Ch 4 making the roi case

Chapter 4. Making the ROI Case
Prepared by: Ayoub S. Al Sahafi Ref.No.:CL186
Open Source for Enterprise
Supervisor: Assistance Professor Dr. Mahmoud Alkhasawneh
Al-Madinah International University
Faculty of computer and information Technology

Open Source – Chapter 4. Making the ROI case
 4. Making the ROI Case
Making the ROI (Return To Investment)
Outline
 4.1. ROI Fashions
 4.1.1. What Is ROI for Open Source?
 4.2. How Open Source Costs Differ from
Commercial Software Costs
 4.2.1. Evaluation Costs
 4.2.2. License and Maintenance Costs
 4.2.3. Installation and Configuration Costs

 4.2.4. Integration and Customization Costs
Outline
 4.2.5. Operations and Support Costs
 4.2.6. The Cost of Narrowness
 4.3. Making Your Own ROI Model
 4.3.1. Creating the ROI Analysis Spreadsheet
 4.3.2. Creating the Estimates
 4.3.3. Elements of Evaluation Costs
 4.3.4. Elements of Installation and Configuration
Costs

 4.3.5. Elements of Integration and
Customization Costs
Outline
 4.3.6. Elements of Operations and Support
Costs
 4.4. Skills Versus Money

Introduction
• The software is distributed with a license that allows other developers can modify
it and/or add to it. Some examples of open source software are WordPress,
Ubuntu, and Mozilla, creators of the Firefox browser.
• Generally, the major difference between open source software and commercially
available programs is you don’t pay for it.
• Some developers create a free and paid version of their products. The free
program is a stripped-down version of the complete version which gives you full
functionality.
• Many commercial programs offer a 30-day free trial, but that might not enough
time to get up to speed, which could force you to make a buying decision before
being ready to do so. In contrast, many open source programs are free, so you
can take all the time you need to learn how they work.

Terminology
No Term Definition
1 ROI Return On Investment
2 Open source Open source refers to software that's free to the public.
3 Source code The software's source code is available to the public to use.
4 Community
5 hurdle rate
A hurdle rate is the minimum rate of return on a project or
investment required by a manager or investor.
6 Investing
Investing is the act of allocating resources, usually money,
with the expectation of generating an income or profit.
7 License permission to do or not to do something.

Terminology
No Term Definition
8 Integration
The combining of subroutines, software modules or full
programs with other software components in order to
develop an application or enhance the functionality of an
existing one.
9 Customization
It is a strategy by which the organization's products or
services are customized through personal participation and
sharing with its clients.
10 Commercial software
is any software or program that is designed and developed
for licensing or sale to end users or that serves a
commercial purpose

 One of the main ways people make decisions is by using
a cost-Benefit Analysis (CBA).
 CBA has two main applications:
1- To determine if an investment (or decision) is sound,
ascertaining if its benefits outweigh its costs.
 CBA simply is: to evaluate the cost versus the benefits
in any new project proposal.
4.Making the ROI Case

2- To provide a basis for comparing investments
(or decisions), comparing the total expected cost
of each option with its total expected benefits.

 The Important thing that the modern IT
department asked for any new project is
cost-benefit analysis be created to
determine if the investment of time and
resources makes sense.
 The following fig. 1.1 is shown that:

New Project
Cost Benefit Analysis
Resource
Investm
ent of
time
Modern IT
Department
Fig 1.1 cost-benefit
analysis be created to
determine if the
investment of time
and resources makes
sense.

Technologists are annoyed by the request to
analyze ROI, for these reasons:
Management's goal in asking for an ROI
analysis is: explain why an open-source project
is going to help the organization succeed by
increasing revenue or saving money.

3. Besides reducing technical costs, they have difficulty making
estimates about how new technology will increase revenue.
2. Intangible benefits, such as flexibility or creating a simpler
architecture, are frequently undervalued or are not included.
1. It is hard to create a defensible approach.
(Because the results of any ROI analysis can be changed massively, by adjusting
assumptions(.

 Most software vendor websites contain and
feature ROI studies for specific uses of the
software or for specific industries.
 Most uses of open source, there is no vendor
preparing an ROI study.
4.1 ROI Fashions
 One common approach is to call something a
strategic investment, meaning the investment
makes sense and will improve the company's
position.

 At a high level, calculating ROI for open source is
pretty much the same as for commercial
software. The equation looks something like this:
4.1.1 What is ROI for Open Source
R/I = ir +s / ec + lmc + icc +ncc + osc
Investment: (Evaluation Costs + License and Maintenance
costs + Installation and Configuration costs + Integration and
Customization costs + Operation and Support costs)
Return:(Increased Revenue + Saving)

 To apply the equation correctly, we need to know
the following:
1- Time horizon for analysis
2- The period of calculating the revenues or
savings against this investment, one year, two
years, ..

3- The ability to compare alternatives
4- Making the right decision between choosing
the fastest time to pay or the greatest long-term
savings.
5- Interest rate assumptions
6 hurdle rate, the minimum return on any
company investment

4.2 Open Source costs Differ from Commercial Software Costs
 There is not much difference between open source and
commercial software.
 Revenue is revenue, and if a computer system helps
support it, that's great.
 The nature of the costs of open source and
commercial

4.2 Open Source costs Differ from Commercial Software Costs
 But an honest analysis of savings would have to
quantify savings due to differences in the
reliability, downtime, maintenance procedures,
and so on.
 Calculating savings is easiest to do when known
costs are eliminated or are replaced with a new
set of lower costs.

4.2.1 Evaluation Costs
3- Right now is the time to buy the product.
 The costs of evaluating open source can be
considered part of the ROI analysis, so it might
not be included in the ROI equation.
 An IT department must be convinced that:
1- Their organization has a need for some software.
2- The vendor's offering is the best choice.

4.2.1 Evaluation Costs
 Arranging a similar installation of commercial
software might require any or all of the following:
4- Trial licenses for additional related software.
1- Negotiation of a trial license that might have a
time limit.
2- Payment of service fees to support the trial
installation.
3- Training.

4.2.2 License an Maintenance Costs
 One of the reasons companies like using
commercial software is that it means an
organization exists that can be held accountable
for the software.
 Open source is no guarantee of zero licensing
costs.
 The savings in license fee is no guarantee that
open source is the right choice.

4.2.3 Installation and Configuration Costs
 Installation and configuration of open source can
be time-consuming, especially for a beginner or
intermediate organizations that are not deeply
skilled in the use of open-source tools.
 Commercial software generally comes with some
sort of install wizard that guides the user through
installation and basic configuration.

4.2.2 License an Maintenance Costs
 While more and more open source projects are
showing this degree of professionalism, the use of
such wizards is still not widespread.
 The real factor in determining whether installation
and configuration will require a significant time
commitment is an organization's skill level in using
open source development tools, system
administration, and operations.

4.2.4 Integration and Customization Costs
 Careful assessment of integration and customization
costs in many ways is the key to avoiding an open
source nightmare.
 It is possible to say that open source integration can
be less expensive, because access to source code
means you can always do the work yourself.
 The need for customization arises when the open
source project must be extended to meet the
requirements at hand.

4.2.5 Operations and Supports Costs
 On the surface, operations and support costs do not
look that different between open source and
commercial software.
 Once software is installed, configured, and
integrated, it is just software, whether it is open
source or not.

 Commercial software vendors might require licensing
fees for any of the following situations:
1- Creating a development environment on each
developer's workstation.
2- Creating a test environment or a staging
environment.
3- Adding servers for scalability
4- Adding servers for disaster recovery or for a hot
backup site For a vendor, all of this makes perfect sense.

3- Adding servers for scalability
4- Adding servers for disaster recovery or for a hot
backup site For a vendor, all of this makes perfect
sense.
 The more an IT department uses a product, the
more value it gets from that product and the
more it should pay for the product.

4.3. Making Your Own ROI Model
 You must do ROI analysis for yourself, whether using
commercial or open-source solutions.
 And while the true costs are rarely quantifiable or
authoritative, doing the analysis for an open source
project is vital, because it can expose the true costs
and risks, and help an IT department prepare for
them.

4.3.1. Creating the ROI Analysis Spreadsheet
 The best way to start an ROI analysis is to start
with a spreadsheet that represents the equation
mentioned at the beginning of this chapter.

4.3.2. Creating the Estimates
 For some data, it will be possible to get numbers to
back up estimates. For example, if an application can
be retired and replaced with open source,
maintenance no longer needs to be paid and the
resulting savings will be clear.
 As an IT department becomes more experienced
with open source, its ability to estimate specific costs
will improve.

4.3.3. Elements of Evaluation Costs
 The following is a list of jobs an engineer will spend
time performing while evaluating an open-source
project (these could also be included as line items in
a cost estimate):
1- Searching for open source.
2- Creating a test environment
3- Installing and configuring software.

4.3.3. Elements of Evaluation Costs
4- Writing test programs.
5- Researching questions and problems.
7- Networking with open source community members
and looking for answers to questions.
6- Researching integration techniques and costs.

4.3.4. Elements of Installation and Configuration Costs
 Installation and configuration costs are the costs of
figuring out how to install the software in your test
and production environment and make it work the
way you want it to work, by using the settings and
parameters that are intended for that purpose.
 Elements of installation and configuration costs
include:

1- Engineer time spent learning how to install the
software in a development environment.
software in a test environment.
software in a production environment.
4- Engineer time spent doing basic performance testing.
5- Engineer time spent developing backup scripts

6- Engineer time spent learning how to operate the
software.
7- Engineer time spent learning how to monitor the
software.
8- Engineer time spent integrating the software into
production monitoring and alerting systems .
9- Training time for developers.
10- Training time for top operations staff.

4.3.5. Elements of Integration and Customization Costs
 Elements of integration and customization costs
include:
1- Engineer time spent gathering requirements
for integration and customization.
2- Engineer time spent reading source code,
documentation, and bulletin boards to understand the
workings of the software.

4.3.5. Elements of Integration and Customization Costs
 Elements of integration and customization costs include:
3- Engineer time spent designing the integration and
customization.
4- Engineer time spent coding the integration and
customization.
5- Engineer time spent testing the integration and
customization.
6- Fees for any consultants brought in to help the process.

4.3.6. Elements of Operations and Support Costs
 The Elements of operations and support costs
include:
5- Operational monitoring.
1- Hardware costs.
2- Rack space.
3- Electric power
4- Network bandwidth.
6- Backups.

4.4. Skills Versus Money
 The investment in open source is also an
investment in increasing an IT department's skill
level.
 Sometimes money is more important than the
time it takes to solve a problem.
 In general, it is hard to argue that creating a more
skilled organization is anything but a net positive
for an IT department.

Summary
 What sets free and open-source software apart is that users can see and modify program code giving users
the opportunity to use, learn, distribute, and sometimes make a profit by selling software.
 Just because open source software is free doesn’t mean it’s not better than proprietary paid software by any
means and sometimes it’s better in terms of community support and security.
 Though open-source software is free and gives the user many benefits, ironically, it comes with the cost of
the Software industry itself.
 Open Source software takes away profit from the software industry.
 In many cases, open-source software relies on donation and community support from its users which
sometimes aren’t so reliable. Aside from that, not all open-source software isn’t supported nor maintained
by anyone.
 While open-source software is the free source of computer software and the development community is a
wealth of resources, it does have a negative side of harming the software industry. Though open-source
software has its advantages and disadvantages, compare to harm, benefits are far more superior. The users
of open source software should donate to the organization considering that open source software is highly
dependent on donation. By ignoring the harms open-source software is truly today’s revolution. Today’s
generation of programmers and anyone involves in IT should try to contribute to the open-source community
by donating and participating in the development of open-source software.

Reference
o http://mason.gmu.edu/~mshahada/OpenSourceSoftware/conc.html
o http://cconlinejournal.org/pg_cco%20article/conclusion.html
o other website

Ch 4 making the roi case

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