Tomorrow's Business Model Today

I think it's fair to say that the reason you don't see a lot of open source enterprise application companies getting funded is that the bigger problem with enterpise software is not the manufacturing but the sales and distribution, and open source does nothing to fix this. Large enterprise IT just won't adopt open source application products, broadly, if a supporting organization is not behind it, it's a fact that we can debate and we'll find outlier examples that seem to prove me wrong but when you go out and talk with enterprise CIO's and IT directors they will tell you the same thing. Let's also be clear to distinguish between infrastructure, middleware, and application segments of the market, and that I'm primarily concerned with applications for this discussion.

So the last time I looked at it, enterprise application companies, even subscription based offerings, that are built on open source still have a cost of sales on the P&L so what's different? Manufacturing is the big difference, but even here there are subtleties at work that bear further investigation. Open source projects are organized around project moderators who lead the distributed development team and coordinate release schedules, and if this sounds a lot like plain 'ol software development, well it is. Taken a step further you would find that the core project team for popular open source projects, like SugarCRM and Compiere, tend to work for the organization behind the project. Now we have not only a sales organization on the payroll but an engineering group as well, and let's not forget marketing, support, and finance. You get the point, being open source doesn't change the fundamental organization of a company that is in the market. There's nothing wrong with this approach, in fact it's perfectly rational to be organized this way.

What is a better approach to project management in the open source side of the business is that there is a community review process for feeding back features and updates that are generated in the extended development and user communities into the core product. This community approach not only makes for a great customer satisfaction vehicle, but it ensures that the hottest and most requested upgrades make it into the product. However, keep in mind that it's still up to a competent product marketing function to ensure that forward thinking features are included for accomodating markets the project wishes to grow into and to thwart competitive actions.

So we have a product that we make available for zero license cost, well how does that makes sense? It works because 80% of a new software account's revenues will be generated in support, training, implementation consultings, and ongoing maintenance, none of which goes away in the open source world, or in subscription licensing either. One also would not have to look hard to find traditionally licensed applications that have a license cost of zero dollars, Oracle does this all the time with their app business in order to drive database revenues. The services side of the business, broadly speaking, is what open source initiatives focus on as their cost revenue generating activity, but in my book a maintenance/support/training/consulting business is pretty damn close to being a license/maintenance/support/training/consulting business.

There is gold in them hills but the simple fact of the matter is that open source and subscription licensing, two completely separate trends that often get lumped together, are not silver bullets for emerging companies. Furthermore, each of these trends imposes risks on buyers that are emerging as the market evolves, and in the case of open source there is no turning back. Proceed with caution would be my advice to startups considering either option for building an enterprise software company on, and don't lose sight of the fundamentals of building and delivering great software to customers.

Link: SandHill.com | Management | Tomorrow's Business Model Today.

A series of social and technological forces are converging to permanently change the way software is developed, delivered and managed. These changes are tearing down the barriers that existed between the commercial software industry and end users and fostering an era of participation, while empowering these businesses through greater access to information.

Comments

[Ramana Kovi]

Best post I have read in long time. Very good analysis.

-Ramana