Thursday, December 4, 2008

Open Source Upturn in Economic Downturn

I've been asked a lot over the last couple of months, "What is the impact of the economic downturn on open source companies?" I'm sure most people have read the slew of articles on this subject and the response is pretty consistent. Organisations are still spending money in this climate but are looking for low cost alternatives over costly proprietary solutions. The commercial open source approach works well in this climate because organisations can try before they buy, they can self-select without the hard sell from the vendor and they only need to buy if they are compelled to do so.

This point draws a fuzzy line between the open source companies that will do well in this climate and those that will suffer. If the open source product falls below the value line (and value can mean very different things depending on the target market) then its going to be difficult for those companies selling the product to operate successfully during this slump.

For established open source company such as Alfresco, SugarCRM, JasperSoft, Intalio or MuleSource, the economic change is already showing positive signs. If you are a new open source start-up or an existing one without a clear path to profitability then the next 12 months will be hanging in the balance. Nobody wants to raise an A or B round of funding right now, the VCs are going to be way too cautious.

However, the reason I am so positive about the year to come is I believe we needed a drastic shakeup in the market for the benefits of open source to be really acknowledged. Right now every organisation is assessing all their costs (most companies have cut between 10-30% of their workforce). In this process, CIO and Managers are being asked to do more with less, to keep the engine running with half the budget. This means they have to look to open source. They then realise that open source companies compete with proprietary software on the features they need and is typically 10-30% of the cost. With a 50% budget cut that leaves you with cash in hand.

Open source companies change the way organisations acquire software. It provides a much more business-friendly way of purchasing software based on real need and value, rather than vendor-crafted perceived value. The proprietary vendors have been getting away with selling promises, but now organisations have no choice but to look elsewhere for real value at a lower cost.