Business value of open source software

by Satish Irrinki (Red Hat)

It’s a truism that adopting open source software (OSS) reduces costs, but that’s not all. Let’s make a deeper dive into the business value of adopting OSS and uncover how the adoption provides immense value at multiple levels of an organization. The value proposition for OSS can be attributed to three groups within an organization – Technical Buyers, Business Buyers, and Economic Buyers.

Technical Buyers
Technical buyers can be best described as the line managers who are operating under stringent budgets to do more with fewer resources. As a result they aim to reduce costs and increase efficiencies within their operating units. In a bid to increase their resources utilizations, the technical buyers seek to increase reliability and flexibility in their operations. To achieve these goals they use systems that are reliable, adhere to standard specifications, and low in cost.

The high level of collaboration and contribution within the OSS development model accelerates the number of features that typical open source software provides. Availability of source code allows the adopters to make custom changes and tailor the software for specific needs. The ability to reuse software components across the organization (develop once and use within multiple systems) reduces the unit cost of development. These virtues of OSS mesh well with the goals of technical buyers and make OSS a viable option when making technology decisions.

Business Buyers
Business buyers are mid-level to senior managers that are responsible for meeting the goals of individual business units. They are focused on overall profitability of the business unit. As a result they try to maximize the revenue and control the underlying operating costs. But, in order to smoothly run a business unit, there should be reliable systems in place to run the operations. For example, if a business unit wants to launch a new product, the billing, revenue recognition, and customer service platforms should be flexible enough to quickly roll out the new product.

The merits of OSS transcend sheer cost savings and reuse of software components. A business system developed using OSS can be built and extended very rapidly by using pre-defined configurations that use very well tested and hardened software components.

This approach to OSS adoption results in much less time needed to commission a system and reduces the time to market for products and services offered by the business units. Thus OSS adoption helps organizations develop competitive advantage by helping them move faster to the market and generate revenue sooner at a lower cost.

Economic Buyer
Economic buyers are the senior executives of an organization that are mainly responsible for setting the strategic direction, spotting new opportunities in the market trends, responding quickly to capture the market, and implementing changes needed to direct the organization. They are responsible for making the right decisions that generate maximum long-term financial value for the stakeholders. However, they are limited by finite capital resources and do not have unlimited projects that they can invest in. In other words, Economic Buyers have limited capital chasing unlimited opportunities.

There are two ways that economic buyers can increase the portfolio value of the projects they invest in, given the limited capital constraint.

1. Increase the Net Present Value (NPV) of the current projects
2. Invest the savings and additional value generated from current portfolio in new projects

There are primarily three ways to increase the NPV of current projects – Increase revenue from the project, decrease costs for the project, and decrease the cost of capital used to fund the project. Adopting open source software lowers the cost of the project and increases the NPV of a project.

It helps increase the revenue by lowering the up-front investment costs (shifting capital expenses to operating expenses) and lowers the barriers to actually kickoff the revenue generating projects. The increase in project portfolio value results in higher profitability and provides the Economic Buyers the ability to invest funds in additional projects and growth for the organizations.

Cost of capital is mostly a financing issue that sits with the corporate finance department, although it can be argued that OSS adoption lowers the cost of capital. I will leave that discussion out for another time.

Conclusion
Open Source Software provides value across the entire organization. The value proposition of OSS satisfies the needs of managers at all levels, from line managers to C-level managers. OSS adoption is no longer limited to making technology decision for a departmental system. The enterprise-wide value that OSS provides and the role it plays in the growth of the organizations warrants that there be an enterprise wide policy to adopt OSS for increased profitability and growth.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.

  1. You actually make it seem so easy together with your presentation but I in finding this topic to be really one thing which I feel I’d never understand. It sort of feels too complex and very huge for me. I am looking ahead to your next post, I will try to get the hang of it!

    1. Thank you for your comment. As you are aware, every organization is different in the nature of business, scale, and scope. The complexity you are referring to, perhaps, stems from the variability in the definition of each organization. That’s why each organization’s performance is measured by different set of metrics.

      The point I am trying to make in the blog is that adopting open source software resonates and favorably aligns with responsibilities of people across the management spectrum, and that having an enterprise wide policy to consider and adopt open source software is the best interest of the organization.

      I am fascinated by the topic and look forward to following up with more information.

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