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Archive for May 18th, 2009

Government procurement and open source

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ZDNet’s Dana Blankenhorn did a post recently about potential changes in the European Union’s procurement process for software – Will European rules impact open source business models? This is an interesting topic.

NOiV, the Dutch national resource center on open source has identified some of the issues in the current procurement process. Rishab Aiyer Ghosh from the United Nations University created a good presentation on the topic: OSOR Guideline on Public Procurement and Open Source Software In it he lists several problems with the current processes including tenders requesting a specific vendor’s technology.

One problem not listed is the cost of tendering. The tendering process is long and expensive for a vendor, in many cases it involves filling out huge RFPs and flying people in to sell and ‘hand-hold’. If you tender for a government project and don’t get the deal, you have to recoup the money you wasted from somewhere else. What governments don’t realize is that when they buy proprietary software the money is recouped from them. All proprietary software companies build the cost of these failed sales attempts into their license fee. As a consumer you are not only paying for the cost of selling to you, you are also paying for a percentage of the cost of failed sales.

Governments are interested in using more open source and commercial open source software because they are expecting a cost reduction. The problem is that they do not seem to understand where this cost reduction comes from.

When you compare proprietary and open source software:

  • Proprietary software has an up-front license fee. The revenue from new licenses is mainly used for sales and marketing expenses. Typically sales and marketing expenses are about 70-100% of the license revenue. In other words the license fee pays for the cost of selling software to the consumers.
  • Commercial open source (whether pure-services, open-core, or gatherer model) does not have an up-front license fee. With these models the openness, transparency, and distribution mechanisms enable a mass-marketing or no-marketing approach to be used. The basis for this is that the consumer is able to prove to their satisfaction that the software does what they need – they don’t need anyone to sell the software to them.

According to the European Union procurement directives, any paid services related to software need to go through their tender processes. So any commercial open source company tendering is expected to undergo this expensive process. But open source and commercial open source software has no license fee, so there is nowhere to bury this cost.

This creates a illogical system. Governments want a cheaper product but have a process that is still expensive to participate in. It’s like asking for a cheap 5-star hotel. Either:

  • You want the vendors to hand-hold and nurse you through the tendering process and will accept that they are going to charge you for this.
  • You want a lower priced product and are willing to participate in a process where you prove that the software does what you need.

You cannot have it both ways.


Written by James

May 18, 2009 at 8:41 pm