July 2007

"In the past, innovation was defined largely by creativity and the development of new ideas. Today the term encompasses coordinated projects directed toward honing these ideas and converting them into developments that boost the bottom line."

Howard Smith, Computer Sciences Corporation

Ottawa has become a source of a rich set of knowledge on all aspects of open source. Over the past two years, there has been a focused, collaborative effort between industry and academia to explore and understand the business of open source. This joint research examined the dynamics and value propositions surrounding open source and explored the non-cost values such as structure, metrics, applicability and transformation challenges. One conclusion is clear: open source is a powerful, new, competitive tool that can be leveraged by companies to appropriate value.

Several key insights have emerged. One insight is that open source is a viable competitive business tool. This is opposed to the prevailing industry perspective that open source is merely about free software and that company interactions with open source projects are limited to decreasing development costs and shortening time to market.

Five Stage Model

Work during 2006 examined companies' interactions with open source projects and developed a unique perspective around value creation and value appropriation opportunities. This resulted in the creation of a Maturity Model that explains much of the dynamics between companies and open source projects.

This 5 stage model (see Figure 1) characterized both the engineering centric behaviour of companies that leverage open source as well as the strategic business approach that enables more mature players to appropriate higher value.

Figure 1: Profits from each level of interaction with open source projects
Figure 1

Stage 1-Use: This stage focuses on development efficiency. At the most basic level a company leverages existing open source projects to reduce development time and costs. In other words, the company is a user of open source; its employees use F/LOSS (Free/Libre Open Source Software) and the open source community is neither harmed nor helped by the company. While the company wraps up its own value around F/LOSS, it provides no or little competitive value.

Higher levels (stage 2 and 3) of maturity result in contribution or even leadership of open source projects in order to accelerate this R&D effectiveness value.

Stage 2-Contribute: This stage occurs when the company moves beyond passive user to collaborator. Managers begin to contribute code to and/or fund the open source project. This benefits the community and enhances the software distribution. However, there is a very narrow business focus, little rivalry, and a loose company-community coupling.

Stage 3-Champion: At this stage executives provide support and a known leader to champion the development of the open source project. The community benefits from the company's activities and vice versa. The company proactively selects and manages an ecosystem anchored on F/LOSS to attain business goals.

Real profits and competitive differentiation can be achieved at stages 4 and 5 of maturity when a company shifts its focus from efficiency to value appropriation and a more strategic interaction with the market and value chain.

Stage 4-Collaborate: The company has now become an open source strategist. Executives identify a position within the ecosystem, define a business model that relies on F/LOSS, and then release code, fund efforts, and exert influence to attain the company's business goals. The community benefits from customer driven resources to produce new versions of software. The company obtains a competitive advantage by changing the environment. Competitive value and proprietary value are coupled with business strategy.

Stage 5-Redefine: This is the most aggressive stage where executives invest in programs and tools to design products relying on F/LOSS projects. The community benefits as it can exploit linkages across F/LOSS projects. The company gains a significant competitive advantage by harnessing changes in multiple ecosystems.

At this stage, the company changes its position in the value chain; for example, a company can shift to a service business model from a product business model.

Lessons Learned

The academic analysis provided data for a number of cases that reinforced the potential competitive leverage that can be achieved via open source. The behaviour of a company and decision authority around open source determines the value that can be appropriated.

Some of the lessons learned dispelled some of the popularly held myths around open source, including those that questioned the quality of the software, the motivation of the contributors, the viability of commercialization, and the legal risk of using open source. They also confirmed the value of an ecosystem to maximize the appropriation of value. Some of the key lessons were that:

  • the ability to appropriate co-created value is more important than lowering costs
  • F/LOSS is about a competitive environment, not a free environment
  • the customer's experience with F/LOSS is a key driver
  • a company needs to scale up the ecosystem in order to co-create value

The research also identified several insights into the challenges of incorporating open source into a company's business model:

  • the need for internal structural changes
  • the effort required to growing and managing ecosystems and the couplings with the company
  • the ability to keep up with worldwide innovation due to the global nature of open source communities
  • managing the unknown of adoption by mainstream customers
  • managing the unknown of company adaptation to value co-creation, new business models, and a scaling ecosystem

Although open source is popularly associated with software, the collaboration achieved by open source extends beyond software into content, hardware, process, and science domains. Collaborative design and development is increasingly becoming a force in the marketplace, so understanding the dynamics is important. This is a relatively new frontier that is the subject of new research.

Ottawa is growing its Center of Excellence for exploring, leveraging and commercializing open source. The state of knowledge for key open source topics has been described in a number of public sessions dedicated to this topic. The Talent First Network in collaboration with industry leaders, open source foundations, and the Ottawa Centre for Research and Innovation (OCRI) has delivered four focused events addressing how open source provides competitive advantages, open source licenses, the ways businesses use open source to create value for their customers, and methods to deliver clean intellectual property.

There are a number of master's theses on the subject of Competing with Open Source completed by students of the Technology Innovation Management program at Carleton University that provide further details on various dimensions of the open source domain.

Recognizing that we have only scratched the surface of the business of open source, new programs, such as the Talent First Network (described in a subsequent article) are filling gaps in skills, knowledge, tools, and processes that will continue to build on the momentum the joint industry-university started in late 2005.

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