LinuxWorld Stakes Out Middle-Market Ground

Pentaho, which was founded by seasoned veterans formerly in the proprietary applications world, including several from IBM, Oracle, Hyperion and SAS, also is betting big on the services channel model. Adrian Marshall, vice president of marketing at Pentaho, Orlando, Fla., told CRN that the company will announce general availability of its first business intelligence suite and its partner program at the same time in the fall. His channel philosophy is simple: “a meritocracy in partnering with no huge fees or other barriers to entry,” Marshall said.

These companies are betting that, even as SAP and Microsoft devote many resources to the midmarket, open-source business applications offer new alternatives and new opportunities for channel partners that cannot rely on the reselling model in the open-source world.

Observers expect to see a bigger services channel build up around business applications than the one that developed around the LAMP stack because business applications have not been commoditized and offer better customization and value-added opportunities, Olliance’s Maresca said.

In addition, many open-source business ISVs endorse a Mozilla-like open-source license that enables services partners and customers to modify software code without having to redistribute those proprietary changes, observers say.

And the value equation in the open-source business applications market shifts to customization rather than the code itself, which should benefit the channel, said Bob Gett, president and CEO of Cambridge, Mass.-based Optaros, which he founded last year to take advantage of corporations’ needs for consulting and services for open-source business applications that would be developed higher up the stack. Gett does not believe that open-source business apps will eliminate proprietary apps, but they will appeal to customers that want control and maximum utility out of their investments. “For a lot of people, the [application functionality] is overkill,” Gett said. “A lot of IT is not critical and not done as cheaply as possible, and spending more on context over control makes no sense. The value is not in the [intellectual property]; it’s in the services. Open source has changed that dramatically,” he said. “The value is in the expertise on how to use it. It’s a services play.”

SERVICES OPPORTUNITIES
Areas especially ripe for the picking for both ISVs and service partners include CRM, business intelligence and content management/portals, observers say.

Cignex’s Nagiah said some of his customers have Vignette or Interwoven in-house but found those proprietary content management applications too costly to customize. While they are not replacing what they have, he said they plan to apply all future dollars to Plone and other Zope-based content management systems for new portals and Web sites.

Many see better cross-pollination opportunities for business application vendors and service partners. Service partners can add value to either horizontal programs such as SugarCRM’s or offer specialized services on top of vertical applications such as Medsphere’s clinical records software for hospitals.

ISVs and service firms have fewer cultural hurdles to overcome since first- and second-generation open-source software companies such as Red Hat and JBoss paved the way for industry acceptance and built a global installed base of open-source customers. Paul Santinelli, a former Red Hat executive and venture capitalist at North Bridge Venture Partners, said venture funding is beginning to flow steadily into open-source business application firms because venture capitalists see a growing, profitable business model. For example, JasperReports, an open-source business intelligence project founded three years ago to provide an open-source alternative to Crystal Reports, was officially incorporated as software ISV JasperSoft in April and scored $8 million in venture capital funding by July, said Paul Doscher, CEO of JasperSoft, San Francisco.

It also helps that vendors like SugarCRM appear to be more hip to the benefits of a services channel than the first-generation open-source companies, which coveted services to bolster their income in lieu of software licensing fees.

Most of the leading open-source application vendors, including SugarCRM and Compiere, have active channel programs or plan to in the near future.

Clint Oram, co-founder and vice president of SugarCRM, Cupertino, Calif., hired a channel executive to oversee its program and now has roughly 45 partners developing specialties in geographical and vertical niches, he said. Traditional proprietary enterprise application vendors make their offerings so complex that they can derive 60 percent of their revenue from professional services such as consulting, implementation and integration, he said. That model has several fatal flaws: It cannot appeal to the SMB market, and it provides incentives for developers to build products that are difficult to implement and install, Oram said.

“That’s not our model. We want it to be easy to install, and we don’t [want to] have channel conflict,” he said, noting that SugarCRM will add value to the stack while partners handle services. “Our goal is driving no more than 30 percent of revenue through services. We are not a services company; we are a products company. If we ever hit 50 percent of revenue from services, then we have failed.”

AgileCo, Atlanta, is a one-year-old company that has built a $2.5 million business providing services for the Asterisk VoIP open-source application used in call centers, as well as on its homegrown JSR168 Web Services Portal, which competes against IBM WebSphere and offerings from BEA Systems.

AgileCo has been dabbling with SugarCRM for more than a year, but they officially became partners two months ago, said Ed Pimenthal, CTO and co-founder of AgileCo. He plans to produce Homeland Security-level security support for SugarCRM by adding the Liberty/SAML Single Single On and Identity Management components, he said.

NEW ERA FOR BUSINESS APPS
Sun Microsystems, Novell, IBM, Computer Associates International and Actuate have begun to donate some of their open-source e-mail and database infrastructure. But to date, none of the major ISVs have dared to open-source their own crown jewels—business apps.

SpikeSource already developed an integrated SugarCRM installer for its system. But SpikeSource CEO Kim Polese said the open-source business applications era remains in its infancy. “It’s still in the early days, but CIOs and senior IT executives are looking very seriously at open-source applications for a variety of business functions for cost benefits and control,” she said.

One SAP partner is skeptical it will make a difference in the near term. “Give them five more years to build up the strength of the application,” said Christopher Carter, president of CCI, Milwaukee. “No one can grow to SAP/Oracle’s size without lots of R&D as well as purchase power,” he said, “and in the open-source arena, it takes a little longer to mature the products.”

There is no doubt that proprietary business apps will maintain a healthy installed base of customers for years to come, but open-source rivals may cut into their grand plans to move down to the midmarket—with the help of a growing services channel. Even solution providers are consuming open-source apps. Bob Kusche, eServer solutions architect at rs-Unix, Chicago, tapped VMAssist to convert his customer information system from Salesforce.com to SugarCRM. The return on investment was immediate, Kusche said. “It saves me the $200 per month I was paying to Salesforce for what was basically an archival solution.”