Why Don't we £Value Open Source Software Assets?

Developers and software providers love open source software (OSS) for its capability, maturity, accessibility and transparency. So why isn't there more promotion of the use of open source software and why do procurement professionals find it so difficult to grasp the value of open source software?

One of the key reasons may lie in the genuine lack of clarity that surrounds the accounting of open source software, which has zero license cost. The ubiquitous use of open source throughout the technology sector coupled with the lack of accounting policy clarity surrounding the acts of creating and open source software, is undervaluing the assets of software intensive sectors like finance and healthcare and of large institutions like the National Health Service (NHS). 

Global accounting standards, as well as those of the United Kingdom, require that software creation and use be recorded as 'assets' on our balance sheets to reflect the fair value transacted by software. Because of this inclusion, the business community is able to treat it as a visible contribution to the capital asset base (i.e. an investment), which requires risk management and security in financial planning.

However, these rules seem to break down for open source software, for which the 'license payment,' the metric normally used for software's value, is zero. This means that:

  • Organizations who use open source software are undervaluing their software (and attached) assets.
  • Software providers who create open source software are not getting the corporation tax breaks they deserve,

If open source was properly accounted for, then there could be a huge windfall for open source innovators, and a medium term boost to public sector organizations as the true £value of open source is realized by an enlightened economy.

Are public sector and other corporate users of open source software undervalued?

Open source assets have a zero license fee, because authors want the widest possible adoption and want to empower users to create value without being encumbered by author's royalties and other constraints. But the absence of price also means no presence on a company's asset register, which is a bit like quietly taking ownership of a car or a building without telling anyone.

Without a registered asset value, the effort of making the OSS asset 'sweat' for their staff and customers, that would ordinarily be classed as capital expenditure (CAPEX), is instead classified as operating expenditure (OPEX). Now this may suit businesses which prefer OPEX, but many public sector institutions are not subject to corporation tax for core activities and might instead prefer to be more precise about the true state of their capital assets to assist financial planning.

If the numbers are small, there is no issue, but if OSS usage across the NHS Trust is significant covering entire software infrastructure stacks, server and desktop applications, then clearly the organization may be significantly under reporting its true asset value and restricting its access to finance. There would also be the potential for organizations to eventually sell or otherwise commercialize these assets, if they have created enough reusable value.

Software companies creating open source should get tax breaks!

On the supply side, a software supplier which “open-sources” their own software asset, is providing a gift to the public that would normally benefit from a capital asset write-off and commensurate corporation tax credit, in the same way as writing off or gifting other plant or equipments. The value of their assets is reduced because they have 'given away' software code, which can then be 'forked' by other organizations capable of establishing their own control over the software.

This is a strong argument for allowing the software provider a complete capital value write-off against corporation tax. Such companies plan to gain in the medium-long term through the provision of attached services or products in accordance with well trodden open source business models.

So how could you attach a precise asset value to open source software?

Here is the rub, open source software would have to be valued against an 'in production' cost model for it to be added to the asset register. A simple download for personal or development use would clearly not count. Traditional software suppliers use an 'in production' model in their license payment terms to match the customer's derivation of value from their software.

The extent to which software is deployed into production is normally specified in the terms and measured by auditable factors such as number of users, servers or data used by the software. Open source code is not normally published with such valuation models. However, if software providers were made more aware of the actual financial benefits to corporate users, and further motivated by a potential tax break related to this 'corporate social' benefit, then providers might consider publishing value models to assist companies and procurement professionals in business planning.

In the absence of such guidelines, accountants might choose to calculate the 'fair value' of their open source assets by comparing to the prices of a product in the same software functional class. Other valuation models are also possible.

The numbers involved are now too big to ignore

It is no coincidence that the biggest companies in the world by market value are proprietary software companies. People and businesses are willing to part with their hard earned cash to pay for software and attached assets and the numbers involved are huge - £billions in the UK , £trillions worldwide. But over the last 10 years, open source software (OSS) has grown into a massive global force with a business impact similar to that of proprietary software sector.

So is it right that this influence should continue to be completely invisible to corporate accountants and risk managers? Well some would say yes absolutely : ) . . But will shareholders really be content to allow sector-wide software asset values in corporations to plateau when in reality this value should have doubled or tripled over the last 10 years?

And how can the financial world completely ignore the immense corporate social value created by software such as Apache's web server, the Linux operating system, Google's Android and more latently Apple's Research Kit? It is like pretending that London Underground doesn't exist, or that having a home near a tube station doesn't increase house prices. Maybe, I'm over egging this argument.

Of course, some of OSS value is been accounted for in traditional ways, such as the forecast revenues of open source companies that have sprung up to support open source software platforms. But this doesn't avoid the fact that the asset values of open source software (Linux etc) usage in most companies is zero. And if assets have no visibility on the balance sheet, there is nothing to be discussed at board meetings, there is no 'value at risk' to be proactively managed and no impact on financial planning and nothing will be said about it in the company's annual report.

Some argue that this technical accounting imbalance should be addressed by requiring ALL software to have zero asset value. But this argument reverses the logic of software's inclusion in the first place and would have hugely unpredictable, undesirable and unfair consequences for the proprietary software business, which makes this argument a non-starter.

The huge benefits of open source is an open secret of the software development community, but they still aren't taken seriously by the business community who still regard such efforts as a geeky pastime. I believe that business attitudes can and will change dramatically if open source software accounting rules are reviewed so that open source software is valued fairly and entered on the balance sheet, and tax breaks were given to companies who make open source software.