Can Open Source ERP Succeed?

by

ERP Analyst, Software Advice

Open source has been a great success for infrastructure software such as Linux, Apache and MySQL. Here at Software Advice, we’ve made use of all three. We’ve also made extensive use of open source development libraries like jQuery. For apps, however, we have either rolled our own or deployed commercial Software-as-a-Service (SaaS) offerings.

We’re not alone in that decision. Open-source applications have failed to gain mainstream acceptance. Despite passionate communities and a compelling value proposition, businesses just aren’t buying open-source enterprise applications. The lone exception, from what I can tell, is SugarCRM (more on this below). But why not enterprise resource planning (ERP)? Why hasn’t an open-source ERP player gained critical mass?

With so many ERP implementations getting long in the tooth, many businesses are yearning to break free from vendor lock-in. To a significant extent, open source offers freedom from vendor control. This, after all, was the original value proposition for open source, even though the whole “free” part gets most of the attention. It seems there is an opportunity for a vendor that does things differently. Can open source ERP succeed?

Here I examine the challenges open source faces in the applications market. In conclusion, I turn the question around to my readers: What do you think it will take to make open-source ERP take off?

Enterprise Applications Are Sold, Not Bought
Enterprise applications require sales and marketing to encourage widespread adoption. The traditional strength of open source is in development – thousands of developers contributing code to a greater good. The open-source expectation is that free software will sell itself. Early adopters will embrace the free technology and rave about its capabilities; the majority will follow the buzz. This has proven effective for open-source infrastructure, where the users are curious developers with the inclination and skill set to tinker with new technologies.

Enterprise applications are different. There is an expectation by the buyer that their hand will be held by doting sales professionals throughout the sales cycle. And they need it. Too many line-of-business buyers are groping in the dark during the software selection process. As a result, the best product rarely wins in the enterprise apps market. The best sales and marketing wins. In the case of ERP, open-source players are helplessly outmatched by Big ERP’s sales and marketing muscle. Oracle spends $4.6 billion a year on sales and marketing, while SAP spends $2.8 billion.

Capitalists Make Poor Contributors
Community contributions are central to the open-source model. Traditionally, the largest area of contribution has been developers writing and contributing code. However, contributions are also made in quality assurance, documentation and support. Again, this has worked well for open-source infrastructure where technology is coded for developers, by developers. There is an admirable sense of partnership between these birds of a feather. A developer’s necessity spurs innovation, while altruism and a desire to be recognized drives her to contribute that code to the open-source project.

This model breaks down when business people enter the picture. As capitalists, they are compensated to grow their firm’s profits, not support a community. Business people seek a proprietary competitive advantage. As a result, they are unlikely to share their innovations. In most cases, business people will support the core of an open-source project; however, they will soon seek to monetize differentiated extensions and other value-added enhancements to the project. Based on what I’ve read of the Compiere chronicles, it appears that the competing financial motivations of the sponsor, channel and contributors were behind many of that project’s challenges.

Application Development Requires Domain Expertise
When it comes to open-source infrastructure, contributing developers are coding in their comfort zone – deep in the technology stack. But when they’re asked to code business applications, they move beyond their comfort zone. For application development, developers need detailed product requirements, which are traditionally delivered by a business-savvy product manager. In open source, this pairing is difficult as a result of the point we made above: business people are less likely to contribute.

Again, the Compiere story is informative. Members of both the Compiere project and its subsequent fork, ADempiere, note that community contributions were primarily technical. These include database ports, performance enhancements, and new web client technology. Once again, we see the developers contributing the underpinnings they felt to be critical. Meanwhile, functional enhancements were developed by commercial entities – Compiere, Inc. and its channel partners – but were typically monetized as proprietary code, rather than contributed.

SugarCRM Has Succeeded, but it’s Fake Open
SugarCRM stands out as the one open-source application project that has gained critical mass. In fact, SugarCRM has emerged as a viable alternative to industry leader Salesforce.com. However, SugarCRM’s success has been achieved through a commercial effort that is almost indistinguishable from a traditional proprietary software vendor. The company has raised over $50 million in venture capital, it has a dedicated sales team, and it employs savvy marketing. Finally, it sells Professional and Enterprise editions, which are essentially commercial software.

Is this true open source? The community edition may be free, but it is flimsy in comparison to the commercial editions. From my perspective, SugarCRM is a commercial software product.

Is There a Path to Open-Source Applications Success?
I don’t pretend to have the answers to a problem many capable people have failed to solve, but allow me to suggest some ideas to get the conversation started:

  • Avoid traditional venture capital. I believe that most venture capitalists have lost interest in open-source. That’s fine. These professional investors are seeking growth and profits that are unlikely to be achieved in open source. Their demands will kill the project.
  • Seek out strategic investors. An ideal alternative to venture capital would be a diverse group of corporate investors. They represent “patient money,” and they can contribute domain expertise. Nevertheless, they should not gain control through the investment.
  • Focus on commodity functionality. Commercial entities are most likely to contribute functionality that they consider a commodity or undifferentiated. Critical mass could be gained by concentrating on applications like financial accounting and human resources.
  • Leverage the Cloud. Cloud hosting of open-source solutions (like this instance on Amazon EC2) eliminates much of the technical complexity of open-source solutions. Meanwhile, it can provide a new revenue steam for monetizing the project.

What do you think will be needed to make open-source ERP work?

A special thanks to Jonathan Gross of Pemeco Inc. for providing insights for this article.

The thumbnail for this post was created by Jason Rogers.
 
  • http://www.redk.net Julio Bleda

    Hello Derek,
    Of course SugarCRM, with his Pro and Ent editions is a commercial software product. But this doesn’t mean that is not open.
    Please, don’t confuse people with the wrong concept that open means free. It’s not the same!
    You pay for advanced features, support and an instance in a cloud environment managed by people that works for money! (as I and probably you and all the people that read your article) And all of this for 30$/month? it is worth what costs, without a doubt.
    Strategic software need professional services, and professional services must be paid.
    That’s my opinion

  • http://www.openbravo.com John Fandl

    Hi Derek,

    Nice article with good insights on Compiere. However, I would caution to extrapolate Compiere to the rest of the open source ERP space. Every story is a bit different.

    I think your strongest point generally is Enterprise Applications Are Sold, Not Bought”, though I don’t buy the analysis. The ERP acquisition process is indeed inherently more complex because of the number (and level) of the decision makers, and the high visibility and importance of the decision. However, the huge sales and marketing spend of the big vendors is largely for the high end of the market. For SMB the channel drives, and the playing field is not so uneven for the open source vendors. With open source ERP, savvy consumers do not have to be “groping in the dark during the software selection process”, as you say. They can actually deploy the real software at zero cost, and run a business pilot to determine if it will work for their critical processes, gauge the usability, etc.

    At Openbravo, our partners routinely work with prospects on such a “paid pilot” basis–for a cost much less than a traditional paper-based vendor assessment study. So, the open source dissemination advantage does yield tangible benefits in the ERP case.

    Re: “What do you think it will take to make open-source ERP take off”?, the answer is “When it is good enough (in terms of functionality and user experience), relative to the proprietary competition”.

    And when is that? I predict that in 2011, open source ERP will begin to show up on the mainstream ERP radar in a significant way. Previous versions have not been sufficiently compelling for mainstream users, and have appealed mainly to companies actively seeking open source solutions. That will change in early 2011 with refreshed product lines.

    Is a strong value proposition that is well-articulated with professional marketing required to sell ERP? Of course. Does the best product always win? Of course not. But as the open source products match (and in some cases exceed) the functionality and usability of the legacy vendors, we will increasingly earn and receive our share. The internet is a great leveler, and good news travels fast.

    Thanks again for the nice piece. Please follow openbravo on twitter if you would like to watch our particular open source ERP story unfold in 2011!

    John Fandl
    Director Product Marketing, Openbravo

  • http://www.cleardrop.com JH

    If you define Open Source ERP as ERP that is absolutely without closed source code then I believe it can only succeed with micro-organisation who like to implement the software themselves. On an enterprise level the functional and technical demands are much too complicated compared to what is currently possible in a sustainable business model solely based on open source software.

  • http://www.gooddata.com Roman Stanek

    Hi Derek,

    Very good article. It reminds me Peter Yared’s piece called “The Failure of Commercial Open Source Software” http://bit.ly/fXdiYu . And Peter was aggressively attacked by the same people who are making money from the fake open source “bait & switch”…

    Roman Stanek
    Fouder & CEO, GoodData

  • http://www.talend.com Renat Zubairov

    Hi Derek,

    Great post. And as Julio also said open source is not free. However frequently open source version is just seen as free to try, where for “enterprise” deployments you should pay. This kind of open source is like a shareware or trial version of the software, with missing “enterprise” features, which is no difference to the usual commercial vendors.

    One other very important aspect is complexity, for enterprise ‘open source’ systems this is a huge factor, also for developers and contributors. Sometimes it’s even explicitly exaggerated by company behind the open source projects to decrease chances of forks.

    IMHO the enterprise open source products will remain a functionally limited demo version of the full-blown commercial products with minor advantages in price and openness.

  • http://www.xtuple.com Ned Lilly

    It’s a little early to be drawing conclusions about uptake in the market. “Open-source applications have failed to gain mainstream acceptance”? Something isn’t a failure until it’s over. As a wise man said, it only ends once; everything else is just progress.

    I obviously agree with John’s points about the sales/pilot process for open source ERP. Here at xTuple, we’ve got tens of thousands of happy open source users, hundreds of whom have become paying xTuple customers. It’s true that most are largely more self-directed than the kind of traditional corporate buyer Derek describes, but we have our fair share of “normal” ERP buyers as well.

    One quick note on your “cloud” point. You link to a video that shows a setup routine for a fairly complex collection of web-based parts. I would submit that with xTuple, it’s an order of magnitude easier than that, even – you download the all-in-one installer, and click install. The GUI client you install can connect to a local database if you choose to install it, to a fully functional hosted demo database of the commercial edition of xTuple, or your choice of xTuple Editions (PostBooks, Standard, or Manufacturing) hosted in the Amazon cloud.

    At xTuple, we understand ERP. We know that it’s different from almost every other kind of software in its ubiquity, mission-criticality, and lack of margin for error. From time to time we get frustrated when we see analysts lump it in with other types of “IT products.” Derek’s piece was better than many in that it at least acknowledges the “differentness” of ERP. We recognize that there’s a lot more that can, and should be done to make the benefits of ERP available to companies of all sizes – this is core to our mission.

    To close by answering his question, “What do you think will be needed to make open-source ERP work” …

    Time. Success begets success, and we see that in our continued growth – quarter over quarter, year over year.

  • http://strominator.com David Strom

    Derek, I disagree that enterprise open source hasn’t taken hold yet. There are lots of counter examples. The Motley Fool.com switched from a Google search appliance to a Solr-based OSS one. Zimbra, OpenOffice, Alfresco are all over the place. One shop I know is using Pentaho business intelligence OSS. What about WordPress, DotNetNuke and Drupal? They certainly are apps used by thousands of enterprises.

    Yes, the developer-grade OSS gets a lot more attention from the press. But the apps are being used by corporate IT shops, and some are also paying for support to make them more useful — that hybrid model is something worth exploring in a future post.

  • http://www.erpra.net Jeffrey T. Hare, CPA CIA CISA

    Derek,

    Overall a good article. I agree with many of your points. I have lived in the Oracle apps market for over 10 years and agree that not always does the best application win. Oracle’s financials suite, long held to be there bread and butter, has many, many, many issues that development fails to recognize primarily, IMO, because their SIGs (Special Interest Groups) and CABs (Customer Advisory Boards) are driven mostly by techies or former techies rather than by folks with deep functional expertise.

    I think the biggest challenge of open source ERP, as has been pointed out, is that the functional users don’t have the time or inclination to provide the specs or drive the products. I see this being the case at Oracle and with their customers who have a LOT to gain in that type of participation. But many BAs (who end as the ‘experts’ on the SIGs and CABs) don’t have a business background, but often have a system integrator background.

    In summary, I agree, the biggest challenge of open-source ERP is specs by qualified experts.

    Having said that, one of the other significant challenges is differentiation in how organizations design their business processes. In an open-source world, the differences add complexity to how the code would need to be developed (integrated vs modular). Not being a developer, I am not sure how big of an issue this would be/is.

  • http://www.opentaps.org opentaps Open Source ERP + CRM

    Derek,

    Thanks for focusing on open source ERP (and for posting that little video about opentaps in the cloud.)

    I think the issue is how do you define “success” — if it means building a fully functional alternative to commercial ERP software; having users, even paying users, and businesses that are profitable; we (and I’m sure the other open source ERP folks) have all been able to do that with open source ERP.

    But if you mean fundamentally taking business software to the next level–better, easier, more useful–we can all do a better job. Let’s make that our challenge for 2011 then!

  • http://www.crmoutsiders.com Martin

    I think Julio makes one very strong and the most important point here – “open” does not mean “free”

    Access to source code happens in a lot of paid-for products. Does that make them “not open?”

    No

    Open source is about licensing at the heart of it all.

    I think in the world of the enterprise and critical production environments – free software (and even some of the limitations of open source licenses) can be a liability not a benefit.

    We should be scrutinizing software and the companies behind them not on a license basis – but whether the software, and to a larger extent the company itself – is OPEN.

    The cloud, and other tech trends like social and mobile are re-defining what Open means – and the old tenets of “open source” philosophy are being left in the dust.

    I would argue that most businesses care very little about terms like Open Source, and rather want flexible, open and simple to use tools that give them positive benefits.

    And, any business that wants to truly succeed and differentiate, will expect to pay for the value received.

    Just my $.02

  • http://www.spagoworld.org Gabriele Ruffatti

    Derek,
    great post! I’m not dealing with OSS ERP, but I know something about OSS application acceptance. It drove me to give you a feedback to all your points in SpagoWorld blog http://bit.ly/h1gsqG. I hope you appreciate.

  • http://opensourceerpguru.com/ Yossi Ben Haroosh

    Derek,
    You’re raising some points here. I’ve been covering open source ERP in my blog for about 3 years (at http://opensourceerpguru.com), and watched the industry go from ‘hardcore’ open source to more commercial open source variant.
    It’s true, that some of the most successful open source projects (Linux, Apache,Firefox) are very technical in nature, and are some of the most brilliant pieces of software ever written. I believe every open source ERP project now has a strong core of ‘suites’ – people with business orientation, who can define to the development teams what businesses really need. And what most businesses need, other that functionality, is a strong implementation & support channel.

    Your article focuses on technology and sales, but in my book, especially in the ERP world, the most important factor for success is a strong partner channel. Most implementation have a lot of local variations, and medium and even small businesses want to meet with someone who is familiar with the solution, can help them with implementation, customizatin and support.

    It’s true that some open source ERP software is being self-deployed but some businesses, but I think this is not the target market for the large open source ERP vendors. They are building a strong ecosystem that can bring their solution to customers globally, and make the customer feel that someone has their back. Most IT& business decision makers still need that feeling, and in my opinion, that is where ‘mainstream’ is.

    As far as your ideas about how to solve the issues you raised – Compiere, Openbravo & OpenERP have all raised capital. The question here, is what questions should be raised: is it ‘what did fund raising do to their open source-ness?’, or is it ‘what did fund raising do to their business of selling ERP?’ . The answer to the first question is obvious – you raise money, no matter what software you are making, the rules change. In my opinion, the second question is more important, and I think you can see the answer in OpenERP 6 and Openbravo 2.5.

    My own ideas on how open source ERP can succeed? Get Accenture to implement your solution!

    Yossi

  • http://www.ssglobalservices.com/ Kengaku, Satoru

    Hi Derek
    Let me make some comments from the very Far East end of the globe.
    Thank you very much for your suggestion about investors, I take it.

    I like your sentences very much, “Enterprise Applications Are Sold, Not Bought” and “the best product rarely wins in the enterprise apps market. The best sales and marketing wins.” I have been in ERP businesses since 1994, I have the same observations. During an ERP sales cycle, most people evaluate ERP sales and marketing, not ERP software per se.
    With fully understanding it, I have decided to challenge Open Source ERP with Openbravo. Why? In the first ERP cycle, people bought ERP without understanding what ERP indeed is. But after using traditional ERPs for a meaningful while, customers and more importantly business partners now know what ERP software is. I see Open Source ERP now has much greater chances especially in SMB areas with a partner ECO system. Actually in 1980’, no one had believed that any ERPs on Open System platforms could be a mainstream. We no longer use the term, “Open System”, right? I believe that, in a future, people will find that “oops, we no longer call them Open Source, because it’s everywhere”.

    Re: Domain Expert
    I had actually been a Japan domain expert of a traditional ERP in manufacturing and supply chain management areas. Even myself worked with business partners and customers to define and review business requirements. I had written functional design documents, developers had started from detail and physical design documents. Hence I believe that partner ECO system and user community continue to be the key source of domain expertise with any Open Source ERPs. A difference should be that, traditional ERP vendors monetize those with high prices, or partner ECO system monetizes those with reasonable prices.

    Re: Fake Open
    Without a commercial success, no software can survive. I think that the notion, “commercial open source” can stand. It’s not free, but business people need professional software and services.

    My additional thought
    I admit that I’m one of old timers, hence I’m more used to 3GL and SQL, like ABAP or PL/SQL. For me, using Java classes to call RDB is a nightmare. But business people care about master data, sell to collection processes, buy to pay processes, accounting, talent management etc. In details no two ERPs are the same, but at high-level (at majority of business people care on daily basis), at least the three ERPs (i.e. two traditional ERPs and Openbravo) I know are much alike.

  • http://www.processmaker.com Brian Reale

    Hi Derek,

    Nice post. I’ve given some thought to your comments and in my blog I explore your points a little further, especially the points about Enterprise Software being Sold Not Bought, and the comment about SugarCRM being Fake Open. Ironically, your discussion immediately made me think about a presentation Larry Augustin gave in 2007 at OSBC about the financials of Open Source Companies compared to traditional pre-bubble software companies. You can read my full post here – http://bit.ly/fVvCUU

  • http://www.keynes-soft.com Lv Xin

    Great Post, Derek!

    “Enterprise Applications Are Sold, Not Bought”. As a local service provider(www.keynes-soft.com) for enterprise open application like Joomla, Openbravo and ProcessMaker in China for nearly 4 years, we have a lot to agree with you on the point. Software like ERP and BPM will require a long sales process to be sold to business. This is the weak point of open source vendors compared to traditional market-oriented players. But good open source software will have a huge oral spreading team(downloaders) will no cost, which means the money can be more effiently used in R&D to make the product more competitive. When the product is good enough, with the addition of global brand stratedy and good local sales team. I don’t think the traditional ERP vendor will still dominate the market.

    As for why open source ERP is not as successful as open source CRM now? My personal point is it’s the difference of the software nature. Think about the end users of an open source CMS/CRM, and compare them to the users of an open source ERP? As internet is still the main marketing channel for open source vendors, “internet open source software ” will have higher exposion rates, conversion rate to decision maker than “intranet open source software” because the internet decision maker is more comfortable using google instead of “groping in the dark” during the software selection process.

    With the evolution of the web, all the enterprise software(including ERP) will become “internet” soon.

  • http://optimeon.wordpress.com Paul Pambudi

    I was actually seriously looking for good-enough open source ERPs to sell in my local market, but the quality of available open source ERPs are so bad. As someone who has deep familiarity with 4 out of top 5 ERPs (JD Edwards, Baan, Oracle, PeopleSoft), I have to agree with you that open source ERPs suck. I myself implemented a lot of great open source products, but my suggestion is to stay away from open source ERPs

  • Brian

    ERP systems are sold, not bought.

    I’ve worked in business administration for manufacturing companies for years. The business owners are convinced that “you get what you pay for”. If this system is free, and that system costs $100K, then the free system must be junk.

    Business owners have I.T. people on staff who they don’t listen to. They have administrators on staff who they don’t listen to. The business owners listen to the software engineer who sells them on features that the “free” stuff has, without looking at why they should go with the “free” stuff.

    Then, after the 6-figure software system is installed (usually with major headaches), the business owner finds out that they need this module and that module. So the software engineer gets to sell them a $25K module that is normally included in the “free” software; and can easily be implemented by their on-staff I.T. personnel due to the TRUE NATURE of the “free” software…that being access to the source code.

    But, business owners are very hard to convince that they should go with the open source package, because they typically know nothing about software. And the argument that the on-staff I.T. personnel can manipulate the source code to create or modify various modules (instead of paying the software engineer who’s attached to the “premium” software) gets washed away when the business owner says, “Our I.T. guy has more important things to do.”

    Oh, then the I.T. guy (who has more important things to do) has to jump through hoops – especially during implementation – because the “premium” ERP system is riddled with bugs, and the software engineer (who already got paid) is unavailable because he/she already moved on to the next sale. It’s usually only threats from the business owner that gets the software engineers to come back and fix the problems.

    Bottom line: business owners are (1) control freaks, and (2) ignorant regarding matters related to information technology; and that’s why open source ERP systems won’t take off.

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