OpenERP Solves Open Source’s Vexing Problem: Making Money

Belgian open source application vendor OpenERP has set up its first overseas business office in San Jose, Calif. Traditionally, the company has worked with reseller partners in the United States and 54 other countries worldwide.

After four years, though, OpenERP has begun an aggressive expansion.

It plans to have 1,000 partners around the world by the end of 2011.

OpenERP’s apparent success is perhaps due to an unusual business model that rewards partners well, offers only one version of the software for both on-premise and Software as a Service (SaaS) delivery, and gives back to members of the community by incorporating their modifications into the core application.

Traditionally, open source software companies make money in one of two ways: They release a light, open source version of their product for free and sell closed-source versions with additional modules; or they offer an open source version for free and a paid enterprise edition version that has some different features, and provide bug fixes only for the enterprise edition.

So, what do you do if you believe open source software should be free with no strings attached? Fabien Pinckaers, CEO of OpenERP, tried different approaches for four years before he came up with an answer: have enough customers and channel partners to ensure growth and put in place a good system of management.

About OpenERP

OpenERP provides its open source software for free under the AGPL license, either on-premise or in Software as a Service mode. It makes its money off four things: Maintenance contracts, charges for hosting the SaaS version, bug fixes and software migrations.

There is only one version of the software, so the code is 100 percent reused. Further, OpenERP encourages customers to upload any industry- or business-specific enhancements they have made so that these can be fed into the core of the next version of the application.

Customers in more than 50 countries download OpenERP in more than 22 languages over 1,000 times a day.

Pulling the Pieces Together

In 2004, while he was still in college, Pinckaers perceived a big gap in the market and decided to start his own open source ERP software development company.

“I started with 3,000 euros (US$4,180) and had only two employees at this time,” Pinckaers told LinuxInsider. To keep the business afloat, he sought implementation projects for his fledgling application. Pinckaers was picky about these projects. “We always took projects that let us make the product evolve as a complete ERP package,” he said. “We refused a lot of projects simply because they were too customer-specific.”

At the same time, Pinckaers was refining his business model. “I tried several sources of revenue before arriving at the current model, which is very strong but difficult to put in place because it requires a mature product and a strong partner network,” he said.

Doing Business the OpenERP Way

Pinckaers channeled more than 50 percent of OpenERP’s revenues into research and development to build a mature ERP product. Meanwhile, he was setting up customer communities and channel partners around the world. Channel partners get 90 percent of the revenue from all their implementation projects.

Is 10 percent enough to sustain OpenERP?

“We have a lot of customers around the world — our software gets downloaded more than 1,000 times a day,” company COO Marc Laporte pointed out. Once the implementation project is completed, partners sell the customers OpenERP’s maintenance warranty, which provides long-term recurring revenue, he told LinuxInsider.

OpenERP built a strong community by taking modifications customers submitted through the community, certifying them, and then rolling them out as new modules for its core application. The customer’s reward is that their customized versions are automatically upgraded when a new version of the core product is rolled out.

OpenERP now offers sales, CRM project management, financial management, human resources, and warehouse management.

“The company appears to have a unique approach to the way it integrates customers and partners into a community that collaboratively develops modules and shares in the windfall,” Al Hilwa, a research director at IDC, told LinuxInsider.

“I suspect its success stems from the uniqueness of its business model and its ability to meet the gap in the market well — most ERP buyers have essentially made a decision to buy rather than build, so they rarely like to get involved in deep function development,” Hilwa said.

Harvest Time

Pinckaers’ approach seems to have paid off, with OpenERP growing by 100 percent annually every year for the past four years.

In March, Pinckaers sought outside funding, raising 3 million euros ($4.18 million) from European investors. By then, the company was already profitable, and the funds will let it steer away from implementation and focus on maintenance and its SaaS offering.

“To succeed as an open source software publisher, you need to reach the critical mass of customers and partners, and you need a mature product,” Pinckaers said. “Most of the open source ERP publishers, such as Compiere and Openbravo, who raised funds too early, are nearly dead.”

“Our current challenge is to grow efficiently while keeping our current productivity,” Pinckaers said. The company will now focus on building up its partner network worldwide.

1 Comment

  • Re:

    "Most of the open source ERP publishers, such as Compiere and Openbravo, who raised funds too early, are nearly dead."…

    Sad. Perhaps this trash talk is spillover from the toxic U.S. mid-term elections?

    I can’t speak for Compiere, but re: Openbravo I will quote Mark Twain with a smile:

    "The reports of my death are greatly exaggerated."

    – John Fandl, Openbravo Product Strategy Director

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