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Saturday, September 27, 2008

Open source ERP and CRM carry strong ROI

Over at Computer Economics, we've just released a new study on adoption trends for open source business applications, such as ERP and CRM, and the results are encouraging.

Bottom line: although adoption levels for open source apps are still low, the ROI reported by our survey respondents is quite strong. 65% report positive ROI within two years, while only 5% report negative ROI. That's one of the strongest performances for any of the 20 or so technologies that we surveyed this year. An executive summary and the full report on open source business applications is available on our website.

Traditional vendors, such as SAP and Oracle do not seem to be viewing open source products such as opentaps, Compiere, xTuple, SugarCRM, and others as a threat. Why should they? The open source ERP and CRM market share is tiny--today. But that may change as major vendors continue to increase their software maintenance costs. As our study found, the ROI for open source is very strong, which should ultimately drive increased adoption.

What will it take for open source applications to really become a serious threat to traditional vendors?

Thriving ecosystem of service providers needed
The primary need is to have a thriving ecosystem of service providers around a few open source products in each application category. Much of the discomfort with open source apps comes because business leaders by nature are conservative. They fear being "orphaned." They perceive proprietary software as being more viable in the long run than open source products.

This is in spite of the fact that the past thirty years have seen dozens of so-called major vendors go out of business, leaving orphaned products. Or, vendors are acquired and their products are relegated to subordinate status in the portfolio of the new owner. Think of ManMan (now in Infor's portfolio) or Manfact (now in Epicor's).

It is also in spite of the fact that each of the open source products listed above--opentaps, Compiere, xTuple, and SugarCRM--have commercial development organizations behind them. Contrary to popular belief, most open source business applications are not developed by "volunteers." Open source is a software licensing model--it has nothing to do with how the software is developed or maintained. Open source means you have rights to the code and are free to use it, enhance it, and even redistribute it, provided you do so on an open source basis.

It also means that anyone, any service provider, can build a business around supporting the software. As long as there are users that need support, there will be demand for services, and with open source there is no restriction on who can provide them. So in this aspect--as we indicate in our full report--open source may in fact be less risky than proprietary software. As long as adoption reaches a critical threshold, and there is a thriving ecosystem of support providers, the product will not be orphaned. And if the product is not widely implemented, at least you have full rights to the source code.

Where will open source service providers come from? Interestingly, I see ERP resellers and VARs becoming increasingly dissatisfied with the current state of affairs. They have their own list of complaints, which I won't enumerate right now. Suffice to say that being an open source service provider is a much simpler life than being a "business partner" with a major software vendor. (Write to me or leave a comment below if you have an opinion on this point.) If open source adoption does increase, I can see a trend developing where service providers begin to add open source support to their offerings, or jump ship altogether in favor of supporting open source ERP and CRM apps.

Don't underestimate costs of open source
Our study sounded one cautionary note regarding open source apps: early adopters tend to underestimate costs. It might be that because they perceive the software as "free," they tend to underestimate the costs of implementation and support. Our full report provides details on the percentage of organizations that reported TCO greater, less than, or the same as budgeted amounts. Nevertheless, in spite of a tendency to overrun budgets, the ROI for open source applications is overwhelmingly positive. In other words, most projects had no problem reaching favorable ROI even with cost overruns.

It's too early to say that open source is the future of ERP, CRM, and other enterprise applications. It is more likely that proprietary software and open source apps will each carve out their respective niches--sometimes coexisting in the same organization. Nevertheless, experiences of early adopters show that the business case for open source is strong. The positive economic characteristics of open source can only lead to increased adoption.

Related posts
Court ruling strengthens legal basis for open source
xTuple: a hybrid open-source ERP development model
The disruptive power of open source
Total cost study for an open source ERP project
Compiere's open source ERP business model and growth plans
Open source ERP gaining adherents
Key advantage of open source is NOT cost savings
Open source: turning software sales and marketing upside down
ERP Graveyard

by Frank Scavo, 9/27/2008 07:54:00 AM | permalink | e-mail this!

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 Reader Comments:

Hi Frank,

Nice post, and very interesting report.

I do have one quibble, however. You wrote:

Open source is a software licensing model--it has nothing to do with how the software is developed or maintained.

Too often, I think, we focus narrowly on the licensing/distribution component of open source, and underplay the equally-important story of the product itself.

I would submit that the in the best-managed open source projects, how the software is developed and maintained is a crucial ingredient of long-term success. And that embracing contributions from the community (as we do) encourages ongoing innovation, higher quality than proprietary commercial software, and a closer alignment with the actual needs of end-users.

So to the impressive ROI you site in your study, I'd add the above measures which may be less measurable - but are no less real.

Cheers,
Ned
 
Frank,

I have been very interested in the trends of open source in the category of business applications software. I appreciate your research on this topic.

any estimate on a "ranking" of these open source ERP projects in terms of

1 functionality
2 number of actual live production implementations

Is there any "specialization" occurring, for example, Vendor A is strong in a certain industry, or customer company size (under 10 M customer rev, 10-100M, etc)?

Are there any SCM or PLM open source projects yet, especially for planning functions? If not a suite, are their "point business process" projects yet, like factory planning, inventory planning, or product portfolio planning?

I wish someone like IBM would buy a few vendors, like i2 for instance, & reposition their apps as open source. IBM could probably achieve a good ROI on i2, on increasing sales of IBM services, IBM hardware, due to the lowered total project costs to a customer of not having to pay the software license portion of the project. In addition, IBM itself could better take advantage of the i2 software for its own huge organization.

This seems to me a much better option, than selling to JDAS for $350M in cash, where the apps will probably slowly die ala how JDAS is doing to Manugistics.
 
Hi Frank,
I am regular reader of your blog posts. You come up with original and up to date information. Thank you for the same.

What I am finding is ROI is strong only when there is no much customization effort is required.
 
I hope that someday SAP can provide an open source application for learning purposes.

Mike
 
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