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Transparency as a business asset?

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 OSS?
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 OSS 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 healthcare and large public institutions like the NHS.
UK and global accounting standards ensure that software creation and use is properly recognised at
the appropriate time on as assets on balance sheets to reflect fair value using license payments and
development effort as metrics. Customers, investors and management then see 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 OSS, where the license payment' is zero. This means
that:
1. NHS Trusts who use OSS are undervaluing their software (and attached) assets
2. Software providers who create OSS may not be getting the corporation tax breaks they
deserve
If OSS was properly accounted for, then there could be a potential windfall for OSS creators, and a
medium term boost to the NHS as the true value of the contribution made by OSS was realised by
an enlightened economy.
Are NHS Trusts and other services that use OSS undervalued?
OSS 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 Trust'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 work for their staff and patients, 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 NHS Trusts are not subject to
corporation tax for core activities and might instead prefer to be more precise about the state of their
capital assets to assist financial planning. If the numbers are small, there is no issue, but if OSS
usage across the Trust is significant covering entire infrastructure stacks, server and desktop
applications, then a Trust may be significantly under reporting its true asset value and restricting
access to finance. There would also be the potential for Trusts themselves to eventually sell on these
assets, if they have created enough reusable value.
Software companies creating OSS 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 orgnaisations who are able establish 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.
OK So how could you attach a value to OSS?
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. Many proprietary 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 audit-able
factors such as number of users, servers or data used by the software. OSS code is not normally
published with any similar valuation models. However, if software providers were more aware of
the financial benefits to Trusts, and further motivated by the a potential tax break related to this
benefit, then providers may consider publishing such models to assist Trusts and procurement
professionals in project planning. In the absence of such guidelines, Trust accountants could
calculate the 'fair value' of their OSS assets by using the proprietary pricing model data of a product
of the same functional class. Other valuation models are also possible like COCOMO, but they lack
market testing.
The numbers involved are big
Just looking at the NHS Trust side of things, there appears to be potentially huge Trust benefit of
migrating to OSS and recognising existing OSS used within the organisations. For instance,
a) if just half of the NHS Trusts migrated to a simple open source infrastructure component
attracting a license fee of 50K, then the NHS as a whole would:
spend nothing on license fees
create 5m of Capital Asset value, excluding project costs
b) for a relatively 'cheap' 1.5m OSS electronic patient record system license:
over 150m would be added to balance sheets, excluding project costs
Given the size of potential OSS uptake in use across the NHS and UK public services, a UK OSS
accounting policy may even give a significant boost to UK GDP, fueled by an increased motivation
to use OSS.
All this makes the 20m of open source funding announced by NHS England sound not only
prescient, but also a real bargain!
How would an OSS asset value accounting policy affect the general perception of OSS?
If assets have no visible impact on the balance sheet, there is nothing to be discussed in the annual
report, no 'value at risk' to be proactively managed and no impact on financial planning. OSS
promotion is currently left to the 'techies', who are usually too embroiled in software delivery and
risk. With an OSS presence on the balance sheets, OSS tax breaks in place this transparency
witwould result in more promotion of OSS by software providers and Trusts, together with a global
view of how much OSS is being deployed across UK businesses to feed statistics to guide Health
(or any other) sector tech strategy and procurement strategy that involves OSS.
More work required!
In a market which is still suspicious of OSS, we need first need to take baby steps forward toward
an OSS valuation policy, but there certainly seems to be enough potential benefit here to warrant
more work in this area. Guildfoss has opened the discussion by presenting the case at EHI Live
healthcare IT event on 4,5 November, and is following up with a small group drawn from industry,

Trust representatives and NHS England, to see if it there a clarification of OSS accounting policy is
needed.

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