1 + 1 = a killer biz model

Steve Hamm

Two of the most disruptive forces in the tech industry, open source software and offshore services, are starting to combine in ways that might be explosive. Each one separately is already having a dramatic impact on the software and tech services businesses. Taken together, they could change the rules of the game for a bigger swath of techdom. Offshoring can cut labor costs by 50% to 80%. Open source cuts the cost of software packages, potentially, to zero. Put the two together and you could have a huge compression of the costs of information technology and havoc for the status quo in a $1.2 billion industry.

I’ve been watching both phenomena for several years, and, except in embedded applications, most of the big Indian outsourcing firms shied away from major open source initiatives. You can imagine why. Their bread and butter is in developing and maintaining traditional software and building on platforms established by made by the likes of Microsoft, Oracle, and SAP. Those giants are some of their key partners. Who wants to stick a thumb in your pal’s eye? Well, things might be changing.

Over the weekend, I learned of a joint project involving Red Hat, the world’s leading Linux distributor, and Satyam, the Indian systems integrator, to create an open source software/services solution for managing data communications within enterprise computing systems. Then, just today, I debriefed Terry Garnett, a partner in the venture capital firm of Garnett & Helfrich Capital, on his return from a whirlwind tour of India. Garnett invests primarily in existing companies or divisions of larger companies that have been neglected but are strong candidates to be recapitalized, reorganized, and sent off in new directions. Two of the companies in his portfolio are open source software outfits, and both of them have strong India/offshoring plays.

I don’t know much about the Red Hat/Satyam deal yet, other than that a Red Hat PR person confirmed it. This is very nerdy stuff having to do with communications between different applications in a distributed computing system. The traditional software it goes after includes IBM WebSphere MQ. IBM has been extremely friendly to the open source movement on the operating system level, but, as open source penetrates more and more into IBM’s middleware zone, Big Blue will become ever more conflicted.

Garnett’s India tour was mainly about fact finding, but he also planted the G&H flag there by opening an office in Mumbai. Says Garnett: “The thing that struck me wherever I went was how much people are thinking out of the box. They were telling me about the companies they’re starting. It feels a lot like Silicon Valley in the 1990s.” G&H will be looking for tech-related divisions in some of the big Indian family conglomerates that can be carved out.

Garnett had never been to India before, so he was blown away by the experience and full of first impressions. His big revelation was that Indian tech services isn’t just about labor arbitrage anymore—they’re about creating new business models. On the theme of combining offshoring with open source, he says, “I got a great sense of opportunity.”

G&H already has its toe in these waters. Garnett is acting CEO of Ingres, the relational database company that he spun out of CA last year. The goal there is to approach companies that are paying through the nose for Oracle databases and convince them that the open source Ingres database is good enough—and a lot cheaper. Ingres is going to build an Indian programming operation and plans on forming co-marketing alliances with the Indian systems integrators. Just last week G&H announced its purchase of a majority interest in Celunite, a Silicon Valley company with 100 programmers in India that is building an open source software package for mobile handsets. It will be competing with Microsoft and Symbian. If things work out right, though, Celunite will have a powerful cost advantage. “Right now, they charge about $10 per handset for software. We might be able to do it for $2. We can take eight bucks out of the handset,” Garnett says.

It’s early yet, but this could be the beginning of something big.