Asay the Alfrescan

I’m on the phone with a WebEx technical support person. Not sure why tech support is necessary for taking my money (I’m just trying to set up a WebEx account for Alfresco - signed up online, gave my credit card number, and have received nothing in return), but whatever.

The thing that frustrates me to no end is that I went from talking with a local, US salesperson to a remote, India-based support person who gave me infinitely less support. He didn’t understand the urgency of my requirements, though he tried hard to care. I eventually hung up in desperation and called back to the US sales team, telling them they were not allowed to transfer me outside their building. Result? Successful account setup.

Which got me thinking. I’m not a big fan of outsourcing in any situation - as I feel that support and development is best done as close to the problem one is trying to solve as possible - but in the open source world it seems insane.

Two big reasons:

1. Development. In the open source world, source of code matters as much or more than the source code itself. It matters that JBoss employs the vast majority of developers that contribute to it. Ditto for MySQL, SugarCRM, JasperSoft, and others, including Red Hat.

   In the open source world, enterprise buyers want to buy from the source of the source code - diluting this through outsourcing is a bad idea. (Yes, as Thomas Friedman writes, some outsourcing is a foregone conclusion. But not all. And in open source, I think Friedman’s rules are less applicable. Open, it matters who writes the code in open source, and where they sit. Coders matter in open source.)

2. Support. In many companies, support is not considered core. (Clayton Christensen talks insightfully and humorously about companies continuously outsourcing “non-core” functions until they have nothing left.) This is foolish at the best of times, but this thinking in open source is suicidal. At its foundation, whatever the business model around it, open source is always about superior support. There are two cores to any open source business: excellent code and superior service. Outsourcing one or the other is sheer stupidity.

If you’re an open source company, you need to keep development and support close to home. If not, we’ll be outsourcing your jobs next.

LinuxWorld Magazine (written by Paul Sterne and Nicholas Herring) has an interesting piece on open source venture capital investments. The report focuses on the question: is now the right time to invest in open source? The answer to some is “Of course!!!” But the data might suggest we’re in an inflationary period, with smart money waiting for valuations to come down.

From the article:

Starting in the mid ’90s, a few brave pioneers like Benchmark invested in an open alternative to proprietary software and made a fortune. By the end of the decade, everyone wanted a piece of the action. A second wave of VCs rushed in at ridiculous valuations and got their clocks cleaned. In 1999 and 2000, over-capitalized, over-valued open source companies burnt through hundreds of millions of dollars. Shame on the dumb money that gives efficient markets a bad name. Then, the bubble burst, and we entered nuclear winter followed by the trauma of 9/11. Valuations plummeted to the ground. Investors panicked and ran for the exits. Things hit bottom when the vulture capitalists waited until the CEO of SuSE Linux was in a cab on the way to file bankruptcy before agreeing to invest at a valuation set at 1% of SuSE’s peak value in 2000.

In retrospect, the SuSE recap was the turning point.

In 2002 and 2003, more smart money like Benchmark, Accel, and AdAstra fueled the open source industry with much needed capital. With the sale of SuSE Linux to Novell in November 2003, the industry reached a new inflection point. Valued at 50% of its peak, the SuSE exit excited a new rush to invest in open source in 2004 (no one wanted to miss the boat). After a small dip in relative value in 2005, when Novell dropped the open source ball, venture capital investment is on the rise and valuations are healthy.

In short, venture investing is a roller coaster. Whether you “lose your shirt” or make a mint largely depends on when you enter and exit the market (and not merely when you enter and exit a specific investment).

For example, take a look at the chart below. It shows the stock prices of Novell and Red Hat over the past 9 years. As an investor in either, you could be bankrupt or filthy rich depending on when you joined the party.

Funny enough, I helped to build that “smart money” period in Novell’s history, and made nothing from it. Matt = stupid.

So, is this a good time to invest? It’s certainly a great time to be in the business of open source. My decision to go to Alfresco has been the best career move I have ever made, and I suspect those at MySQL, Red Hat, JBoss, SugarCRM, etc. would concur. The problem for VCs, however, is that valuations are on the rise, and the amount of money in the market has moved well past the $1.3 billion I blogged earlier this year, making it harder and harder to make money, even on good exits.

Btw, if you want to know where to get the smart venture money, look to experience:

I had breakfast this morning with a sales director for a large, successful software company. He heads up several of the company’s major accounts, and had fascinating insight into the software industry, generally.

Hint: It’s being destroyed.

Well, “destroyed” in the Schumpeterian sense. Destroyed in the sense of a massive transfer of wealth from those who depend on upfront license fees to those that can thrive on much lower deal sizes that primarily consist of downstream maintenance revenues.

He mentioned that his particular branch of software (EAI) is undergoing commoditization, which surprised me: CRM, ECM, operating systems, etc. These areas are clearly being commoditized, but EAI? What could be causing this, as there aren’t currently dominant open source contenders, and there hasn’t been much standardization of EAI technology and product? He listed a few reasons (which mostly equate commoditization with a significant lowering of prices):

1. Vendors like IBM, giving away the software to drive hardware and services revenues.

2. Second-tier vendors trying to build market share by offering lower prices.
3. “It’s plumbing - why should I pay for it?” (This sounds like an open source opportunity waiting to happen.)
4. Accenture and other large SIs driving down license costs in favor of higher services costs.

These were just a few of the factors he cited. Again, it was very intriguing to me given that EAI isn’t one of those areas that I’d normally consider in the commoditization phase.

But he should know. Sales people feel pricing pressure first. He told me, in fact, that across the board, CIOs are rejecting large, enterprise-wide deals, preferring to pay “by the drink” instead. So I asked him, “What does this mean for sales people? How are they feeding their children, given the smaller deal sizes?”

The answer? Some are getting out of enterprise software sales altogether. Companies, for their parts, are shifting to compensate their sales forces based on maintenance deals (or, rather, weighting compensation toward the full value of the deal to get sales people to not discount maintenance to try to raise license revenues), rather than on upfront license fees. It’s a rapidly changing world.

It’s a world, frankly, that most software companies are ill-prepared to meet. They’re either in denial (The market will turn around. Open source can’t touch our market. Etc.), or they’re in retreat. Very few (IBM perhaps among them) are actually meeting the threat head on with a hearty embrace. These few are succeeding. The rest are withering.

In short, regardless of your thoughts on open source, it’s clear that the general fundamentals of open source apply to the changing world of software:

1. The future of sales is on the web. (I’ve yet to visit a single customer at Alfresco, yet sales are booming. The software must sell itself in the new software economy….)

2. The future of sales is technical. My director of solutions engineering (part SE, part architect, part sales guy) speaks the customer’s language - his job is to round out the edges of Alfresco’s code, to help the customer see how to implement it, etc. He’s exceptional, and exceptionally productive for us. I wonder if the sales model of the future doesn’t look like this: downloads -> inside sales -> sales engineer/architect -> sale. It’s a lot cheaper, and a lot closer to what the customer actually wants.
3. Sales compensation must be tied to maintenance and support. Maybe this means the sales people must be as much about support as they are about driving upfront fees…perhaps more so? (See above.)

Food for thought. In the meantime, I’m waiting for the United States to allow me to donate to my favorite corporate charities.

Can I get a write-off for buying Microsoft Office?

One article that I found particularly interesting is the case study on The Christian Science Monitor. I know Curtis Edge (CIO) and Terry Barbounis (CTO) pretty well, as they use my employer’s software. But I didn’t realize just how much open source was having an effect on how the organization hires:

“?I need to hire inventors, and I want to be partnered with groups that want to do the same thing. We need a culture that does that,”? Edge says. That’?s why Edge has pushed the use of open source technology at the church, including adopting the Alfresco content management system for the Monitor. He’s also made changes in his IT staff to ensure that the church’s in-house IT culture fits the open source culture. In the past 18 months, he’?s had 60 percent turnover in his IT staff as he changes the culture to a more flexible, entrepreneurial — even creative — approach to technology development.

If I’m an IT administrator or an architect at an enterprise, this is revelatory (pun intended). Instead of hiring people to be mindless drones that point-and-click Microsoft technology, Curtis is looking for bright, creative people to actually mold IT to his organization’s advantage.

Maybe IT does matter, after all….

Further in the article, Curtis provides more insight into their reasons for using open source:

Although Edge is happy to use commercial software for established business practices, such as Oracle Financials for accounting, he does not want to be tied to a specific vendor’s approach for an emerging, core technology like content management. “?When it comes to the Web, we’re still sorting out best practices,”? he says.

Instead, Edge wants the broader collaboration fostered in an open source community. He feels that the open source methodology allows problems and opportunities alike to be identified quickly by people who can do something about them.

“?I like the open source community because anyone at any level can talk,”? Edge says. “I want my developers to talk with other developers, rather than with a help desk or a support organization. There’?s a lot of benefit from a grassroots community figuring out what’s good for everyone.”?

So, reading between the lines somewhat, for the technology that is well-understood and mainstream (meaning, it’s a common need that isn’t going to be much improved by dramatically tailoring it to one’s organization), go with proprietary software. But for those areas where IT really does matter, use open source, because you can tailor it to your advantage.

In short, for IT that doesn’t matter, use Microsoft. For that which does, use open source.

Another way to say this? Open source software is as much about people as it is about software. With proprietary software, you get bits. With open source, you get people and bits. I’ll take the latter any day over the former.