Open Source innovation vs. commoditization

Matt Asay took me to task for a comment I made at the Enterprise Software Summit this week:

“and had Jeff Nolan
(Director of the Apollo Group at SAP and former VC with SAP Ventures)
challenge open source as a tired commoditizing play. He’s right. It
really is dull if all open source can do (or, rather, what open source
commercial enterprises tend to do, commoditize big, existing markets).”

I thought about this when I read it and replayed the exchange we had during his presentation wondering if I was really saying that. Short answer is that I am but not in the way Matt suggests, and I’m not even sure I’m talking about commoditization.

Matt was suggesting that there is a wave of open source enterprise application companies on the horizon and that they will offer the potential of displacing the incumbants. That could be one scenario. The comment that I made is that nobody in the enterprise world really gives a shit about whether an app is open source or not if the application doesn’t solve their problem. This is the problem that applications like SugarCRM are facing, first they have to build a good CRM application as the entry fee to the market, then they can blather on about open source all they want. If Sugar doesn’t build a good CRM app then what is the incentive for anyone to 1) select them over someone else who has a functional app, or 2) displace an existing vendor from the account.

The point about displacing existing solutions is an incredibly important one because if you spend a lot of money on a traditional enterprise application like Siebel you are looking at that as an investment that you will use for future benefit. It’s far different than saying “well I think I’ll use Microsoft Money instead of Quicken because it’s a lot cheaper”.

The point at which enterprise software vendors are really in trouble is when their customers start looking at that license/services/support expense as a sunk cost… it’s gone and not coming back so there no reason to stay on the current path. I don’t see any indicators that would support this today, but it’s a real possibility that the entire industry needs to be aware of, and for that matter actively create conditions that result in better applications cheaper.

We love open source, we’re big supporters of MySQL, we invested in Red Hat, Sistina, Zend, and most recently Socialtext. SAP was the first major application vendor to officially support Linux as an application platform, and we continue to do things like add development support for Eclipse in NetWeaver. All of the investments in OSS we made were predicated on having an economic model on top of a solid application, the fact that they are open source really was not a factor in our investment decisions.

It’s somewhat ironic that Matt uses Socialtext as an example of a company creating a new market, which I really have to disagree with. Socialtext is using wiki technology to disrupt the existing market for collaboration and knowledge management software, in other words a market that already exists but is poorly served. Commoditization also implies a loss of pricing control, which is something that Socialtext is not experiencing as a result of their success… if anything success in enterprise software actually creates pricing power.

Far too many open source application companies think that the reason why enterprise prospects will get excited about them is because they are less expensive than proprietary apps. No, everyone is cost conscious but I don’t know a single enterprise class buyer that would simply do a price analysis as the sole determiner in their buying process. The app has to fit their functional requirements in order to win, and if it doesn’t then it has to fit a strong portion of their functional requirements and be priced accordingly so that the effort to make it a 100% fit is manageable.

This is where Vinnie or Dennis jump in about out-of-control enterprise implementations that piss away customer dollars. I’ll wait. Okay, for every one of the high profile ERP/CRM/SCM projects that failed there are hundreds – thousands – of implementations that are delivered on time and work as promised. If it weren’t the case we wouldn’t be in business today. (BTW, I’m not picking on Dennis or Vinnie, I have abundant respect for their points of view and agree with them on many points).

The next thing that OSS proponents say is that you get all the source code… big whoop, we’ve been doing that for the 15 years (if not longer). That’s right, you buy R/3 and you get the source code. There might be warranty or support agreement issues if you go mucking around in it, but so are there with Red Hat.

Community developer support is next up. The reality is that the great bulk of OSS projects have a couple of developers and that’s it. The biggies has teams of developers and quite often they work for the same company. There are literally thousands of developers on SAP, Oracle, Peoplesoft, Siebel, etc… hell, you can even find an entire community of developers around AS/400 software and IBM hasn’t sold one of those boxes in years.

My comment to Matt on Monday was that going out and creating an OSS company for ERP is fighting yesterday’s war. I’d be more interested in seeing someone go out and build something better than ERP/CRM/SCM/whatever and use the open source community process to do that. Innovation means going beyond where the market is today, it doesn’t mean simply doing the same thing cheaper or differently.


Anarchy for the UK
It’s coming sometime and maybe
I give a wrong time stop a traffic line
Your future dream is a shopping scheme

“Anarchy in the UK” – The Sex Pistols

The afternoon session of the Enterprise Software Summit yesterday was a good old fashioned food fight. It became apparent that the room had split into two factions, the first being the “Anarchists” and the other group I’ll just call the “Status Quo’ians”. JB Holsten and Ross Mayfield were up giving a primer on RSS, blogs, wikis, and the broad cultural ramifications being foist upon companies in the market today and all hell broke loose… and I’m quite sure I had nothing to do with it 🙂

I think that the ongoing series of discussions throughout the day were leading up to this confrontation, although in hindsight I would point out that the guy who inspired the Anarchy title of this post wasn’t even there in the morning session so I maybe that had nothing to do with it… and I’m not hesitant about pointing out the fact that he wasn’t there in the morning because I’m 99% sure that guy isn’t reading any blogs.

The key issue pivoted around a legitimate question thrown out at one point, which is whether or not all this free flowing and unstructured “conversation”  by employees, partners, customers, or whoever potentially diminishing to brands. The premise of the question is rooted in the notion that companies actually control the conversation about their products/services/brand in the marketplace, something I reject. What this question also does not acknowledge is that the best spokespeople for your brand are in fact your employees, partners, and customers, and not the “marketing spokesperson” or the CEO. Read The Me2 Revolution.

After much debate we get to the substance of the dispute, which is “what if one of your employees says something bad about the company?” The only answer I would give to that is “well, is it true?” in which case you have a bigger issue to deal with, but even if something bad is true are you assuming that it won’t come out anyways? Of course you can’t respond with an answer to a negative but there is ample historical evidence that supports the notion that companies are unable to contain anything negative about themselves.

More points were made about disclosure of information that is deemed sensitive or in violation of government regulations. Rules already exist in companies that cover this, you certainly don’t need to create ‘blogger versions’ of quiet period rules or confidentiality clauses in employment agreements. This is a non-issue.

It’s absolutely myopic for any marketing professional to look at what is happening in social media and not come to the conclusion that the strategy and tactics by which they engage the marketplace are not going to evolve as a result. This is not to say that everything gets thrown out the window and we invent new rules, not at all because what I am saying is that smart companies are adding this componentry to their toolbox in addition to everything else they are already doing. Want to ignore it, fine but be sure to dust off your resume.

I am an antichrist

I am an anarchist

Don’t know what I want

But I know how to get it

I wanna destroy the passerby

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