The 451 Group believes that enterprise software vendors can no longer afford to ignore open source. It is a powerful force of change with both upside and downside potential. In the worst-case scenario, open source can do severe damage -- to licensing schemes and to legal definitions of intellectual property -- if used improperly. The potential benefits, however, are also massive -- making it important to clearly understand the critical path to finding upside in the commercial adoption of open source. Plus, as the lines between what is "open" and what is proprietary blur, licensing models will increasingly contain hybrid approaches to code ownership and permitted use -- meaning that nearly every piece of enterprise software will eventually contain open source elements.

These findings are contained in a report released today by New York-based The 451 Group, a technology industry analyst company focused on the business of enterprise IT innovation. This report provides analysis of the market opportunity for companies that are building or investing in open source technology, or are using it in the software they deliver to enterprise organizations.

"Potential adopters of open source software -- whether investors, established software vendors, entrepreneurs or enterprise IT organizations -- must weigh the risk and burden that open source imposes, in terms of choosing the right license, effectively managing communities of open source developers, assigning liability and other considerations, against the potential benefits of exploiting this development resource," said Martin Schneider, Business Applications software analyst at The 451 Group.

The 451 Group has found that software vendors, enterprise IT managers and investors all face four common obstacles to adoption of open source software, which are:

• Software quality (or the lack of it).

• Availability of commercial-grade support.

• Deliberately disseminated fear, uncertainty and doubt.

• Confusion related to different license regimes.

"Software vendors and investors can gain a sound competitive edge by exploiting open source business strategies - but too often the pragmatic benefits of development and dissemination of the software are obscured by irrational fears rooted in outdated ideological battles," said Schneider. "Since open source projects encompass every sector of the enterprise software industry, any vendor that isn't aware of the strengths and weaknesses of open source efforts that affect its products is placing itself at significant risk or may be missing out on a tremendous growth opportunity. Moreover, both enterprises and vendors alike will increasingly run across open source code in software that is proprietary -- making it impossible to develop infrastructure tools and applications without open source elements as part of a hybrid approach."

451 analysts believe that the successful commercial adoption of open source strategies is likely to require technical, cultural, legal and commercial changes. Open source approaches are being adopted most readily where prevailing organizational culture is most amenable to it -- a vendor that is already generous about revealing its code, or a company with a large proportion of open source contributors on its programming team, for example.

The 451 Group found that risks and benefits also exist for investors and venture capital firms considering or actively participating in investments in open-source-based technologies. Standard assumptions about valuations, revenue models and business plans will need to be reassessed before pursuing investments. And soon all software companies will have an open source element in their business plans. When that happens, the distinction between open source and traditional companies will blur -- as part of an overall trend toward hybridization that The 451 Group believes is occurring -- and the novelty of investing in open source models won't be so evident.

"There is an opportunity for VCs to alter the way they operate. VCs should look for talented technical groups that are doing good work and proactively approach them about forming a company with funding. The rest of the open source community will be doing many aspects of due diligence for free," said Schneider. "VCs must also identify what they believe the real, core asset is in an open source software vendor. When the software is being offered at varying degrees of 'openness,' core value-add and revenue streams can be very different than at a traditional enterprise software vendor."

These findings are contained in a 451 Special Report titled "Cashing in on open source software." This report was led by Rachel Chalmers, senior analyst of Enterprise Software, with support from Schneider and John Abbott, chief analyst. The 119-page report examines the decisions that enterprises and vendors need to make when choosing whether to incorporate an open source approach into their businesses. It discusses how investors should view the use of open source in potential investment targets and how open source affects the value of and risk associated with investments made in this area. Fifteen case studies yield a considerable amount of actionable advice for other organizations considering adopting similar strategies.

The report includes 15 in-depth case studies of companies that are building or investing in open source technology, or are using it in the software they deliver, including the following companies (although this is not a complete list of companies covered in various sections of the report): Compiere, Dresdner Kleinwort Wasserstein, eBay, IBM, Independence Air, Index Ventures, Iona Technologies, JBoss, Microsoft, MySQL, Novell, Rustic Canyon Partners, Sevin Rosen Funds, SugarCRM and Sun Microsystems.