Red Hat — Finding Opportunities in Open Source
In 1998, Paul McNamara was the fifteenth employee hired at Red Hat. His new job was to find business models that had made money from a free product and convince venture capitalists to invest in a company that gave away its software. He was also asked to engage the best people in the new open source industry, software designers who had been giving their expertise away for free. This presented another great challenge. “The open-source community of developers is the essence doing it for free,” he was told. “And by the way, they don’t do bosses.”
The free-wheeling and idealistic culture of the open source community presented real challenges to creating a business organization. Paul had started his career at IBM and his first step was to learn about the world in which this new business existed. He spent his first day on the job at the Linux Expo hosted by Duke University, ground zero for the open source revolution. All one thousand seats in the auditorium were filled and participants stood three to four deep against every wall waiting for the keynote speaker, the man who had invented the open source phenomenon. Paul was amazed at the electricity in the air. “It was like waiting for U2 to come on stage at Madison Square Garden,” he told me later.
A man finally walked on stage and said, “My name is Linus Torvalds . . .” The auditorium erupted. As Torvalds continued, the room went dead quiet, “. . . and I am your God.” The audience again went wild, shouting Torvalds’s name. In that moment, Paul knew he had entered a very different universe from IBM. This was pure passion — a community giving its extraordinary skills to create something meaningful that could be available to everyone. These engineers earned their livings at day jobs working on software design that within a few years would be replaced by what they worked on for free at night. They were the best in the business and they were revolutionizing the field of computing just because they could. Paul kept asking, “What’s the business model? Free and brilliant? You can’t build a business by selling what people could otherwise get for free.”
But that’s exactly what he had been asked to do. By this time, several things were clear. The users and creators of open source software had always been the same but suddenly a market was beginning to evolve to meet them. Business buyers were looking for software for which they could manage the code, and they recognized that free didn’t necessarily mean inferior shareware had paved the way for years. But they needed backup plans. What if they ran into coding problems or had trouble launching applications with their new software? Even worse, what if something threatened to take their business down for hours or even days?
These commercial customers needed a relationship with a trusted provider of Linux, the popular, open source operating system for personal computers. They needed someone who had both strong standing in the open source community and the ability to provide businesses with the support and services necessary for maintaining their software. Red Hat, in a Eureka moment, realized that it could supply the software for free and charge for providing high-value services. In an industry where bits and bytes of the software were usually considered to be the most valuable thing, Red Hat’s new approach was nothing short of radical.
Red Hat began to offer software services and the market responded immediately with enthusiasm. The company began by offering 24/7 support; shortly after, it began to offer training, allowing in-house IT staff to become “Red Hat–certified engineers.”
It also came up with the idea of offering electronic services to customers: automatic upgrades, security patches, and system health monitoring. All the while, Red Hat’s engineers continued to be co-evolvers of Linux, contributing all of the code they developed for Red Hat Linux back to the Linux community. Initially the idea was hard to sell to venture capitalists because the idea of open source was still hard for them to grasp. But the investors who finally got it have been very happy that they did.
When Red Hat eventually went public in 1999, it became the seventh most successful IPO in the history of the stock market. From the start Red Hat built a way to make its offerings work for customers, co-creators, and communities. Reciprocal benefit was inherent in the design. The company played with the idea that it could offer modified software, selling it as proprietary, but realized that this was inconsistent with the ethic and process of open source; freedom (and making it free) was the essence of both the product and the process. This created an entirely new business philosophy. The process was supercharged because it was part of a visionary movement to eliminate the software priesthood and democratize how things get created. The sense of mission surrounding the company and community meant that all were welcomed into the design and creative processes and the co-creators were both the community and the customer. This was a unique period in business history and Red Hat’s stakeholders were at the center.
Red Hat is successful today because it did not segment and draw lines between stakeholders and try to manage them separately. It saw them as one entity and brought them together to create one of the most amazing businesses of the new century, one founded with a stakeholder integration ethic. It represents the wave of the future and requires radically new ways of thinking about the purpose of business organizations and how they work.
Any company can create such a work culture if it follows the systemic thinking of seeing stakeholders as an opportunity for creativity and not a duty or obligation for corporate responsibility
