they choose to develop an open source application rather than go with a commercial product for their partners? First, because the open source application could be customized and internationalized to suit the requirements of each market and facility. Second, because it was actually cheaper for them to develop a new manufacturing application using our framework and existing applications than to license commercial manufacturing software for each of their partners, which could really add up as they grew. Finally, going the open source route, there is no vendor lock-in to restrict what they can do down the road.

Case Study #3: British Telecom

Our thid and final example is British Telecom, one of the largest telecommunications companies in the world. British Telecom is planning to go live in the fourth quarter of this year with our application as their product catalog manager and online ordering system for mobile products and services. They will be serving all 18+ million residential and commercial customers in the United Kingdom with this system. As such, it is a very large deployment: they are scaling it out to support up to 16,000 simultaneous visitors using a cluster of 72 CPU's. Interestingly, they will be doing it with Solaris, Oracle, and the WebLogic application server, so they will be integrating our open source application with a lot of existing commercial infrastructure.

When we asked British Telecom why they are going the open source route, we got a very interesting answer. The commercial solutions they looked at were expensive, given their volume and growth rate. It would have been several millions British pounds a year. More importantly, the commercial solutions would have still required a lot of coding and development. So it's like spending a lot of money to buy one of those mail order toys, only to get a box full of little plastic parts that you have to paint, glue, and assemble. Not much fun.

Conversely, with open source, they found that it had a reasonably good fit for their requirements. It still needed work, but they thought it was a good strating point because of a “well thought out data model,” and it was “easy to change.” Best of all, it was free, so the low cost helped as well.

General Theories of Open Source Adoption

There are many other interesting companies using our applications, but I thought now we should take a look at more generally, why enterprises are adopting open source applications. So now I'd like to discuss three key drivers of open source applications adoption and then three catalysts which are speeding up the process in today's environment.

Adoption Driver #1: Open source is a better fit (the "natural selection" theory)

First, I believe that enterprises are adopting open source business applications for the very simple reason that sometimes it is the best fit. We are used to reading in the media of this titanic battle going on between open source and commercial software. Linux versus Windows. MySQL versus Oracle. But the reality is, open source and commercial software are diffferent animals. They are made differently and used differently. Therefore, it figures that there are some environments which are best suited for open source and some for commercial software.

To find out what those environments are, let's take a step back and first ask ourselves, “Why do people want open source software in the first place?” So this is a poll that we did on our website,, where we asked “Why are you using open source ERP software?” And the answers are not surprising: they are looking for a lower cost solution, more flexibility, and freedom from vendor lock-in, plus a host of other reasons as well.

So now let's just assume that if all of these conditions are true, then more people would choose open source software. Conversely, if none of them are true, then people would choose commercial software. In other words, if users had highly differentiated requirements, so they needed to do a lot of customization, or if commercial software is very expensive, then open source is a natural fit. If, however, the requirements are very uniform, there is little or no customization, and commercial software is very inexpensive, then more people are likely to use commercial software.

When we look at the spectrum of applications used in an enterprise, we actually see exactly this pattern. At one extreme are web applications and ecommerce or online stores. Every company has different requirements—every online store you've ever shopped at probably worked differently. As a result, you see a lot of people using open source software for these applications.

On the other extreme, you have something like accounting, which is highly standardized. There is only one way to do accounting! Anyone who tried something different has gone to jail, so there is no customization here. Also, commercial packages are relatively inexpensive. A few hundred dollars would buy you a pretty good desktop accounting package. A few thousand would get you something that would work for most organizations. As a result, we see a lot of companies still using commercial accounting software.

In the middle are applications like manufacturing and warehouse management, which are quite expensive commercially, and where different industries and companies still have fairly different requirements. Then there are applications like CRM. Again, you see a lot of differences in requirements, but there are some fairly inexpensive commercial options out there, so I put CRM between accounting and manufacturing.

When you look at our project today, you see exactly this pattern. We see a lot of people using ecommerce or developing custom web applications. Then there are some companies doing manufacturing and warehouse management, but fewer. And a smaller number still doing accounting and financials, with many more opting to integrate with existing commercial accounting packages.

So this is what I call my “natural selection theory of open source vs. commercial software.”

Adoption Drver #2: Open source empowers new business models

The second key adoption driver is that open source is a great tool for empowering new business models. If you think of a new product or service, by definition, there's probably not a commercial package supporting it yet, because, well, only you do it. Open source, by comparison, gives you a low cost foundation and flexibility for building something which would support your business models.

And what are some new business models today? Selling online, subscription-based services, personalization or customization businesses, collaborative communities. These are all examples of some new products and services for which there is often no ready commercial package. Then there is this whole “Software as a Service” or “Software on Demand” model, which I'll talk about later.

Common amongst all these business models is that they involve novel products and services, where the various vendors have highly different offerings. As a result, there is not a set of standardized “industry” requirements, because the “industry” doesn't actually exist yet. In such an environment, it is really hard to find commercial packaged software, because it's actually not economically viable to create commercial packaged software where there are no common requirements. This is where open source finds a natural niche.

Look back to our case studies, and you'll see that Ameniti, British Telecom, and Snaidero had this in common: they all had unique products or services (British Telecom), or needed to respond to new opportunities (Ameniti), or had a completely new business model for which commercial packaged software was ill-suited (Snaidero.)

Adoption Driver #3: Open source is addictive

So if this were it, and if the only reasons for open source software versus commercial software were natural selection or new business models, eventually we'd get to a bifurcated world. Some parts of an organization would use open source software, some commercial software. Newer companies would use open source, older ones commercial. But there is one more thing: open source software is very addictive. Once an organization gets comfortable with open source software, they'll want more and more of it. We've seen time and again open source get into an organization from the edge, and it's happening in applications as well.

When you think about it, this is actually very natural. Open source has the attractive advantages of being free, flexible, and giving users the freedom to do what they want. The only key hurdle is familiarity—we don't have publicists or salespeople or "targeted" mailings. People “buy into” open source software because it works!

So, as a result, we tend to see people use open source in the “edge” of their enterprise, then move it to the core over time, as it becomes proven. We've seen this with the adoption of our project—the kind of company that's most likely to adopt our open source application is one that's already using other open source software, such as Linux, MySQL, or PHP. We also see it within our application. People tend to start with ecommerce or CRM, then implement inventory or manufacturing, and finally move their accounting over to open source.

Catalysts which are Accelerating Open Source Adoption

In today's environment, there are also three catalysts speeding up the adoption of open source applications.

Transition to Service Oriented Architecture (SOA)

There's been a fundamental change in the way we built enterprise software. Instead of building it around a database, some stored procedures, and client/server user interfaces, creating a very closed and inward-looking application, we're now moving to building open architectures that can let different applications talk to each other. Thus, different commercial applications or open source ones can now all work together. As a result, SOA has created many more openings for open source applications in the enterprise.

Transition to On Demand Software

I think this is just starting to gain momentum as a driver of open source applications and will become much more important over time, because open source applications are naturally suited for the on-demand environment. We have newer architectures with web-based user interfaces, instead of the old client/server architecture that could be very expensive to deploy. We have a flexible application that can be customized and adapted to the unique requirements of specific markets or niches, so an on-demand vendor can create a differentiated offering. Commercial software which can't be modified, in contrast, force on-demand vendors into the uncomfortable position of a commoditized product offering. Finally, open source applications such as ours can be deployed on a completely open source stack, so it's much less expensive than licensing commercial applications, databases, and operating systems.

Vendor Consolidation.

The third catalyst is a gift from the commercial software industry, and that's all the vendor consolidation that's going on today. What the consolidation is doing is reducing the amount of choice available to users. This is the essence of consolidation in any industry, be it airlines, telecommunications, or software: reduce choice, reduce capacity, and raise prices. Well, open source is the antidote of consolidation, because we're about creating more choice and lowering prices. As companies find that they no longer can meet their needs with commercial packages, they are finding open source as an alternative. Just as importantly, a new breed of independent software vendors are now rising up to serve those forgotten niches, and they are increasingly doing it with open source software as the foundation of their product offerings.

Looking Ahead: How Open Source Will Transform Enterprise Software

So in summary, we see three key drivers for the adoption of open source applications:
  1. A “natural selection” process where open source applications are a better fit, when requirements are highly differentiated, lots of customization is required, or commercial options are very expensive.
  2. Open source software is a natural tool for empowering new business models.
  3. Open source is addictive for users and moving in from the edge.
We also see three catalysts for the adoption of open source software today, and they are the transition to services oriented architecture, the growing popularity of software on demand, and the consolidation amongst commercial vendors.

What's ahead? I'd like to make one prediction, and that is that open source business applications will transform enterprise software the way that Dell transformed the PC industry. If you remember way back when, people bought computers off the shelf off stores like ComputerLand, and those computers had been manufactured perhaps months earlier to vendor specifications. Then a company called Dell came along and offered customers the ability to buy a computer that exactly fit their needs. In the process, they completely revolutionized the way that computers are sold and manufactured.

I think open source applications have that same potential. We have a large pool of existing applications components and a global community of developers or assemblers, so users can either download the application and use it “as is,” the way you can buy one of Dell's most popular configurations right off the internet, or customize it to fit their unique requirements ob usiness model. Their enterprise software can be built “on demand” the way that computers can be built “on demand.” In the process, we'd have a much more efficient software industry, one that is not littered with a lot of inventory of unneeded features.

I think this will then lead to open source becoming a driver which empowers greater innovation in the real economy. All the innovation that's happening in open source software can help to power new business models and new products and services for real people. And that's what's so exciting about open source software today.

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