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Unlocking the enterprise for open source

Businesses want to save money and boost IT efficiency. Can open-source applications do the trick?

Bob Gatewood needed more control. The chief technology officer at Athena Healthcare was sick of multiple databases that contained the same customer record. He wanted to tightly integrate the company's customer data into its Web portal, its financial accounting system and its call center software.

He also needed to save money. Paying his existing customer relationship management--or CRM--vendor, Salesforce.com, was growing increasingly costly. The reason: He was adding 10 new employees a month to handle his company's workload, which in turn obliged him to pay for 10 additional CRM licenses under the terms of his contract with the vendor.

"We realized we needed to integrate CRM into our system," Gatewood recalls. "It was not a separate thing," he says of Salesforce.com's CRM applications, some of which are free and others licensed with a support contract, and of his company's other enterprise software applications. Gatewood was on the verge of directing Salesforce.com's in-house software developers to build a unique CRM product, which would integrate Athena Healthcare's customer relationship business tools with its other enterprise software applications, when he learned about an open-source CRM product offered by SugarCRM that might solve his problems.

After learning more, Gatewood did what a growing number of CTOs are doing today: He went open source, teaming up with the Cupertino, Calif.-based start-up to design and then graft his own CRM system onto his existing IT infrastructure, helping his company's bottom line and boosting employee efficiency across converging software platforms. Such a shift toward open-source software for CRM and other business software applications, such as enterprise resource planning, is now beginning at corporations across the globe.

"I've been surprised at how aggressively enterprises are looking at open-source software and how willing companies are to take on so much complexity," says Sam Jadallah, a general partner at venture capital firm Mohr Davidow Ventures, who spent 12 years working at Microsoft, where he ended up leading the software giant's sales and marketing efforts to commercial customers. "The market is telling us that open source is a viable approach to displace the incumbent vendors," adds Nick Sturiale, a general partner at Sevin Rosen Funds in Menlo Park, Calif. "That's why it's getting so much interest."

"Our customers don't want to be held hostage by a particular vendor."
--Steve Ciesinski, CEO, Laszlo Systems

This shift is motivated by a web of frustrations shared by corporate buyers of licensed business software, whether purchased from major vendors such as SAP or Oracle or rented as a service from alternative vendors such as Salesforce.com. Companies are paying too much for complex products that they can't fully control. They are then locked into that software provider for support or requests for additional functionality, which are often sizable and unplanned expenditures. And when previous versions of the program are no longer supported by the vendor, they have no choice but to upgrade at tremendous cost.

It's the software industry's version of planned obsolescence, or at least that's what open-source business software providers would like prospective customers to believe. "Our customers don't want to be held hostage by a particular vendor," explains Steve Ciesinski, CEO of Laszlo Systems, a San Mateo, Calif.-based open-source software start-up developing rich media applications for the Web. "They don't want to keep having to pay recurring license fees for underlying technology. That's what our competition offers them."

It's not that simple, of course. Open-source software also must be paid for, licensed and serviced, though not in the same way as big, licensed software platforms from SAP, Oracle or Microsoft. And application service providers or ASP business software makers such as Salesforce.com compete directly with open-source software providers by licensing their wares "on demand' over the Web.

But Ciesinski's point about planned obsolescence is still germane--corporations are tired of making strategic decisions about licensed software systems and then having to live with escalating costs and complexity for increasingly inefficient services, only to start all over again when the next upgrade is unveiled. What's more, the growing success of open-source software in other parts of corporations' IT infrastructure--think Linux--is abetting corporations' embrace of open-source applications software.

Opening the floodgates
The move toward Linux-based open-source operating systems, which began about 10 years ago but has gained momentum in recent years, then shifted to expensive Web server, database and application server software. Now, the open-source software revolution is cascading into the enterprise application software arena, with open-source entrepreneurs and their venture capital backers rapidly trying to carve out positions in different enterprise application segments such as CRM and ERP.

And companies are buying. Robert Frances Group, a Westport, Conn.-based IT consulting firm, found in a recent survey of its customers that the uptake of open-source software of all sorts in the past 12 months has more than doubled. Indeed, large players such as IBM and Sun Microsystems, midsize companies such as Novell and Red Hat, or the venture-capital-backed start-ups such as MySQL and JBoss, are all taking open-source software deeper into the enterprise.

If open-source enterprise application start-ups in particular can make their business models work, then the lower costs that corporations already enjoy by using open-source software infrastructure will be extended to other areas of their IT infrastructures as the licensed software providers are forced to lower the price of their products and services. It could usher in a new era of cheap software that will be a boon to companies across the planet--and costly indeed for license-driven software companies such as Microsoft and even on-demand software vendors such as Salesforce.com.

But it's not that easy to embrace open-source business application software. Integrating the applications to customers' existing proprietary software can be challenging, and reliability can be spotty. In many cases, corporations need internal developers to install the software themselves. And if something goes wrong, there may not be a vendor to rely on for support.

Equally important, open source does not mean the licensing of software is no longer an issue. In fact, it can be more confusing and potentially very costly if a company unknowingly uses code that the owner of that code--out there somewhere in the world--is charging for.

To help clear these hurdles, open-source devotees have emerged in recent years to deal with these integration, licensing and support issues. This, in turn, is helping open-source business software vendors crack the corporate marketplace. To understand how the open-source vendors, services companies and consultancies do this, however, requires a brief step back into the history of the open-source movement.

Companies and governments have been using open-source software to replace Microsoft's server software with some version of Linux for more than a decade. Initially, they were attracted by the cost savings associated with switching from Windows server software or Sun's Solaris server system to Linux.

Linux was first released in part by Linus Torvalds in 1991. His open-source code in time began to challenge the grip of licensed software on corporations' IT infrastructure. By 1995, open-source Web server software programs called Tomcat and Apache first appeared, and the next year MySQL, an Uppsala, Sweden-based start-up, released its first open-source database software.

"We are seeing widespread acceptance for Linux, Apache, Tomcat, MySQL, Thunderbird, Firefox and OpenOffice in manufacturing, retail and government."
--Evan Bauer, principal research fellow, Robert Frances Group

MySQL is now used by 5,000 companies worldwide and competes with other relational databases produced by Computer Associates International, Microsoft and Oracle. In what has become a common business model in the open-source community, MySQL users pay nothing unless they embed the database into their own proprietary code and then sell that product or unless they would like support and maintenance.

Together, Linux, Apache, MySQL and the so-called Perl and PHP scripting languages that together are referred to by the acronym LAMP (which stands for Linux, Apache, MySQL and Perl), have come together to form a free stack of open-source technologies. "The LAMP stack is extraordinarily widespread," says Robin Bloor, a partner at Hurwitz Associates, a technology research firm in Waltham, Mass.

Competing stacks include Microsoft's .Net and Sun's Java/J2EE, two proprietary software technologies that over the past few years have battled to become the de facto standard for Web server software as the rival LAMP open-source alternative rapidly emerged. Indicative of who's winning the war came in June, when Sun partially opened its Java software to open-source applications development. But the LAMP stack is nonetheless gaining traction.

Among the companies that have widely adopted the LAMP stack are Japanese electronics giant Sony, Houston-based Continental Airlines, Germany's second-largest bank, HypoVereinsbank and Swedish retailing giant H&M.

Now the new open-source avenue that's becoming popular is in middleware. Case in point: Atlanta-based JBoss' application server was being used by 35 percent of IT managers last year, according to a report from BZ Research, a Huntington, N.Y.-based research firm. JBoss' market share rose from 9 percent one year earlier, while IBM's WebSphere, BEA Systems' WebLogic and Oracle's application server shares all declined, according to the same report.

"The firms that were 'sticking with Windows and Solaris' now have major Linux adoption programs," says Evan Bauer, a principal research fellow at Robert Frances Group. "The scientific community and financial services industries are well down the adoption path, but we are seeing widespread acceptance for Linux, Apache, Tomcat, MySQL, Thunderbird, Firefox and OpenOffice in manufacturing, retail and government as well. The trend is only growing."

Making the switch
This rush of companies into open-source software code for their core hardware has laid the groundwork for open-source penetration in the business software applications arena. Moreover, the rationale driving this new round of open-source adaptation by corporations is not just about the pure cost-reduction reasons driving the original shift to the LAMP stack.

"Companies initially used open-source software to save money," says RFG's Bauer. "Increasingly, they're doing it to take advantage of the world's largest pool of technical innovation and to take ownership of their technical architectures, rather than having to make a long-term bet on a vendor's marketing strategy and ongoing ability to execute. It is about opportunity as much as it is about cost."

"How you charge for (open source) is an open question. Value will come out of support, maintenance and making sure it is integrated properly."
--Russ Siegelman, general partner, Kleiner Perkins Caufield & Byers

Take the senior IT director at a medium-size business software company as a prime example of this trend. He prefers not to be identified, but says his Silicon Valley-based company first used open-source software two years ago to reduce its reliance on a single vendor. The company's decision to replace its closed-source third-party Simple Mail Transfer Protocol gateway software, which managed the company's 500-strong e-mail communications needs, with an open-source alternative called Exim, developed in 1995 at Cambridge University, wasn't flawless. The IT director was forced to deal with the lack of dedicated support and the need to keep the system's security up to date with patches and other new applications.

The tech executive, however, looks back on the process as a success and as a reason for the company's continued push into open-source software. "The fact that we were willing to switch our SMTP gateways to an open-source solution shows that we are willing to consider open source wherever it makes sense," he explains. "Of course, it would have to be fully evaluated, tested, justified and the risk understood before replacing a mission critical application."

Which is exactly what he's done since the successful switch from SMTP. The executive says that since the Exim implementation he has purchased Groundwork Open Source Solutions Inc.'s IT monitoring service to track network utilization and Web application performance and availability. And currently, he's evaluating open-source intrusion detection and server virtualization software from other open-source vendors.

"It's an easy jump from infrastructure to applications, and that will challenge the likes of Seibel, Oracle and SAP," says Paul Doscher, president and CEO of JasperSoft, an open-source business reporting software start-up. "As long as corporate technology offices believe these products are quality, deliver solid functionality and are extensible in ways to satisfy their unique needs, there's no stopping this. And that's what open source provides."

John Roberts, CEO and co-founder of SugarCRM, is even more upbeat. He believes his open-source CRM start-up is doing to Salesforce.com's on-demand business model what Salesforce.com did to San Mateo-based Siebel and other licensed software companies. SugarCRM was one of the first enterprise application developers to receive venture capital funding last year; its venture capital backers are Draper Fisher Jurvetson of Menlo Park and Walden International of San Francisco.

But the number of start-ups developing open-source enterprise applications is now multiplying and covering most major sectors, such as enterprise resource planning, business intelligence and project management. Some are even targeting specific industries. Aliso Viejo, Calif.-based Medsphere Systems, for example, makes open-source electronic medical records management software, and Huntsville, Ala.-based Digium develops an open-source public branch exchange, or PBX, office phone system.

Business models vary from company to company, however, among these start-ups--none of which clearly points to a path to profitability. "How you charge for it is an open question," says Russ Siegelman, a general partner at venture capital firm Kleiner Perkins Caufield & Byers who spent seven years working at Microsoft. "Value will come out of support, maintenance and making sure it is integrated properly."

But others are going beyond the support, maintenance and integration model, seeking a better base of revenue by providing the basic version of the code for free to anyone who wants to download it, but then also offering a premium version that comes with advanced functionality, installation, support or interoperability certification.

Ciesinski's Laszlo Systems offers its open-source development tools free of charge but then charges customers such as EarthLink for its closed-source e-mail application. JasperSoft offers its basic version for free but charges $9,999 for a license on a per-central-processing-unit, or CPU, basis, referring to the units that comprise the brains of a computer server.

"Open-source and commercial software applications will coexist in the enterprise for a very long time."
--Nick Halsey, vice president of marketing, SpikeSource

Then there's Lincoln, Mass.-based Sleepycat Software, which reasons that its product is better than its rivals and so charges the customers that use its code in commercial applications on a per-license basis of $185,000, comparable to its competitors' rates.

That sounds as expensive and as complicated to purchase as traditional licensed software or on-demand software. Indeed, Salesforce.com resides on both sides of this market divide. But for corporate executives, the cost is almost always less than closed-source rivals. And even if it's not, the product is usually easier to customize than closed-source code and extends further into a company's IT infrastructure. But will these open-source business enterprise software start-ups become viable enough to make the open-source business model work so that they will be around in the future to support their products?

Increasingly, it seems as if they can. Proof is in the number of large technology companies with significant proprietary software that have responded to the open-source challenge by open sourcing at least some of their code, which in turn ensures that smaller open-source software vendors have a chance in the marketplace. Bob Mack Peak, vice president for marketing and business development at SVC Financial Services, said the large software vendors have no choice but to experiment with open-source software development.

"They've built companies with massive infrastructures based on selling software that costs $100,000 to $200,000," he notes. "Well, people aren't buying that anymore," says Peak, a veteran software industry executive, who was vice president for worldwide sales at Computer Associates in the 1980s and then worked under Tom Siebel at Oracle in the 1990s.

Baby steps for tech giants
The high-tech industry's largest software players are taking baby steps to reduce the large infrastructure associated with proprietary software development. IBM, for example, open-sourced its development framework called Eclipse, which competed with Scotts Valley, Calif.-based Borland Software's JBuilder. Armonk, N.Y.-based IBM reasoned that it would make more money selling hardware and services around a product supported by a robust community of developers than by just selling the Eclipse software itself.

Or consider these developments: Islandia, N.Y.-based Computer Associates open-sourced its Ingres relational database last year; Microsoft ventured onto SourceForge.net, a kind of clearing house for open-source development projects, with an automatic-installation writing code that would help developers integrate their work more easily into Windows; and Palo Alto-based Sun recently made its Solaris operating system open source in order to gain an even larger following in the developer community.

Still, only a few corporations have dumped their commercial software licenses for open-source enterprise applications. Open-source testing and certification company SpikeSource, based in Redwood City, Calif., discovered after interviewing fifty chief information officers that their concerns revolve mostly around validation, integration, testing, support and service. "Open-source and commercial software applications will coexist in the enterprise for a very long time," argues Nick Halsey, SpikeSource vice president of marketing. "You will see more open-source alternatives in the future, but an important problem we are solving today is testing and validating commercial software to make sure it runs smoothly in open-source environments."

Adds Graham Byrd, vice president of marketing at San Francisco-based Open Group, a vendor- and technology-neutral consortium based on open standards and interoperability: "It requires huge technical expertise to get your head around how this will fit within your business. If you go to Oracle, they'll say Oracle Financials will do A, B and C. If you want to do the same thing with open source, you need people within your organization who have an architectural view of your systems and business processes."

Open-source software providers are responding to the problems by offering a variety of installation packages. Groundwork, for example, offers its code for an annual fee, but it also will install and integrate its open-source IT management software for a company for fees ranging from $50,000 to $300,000. By comparison, a license without integration costs for HP's OpenView costs between $200,000 and $2 million.

"We're providing a throat to choke if something goes wrong."
--Byron Sebastian, CEO, SourceLabs

Licensing, or validation, remains a major obstacle, too. Because there can be a slew of licenses applicable to one piece of code and each license is slightly different, a company using that software in its own product might have no idea how much that software could cost it. "Some people might not do it because it's a little too hard for them to understand what kind of risk they're taking, and for some people they might not know whether they're even taking risk," says Bloor.

Waltham, Mass.-based Black Duck Software is one of the start-ups seeking to address this problem. Its technology analyzes a company's software to identify open-source code that may require vendor licenses. Says Douglas Levin, president, founder and CEO of Black Duck: "We want to help companies understand the consequences of combining open source with their proprietary code."

Support and service are the other headaches that can plague corporations considering open-source applications. When a customer buys from, say, SAP, they know the German software giant is responsible for making it work. That's obviously not always the case with open-source alternatives.

A company that sells or gives away open-source software almost always has some sort of support and maintenance program that it charges for. But if the company has pulled some code developed by the open-source development community that hasn't been repackaged by a company, it has to rely on itself to make it work.

SpikeSource, co-founded by Kleiner Perkins' Ray Lane, and Seattle-based SourceLabs, which has funding from former Microsoft executive and Ignition Partners co-founder Brad Silverberg, have emerged to try to tackle all of these installation, licensing and support issues. "We're providing a throat to choke if something goes wrong," says SourceLabs CEO Byron Sebastian.

The reason: IT directors have told Sebastian that their jobs would be at risk if they installed some open-source software and there was no vendor to rely on in case something went wrong.

If all these issues can be dealt with, corporate executives will grow increasingly excited about the possibilities of better and cheaper software on the horizon provided by reliable vendors. To Athena Healthcare's Gatewood, however, this is old hat by now. He was an early adopter of the LAMP stack and is now in the process of customizing the SugarCRM code so that the company can measure how effective its customer response efforts are on a real-time basis.

He's also tinkering with an open-source project called Dot Project, which is in the project management software arena. After determining how important the project management system is and whether he would want to modify it to fit Athena's own systems, Gatewood will decide whether to buy a commercial version, such as Microsoft Project, or an on-demand version from a company, such as eProject of Seattle, or instead just take the free Dot Project code and integrate it into their system on their own.

"If the SugarCRM and MySQL people can make this business work and are profitable, I would expect to see more business models like this pop up," says Gatewood. "And I would expect to see our costs go down without the quality of software being different."

That's the reverse of the planned obsolescence built into most proprietary-licensed software today. That would be truly revolutionary.

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