How to Value Open-Source Software

Open-source software is a type of software that is distributed in its source code to allow individuals or developers under an open-source license to read, use, study, change and modify the software. It is often developed in a public manner to allow the addition of its source code by anyone. But, did you know that open-source software can be valued? In this article, we discuss the concept of open-source software including its working, pros and cons as well as understand how to value it.

Open source software

Before we go on and discuss open-source software valuation, let’s first dig deeper into the concept of open-source software itself. What is open source? Open source refers to a promulgation philosophy, which offers its users complete access to the code or blueprint of a particular program which allows them to read, study, alter and modify the software. Well-known examples of open-source software are the Linux operating system, Mozilla Firefox web browser, and VLC player. Thus, open-source software may be defined as a program that grants its users the freedom to view, alter or add to its source code, and use it for any purpose. The valuation of open-source software is extremely important, which will be discussed later in this article.

What is open-source software?

Open-source software is a particular type of software that is developed in an open manner and distributed in its source code. The source code is therefore available for anyone to read, study and even change it. Open-source software is often made publicly accessible so that people can voluntarily contribute to the source code and make changes. As a result, a piece of software which is derived from publicly accessible source code is deemed to be open-source by definition.

How does open-source software work?

Open-source software is typically shared publicly and kept in a public repository. In order to develop and modify software that is open-source, anybody with access to the repository is allowed to read, study and change the source code. The source code of open-source software is in a very well-organized and standardized format so that developers can easily read, understand and modify the code by themselves. In this regard, the working model of open-source software is very similar to any other software, other than the fact that it is available for anyone to study, modify and develop.

Pros and cons of open-source software

Now that you have a fair idea of what open-source software is, let’s discuss some of its main pros and cons. Here are a few pros of open-source software:

Pros

• Cost-efficient – Open-source software is much cheaper than proprietary software, although it depends on the specific situation. In most cases, open-source costs less and are better than proprietary products. With open-source software, there are no hidden fees, no licensing fees and no subscriptions, which makes it cost-efficient.
• Flexibility – Open-source software allows users the power to alter source code, add content and even change the philosophy of the product. This feature helps in the experimentation and improvement of a particular open-source product. Thus, you can customize the product as per your specifications.
• Scalability – In the case of open-source software, you can add or remove modules of the system and make changes to the different parts of the system. This keeps your open-source software scalable, adaptable and dynamic.

Cons

• Security – The biggest disadvantage of open-source software is that it could be very difficult to secure and maintain the quality of such systems. The reason is that there are a number of developers who are making alterations within the system, which could lead to security breaches in the future.
• Maintenance – As there is no strong authority to maintain the code of open-source systems, it can be difficult to monitor the progress of such systems. In some cases, there could be bugs and errors within the code, therefore it could be difficult to fix such problems.
• Support – The open-source software is generally developed by successive groups of its users in a public manner, which means that there is no central support centre to provide technical support. It can be difficult to resolve issues with such systems as there is no single authority to follow up on the problems.

Benefits of open-source software for businesses

Open-source software can be a powerful tool for businesses when it comes to improving the quality of their systems and products. Let’s take a look at some of the main benefits of open-source software:

• Prototype-led ability – The main advantage that open-source software provides is its ability to prototype with the help of third parties. Since your prototype will highlight the areas in which your thinking is faulty, being prototype-led enables you to develop solutions which are a far good fit for your business challenges.
• Replaced vendors – Open-source software enables you to avoid vendor lock-in, which means that it gives you the freedom to choose your third-party vendors as well as switch them away if there is a problem with a particular vendor. This feature of open-source software can help you in reducing your costs as well as avoid vendor lock-in.
• For the community, by the community – A community-enabling culture, which encourages user groups with fresh ideas, is another source of inspiration for open-source software. The fact that open-source software is developed by a community of users can help in making your organization a community-oriented one.

Example of open-source software

There is a lot of open-source software which is considered to be in high demand right now. One of the most famous open-source software is Linux and its underlying kernel, GNU Linux, runs on millions of computers around the world today. The Mozilla project is also another example of open-source software that has been adopted by millions around the world.

Open-source software is a powerful tool to bring fresh ideas to your organization as it is developed by a community of people who are constantly sharing their ideas with each other. While the pros and cons of using open-source software are many, you can use it effectively if you mastermind the overall development in such a way that you keep your product’s target audience at the forefront. Other examples of open-source software are VLC media player, SugarCRM, VNC, Apache web server, LibreOffice, and jQuery.

How can a company create value with open-source software?

Well, there are a number of factors that can be taken into consideration for open-source software valuation. Let’s take a look at some of those factors that can help create value with open-source software:

• Always check compliances and security threads – A common mistake that a lot of organizations make is to overlook security and compliances when they are looking for a new piece of software. It’s important to check whether the open-source software is compliant with the various security standards and compliances, before going ahead with the deal.
• Carefully license considerations – There are a number of licensing models available for open-source software, which should be taken into consideration before deciding on them. In this regard, you need to check both the licensing model as well as its underlying effects on the overall functionality.
• Use automation – Companies can use open-source software to automate their tasks, however, you should use it only when it’s appropriate for your specific business domain. The right use of open-source software can enable you to increase your speed of work and productivity while lowering your overall costs as well.
• Be protective – You should always be aware of the fact that open-source software could be highly vulnerable to attacks, therefore, you should always be careful in choosing such systems. If you are using open-source software within your organization, then it is essential to have proper backup systems in place to avoid any major harm in case there is a security breach within such software.
• Continuous monitoring – Keeping a constant check on the quality of open-source software is very important for its longevity within the organization. Therefore, it is essential to perform regular checks on such software to ensure that it’s able to deliver the required functionality without any issues.

How to value open-source software?

Now that we have understood why companies should value open-source software, it’s time to take a look at the various ways in which you can value such software. In general, there are three methods you can use to value open-source software. Based on the expected profit, the number of users, as well as the complexity of the software, you can value open-source software. Below mentioned are some common methods using which you can value open-source software:

Methods to value open source software

The following are some of the common methods that can be used to value open-source software:

• Income-based approach – The income-based approach is one of the most common valuation methods for open-source software. Based on the analysis of future profits, projected cashflows, or cost savings, the company can decide on an appropriate value for such software. Basically, the future cash flows are discounted using a discount rate, which results in terms of a present value. The present value is the actual value of open-source software for the company.
• Cost-based approach – The cost-based approach is another common method to value open-source software. According to the cost technique, which is based on the replacement concept, value is based on the anticipated price for replacing the software with a version with equal capabilities. There are two different kinds of costs: replacement costs, which evaluate value as the price of replicating the functionality of the software, and reproduction costs, which evaluate worth as the price of recreating an exact duplicate of the software.
• Market-based approach – The market-based approach is yet another method that can be used to value open-source software. According to this, the company can evaluate the worth of open-source software by comparing it with the value of similar software that is available in the market. It can also be determined by using a benchmarking method, which might be based on factors like support costs, productivity gains, or process improvements. As a result, the open-source software can be worth the same amount as what other similar software is actually priced at under a market-based approach.

Get A Software Valuation From Eqvista!

Taking the right steps towards the usage of open-source software can help you to make your organization a more productive and efficient one. But, valuing open-source software can be a bit tricky because of its unique nature of being open-source software. Well, Eqvista is here to help you with that!

Eqvista provides a powerful open-source software valuation tool which helps organizations to estimate the value of the software in a matter of minutes. While Eqvista serves as an open-source software valuation tool, it takes into consideration various factors to give you an accurate result. To know more about Eqvista and its open-source software valuation services, contact Eqvista today!