Open source migration in public sector

Open Source Migration in
Public Sector:
A feasibility study
Androklis Mavridis, Dimitrios Fotakidis and
Ioannis Stamelos
(SWENG Group, Department of Informatics,
Aristotle University of Thessaloniki, Greece )

Agenda
Problem scope
Approach
Feasibility Study
Results
Conclusions
Q/A

Problem Scope
The benefits of Open Source Software (OSS) within
public sector (PS) have been highlighted by numerous
studies…
However the OSS migration is not a risk free plug and
play process.
 Uncertainty of the quality of the OSS applications
 The dynamic nature of the majority of OSS projects
 The lack of technical support are some of the obstacles faced by
integrators…
 But while there is an acknowledged demand for financial
transparency (ADVOCATING) the use of OSS…
 Lack of awareness of the feasibility and viability of OSS in the PS
environment.
 The majority of public sector organizations (probably mostly in Greece
!!!), show little interest in financial performance…

Problem Scope 2
Focusing on the generated value from the OSS
adoption in the specific PS environment…
We try to shed light to the uncertainties that
affect its viability…
We conducted a feasibility study in fifteen
municipalities in Greece,
We calculated the value generated from three
scenarios of OSS adoption namely minimal,
basic and massive based on the number and
type of the adopted software solutions.

Approach
We argue that the value of an OSS is both
generated and affected by its project's dynamics
As the OSS evolves over time, uncertainties
related with its provided qualities may be
introduced or resolved.
To what extend these uncertainties will affect the
anticipated value is subject to organization's
capacities, competencies, resources and
constraints.
Hence, selecting the right OSS solutions (the
more profitable) depends on organization's
resilience to these uncertainties.

Approach 2
Thus, finding the more profitable migration
scenario is not simply a matter of
accumulating the value generated from
the number of OSS solutions to be
adopted
but of identifying which OSS solutions
maximize and/or maintain their values
over time (as uncertainties are resolved
through the passage of time).

Approach and real options
As we deal with notions such as:
Uncertainty
Risk
Value
Time
It seemed quite normal to employ an
econometric method/technique able to deal with
these constructs.
Real options analysis is the most well known
capable of that!

Real options (RO) in a nutshell…
Not having the time to dig into the details…
RO is a powerful method for decision making.
Based on the theory developed to cope with
uncertainties in stock market (some 30 years ago)
Provides an alternative valuation of a project
One that takes into account future conditions and tries
to maximize the revenues (finding the optimum time to
implement the “project”
First application on oil rings, real estate, R&D etc..
Rapidly expanded on IT and software engineering
(System Architecture valuation, IT assets etc…)

Real Options in our study
Real options analysis explore the volatility of the
anticipated OSS value in order to provide reasoning
about the viability of the migration scenario.
Real Options Analysis (ROA) is based on the analogy
between investment opportunities and financial options.
A real option is a right, but not an obligation, to make a
decision for a certain cost within a specific time frame.
A project is perceived as an option on the underlying
cash flows (value) with multiple associated investment
strategies to be exercised if conditions turn out to be
favorable.

Real Options 2
 Inputs:
 Current Value (Net Present Value) of migration
scenario (So): The accumulation of the costs of the
operational proprietary software are the cash flows
generated from the adopted OSS.
 Exercise Price (X): Total Cost of Ownership (TCO) of
the adopted OSS.
 Time to Expiration (T): The time frame decision
makers have to select the optimum migration
scenario.
 Volatility of the Underlying Asset Value (σ): The
percentage of the cash flows fluctuations due to
uncertainties introduced from the dynamics of the
adopted OSS.
 Risk Rate (r): The Cost of capital (typical inflation rate)

Methodology Steps
 Our approach is applied in three
consecutive steps:
1. We Discover of the uncertainties.
2. We calculate the expected cash flows and
their associated volatilities in the form of (%)
standard deviation,
3. We calculate the call options for each OSS
candidate and we compare the results.

Feasibility Study – preparation
We recorded all proprietary applications -
currently in use in many Greek Public Sector
Organizations - and categorized these according
to their provided functionalities and domain:
Administrative Applications
Office related Applications
Resource Planning Applications
Operating System

Feasibility Study
After conducting interviews with IT
managers we produced a list of OSS
applications capable of providing the
intended functionalities (substituting the
proprietary) and group these into three
migration scenarios:
Scenario 1 - Massive Change
Scenario 2 - Basic change
Scenario 3 - Minimal change

Feasibility Study – OSS applications
SOFTWARE SCENARIO 1 SCENARIO 2 SCENARIO 3
Office Application OpenOffice.org OpenOffice.org OpenOffice.org
Operating System UBUNTU LINUX - -
Protocol
Document Management
SCRIPTUM SCRIPTUM SCRIPTUM
Registries Managment
Real Estate Tax
Traffic code
Water/Sewer
Irrigation
OpenERP OpenERP -
Payroll
Humman Resource
Management (HRM)
OrangeHRM OrangeHRM

Feasibility Study - Municipalities
We proceeded to a closer examination of
15 municipalities:
average in population size
and in IT department staffing,
Obtained the necessary financial data for
our ROA application.

Feasibility Study – Data TCO
OSS Installat Maintena
00000000Ope 00000 0 00000
00000000 000000 00000 000000
00000 000000 00000 000000
000 000000 00000 000000
000000 00000 00000000000000O
OSS Installat Maintena
00Ope 0 0
00 00 0 00
0 00 0 00
00 0 0000O
ó óOSS ó óInstallat ó óMaintena ó
0ó0óOpe 0ó 0ó
0ó0ó 0ó0 0ó 0ó0
ó ó ó ó

Feasibility Study – Revenues
(assumptions)
We calculated the costs of the currently
operational proprietary software for a
twenty years period.
These costs were attributed to the cash
flows generated from the adopted OSS
In other words what we spend for closed source
is the value gained from OSS – TCO from OSS
Value_oss = TCO_closed – TCO_oss

Feasibility Study - NPVs
From the collected information we were
able to calculate the total Net present
Values for the three scenarios:
Net Present Value
Scenario 1 Scenario 2 Scenario 3
134,001 169,445 42,199

Feasibility Study - Volatility
To estimate the volatilities we took into account the
following factors affecting the expected cash flows for
each scenario:
 Popularity of the OSS to be adopted
 Awareness of the OSS from employees
 Dependency of the substituted proprietary application with
legacy applications
Based on the scores and weights provided by the IT
managers we obtained a 30%, 20% and 10% volatility
(Monte Carlo) estimations for the three scenarios
respectively.
With risk rate at 10% and Time to expiration 4 years we
proceeded to Real Options application

Feasibility Study - ROA
 To calculate the Option Values C
we employed the Black-Scholes
model given as :
 where:

 and N(d) is the probability that a
random draw from a standard
normal distribution will be less
than (d).
 http://www.soarcorp.com/black_scholes_calculator.j
sp
C0 = S0N(d1)-Xe-rTN(d2) ,
d1 = [ln(S0/X)+(r+σ2/2)T]/σ√T
d2 = d1 – σ√T

Results – Option Values
These option values represent the
additional value that comes from the right
not to implement immediately the
migration scenario but only upon favorable
conditions.
OptionsValues
Scenario1 Scenario2 Scenario 3
70,845.18 115,471.65 25,642.09

Results – Option Premiums
Option Premium:
is the real cost of owning a stock options contract.
In our context, -and analogous to this of stock markets -
Option Premium is the amount of money the PS
organization will loose by waiting to see how the
uncertainties associated with the migration scenario will
evolve over the time to expiration.
Option Premium
Scenario 1 36,694.10
Scenario 2 26,576.26
Scenario 3 8,143.09

Interpretation of results
The third scenario is the one with the
lowest cost of waiting (option premium).
Nevertheless, the second scenario is the
one that should be preferred as not only
provides the highest Net Present Value
but also a lower cost of waiting (option
premium) in comparison to the first
scenario.

Conclusions – Further work
The application of ROA addresses some fundamental
issues:
 like the lack of accountability and risk averseness inherent in PS
environments.
The method provides an alternative view to the OSS
migration process in the uncertain Open Source
Software realm.
By perceiving the OSS migration as a risky investment, a
more accurate calculation of the anticipated value of
OSS employment to PS environments can be achieved.
It is our intention to extend this study to other public
sector organizations.

Open source migration in public sector

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