Article

Can open source ERP software make an impact on the market?

Keith Kessinger

Traditionally, ERP powerbrokers such as Oracle, SAP and Epicor have dominated the ERP market with expensive proprietary software, leaving few options for small to midsized manufacturing firms to fall back on. In the last decade, however, a handful of open source ERP software companies, with radically different business models, have emerged with hopes of changing the ERP software industry. 

Open source ERP software remains a niche part of the overall ERP software market, but there is room for it, according to Jim Shepherd, research director at Boston-based AMR Research.

"In the past 10 years, we've seen the market consolidate, with 20 or so vendors generating revenue of more than $100 million," Shepherd said. "So there are definitely market opportunities out there."

As of late, open source ERP software has made some significant strides, with Openbravo, located in Barcelona, Spain, joining forces with Pentaho, based in Orlando, Fla., to provide companies with open source ERP and BI systems, respectively, in order to lessen the technological footprint when installing both. Also, Compiere -- another open source vendor -- just released its 3.1 product with new manufacturing-specific capabilities, such as work-in-process tracking, completion of final assemblies to shipping, work order costing, and the ability to create work orders and select customer specific options at order-entry time.

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Spearheading a revolution

Companies like Compiere and Openbravo are leading the charge for open source ERP software across not just manufacturing but all industries. Their software offerings are considered open source, but their business models allow them to generate revenues in spite of having to provide licenses free of charge.

For instance, Compiere, based in Redwood Shores, Calif., is championing the commercial open source business model. The company provides a free version of its ERP software, along with the source code, on Sourceforge.net.

"This allows users to test the product out and see if they like it," said Sunny Gosain, senior vice president of products, technology and customer success at Compiere. "In addition, it allows us to gain penetration into the market with little investment."

Despite the free licenses, Compiere -- through its commercial model -- is able to turn a 21% profit from its investments in service, support and R&D by targeting customers who are looking for expanded features, technical support and maintenance upkeep.

The commercial open source model benefits both vendors and customers, Gosain said. With Compiere's open source ERP model, the support structure provides revenue, which allows vendors to innovate and upgrade existing software. They also receive input from a community of outside developers, which helps the software platform grow.

As for customers, they benefit from having a fully transparent ERP system that can be customized to their needs. Also, they are not locked into any expensive, long-term vendor commitments, as they would be with the proprietary software model. Users are free to end their relationship with open source providers as they see fit, Gosain said. And, finally, there are no upfront licensing fees that can cripple SMBs, which can't generate the initial capital required.

Openbravo, on the other hand, uses a slightly different model to distribute its open source ERP software. In addition to posting its code to Sourceforge.net, Openbravo works with partners. Its associates work with customers in order to help alleviate the problems associated with ERP installation and implementation. This may cut into the firm's bottom line, according to Josep Mitja, chief operating officer at Openbravo, but it's necessary because "not everyone is familiar with open source programs, and they like to hear what we can do for them." 

Like Compiere, Openbravo provides a premium package that includes customer service and support, allowing users to opt out at any time.

"We found that customers really value not being locked into any commitments," Mitja said. "Our unique business model gives our end users a lot of options."

The open source ERP impact

Measuring the impact of open source vendors can be difficult, owing to the nature of open source software. Because the applications are not copyrighted and are generally free (or provided for a nominal fee), the only way to gauge the proliferation of the software is through downloads totals – but that's an imperfect measure.

On Sourceforge.net, Compiere and Openbravo have reached download totals of approximately 1.4 million and 765,000, respectively, but Mitja and Gosain admit they do not have an accurate metric for measuring the software distribution because this does not reflect the actual number of users and companies that have adopted the programs.

Even if they did, AMR's Jim Shepherd contends that open source vendors have had little impact on the ERP market as a whole.

"This type of software model has been around for a while, and these companies were hoping for a groundswell of demand for open source – but that hasn't been the case," he said. "Firms are usually interested in open source options for financial reasons, but it's nothing more than a curiosity for most."

Shepherd attributes the lack of open source's penetration into the ERP market to a number of perceptions surrounding the software.

"Well there's a sense that there's no adult supervision," he said.

According to Shepherd, users have concerns about things like who's testing the program, how new features will be implemented and whether the vendor can maintain a revenue stream to stay viable -- although he admits that these concerns are generally overstated and many are misperceptions.

"We consider ourselves a research and development company," countered John Cigari, Compiere's chief marketing officer. "We have created a number of innovative technologies that help our customers customize their software to meet their needs. This comes in addition to the support and services we provide."

While this may be true, Shepherd doesn't see how small to midsized open source vendors can innovate sufficiently to affect the market leaders, despite having a community of developers and dedicated in-house technicians.

"It's hard to claim that open source vendors have more resources than their proprietary counterparts," he said.

In the end, open source ERP software -- despite its advantages -- will serve only niche consumers, Shepherd believes. "There's no evidence that there will be a change in the market in the foreseeable future," he said. "There's definitely a market for it, but I don't see these types of companies taking 20% or 30% of the overall market share."


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