A new frontier is opening up in the open-source space, where a third wave of software adoption 
is taking root higher up the stack—at the business application layer—and further downmarket, 
where solution providers are best positioned to profit. Emerging open-source business applications
from companies such as SugarCRM, Plone, Compiere, JasperSoft and Pentaho are being adopted even 
more quickly in the midmarket than in the enterprise, where the first two waves of open-source 
adoption—the operating system and infrastructure stacks—got their first blessings from deep-
pocketed Fortune 500 and Wall Street firms. 

This is happening, observers say, because small to midsize companies find open-source applications
affordable compared with proprietary applications from vendors such as Oracle, Siebel and SAP, 
especially when customizing those apps has been out of the financial reach of most midmarket 
customers. 

“The first wave of open-source adoption was the OS, and the second wave was the infrastructure 
stack, but the OS and the infrastructure are commodity layers,” said Larry Augustin, a SugarCRM 
board member and vice president at Medsphere, an open-source ISV in Aliso Viejo, Calif. 
“Applications are expensive. [With open-source applications], I can undercut Siebel and get 
to a market that Siebel has been unable to reach.” 

And numerous service firms have sprung up to capitalize on the wave of open-source business 
application adoption and new partner opportunities cropping up. These include AgileCo, Cignex, 
KnowledgeBlue and Optaros. 

“[Open source] is taking off in midsize companies with up to $1 billion in revenue and for 
applications that require heavy customization,” said Navin Nagiah, CEO of Cignex, a Santa Clara,
Calif.-based consulting partner for SugarCRM and Plone that generated $10 million last year. 

The availability of open-source CRM, ERP, content management and business intelligence 
applications, which all will figure prominently at LinuxWorld Expo in San Francisco this week, 
is changing the game in an already rapidly consolidating business applications market. To date, 
open-source apps have done little to dent the sizable market share and revenue of proprietary 
ISVs. And most remain relatively unknown. Plone, for example, is one of many Web content 
management systems based on the Zope open-source content management project. And Compiere is an 
emerging open-source ERP platform that has gained popularity in Europe as an alternative to SAP 
and Microsoft. 

Still, open-source applications are gaining modest traction and soon should begin to worry 
entrenched players in the proprietary applications market, observers note. Even Microsoft should
be concerned about these open-source applications, sources said, particularly since its Microsoft
Business Solutions unit has not grown as quickly as executives had hoped after the Redmond, 
Wash.-based software giant acquired Great Plains Software five years ago. 

Executives at ZeOmega, which generated $2 million in services revenue building portals for health-
care and insurance companies based on Linux, Zope and Plone, also point out that Microsoft 
Content Management Server (CMS) has not sold as well as expected. “We have a couple customers 
that don’t want to be locked into Microsoft or pay a license fee to Vignette,” said Sathya (Sam)
Rangaswamy, founder and CEO of Frisco, Texas-based ZeOmega. 

KnowledgeBlue wraps services around Compiere for midsize companies in vertical niches. The Salt 
Lake City-based firm sells the software under its OpenBlue private label and makes money by 
offering consulting and integration services and implementing accounting software and customer 
order, payment and contact management software. Founded this year by former IBM and Unisys 
executives, KnowledgeBlue is growing 500 percent quarter over quarter in Microsoft’s sweet spot—
small to midsize enterprises with revenue between $500 million and $2 billion, said Robert Kunz,
CEO of the company. 

These new open-source offerings are giving commercial software vendors “a run for their money,” 
said Chris Maresca, a principal at Olliance Consulting, an open-source consultancy in Palo Alto, 
Calif. “This area represents a huge opportunity, as traditional enterprise applications carry 
enterprise price tags.” 

Last week at the O’Reilly Open Source Conference, Intel, SpikeSource and Carnegie-Mellon 
University announced a Business Readiness Rating System for open-source software. This week at 
LinuxWorld Expo, the spotlight will shine on open-source business applications and the strategic
partnerships around them. 

At the conference, for example, SugarCRM, which targeted SMB customers with its first product, 
plans to announce an enterprise version of Sugar Suite, as well as new partnerships with JBoss 
and SpikeSource, a services firm that certifies “Linux + Apache + MySQL + PHP/Perl/Python” (LAMP)
open-source infrastructure stacks for customers. SugarCRM launched a two-tiered channel program
in February. 

And Novell will announce at the expo a partnership with Pentaho. As part of the deal, the open-
source business intelligence company will participate in Novell’s MarketStart incubation program,
one Pentaho source said. 

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.” 

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. 

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.”

Source:http://www.crn.com/sections/coverstory/coverstory.jhtml?articleId=167600266&pgno=11