Understanding the economic advantages & financial benefits of the enterprise open source format in PLM is important when building a corporate business case for a PLM strategy.
There are a number of factors that your team will want to consider when conducting an evaluation, with two of the most important being the Total Cost of Ownership (TCO) and the Return On Investment (ROI).
After all, the ability to drive agility and improve competitiveness are relative to the economics of the solution. Your company needs to take a hard look at the inherent costs and potential payback in order to justify the investment. That’s just smart business.
Now, there’s a compelling difference in the financial structure of the enterprise open source model used by Aras vs. the conventional up-front user/module license & maintenance model of the other major PLM providers. These business benefits are sometimes lost when all the emphasis is placed on the feature / function aspects of the PLM evaluation.
Thought I’d try to summarize some of the key considerations here and provide some background as well.
Customer’s Business Benefits
Eliminates PLM License Expenses – Removes the up-front capital expense for PLM licenses and the incremental license costs associated with roll-out.
Improves Time-to-Value – The elimination of the sizable initial expenditure on PLM licenses means that the time to positive payback for the PLM solution is much shorter.
Reduces Project Risk – Because the customer no longer has a significant up-front expense the financial risk is reduced and the user and provider are both economically motivated to succeed.
Creates Balanced Relationship – With no licenses to sell and subscription revenue dependent on successful, continued use of the software better alignment is achieved in the relationship.
Validate Before Committing – Instead of spending money to buy PLM licenses before knowing if the solution will work for a specific process or scenario, the company can verify fitness for use before making an organizational commitment.
Fixed Cost Predictability – The optional enterprise subscription cost is fixed over the term providing budget certainty, and does not limit user access so companies can add as many users as needed without restriction or additional cost.
Greater Control & Flexibility – Company has complete freedom to use, customize, integrate and extend the PLM solutions and can share customizations internally or with other companies such as suppliers and outsourced partners.
Cuts Total Cost of Ownership – Eliminating PLM license fees can reduce TCO from 15-38%. The initial start-up costs are decreased and the expansion costs are reduced, substantially for larger scale deployments.
Improves Return On Investment (ROI) – Reduced TCO means that a positive ROI is more quickly and easily attained; the Net Present Value (NPV) of the project is lower and an advantageous Internal Rate of Return (IRR) is more achievable.
Background & Overview
Over the past 10 to 15 years the use of open source software in global corporations has increased dramatically. Starting primarily with the Linux operating system and Apache Web server and expanding to other infrastructure products such as databases and middleware and into all different types of software from email and productivity applications to full scale enterprise business solutions and engineering systems.
Open source software used to be low quality shareware developed by off-hours programmers and students in their spare time, but not anymore. Today, led by IBM, Red Hat, Oracle and even Microsoft, as well as, engineering software providers such as Aras and OpenCFD's OpenFOAM, the software industry is engaging in open source to create high quality software solutions for a variety of purposes.
These days ‘commercial open source’ or ‘enterprise open source’ typically means that a solution is sufficiently robust to compete directly with conventional proprietary offerings on functionality and capabilities, and that there is a company standing behind the solution to provide enterprise-class support and values added services.
As companies around the world increasingly understand the business benefits of open source in addition to the technical advantages, the adoption of open source solutions has expanded significantly. A survey conducted by Accenture in 2010 of 300 large organizations in both the private and public sectors found that 50% of respondents are “fully committed to open source” in their business, that 69% of organizations anticipate increased investment in open source software, and 38% expecting to migrate mission-critical workloads to open source in the next 12 months.
“What we are seeing is the coming of age of open source,” said Paul Daugherty, chief technology architect, Accenture. “Through both our research and our work with clients, we are seeing an increase in demand for open source based on quality, reliability and speed, not just cost savings. This is a significant change from just two years ago when uptake was driven mainly by cost savings. We can expect to see this trend develop as open source continues to evolve and address even more business critical functions.”
A research note by Gartner emphasized that, “Many open-source technologies are mature, stable and well supported. They provide significant opportunities for vendors and users to lower their total cost of ownership and increase returns on investment. Ignoring this will put companies at a serious competitive disadvantage.”
As enterprise open source momentum continues to increase in PLM, it is important to understand how the format works, how it is different from conventional proprietary licensed PLM offerings and what the business benefits and technical advantages are of this approach.
Aras is the leading provider of enterprise open source PLM solutions worldwide, and the following points are specific to understanding the economic benefits of the Aras enterprise open source model.
We are an American corporation that is a for-profit company with a worldwide presence. Our team is comprised of executives and technologists from the other major PLM/PDM companies including Agile/Oracle, Dassault Systèmes, PTC and Siemens PLM Software, as well as, Computer Vision, Eigner+Partner, MatrixOne, Workgroup Technologies and others. Aras personnel typically have 10+ years in PLM/PDM, and have also worked in PLM-related roles at global companies.
Our PLM solutions are freely available for no charge with unlimited user access (no user license costs and no module fees). Companies can download, install, customize and use the Aras PLM solutions forever without any financial obligation to Aras.
We use a Red Hat (NYSE: RHT) business model making money by selling optional subscription packages, consulting services and training. The Aras subscription packages are the equivalent of enterprise software maintenance, albeit, with a number of additional benefits unavailable in traditional maintenance such as no charge for Upgrade Services including solution customizations, free training, discounts on consulting and more.
From a financial perspective, we operate an annuity-based business that drives scalable, recurring revenue and relies on GAAP rules (Generally Accepted Accounting Principles). Aras is a high growth business structured for profitability and cash flow positive operations. The economic efficiencies of our financial model translate directly into the cost benefits achieved by our customers.
- PLM license costs are eliminated
- Improves Time-to-Value / time to achieve positive payback
- The Risk structure is more balanced and there is not a large capital expenditure to start
- Working with a software vendor as a partner, rather than adversarial sales relationship
- Ability to validate the solution will work for intended purpose prior to making an organizational commitment
- Can ramp up usage from small workgroup to large scale user base with a predictable, fixed cost
- Complete control & flexibility on how to use, deploy, customize and integrate the PLM software
- Reduces overall Total Cost of Ownership (TCO) for cost savings and improved Return on Investment (ROI)
For additional reading I recommend checking out a couple pieces that Graham McCall at AESSiS did a while back that concentrate on the cost structure and ROI aspects titled, Cost of Ownership Comparison between Aras and Other PLM Solutions and More Thoughts on the Impact of Diverging PLM Business Models on ROI & Time to Value.
And if after reading this, you’d like to learn more about Aras you can check out the solution functionality, the quality and security of our software and the types of optional services available.
In the end, we believe that companies should validate for themselves. Learn, evaluate, build the business case and test any PLM solution they will use. PLM is part of the strategic foundation of your business. Don’t rely on flashy salesmen and slides. Do your homework, run pilots and make sure the solution and the economics of it will work for your company now and into the future.
What’s your take? Does your company want to continue with the status quo in PLM and keep shouldering the costs and risks? Or are your executives ready for a more advantageous economic model where you control your own destiny and actually attain an ROI?
Fri, Jan 28 2011 3:38 PM
Filed under: Enterprise Software, Open Source, PLM, Aras, PLM Software, enterprise open source software, Economy, PLM Strategy, product lifecycle management, AESSiS, CIO, ROI, TCO, PLM license costs