I wrote this message back in 2004, and with the new procurement concerns coming from the Federal government, I want to re-iterate it. The connection is that you can compete to price alone ONLY if you have a full, stable specification. (Pencils are about all I can think of that fit that description)
Date: Fri, 08 Oct 2004 13:46:19 -0400 From: Michael Richardson <firstname.lastname@example.org>
My opinion is that there are little direct cost savings to FLOSS. It may well have higher direct costs, even. The reason has nothing to do with FLOSS. It has to do with cost/benefit ratios of outsourcing.
FLOSS is primarily about insourcing large amount of things. Off-the-shelf manufactured products represents ultimate outsourcing.
It is always cheaper to outsource IT, provided that you know what it is that you need doing (in sufficient detail that you can write the contract 1), and that your requirements are at least 90% in common with everyone else.
Outsourcing has the following problems:
a) lack of flexibility b) lack of customization c) lack of agility/dexterity (you can't change things quickly)
<SARCASM> But, we don't expect those things from our governments anyway. Certainly there are no corporations or NGOs that have any need to innovate, adapt to changing economic trends, or react to customer demands. </SARCASM>
Note: it doesn't matter what the licensing policy of the software is. It is the business relationship that means that you are charged a fixed price for a fixed basket of goods that is the problem.
In a typical MS-Office desktop environment you have no useful first line of IT people. Even if you might have competent system administrators (and I don't mean MCSEs) there is essentially nothing that they can do to deal with any major issue. The only thing they can do is click on wizards, and call 1-900-Microsoft. As long as you only do things that 90% of microsoft's other customers also do, you are fine. You will get a fix sooner or later. If you are in the other 10%, and do unusual things, you are SOL.
Since there is no use for a senior system administrators (they can't do anything), you might as well hire junior MCSEs, as they are cheap, redundant and easily replaced.
 You do need the occasional access to a VERY SENIOR, UBER IT/business person to write the contract perfectly. I know very few people who have these skills. You can contract a "consultant", but as most of the ones that have the time to deal with MERX-RFP-crap to get the contract to do the consulting, have the time because it is a loss-leader to being in a position to sell the solution as well, they probably are too vendor bias'ed, so you don't get a good contract.
Insourcing is about empowering people to solve their own problems. Giving them a multitude of tools (a utility belt), and the ability to adapt and fashion their own tools. This is where the licensing policy matters. If you can take the whole product to another supplier, or do the work internally easily, then you can adapt things. Things that are high risk are usually best done internally, where you can control the risk (==cost).
It is also why things like VisualBasic exist, and is the #1 tool that MS-Office shops use. It provides them the flexibility, agility, etc. that you need. But, this is in fact insourcing!
Note that the lack of  in most departments is what actually makes it very hard for FLOSS-corporations to offer open source solutions in response to outsourcing requests. Since the buyer doesn't really know what they want, they seldom get what they need, often pay huge amounts to have things "customized", and in any case, their needs change often.
However, since FLOSS corporations are often made up of a small number of  like people, and a better solution is to train the internal people to do most of the work.