Is open source a threat to traditional CRM vendors?

Two vendors currently dominate the CRM market: Oracle, the largest vendor of on-premise CRM systems, and Salesforce.com, the largest vendor of on-demand CRM services. What those two applications have in common is that they’re proprietary; the software code is owned by the vendor and kept secret from the users.

Until recently, corporate users haven’t cared, but there’s growing evidence that many companies would prefer to be able to examine, and possibly change, the software code inside their CRM systems.

For example, a recent IDC survey of 515 IT decision makers in Western Europe showed surprisingly high usage of open-source enterprise applications. Nine percent of respondents reported current use of an open-source, back-office application (typically Enterprise Resource Planning, or ERP), while 7 percent of respondents use an open-source CRM application.

Some of these organizations were rather small (as few as 50 employees), but that’s the lower range of the SMB market, which has been the Holy Grail for CRM vendors ever since the large-enterprise market became saturated as the vast majority of firms have committed to a particular product.

Not surprisingly, the survey showed that the main driver behind open-source adoption is cost, specifically the absence of an upfront license payment along with a lower total cost of ownership.

According to open-source CRM vendors, CRM users also value the customization features that allow their CRM implementation to adapt and grow as a company adapts and grows. Because the firm using the software can modify it, the system can more easily adapt to the changing needs of a growing multinational sales team.

On the other hand, the main inhibitor preventing organizations from adopting open-source applications is concerns about the level of software support and the quality of open-source software. That’s particularly true when the firm using the software modifies, raising the concern that the modification might not work, or may require rework, for successive versions of the core system.

The survey results show that open-source adoption in ERP and CRM has reached a critical threshold and should now be on every CRM vendor’s radar screen, particularly for those that compete in the midmarket, according to IDC research director Bo Lykkegaard. "In an enterprise applications market in which large vendors boast a 10 percent market share, adoption rates of 9 percent and 7 percent appear very high," he said.

The trend may this represent a threat to proprietary CRM vendors, such as Oracle and Salesforce.com. The net effect will be price pressure, rather than a war between an open-source community and commercial proponents. "It will all come down to a battle over who can provide the customer with the most ERP or CRM [for the dollar,]" says Lykkegaard.