Burnham's Beat

Indian Outsourcers: Open Source's Best Friend or Worst Enemy

In the past couple of weeks I have had several conversations in which Indian IT outsourcing shops have come up in the context of Open Source.  Several Open Source firms have mentioned that Indian outsourcing shops are becoming very good customers and in some ways are really starting to drive enterprise IT adoption of Open Source.  For example, one Open Source company mentioned to me that several Indian outsourcers were aggressively using their distributions as way to cheaply prototype solutions for clients without having to actually buy a license.  If the clients bought the prototype, the outsourcer could deliver the solution with the "free" open source software embedded in it and stick the client with the maintenance.  The pricing headroom created by the lack of up front license fees in the project allowed the outsourcer to lower prices and/or improve margins on their upfront work, while the Open Source software firms got the back-end revenue stream.  A real win/win.

If this is indeed a real trend (and the logic/economics make a lot of sense) than it would appear that Indian outsourcers are one of Open Source's best friends.  Not only are they driving adoption of the products into enterprises (both overtly and somewhat covertly), but because everyone is hiring them as "experts", their endorsement of open source platforms is likely to start swaying the minds of a lot of internal IT types ("If it's good enough for the experts, it's good enough for us").

Be Careful Who You Partner With
I was pretty much set on this opinion until I talked to an entrepreneur friend of mind who was telling me about his own set-up.  He has outsourced all of his IT to India (it's interesting to note that he has also outsourced his CFO to India, his customer service to the Philippines, and his manufacturing to China).  For his CRM system, his outsourcer recommended a well known Open Source CRM platform and even offered to customize it for his needs.  This would seem to prove the above point in spades expect for the fact that in addition to the customization work the outsourcer offered to do all regular maintenance and support for $10/hour.  This meant that my friend had no need to buy a support contract from the Open Source CRM company which means, being a cash poor entrepreneur, he didn't.

Now the idea of a 3rd party providing open source support is not a new one and is often held out as a convenient Open Source boogie man.  For example, Oracle has made a big deal out of its own efforts to offer 3rd party support for Red Hat's Linux distribution.  However, big firm's such as Oracle are never going to be the low cost providers of support and are not likely to view 3rd party support as a core business.  That's not true for the outsourcer's though.  They are definitely focused on being cost competitive.  What's more, support services have the potential to become a critical component of their business models as it gives them a means to not only generate more stable non-project based revenue streams, but also a persistent connection to their customers.  After all, what better way to amortize their up-front training costs and ensure continuing proficiency than to have their own troops continue to support Open Source products once they are deployed.

A New Chapter In Open Source?
It is interesting to consider how this might all turn out as it may lead to a new chapter in the Open Source movement, which seems to have had 3 major chapter to date. The first chapter was the relatively long process of building a grass roots movement to embrace Open Source.  The second chapter was largely about big companies selectively co-opting elements of Open Source in an attempt to commoditize competitors' products (IBM's masterful embrace of Linux as a way to kill off Windows NT's march into the glass house comes to mind).  The third chapter, our current place in the story, is characterized by the rapid growth and financial viability of Open Source companies combined with a competitive response from some of the same proprietary software firms that now belatedly realize they have created a monster.  At this rate, the forth chapter may well be a battle between outsourcers, who seek to use Open Source as way to commoditize all software, and Open Source firms who seek to build sustainable support businesses without giving away the farm.  Alternatively this chapter could end up witnessing a strong alliance between the two sets of firms which results in a win/win for both sides (and a lose/lose for proprietary software firms).  From my perspective, it's not clear right now which way things are going to go, but it is clear that things will likely be fun to watch.

Is Open Source Becoming Over-Sourced?

Is it just me or does just about every start-up software company have some kind of open source angle to their story these days?  I can’t count the number of start-ups that I have talked to recently that have the following business plan:  1) We have developed a core piece of amazing software 2) In an effort to make gullible, civic-minded developers around the world donate thousands of hours of free development time to our commercial enterprise we plan to declare that our amazing software is “open source”.  3) Once said gullible developers have freely helped us build out a real application, we plan to lure even more gullible corporations with the promise of “free” open source software only to become fabulously wealthy when said corporations determine that they must give us tons of money for support and maintenance of said software.

Truth be told, I have actually found some of these businesses to be very interesting, but others seem to believe that building a successful software company is simply a matter of changing their domain name from software.com to software.org and waiting for the money to roll in.

Granted, I can see how “grand scale” projects such as operating systems, databases, app servers, and other core pieces of infrastructure software are high profile enough, intellectually challenging enough, and broad enough to attract a large following of open source developers (and serious corporate sponsorship).  However I have a harder time seeing how this applies to niche oriented infrastructure projects and especially to applications.   Is there really a critical mass of idle/motivated developers readily available to pitch in for every conceivable niche software project in the world?  Are developers really so stupid that they will devote all their free time to making someone else rich?

Ultimately I think a lot of these niche plays in Open Source may end up becoming what I’ll call “Over-sourced”.  Sure they may succeed in generating some initial interest in their open source project on check processing software or linear optimization, or what have you, but they will never be able to generate the kind of broad based community support that is critical the long term success of the project.  As a result, their open source community will ultimately fade away and leave them (and their customers) holding the bag with a bloated code base and panicked customers.  Of course that outcome may not be so bad for some of these open source companies as their customers will have no choice but to contract with them for support and they will thus ultimately end up looking like any other mature enterprise software company.

It is in this way that I think Open Source is really just becoming a marketing gimmick for many start-up companies.  It gives them a way to lower the perceived risks of dealing with a start-up by addressing issues such as vendor lock-in and up-front investments head-on.  There’s nothing wrong with that and there are definitely a lot of situations where such an approach might work, but there’s no need to talk a lot of BS about leveraging free development talent and giving away free software because everyone knows there’s no such thing as a free ride, even in the land of open source.

Software's Top 10 2005 Trends: #2 Open Source

Open Source is one of the most important and perhaps the most controversial trends within the software industry.   While some see Open Source as a kind of communal catalyst for innovation and creativity others see it as a wildly destructive trend that threatens to undermine the economic viability of the entire software industry.

To date, Open Source projects have largely been focused on broad horizontal platforms within infrastructure software.  These projects have been so numerous and so successful that many pundits now talk about building applications on top of the all-Open Source LAMP (Linux, Apache, MySQL, Php/Python/Perl) stack.  And that stack continues to get bigger as Open Source projects start migrating to more complex infrastructure platforms, such as applications servers (J-Boss, Zope, JonAs, Enhydra).  In fact, there are Open Source projects currently underway for just about every major infrastructure software technology you can think of from Content management, to BPEL, to you name it.

One of the biggest questions facing the software industry in 2005 is whether or not Open Source will “jump the species barrier” and start to become a major factor in the enterprise applications space.  A quick look at Sourceforge confirms that to date most Open Source efforts in the applications space have been confined to niche applications in the academic space, but there are now numerous efforts underway, such as SugarCRM, to try and create enterprise-ready Open Source applications.   Whether these applications efforts are successful or not is one of the key issues keeping software company executives up at night.

For software executives, Open Source presents three major choices:  beat it, join-it, or co-opt it.  The conventional wisdom suggests that the way to beat Open Source is to “out-engineer” Open Source by providing a more stable, secure and feature rich product while at the same time “out-servicing” Open Source by providing robust 24/7 support.   This strategy appears to be keeping many Global 2000 customers “in the fold” for now, but even at these customers Open Source software is increasingly showing up in non-mission critical areas.   

Joining Open Source is an option many companies, especially many small infrastructure software companies, increasingly appear to be taking.  These companies typically develop their software in-house and then once finished (or almost finished) declare to their software to be “Open Source”.  The strategy is essentially to use “free Open Source software” as a way to acquire customers that can then be charged services and maintenance fees.   This strategy sounds great but has several drawbacks, chief of which is that simply declaring a software product to be Open Source does not automatically create a large community of diverse programmers who are willing to devote substantial free time to improving the product, but it definitely does make the company’s IP public domain.  Thus, many of these companies face the prospect of getting little or no development leverage from Open Source in return for giving up the copyright to all of their code.

Attempting to co-opt Open Source is probably the most popular and most complicated approach to dealing with the issue.  IBM is the poster child of Open Source co-opting.  IBM primarily sees Open Source as a way to commodify the main revenue sources of its key competitors.  IBM’s bear hug of Linux was largely part of a (arguably wildly successful) strategy to undermine the value of Solaris and Windows NT and thereby stall their push into the glass house.  But IBM’s love of OpenSource only goes so far.  You don’t see them pushing J-Boss at the expense of Websphere or MySQL at the expense of DB2.  Indeed IBM continues to lay out big bucks for “proprietary” software, so their love of Open Source appears to only go as far as they can co-opt it.   Taking IBM’s lead, most of the other major software vendors (save Microsoft) now appear to be selectively co-opting Open Source to use as a weapon against their competitors.

For software VCs, Open Source creates a number of tricky investment problems.   If one continues to invest in proprietary software, you run the risk of getting “Open Sourced” if the space becomes attractive enough to create either a developer community groundswell or interest from an elephant like IBM.  If one invests in Open Source, you run the risk competing with 5 other companies selling the same product and turning software margins into services margins.

However, there is some middle ground.  For example, companies that offer software as a service are somewhat protected from Open Source pressures as customers are buying the whole service not just the code.  Indeed companies that offer software as a service can leverage a lot of Open Source software to lower their own costs.  In addition, while Open Source projects may make some headway into a few large horizontal applications, chances are that it will be very difficult for them to penetrate specialized vertical niches because there just aren’t a lot of developers out there that understand the business logic required for those niches, thus making it much harder for an Open Source project to attain critical mass.

Ultimately the biggest issue for VCs is whether or not Open Source has effectively “capped” the home-run potential of software deals by guaranteeing that any new horizontal software platform that achieves critical mass will inevitably face intense competition from a free, Open Source equivalent.

Personally, I’d like to think that the answer to that issue is “no”, but I also believe that creating a next-generation “home run” platform company is now a whole harder thanks to Open Source.

For a complete list of Software's Top 10 2005 trends click here.