Editor’s note: Jim Whitehurst, chief executive officer of Raleigh-based (NYSE: RHT), is one of the speakers at the eighth annual this week in Durham. Whitehurst recently talked with Kate Catlin of about Red Hat, Red Hat’s Linux-based business, the challenges in changing from his former role as an executive at Delta Airlines to Red hat, and the leadership required to be successful in business today given the ongoing economic crisis.

This is the second of a two-part interview with the focus on Red Hat and its business model:

What is Red Hat? Can you explain what open source software is and how it relates to Red Hat’s business model? How does one make money selling free software?

Red Hat is the leading software company using the open source model. We’re a member of the S&P 500 and one of the fastest growing, most profitable public software companies. We’re best known for the Linux operating system where we have 80+% share of paid Linux. But we also have a full suite of enterprise infrastructure software and basically open source software is a development model where source code is open and freely redistributable.

So computer code is 1’s and 0’s that the computer interprets, but that starts off as what we call source code and that’s something that is somewhat English readable, it’s certainly understandable by a person, and that’s what a programmer writes in; and that’s later compiled back down into 1’s and 0’s that a human can’t understand but a computer does.

And open source is a model where that source code, rather than keeping it proprietary and closed within a company, you actually distribute that source code along with the compiled code. And what that allows is customers, developers, anyone who’s interested, can see that source code and make additions and changes to it.

Now why that’s been so successful is that by getting communities of literally hundreds of thousands of people around the world interested in specific open source projects, these projects at a much lower cost and much more quickly, can grow, can add functionality, can find bugs, can become more secure. So in the same way that Wikipedia, by asking basically the world to contribute to the general knowledge on there, and it quickly surpassed any commercial encyclopedia in terms of total amount of knowledge, open source software does the same thing in software.

So, very, very quickly Linux has become a much more secure, robust operating system than is say, Windows, even though we are a much smaller company than Microsoft, and that’s because thousands of people contribute.

Red Hat makes money, I often say, specifically by selling free software. But actually, Red Hat makes money by recognizing that some of the very things that make open source a very powerful development model make it a very difficult thing to implement in the enterprise. And what I mean by that is the power of open source is that thousands, or tens of thousands of people, are contributing to various components of the code. And that’s great as a development model because it leads to very fast iteration and with very, very modular components; which makes it a lean but very secure operating system.

The problem is for an enterprise, you don’t want that rapid level of change. So, for instance, Linux changes everyday. Right?

Somebody’s changing a component of Linux everyday, which again is great to add new functionality, but if you’re running the New York Stock Exchange, the last thing you want is for your core operating platform to change everyday. And so Red Hat offers a whole series of services that make the open source development model available to the enterprise. So we offer, obviously, service and support, and testing; but we also guarantee that we will continue to support our platforms and update some new hardware we run, security, and other patches for 7 years after a new version comes out.

So, if you are again, someone like the New York Stock Exchange, who may spend tens or hundreds of millions of dollars riding on top of that platform, you can be confident that for the next decade your application will continue to run. And so by putting together that whole set of things around stability and engineering and support, and put on top of that, again professional services and other things, we’ve been able to build a very, very profitable model by giving away software.

How does your business model affect the way Red Hat executives lead internally and the ways in which the company recruits for and develops leaders?

The open source model, by its nature, is a 21st century model. We don’t think in terms of, nor do we act in ways where we think about control. We think about influence. We don’t think about ownership. We think about communities of collaboration. So, instead of trying to amass intellectual capital, we try to distribute and build the largest base of capital around that.

Now what that means in terms of the way executives need to lead is that we have to be a very, kind of loose, non-hierarchical group of managers who’s comfortable in a role of influence rather than leadership. And, you know, it’s particularly important because the boundaries of the corporation become very porous. So Red Hat, as I said is 80+% share of paid Linux.

We are less than 20% of the total contributions to the Linux kernel. So the people we work with are sometimes employees, they’re often times not. You know, they may be at universities, they may be at customers, they may be at partners, frankly they may be at competitors. And so, we have to be very, very careful that we don’t mandate. And I think the reason Red Hat has been successful is because we’ve learned the value and the importance and the art of influencing rather than mandating.

So, I do feel we are the leaders in the communities we participate, again using Linux as an example; we are the leaders in the Linux development direction. But we do that not because we formally have that role, it’s because we’ve built an ecosystem and we are a good contributor to that system and therefore we have built credibility and have an ability to influence over time. And so as leaders at the company that’s true both internally and externally.

I can’t mandate, you know, go do X and go do Y. I mean our employees, again its porous, they can leave they can go other places. But more importantly is, we have to foster innovation and creativity in a way that companies that are just trying to just allocate and manage capital don’t. And so the management style, just by nature has to be more inclusive, more open, much more communicative than I’d say the traditional 20th century company.

I come from a 20th century company world. Right? You know, running Delta Airlines before Red Hat. And when you are dealing, again, with a traditional 20th century company that has tens of billions of dollars worth of capital, you typically run a very hierarchical system to basically be able to distribute and organize and maintain in control of this massive set of physical assets and insure that they are managed and you will have a return on it, etc., etc.

In a world of ideas, I am not trying to manage our employees as cogs in the wheel, as a matter of fact I rarely call them employees, I call the associates. My job is to get the most innovation and creativity out of our people. And so it’s all about how do we motivate, how do we inspire, how do we create a meritocracy where the best ideas win. So it’s a very different skill set because it’s not sustainable for me to have our employees to do things because I tell them to, I need to influence to get people to do things because they want to.