R.I.P. Vendors: Can Open Source Fundamentally Change the Way Third Parties Operate?

Sit down and buckle up, because I'm about to fire off a hot take.

Open source will lead to the death of the traditional vendor model we are familiar with today.

(Told you it was a hot take.)

First, let me take a step back before I have half of you chasing me out of town with pitchforks.

For my April feature, which should appear online in roughly a week or so, I looked at the growth of financial firms' willingness to use open-source software. I had the chance to speak to folks on the buy and sell side about the state of open source in the capital markets; what are the most important things to consider when picking a project; and what is holding back trading shops from getting more involved in the open-source community.

Now, I don't want to step on my story too much and ruin it, but I did speak to technology executives working at some of the largest buy- and sell-side firms in the world (nice brag, Dan), all of whom were very supportive of open source.

In fact, one executive at a large US-based investment bank, who I identify in the story, goes as far as saying open source has become such an integral part of the software development ecosystem that he can't imagine going back to a world where the only software used is provided by vendors.

So, let's pull on that string a bit.

A New Era

Let's just look at the basic timeline of things: Following the financial crisis, financial firms, looking to cut costs and not wanting to risk making a bad investment on a tech-build gone wrong, outsourced technology to vendors, who eased service-level agreements (SLAs) to make them more attractive, as banks and asset managers are looking to avoid vendor lock-in.

As the economy recovered, firms gained back a bit more flexibility in spending and brought some of those outsourced platforms and applications back in-house.
Now, with most technology budgets at least stagnant or even slightly up, there is an opportunity to bring even more technology back internally.

While all this is happening, open-source software continues to rise in popularity. Communities continue to grow larger and become more interactive with hundreds and sometimes thousands of contributors working together to try and improve upon the same base code.

Suddenly, firms have a way to bring innovation back in-house while still having the benefit of outside help, except at a much cheaper cost.

Still Not There

Let's make one thing clear: This theory isn't predicting vendors are eliminated entirely. One buy-side executive told me outright that for applications or platforms that are enterprise wide, his firm would not use open-source software that wasn't backed by vendor support. That's a role, I believe, vendors can continue to profit from. Offering that trusted, recognizable name to help stand up open-source projects seems to be an area that will continue to have a market.

However, is it really that crazy to consider the role of commercial vendors drastically changing as more and more developers, especially younger ones, become immersed in open source?

Granted, there are still some major hurdles for the open-source community to overcome, the biggest being the issue around licenses. Still, there's potential for open source to seriously disrupt the space.

Let's also not forget the security advantages that come from using open source. One sell-side executive says the benefit of having so many people combing through code for security bugs and issues actually, in some ways, creates a safer environment than vendor software can provide.

Am I wrong? Maybe. It certainly wouldn't be the first time. But there is no denying open source is becoming more popular amongst those in financial services, and at the end of the day there are only so many technology projects financial firms can take part in. 

This week on the Waters Wavelength podcast ─ Episode 9: Cyber Risk North America, Deutsche Börse-LSE Deal

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Food for Thought

• We are now under a month away from North American Trading Architecture Summit 2016, which is held in New York. For more info on the event, click here. 

• Obviously, the IHS-Markit merger was a big news story that broke this week. However, I'm holidng my opinion until Thursday's Waters Wavelength podcast.