Cost-Conscious Companies Turn to Open-Source Software

As the recession puts pressure on tech spending, many companies are turning to open-source software to handle more IT tasks

By Rachael King

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After the tech bubble burst, E*Trade's technology chief, Lee Thompson, needed to find a way to do more with less. In 2001 and 2002, the online stock trading company shrank its tech budget by one-third. "We had to go through and figure out every penny that we were spending…and make alternatives to reduce those costs," says Thompson, vice-president and chief technologist of E*Trade (ETFC). So he began using software that can be downloaded at no cost via the Internet. By the end of 2002, he was saving $13 million a year thanks to use of these freely available applications known as open-source software, and the fact that he could run that software on less expensive hardware .

It's 2001 all over again. With the economy in a tailspin, companies once again are under pressure to cut IT costs (BusinessWeek, 11/13/08). Growth in U.S. tech spending may contract to 0.9% in 2009, according to market researcher IDC. The end of 2008 looks particularly bleak, according to an October survey by ChangeWave Research, which noted the sharpest decline for corporate software on record. About 40% of the 1,841 corporate software purchasers surveyed said their companies would spend less on software in the coming 90 days.

Budget Cuts Spur Interest

The tightening of the purse strings is causing some companies to step up use of open-source software. "Budgets are being cut, and some companies are looking at opportunities to use open source more in the enterprise,"says Matt Aslett, an analyst at consulting firm 451 Group. While open-source software is already widely used to help businesses run their servers and database management systems, it's gaining wider acceptance in such areas as collaboration, customer relationship management, and supply chain management.

A resurgence of interest in open-source software bodes well for the companies that have invested in its development but at times have struggled to make money from it. Open-source vendors typically generate revenue from helping maintain or adding features to software that's otherwise available for free.

SugarCRM, a 4½-year-old company that offers both free and subscription-based open-source customer relationship management software (BusinessWeek SmallBiz, 4/16/08)>, posted record revenue in the third quarter. Because it's not publicly traded, the company doesn't disclose exact figures, but it now counts 4,000 paying customers, including H&R Block (HRB), Men's Wearhouse (MW), and Japan's Shinsei Bank. "We're obviously not excited about a global recession but if we're going to have one, I'd rather be a commercial open-source company rather than a proprietary one," says SugarCRM CEO John Roberts, who says he's seeing larger deals.

Other commercial open-source vendors that have clocked record quarters include Digium, which sells small business phone systems built from open-source software called Asterisk, and Zenoss, which makes open-source network management software. Digium and Zenoss make money by selling support services as well as extra features that enhance the software, such as high-end security.