Managing the Open Source vs. Proprietary Decision

In their new book, The Comingled Code, HBS professor Josh Lerner and London School of Economics professor Mark Schankerman look at the impact of open source software on economic development. Our book excerpt discusses implications for managers.
by Josh Lerner & Mark Schankerman

Editor's note: In their new book, The Comingled Code: Open Source and Economic Development, HBS professor Josh Lerner and London School of Economics professor Mark Schankerman look at the impact of open source software on economic development, as well as the resulting policy and management implications. In this excerpt, they discuss how corporate managers should consider the interaction of open source and proprietary on software they develop and use.

Implications For Corporate Managers

Be sensitive to the lack of a ''right'' answer. There is no reason to expect different firms to make the same choices in terms of open source and proprietary software. There is no simple ranking of open source and proprietary software, either in terms of the full costs of adoption or the quality of the software. The basic reason is that open source and commercial software pose different trade-offs in terms of costs and quality, and companies are heterogeneous. These users do not all attach the same weights to the different dimensions of cost and quality.

Moreover the trade-offs regarding the various dimensions of cost and quality, and the weights that users attach to them, are likely to depend on the particular task for which software is needed, so the same user could make different choices about which software to use.

The appropriate mixture between open and proprietary software will vary with the company's circumstances.

When considering the costs and benefits of open source and proprietary software, approach the received wisdom with caution. Our survey of firms regarding the costs of different types of software suggests that some of the commonly accepted patterns about the differences in costs and benefits between these two types of software do not hold. For instance, the relative differences in the cost components are not as sharply different as we would have assumed. Therefore it is important to do a precise analysis adapted to each specific case.

The appropriate mixture between open and proprietary software will vary with the company's circumstances. Our survey suggested a number of patterns that drive firms to engage in open source development. For instance, not surprisingly, larger firms were much more likely to engage in some open source activity than either small- or medium-sized companies but less likely to specialize in open source. Similarly companies that work on customized software, bundled software, and (to a lesser extent) support services are significantly more likely to engage in some open source than pure software developers. Synergies are likely to make it more attractive to combine open source with some business models than others.

The appropriate mixture between open and proprietary software will vary with the stage of development of the nation in which the company is based.

Our survey showed that the relative importance of the initial cost of the software and what we term complementary costs—those involving the costs of switching, assuring interoperability, support and upgrades—vary with the level of national economic development. We find that the initial cost of software is relatively more important in less wealthy countries than in middle-income countries, and at the same time more important in middle-income than in high-income countries.

Meanwhile the complementary costs grow in importance in wealthier nations. Remember not to confuse vertical and horizontal differentiation. As we highlighted in chapter 5, there are really two kinds of quality differences: vertical differentiation, where one product clearly dominates the other (the BMW vs. the Yugo, in our example) and horizontal differentiation, where different consumers with different needs would choose different options (the Yugo and the pickup truck). The vast majority of instances in software involve horizontal differences, where different customers will make different choices. As a result coexistence between open source and proprietary software is the rule rather than the exception.

Managers must make choices with a keen eye to their target audience and awareness that no one product is unlikely to satisfy all users. Mixing is the rule, not the exception. We observe that users extensively mix the two types of software, and that this pattern held in all the countries we studied. Moreover the extent to which open source is used and the degree of mixing between open source and proprietary software both depend on user characteristics, in ways that are consistent with economic principles. Companies should see the use of open source and proprietary software not as an either-or decision, as it is so often depicted in the literature, but as a continuum.

    • Joel
    • Consultant, Open Solutions Consulting
    I like this article because it provides some insight for decision makers beyond the argument that open source is free. I am a little disappointed that there was no mention of one of the key reasons for using open source which is 'control'.

    The London Stock Exchange recently bought an open source company that developed an application for the exchange in lieu of a Microsoft solution because purchasing the entire company was half the price of the large vendor solution. One of the main reasons behind this decision is that they could create and deploy fixes at a pace which was aligned with their business needs, and not have to wait for a large vendor to produce a patch or a full release based on their own internal business practices.

    For similar 'control' reasons the Chinese government sponsored the development of Red Flag linux to replace the large vendor solution that was currently deployed by the government.

    Open source removes control from the vendor and gives it to the purchaser because with open source the purchaser owns the rights to the code. Also, if the original developer's support costs are too high it is much easier to switch to another vendor to provide support than with a proprietary code base thus encouraging healthy competition in the market.

    Currently, the US Federal Government is deploying numerous web-sites (including using an open source content management system called Drupal for many of the same reasons as listed above.

    With the 'control' that open source affords do come some economies such as buy once, deploy many. For example, picture a government specific application that is developed for one Department and then just given to other agencies that require the same software as opposed to each agency buying separate copies/licenses from an ISV. This is a nightmare that I am sure keeps Steve Balmer up at night.
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    An acceptable Open-source Software (OS) generally complies with the following criteria:
    i. Free Redistribution.
    2. Includes Source Code, the preferred form in which a programmer could modify the program OS must not allow deliberately obfuscated source code.
    3. Derived Works
    OS license allows modifications nd derived works and allows them to be distributed under the same terms as the license of the original software.
    4. Integrity of the Author's Source Code
    OS license explicitly permits distribution of software built from modified source code.
    5. No discrimination against persons or groups
    6. No discrimination against fields of endeavor
    7. Distribution of license
    The rights attached to the program apply to all to whom the program is distributed without the need for execution of an additional license by those parties.
    8. License is not specific to a product
    9. License does not restrict other software.
    10.License is technology-neutral.
    In view of the operational flexibility of an OS software, it would generally be preferred. However, companies would examine other aspects such as the requirement, standard of performance and cost before adopting a software.The proportion of open to proprietory software will vary from company to company. And, the advantages of OS software notwithstanding, decision to adopt a software must primarily be taken on need-based basis.