The ROI of Open Source

The ROI of open-source software is a contentious issue. Several recent studies, conducted by Yankee Group, JupiterResearch, Forrester Research and others, have focused on the ROI of upgrading a Windows installation versus switching to Linux and have concluded that it is less expensive to stick with Windows. But the reports miss a critical point: Switching from Windows to Linux is the worst-case ROI scenario. After all, the new platform requires training and perhaps hiring new personnel—always expensive propositions—versus merely paying for licenses.

A more important question is, can open source generate real ROI elsewhere? Yes. Oregon State University (OSU), for example, has websites that visitors need to search, so the school bought a Google appliance for about $125,000 per year. Two years later, OSU’s IT department, aided by the Open Source Lab, replaced the appliance with an open-source search product called Nutch (license cost: $0). Nutch is not as easy to use as the Google software, so additional administration costs run to about $10,000 yearly. The overall five-year payback, however, even when you consider additional hardware and engineering time, still produced an internal rate of return of 2,300 percent.

As they say in the weight loss commercials, these results may not be typical. But other companies have also found success. ABB, for instance, is an $18 billion Swiss industrial company. When its Power Technologies Products (PTPR) business needed to integrate new features into its software infrastructure, the PTPR Software Factory Group constructed a J2EE-based “Integration Framework” using a popular open-source tool called Jboss. By using open source, ABB estimates it can save $1.1 million in just its first five factories, with further savings to come as it rolls out to more of PTPR’s 52 locations. Interestingly, the Integration Framework runs on Windows and uses SQL Server as its data store, belying the perception that moving to open source is a massive rip-and-replace operation.

The key to success is determining which projects make sense for open source. To get started, treat each product individually. Savvy organizations consider both commercial and open-source options for projects, and choose the right product for the given situation. Then make sure you evaluate using the proper time horizon. A single heads-up comparison between a commercial product and its open-source counterpart may not offer good open-source ROI, because the costs of training and switching can outweigh the cost of a commercial license. But if you extend the time horizon to the realistic life of the application, it may tip the balance toward open source. Finally, take the entire organization into account. While a specific open-source project may not offer great ROI, the cost benefits of pioneer applications often materialize downstream in later projects that are able to adopt the open-source package. Even if you purchase enterprise licenses for your commercial products so that your marginal cost for a new application is effectively zero, keep in mind that someday, when those licenses are up for renewal, that marginal cost may be much higher.

This column hasn’t touched on any of the other reasons organizations use open source: flexibility, reduced operational costs through not needing to track license compliance, and greater control of the organization’s software stack, since there are no forced upgrades or product end-of-life announcements. Because ROI is so tangible, however, it is critical to address it explicitly. Just keep in mind that there is no single answer; you need to find the right choice for your organization and your application.

Bernard Golden is CEO of Navica, an open-source consultancy, and is the author of Succeeding with Open Source (Addison-Wesley, 2004), and the forthcoming Open Source Best Practices. Contact him at bgolden@navicasoft.com.