making a (profitable) business built on open source

MAKING A (PROFITABLE) BUSINESS... BUILT ON OPEN

SOURCEJEFF WALPOLE

CEO, PHASE2 TECHNOLOGY

WHAT I AM TALKING ABOUT• Growing a successful business is hard

• but sustaining a reasonably sized / profit generating business is even harder.

• Right now many of the businesses in our space are “riding the Drupal wave”, operating as specialized implementers of Drupal.

• Shifting to a larger high profit and sustainable business will be hard for many due in part to the intricacies of open source competition and open source productization.

ABOUT MEWho I am:

Almost 20 years in the software / consulting business

Led Phase2 for the last 11 years based upon open source software and services

Who I am not:

I am not a CTO and wont be talking about technical strategies.

I am not a lawyer. I can’t answer “can I do THIS in GPL?”

OUR WORK IN DRUPAL

DRUPAL COMMUNITY

55+ 12 50+ 6Involved Drupal Professionals

Speakers atDrupalCon Denver

Key ModulesMaintained

DistributionsBuilt

open

2Security team

members

STARTING A SERVICES BUSINESS IS EASY.

SCALING IT IS HARD.

The Growth Curve / Scaling -> Sustaining

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 2015

50+ person businesses - self sustaining / high profit

Takes additional things to be scalable AND sustainable.

What are those things?

1-20 person shops - making a living

mainly hourly servicesevery hour spent = a dollar earned

"We build a website" - islands of isolation

your competitive advantage is probably being the ones that "know" Drupal

works for a life style business

20-50 person medium businesses - growing but not (yet) sustaining

Takes a mix of hourly + fixed + retainers

Takes repeat business and strong customer loyalty

Takes some sales (pricing/estimation savvy)

Requires strong project management to succeed

HOW TO SCALE SERVICES:• great sales & marketing

• great recruiting

• infrastructure for efficiency (processes, project management, supporting functions)

• partnering to grow capabilities/business development

• securing larger contracts

• M&A

SUSTAINING TAKES MORE...• reliable/recurring sales & marketing with process

• sustained competitive advantage (vs. a point in time)

• securing long term contracts (e.g. government)

• intellectual property

• passive revenue/ productization

• investment?

CHALLENGES WITH SUSTAINABLE SERVICES

MAKING $ WITH NICHE DRUPAL WAS EASY• cost to develop was low

• cost to recruit/train developers was *relatively* low (at least initially)

• testing is (partially) free

• re-use of our own and others contributions

• community innovation means the community develops and innovates for us

PARADOXES OF DRUPAL COMPETITION• competitive advantage (knowing how it works + being

better than anyone else - and proving it!) is very hard to sustain

• competing is perceived to be bad because open source ethos

• competing is hard because others can copy easily when you "share" in an open model

COMPETITION IN DRUPAL IS CHANGING• more players in the market

• downward pressure on rates & pricing

• more off-shoring and different resource make-up on projects

• greater competition from larger companies/platforms now competing with Drupal (CQ5, Salesforce, etc)

OTHER MACRO THREATS• Adoption is everything - without it our advantage dies

• Talent shortages hurt everyone

• Community dynamics

SO HOW TO SUSTAIN, NOT JUST SCALE?

THE REALITYThe challenges of Drupal and “open source business”

are not really about IP or licensing. Open source is

actually part of the solution, not part of “the problem.”

but so is good old fashioned business strategy.

GROW THE ECOSYSTEM• more businesses at scale

• more businesses figuring out how to create business models around Drupal

• more specialization/ less internal competition among firms

• more varied business models around Drupal

• more Independent Software Vendors (ISVs)

THE IMPORTANCE OF THE ISV• A software ecosystem cannot rely on services companies around

a single product

• ISVs (Independent Software Vendors) provide depth

• ISVs for us (Drupal) could include integrations, platform vendors, add ons, etc.

• Otherwise we are all just Drupal VARs (Value Added Resellers)

HOW DO PRODUCTS HELP?

PRODUCTS ≠ SCALE• building and distributing a product CAN be a way to scale a

Drupal business, IF you change your model to support “product operations”

• Developing a product (or more precisely supporting one) can actually hinder growth of a services company.

• “I am launching a product, so that we can grow revenue” is a common but uninformed opinion on pure Drupal

PRODUCTS ≠ SCALE• Plenty of services businesses also scale: large-scale

consulting firms, hosting providers, and many in the software space scale without products

• Products can produce passive revenue (see above re: business models) and be helpful for sustainability, but are not the only way to “scale”

HOW OS CHALLENGES PRODUCTIZATION• You build an open source product and distribute it.

• The market uses it, demands features, requests releases.

• “Selling it” can be undone by any buyer who then distributes it for free.

• “Selling services around it” is not productization.

DISTRIBUTIONS ≠PRODUCTS

• Re-use

• Standardization

• Interoperability

• Use case targeting

• Building blocks for other models

BUT THEY ALLOW FOR...

DISTRIBUTIONS DON’T ALLOW IP CONTROL. SO THEY ARE...

• marketing (for everyone)

• lead gen and marketing for the creator/ maintainer

• platforms for more sophisticated services/ tie-ins

• better platforms for application stacks

• could allow for support models

OPEN SOURCE BUSINESS MODELS

SERVICE(ISH)Model Examples

Consulting and Implementation (e.g. professional services) Every “Drupal shop” out there

Documentation and training Redhat, Build-a-Module, Drupalize.me

Support retainers & subscriptions Acquia, Redhat

PRODUCT(ISH)Model Examples

FreemiumAlfresco, EZ Publish

Dual licensing JBoss, MySQL

Distributions Commons, OpenPublish, Atrium

INTEGRATIONSModel Examples

Add-ons (apps/plugins/themes) Wordpress, EzPublish

External Product Integration cloud services, Drupal Commerce

Application bundles (stacks) Redhat OpenShift

WHICH ONES WORK FOR DRUPAL?

Competitive/Legal Feasibility

Low Barriers to Entry High Barriers to Entry

potential

Freemium

Dual Licensing

Distributions

Add-ons & Plug-ins

not recommended

Product Integration

Application bundles (stacks)

where we started where to focus

Support Retainers/

Subscriptions

Consulting and Implementation

Documentation & Training

Complexity

High Feasibility

Low Feasibility

SO WHAT’S THE ANSWER? Ask yourself whether you are willing to invest in products. That investment requires a different approach to product building, product management, community management, market matching, and continued, sustained investment. It also requires an excellent idea for a product that people need.

IF YOU ARE WILLING TO INVEST...• first leverage Drupal’s popularity for lead generation

• master services / deliver them successfully

• corner specific Drupal niches for competitive advantage

• invest in building discipline to help you realize revenue on that

• add something to the product that creates passive revenue

• bundle support, documentation or training for it

• create a distribution, package or integrated product from it

IF YOU ARE NOT WILLING TO INVEST...

• first leverage Drupal’s popularity for lead generation

• master services / deliver them successfully

• corner specific Drupal niches for competitive advantage

• invest in packaging your services, automating aspects of them, or finding ways to build greater margin in them

• use increased margin to re-invest in more process and automation

...that doesn’t mean an unsustainable business. Instead...

AND IF YOU’RE BORED...

SUMMING IT UP

DRUPAL IS MORE THAN A CODE BASE.

IT HAS A GIGANTIC USER BASE; A POWERFUL BRAND;

TOOLS & RESOURCES THAT CAN DRIVE DOWN COSTS AND DRIVE UP REVENUE

WE HAVE DRUPAL. HOW CAN WE START USING IT AS A TOOL TO

BUILD NEW LINES OF BUSINESS? NOT JUST A TOOL FOR BUILDING OUR WEB SITES.

CHANGE THE OUTLOOK:LET’S STOP THINKING ABOUT DRUPAL AS A CODING

PLATFORM WE “USE” AND START THINKING ABOUT IT AS A BUSINESS PLATFORM WE LEVERAGE.

THANKS! QUESTIONS?

JEFF WALPOLEjwalpole@phase2technology.com

t: @jeffwalpole

www.linkedin.com/in/jeffwalpole

phase2technology.com@phase2tech