For companies selling proprietary software in the 1990s, the open-source software movement at first seemed like a crazy idea. As it grew, it came to be perceived as a significant risk. The software business was based upon developing valuable intellectual property and then licensing it to users. Piracy was thwarted with software encryption and codes as well as legal action as any infringement of intellectual property was met with a bevy of lawyers. When open-source evangelists began saying that the software should be given away for free, it was an attack upon the core of their revenue model. As the adoption of this open-source software increased, this was a growing threat and a tremendous risk.

This is how IBM first viewed open-source software. When MIT technologist Richard Stallman talked to technologists at the company in the 1990s about his GNU software, his idea that software should be like “air” went against every basic instinct of the industry. There was no business model, and it looked like it could undermine the company’s current software revenue model by giving away valuable products for free. From this viewpoint, sharing software was the same as stealing it. This was a growing risk that needed to be managed. (This is how Microsoft continues to view open source, as one of the greatest risks to its dominance in software.)

But eventually IBM took a very different view of this strategic risk. The company embraced the open-source model and developed a business model to benefit from it. (The fact that IBM’s proprietary Web server software had only gained a fraction of the market made this shift in thinking easier.) The new business model was based on using open source as the foundation and then building IBM proprietary software and services on top of it to increase its value. They also structured their involvement in a way that reduced their liability, given the company’s deep pockets.

With this shift in mindset, it became apparent that open source had many advantages. The software was created by a community structured as a meritocracy, in which developers competed to add source code and users fixed bugs so that the system was self-correcting. Distribution was easier because it was free, and the community that created it helped to spread it. IBM became one of the most important proponents of open-source software, helping to drive a revolution that it might once have wished to stop.

It turned out to be a win-win situation for both IBM and the open-source Apache web server initiative. IBM contributed equipment and programmers, giving Apache added credibility and the service support to increase the comfort level of large clients. At the same time, IBM now had solid software and an easy distribution platform for basic server software, which was never going to be a high-margin business anyway. By early 2003, Apache was running on more than 60 percent of all servers and IBM had launched other successful open-source-based projects such as WebSphere and Eclipse.

In the instant that it embraced this new mental model – this new way of seeing IBM transformed one of its greatest risks to its software business into one of its greatest opportunities. IBM realized many benefits from the open-source model. This dark cloud had a silver lining.

In this chapter, we will consider how a shift in mindset can transform risks into opportunities. We’ll discuss how the traditional approaches to examining risk tend to focus on the downside of risk, but obscure the potential opportunities that risks present. We will present a broader perspective of “total risk” that considers both sides of risk to generate integrated strategies. Based on this broader view of risk, we discuss the pitfalls of Chief Risk Officers in focusing the attention of the organization on protecting against the negatives of risk rather than exploiting their positives. Finally, we explore the implications of this view of risk for the organizational architecture of the firm, leading to a reconsideration of the theory of the firm.

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