Open Source ERP Grows Up

ERP has been a kind of final frontier for open source software. But now more IT leaders at midsize and smaller businesses are saying yes to open source software for ERP systems that pump the very heart of the business.

Can open source software find a home in mission critical systems? Based on momentum in the open source ERP market, it's starting to look that way, particularly for IT leaders at midmarket and smaller enterprises.

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While enterprise resource planning systems are the heart and soul of the modern business, they've also been an IT bogeyman for the past decade. The software requires long and expensive customizations to fit the business processes of specific industries and companies. Tales of late, costly rollouts haunt IT managers looking to upgrade the way their companies currently do business. Recently, garbage-hauling giant Waste Management filed a lawsuit against enterprise-software maker SAP for $100 million to cover the cost of its failed ERP implementation.

The problem has lingered since the 90's: In 1997, Nestle USA embarked on an ERP project that took more than six years and $200 million; the company originally intended to spend the same amount on rolling out the system to all offices internationally.

Even when rollouts are done, enterprises find themselves locked into costly licensing and maintenance agreements, in a market without much price pressure, dominated by two main vendors, Oracle and SAP.

Enter open-source software. Popularized by the growth of the Linux operating system, open-source software allows anyone to view and audit the source code and customize the software. ERP systems require a great deal of customization, making open source a seemingly ideal approach. Companies also appreciate the ability to audit the code that runs their critical systems.

In 2007, former CIO of Capital One Gregor Bailar told attendees at CIO's CIO-08 The Year Ahead conference that he was excited by the potential of open-source ERP systems: "I'd love to have an open source ERP system that would just wail on what we have," Bailar said.

For small- and medium-sized businesses, the lower cost of open-source ERP systems is often the major selling point, initially. This was the case for frozen food maker Cedarlane. Going with an ERP system created by xTuple (formerly OpenMFG) saved the company "a couple of hundred thousands dollars" from the get-go, says IT director Daniel Baroco. To convince the company's owner to move the company to an ERP system, there needed to be little up front cost for the then-$40-million business, he says.

"You couldn't even put on the table that we were going to invest a million dollars in technology," Baroco said. "For emotional reasons, more than anything."

The impact of the system is obvious today, he says. The company has grown its revenues to $600 million, from $40 million, and the amount of paperwork created to fulfill orders has dropped significantly. In 2004, workers typically had to fill out 1,000 invoices per day, sometimes creating three invoices for the same order. Today, the company has reduced that number to 400 and can track food wastage: that's data it didn't have in 2004.

"I was really undereducated in the open-source thing at the time," Baroco said. "I became a fan of open-source because of this."

Small and midmarket businesses, such as Cedarlane, are the best prospects for open-source ERP implementations, says Ned Lilly, CEO of xTuple.

"The sweet spot for us is the $20 million to $50 million company that is hitting their head on the ceiling of trying to work on QuickBooks," Lilly says.

Lilly does not expect to convert many customers of traditional leaders such as SAP and Oracle, but for smaller companies that are worried about cost and the complexity of traditional implementations, open-source solutions are becoming a clear choice, he says.

"The fear factor around open-source software has really dissipated," Lilly says. "When we started the company in 2001, at that point, you were still educating people about what open source really means."

In the European and Asian markets, however, customers are more savvy about open-source and have pursued business systems based on the model as way to prevent vendor lock-in, says Don Klaiss, CEO of open-source ERP vendor Compiere, which released an upgraded version of its solution today.

"There are parts of the world, particularly in Europe and Latin America, where there is a very strong bias in favor of open source," Klaiss says. "Customers are very tired of paying high license fees and maintenance fees."

While open-source seems well-suited to the task of enterprise resource planning (ERP) software, the demand is also due to the well-publicized failures of the traditional proprietary software, says Matt Aslett, enterprise-software analyst with The 451 Group.

"The ERP space is ripe for disruption given the amount of consolidation that has occurred in recent years, the ongoing tales of failed projects, and the relative failure of the enterprise vendors to break into the SME [small and medium sized enterprise] space," Aslett says.

Revenues are booming. Compiere saw 300 percent growth in sales in 2007 and expects a similar jump this year, Klaiss says. xTuple's Lilly predicts that sales for his company will double as well. Another open-source vendor, Openbravo, which started as a project in 2001 and as a company received $6.4 million in venture capital funding 2006, estimates that revenues will triple this year and the size of the company will double from 70 employees today.

For the open-source vendors, having a community built up around their product code multiplies their development efforts many times. Openbravo's partners and customers, for example, are currently localizing the product for 50 different countries.

"The future looks great," says Openbravo's COO Josep Mitja. "I think we are one of the companies doing our job better, but no matter how successful Openbravo is, open-source ERP companies, in general, will see significant growth in the next few years."

The growth numbers, however, should be taken with a grain of salt, says analyst Aslett. "ERP is one of the last areas of enterprise IT infrastructure that is relatively untouched by open source, and the open source vendors can be expected to grow revenue over the next year and a half," Aslett states. "However, it must be remembered that these vendors are starting with revenues of next to nothing, while the revenues of the established vendors are measured in billions of dollars."

Yet, Openbravo's Mitja believes that what open-source ERP vendors are selling is something that proprietary vendors will not be able to match: Freedom from another company controlling your critical systems.

"With open source, you can take the code and do whatever you need to do," Mitja says. "There basically is this notion that you control your destiny."

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