Cost-Conscious Companies Turn to Open-Source Software

After the tech bubble burst, E*Trade's technology chief, Lee Thompson, needed to find a way to do more with less. In 2001 and 2002, the online stock trading company shrank its tech budget by one-third. "We had to go through and figure out every penny that we were spending…and make alternatives to reduce those costs," says Thompson, vice-president and chief technologist of E*Trade (ETFC). So he began using software that can be downloaded at no cost via the Internet. By the end of 2002, he was saving $13 million a year thanks to use of these freely available applications known as open-source software, and the fact that he could run that software on less expensive hardware .

It's 2001 all over again. With the economy in a tailspin, companies once again are under pressure to cut IT costs (BusinessWeek, 11/13/08). Growth in U.S. tech spending may contract to 0.9% in 2009, according to market researcher IDC. The end of 2008 looks particularly bleak, according to an October survey by ChangeWave Research, which noted the sharpest decline for corporate software on record. About 40% of the 1,841 corporate software purchasers surveyed said their companies would spend less on software in the coming 90 days.

Budget Cuts Spur Interest

The tightening of the purse strings is causing some companies to step up use of open-source software. "Budgets are being cut, and some companies are looking at opportunities to use open source more in the enterprise,"says Matt Aslett, an analyst at consulting firm 451 Group. While open-source software is already widely used to help businesses run their servers and database management systems, it's gaining wider acceptance in such areas as collaboration, customer relationship management, and supply chain management.

A resurgence of interest in open-source software bodes well for the companies that have invested in its development but at times have struggled to make money from it. Open-source vendors typically generate revenue from helping maintain or adding features to software that's otherwise available for free.

SugarCRM, a 4½-year-old company that offers both free and subscription-based open-source customer relationship management software (BusinessWeek SmallBiz, 4/16/08)>, posted record revenue in the third quarter. Because it's not publicly traded, the company doesn't disclose exact figures, but it now counts 4,000 paying customers, including H&R Block (HRB), Men's Wearhouse (MW), and Japan's Shinsei Bank. "We're obviously not excited about a global recession but if we're going to have one, I'd rather be a commercial open-source company rather than a proprietary one," says SugarCRM CEO John Roberts, who says he's seeing larger deals.

Other commercial open-source vendors that have clocked record quarters include Digium, which sells small business phone systems built from open-source software called Asterisk, and Zenoss, which makes open-source network management software. Digium and Zenoss make money by selling support services as well as extra features that enhance the software, such as high-end security.

How Open Source Works

Open-source software actually refers to a method of creating software where the source code—essentially the blueprint of a software program—is openly shared. This is in stark contrast to how conventional software providers such as Microsoft (MSFT) closely guard the source code to products like Windows Vista. The people who create any given open-source software project usually don't work for one company. The creators are typically a community of software developers—often thousands of them—spread across the globe.

Companies generally can expect to pay less for a subscription to an open-source product than for its proprietary counterpart. Most companies download a free version of the software and test it out before they buy a subscription. The biggest commercial open-source company is Red Hat (RHT), with more than $500 million in revenue in the 12 months ending in February. Red Hat sells multiple products. The most widely used is Red Hat Enterprise Linux, with about 2.5 million paid subscriptions that give buyers access to software updates and support services.

Linux Leads in Server Software

Linux running on corporate servers is one of the most common uses of open-source software among businesses, according to a September 2008 Gartner (IT) survey of 274 companies worldwide that either currently use open source or are planning to do so in the next 12 months. About 52% of the companies surveyed are already using open-source server software and another 23% plan to use it within the next 12 months. Linux as an operating system for the desktop is much less established in enterprise use, with 39% of respondents in the Gartner survey currently using it and another 22% expecting to use it within the next year.

About two years ago, Office Depot (ODP) began installing the Linux operating system by Novell (NOVL) on its servers, moving away from proprietary software for a range of hardware including IBM (IBM) mainframes and Sun (JAVA) servers. "Each one of those platforms requires adept teams that know those operating systems and it's more cost-effective to standardize on one platform," says Michael Manis, vice-president for global shared services at Office Depot. Today, Office Depot runs about 400 servers with the Novell software and the company continues to add more servers as it makes sense. Manis says the software gives the company more flexibility because it runs on off-the-shelf servers and the company can build the system as it's needed—rather than, say, upgrading an entire mainframe all at once.

Office Depot says college graduates are also more excited about working with open-source software rather than proprietary programs, making recruiting easier. "You can't go out and get somebody out of the university today who is a mainframe COBOL expert," says Manis, referring to one of the oldest programming languages often used on the hulking computers that serve hundreds of people.

As the economy worsens, some degree of paralysis has set in with regard to IT spending. Companies that have stopped spending money on large, proprietary systems are unlikely to use budgets for open-source software spending, says 451 Group's Aslett. Others may flock to commercial open-source vendors but may be unwilling to pay subscription fees, since many of these packages are available for free. "Enterprises might do open source and support themselves, and they may not sign up for commercial packages," Aslett says.

Existing Customers Step Up Use

Many analysts expect growth in corporate open-source use, whether paid or unpaid, to come from companies that are already using it and want to further cut costs. Japan's Shinsei Bank began using open source about four years ago. Working with Red Hat and other vendors, Shinsei later expanded its use of the software, replacing some of its infrastructure components. Along the way, Michael Tiemann, a founder of Red Hat introduced Shinsei to the folks at SugarCRM and other open source projects. In the interest of maintaining a diversity of suppliers, Shinsei now uses SugarCRM for certain customer service tasks, and MySQL open-source database management software running on low-cost Intel (INTC) servers.

The Los Angeles Times says it's drawn to open-source software by the community of developers constantly working to improve it. In January 2008, the newspaper began using Alfresco to manage some of the images and video for its Web site. "We called other companies using Alfresco, and we started asking questions," says Kamran Izadpanah, vice-president for technology and architecture at the Los Angeles Times. "Everybody has been helpful and open," he says, adding that he would not likely get the same kind of help from other companies using proprietary software.

Still, working with open-source software requires a lot more self-direction than working with proprietary software. Companies that aren't working with commercial open-source vendors or consultants will get a lot less hand-holding than they may be used to. "The question of self-sufficiency tends to be the biggest hurdle for organizations," says Bernard Golden, CEO of Navica, a consulting firm that helps organizations implement open-source software. "I always recommend to clients that unless they're going to save 30% or more, it's probably not worth the churn of trying to figure out how to use open source."

Benefits Beyond Saving Money

For some companies, the benefits of open source extend well beyond cost savings, to such areas as license management. "Your engineers spend less time on contract negotiation and more time on the technology, which is really what you want them to be doing," says E*Trade's Thompson.

The online trading company also says its systems have become more reliable under open-source software. On Jan. 22, around the time of an interest rate move by the U.S. Federal Reserve, nearly 55,000 customers logged in at once to, the highest level in the past five years. The site performed at normal levels across all its trading and investing platforms, and the company says it fared much better than the competition.

Today, Thompson is considering expanding E*Trade's use of the Alfresco open-source content management system. He's also starting to use open-source techniques for internal software development, such as using smaller, more agile teams and breaking up software projects into modular pieces. "If you look at what's happened in the last year and you look at what happened in the dot-com era, there are some parallels," Thompson says. "A lot of people who are under a budget crunch like we were in 2001 will come to the same conclusion about open source."

Business Exchange related topics:Open Source SoftwareInformation Technology ExpensesCustomer Relationship ManagementCost Reduction