Alan MacCormack: The true costs of software: ‘free’ doesn’t mean ‘cheap’

How much does “free” software really cost? That question remains at the heart of decisions made by CIOs and other technology leaders trying to decide on the software and associated hardware that will lead them into the future.

Advocates of Linux and other open-source products sometimes argue that because the software is distributed free of charge, it’s self-evident that it’s more financially attractive than proprietary products from companies like Microsoft Corp., IBM Corp., SAP AG or Oracle Corp. IBM, which is increasingly pushing its support of Linux, suggests that a consensus is emerging that the total cost of ownership (TCO) of Linux is significantly lower than similar costs for competing proprietary operating systems (although it doesn’t appear to extend this argument to other open-source software that competes with its own revenue-producing software.)

Journalistic accounts of the spread of open-source also tend to assume that the price difference is a critical competitive advantage. “Because it is free,” declared a recent Business Week cover story, “Linux is undercutting Microsoft much the way Microsoft has gutted its rivals with lower prices for the past two decades.”

Yet anyone who looks into the problem of measuring the TCO of software quickly recognizes how murky this field can be. “Free,” it turns out, doesn’t necessarily mean cheaper.

To assess the merits of these various claims, I recently reviewed a large sample of publicly available articles that purported to address the TCO of different server operating systems. The first fact to emerge was that most of the 84 different documents I reviewed couldn’t even be considered studies – they didn’t capture sufficient data on the full range of costs needed to evaluate TCO, and they often based their conclusions on the analysis of results from only a single company’s experiences. Yet the handful of studies that were more comprehensive revealed that the issues surrounding software TCO are more complex than is typically portrayed.

To begin with, it appears that the price of software itself – whether it’s free or not – is so low relative to the TCO that it may have little impact on the outcome of IT investment decisions for many purchasers. In most cases, the price of software proved to be less than 10 per cent of the TCO.

Where costs do become significant for all types of software is in the level of staffing needed. By staffing, I mean the training, maintenance, support, administration and other personnel costs necessary to run the software package efficiently. These costs can add up to as much as 50 per cent to 70 per cent of a software system’s TCO over its useful life.

Yet even staffing costs vary greatly depending on what type of workload is placed on the software and what sort of tools the software provides for users. For example, one study that compared the TCO of Windows and Linux for different server workloads found that the Microsoft product’s TCO was lower for networking applications but more expensive for Web-serving applications. In sum, how a company uses its software tells you a lot more about TCO than the sticker price.

The fact that people use software in different ways also points to one of the problems in using a simple TCO analysis to make purchasing decisions. Too often, it’s assumed that the software packages being compared provide essentially the same sets of benefits to users. But specific products and features that are vital to some users will obviously increase a particular software package’s value relative to other packages.

Furthermore, a software package that provides more applications and choices for users brings with it additional, often unmeasured, value. A CIO must therefore be careful to examine the differences in both cost and value to make an effective investment decision for any type of software platform.

A company must understand what it expects from its software as it weighs the decision about whether to embrace open-source. Fortunately, more companies are approaching the TCO issue in this way. Instead of just looking at the price of software, they’re doing thorough, company-specific examinations of how the software will be used, by whom and for what purpose.

Those sorts of questions ought to bring a CIO much closer to what his true costs are – and deliver a healthy dose of realism to the debate about “free” software.

Alan MacCormack is an associate professor of business administration at Harvard Business School. He can be reached at [email protected].

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