Red Hat CEO: Software vendor model is broken

Speaking at Interop New York, Jim Whitehurst derides the current model of selling commercial software

The current model of selling commercial enterprise software is broken, charged the CEO for Red Hat. It is too expensive, doesn't address user needs and, worst of all, it leaves chief information officers holding all the risk of implementing new systems.

"The business models between customer and vendors are fundamentally broken," said Jim Whitehurst, speaking Wednesday at the Interop conference in New York. "Vendors have to guess at what [customers] want, and there is a mismatch of what customers want and what they get. Creating feature wars is not what the customer is looking for."

Of course, being an executive of an open-source software company, Whitehurst would naturally be critical of the standard model of software sales, and he has spoken critically of the model in the past. In his presentation at Interop, however, he also discussed how cloud computing could offer a break from this routine, depending on how it is implemented.

"People say [they are interested in the] cloud but what they are really espousing are frustrations with existing IT business models," Whitehurst said in an interview with IDG News Service after the presentation.

Whitehurst kicked off his talk by asking a seemingly simple question: "Why are costs of IT going up when the underlying costs to deliver those services halves every 18 months?" The cost of computing should come down, he reasoned, thanks to improving processing speeds and storage capacities. New, more powerful development tools and frameworks should also ease the cost of deployment. Yet IT expenditures continue to go up by about 3 percent to 5 percent a year.

The answer to his question is that "it's the vendors and how we are delivering [IT] for our customers," he said.

Whitehurst estimated that the total global IT market, not including telecommunications, is about US$1.4 trillion a year. Factor in the rough estimates that half of all IT projects fail or are significantly downgraded, and that only half of all features in software packages are actually used, then it would follow that "easily $500 billion of that $1.4 trillion is fundamentally wasted every year," he said.

Whitehurst took aim at the "typical software sales model" for this state of affairs. To develop software, a vendor may spend years interviewing customers, estimate what they need and build a set of features to meet these demands. For the customer, this work translates into yearly maintenance fees and the necessity of buying an upgraded version of the product every few years. Also, because of the great amount of work involved in changing to another software package, the vendor can price its offerings at an artificially high rate. He noted that Red Hat still runs Oracle's financial systems "because it would be a nightmare to move" to another platform, he said.

"With software, you are renting the ability to use features, and then every few years you have to rebuy the same thing," he said. "The cost to provide and the pricing that has been changed has nothing to do with one another."

And despite the vendor's iterative process of improving software, "there has been no change in product quality demonstrated in the past 30 years," he said.

Naturally, during his talk, Whitehurst touted the open-source model as an alternative. "Open source represents a fundamental change to the model," he said, arguing that open source, thanks to customer participation in the maintenance of the code, has a lower bug density, as well as more useful feature functionality. "With open source, you are not buying functionality. You are buying services and support," he said.

Whitehurst reflected on his time at Delta Air Lines, where, prior to joining Red Hat, he worked as the chief operating officer while the airline was going through bankruptcy. At the time, he was asking all of Delta's suppliers for a break in billing, and most companies cut the then-troubled airline some slack, except for its IT vendors.

"We beat up on vendors in every area -- airframe manufacturers, our catering supply -- we got cost out of everywhere, except IT. We couldn't get money out of IT. The business models were so fundamentally broken, that even at death's door, we couldn't take costs out of IT," he said.

While the vendors are selling functionality, IT departments take on the risk of turning that functionality into something beneficial for their organizations. The software and hardware are already paid for before the service they are running is actually offered.

This is why cloud computing is so appealing to CIOs, Whitehurst said. CIOs are not so much interested in the ability to move workloads off to external data centers as they are in not paying system costs until those show some business value.

Currently, the cloud computing model stands at a crossroads between the software sales approach and one based on open standards, Whitehurst argued.

"How cloud computing evolves will determine how powerful it is," he said. One route would be to "devolve into a walled-garden cloud." The other approach would resemble the evolution of the Internet, where a group of common standards is developed and vendor innovation happens at the edges.

"That will ultimately determine the success of cloud computing and how IT will be used in the next generation," he said.

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com

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Tags open sourceIT managementCIO roleOraclesoftwareapplicationsArchitectureCustomer Relationship ManagementRed Hat

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Joab Jackson

IDG News Service
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