Software Escrow Can Serve As Credit Crunch Insurance, Says Expert

Companies are being urged to implement software escrow agreements as more and more firms go bust. One legal expert said that companies should go further and assess their whole software supply chain to protect against the effects of the downturn.

Software escrow agreements are signed between the supplier and buyer. They place the software's source code in neutral storage and the buyer of the software gains access to the code under pre-agreed circumstances. One of those is almost always the failure of the software supplier's business.

That protects the buying company because it can continue to use and update the software even if the supplying firm is not around to provide the support that was agreed in the original contract.

NCC is a supplier of escrow services, and it said that companies should be putting escrow in place now more than ever.

"We are already seeing the devastating effect of the recession as it hits the UK’s high streets. The potential for software companies to declare bankruptcy is very evident in the media at the moment," said Jon Leigh of NCC. "We are urging companies – especially those reliant on using or delivering bespoke or tailored software – to carry out an escrow audit as part of their best practice procedure to identify the applications most at risk. This will enable them to protect themselves and their customers if the worst does happen."

Charles Park is a technology law specialist at Pinsent Masons, the law firm behind OUT-LAW.COM. He said that escrow should be looked at, but as part of a wider review.

"It's about the whole supply chain. Escrow is one tick in the box. If you can get the code back in the first place, that's something, but where will you get the people?" he said.

Park said that companies which rely on software from smaller suppliers must ensure that they are not simply left with discs full of software code that they cannot understand.

"If you have business-critical software which requires maintenance you need to put contingency planning in on how you are going to get the developers from that company that has gone bust to help you," he said. "Over-dependence on potentially weak software supply is what escrow highlights. Stage one is to get the source code back, but stage two is where you have to get the people to look after it."

The NCC said that the problem of how to secure access to software after a supplier goes bust was becoming increasingly pressing.

"According to statistics released by the UK Insolvency Service there has been a 129% increase in the number of businesses in the IT sector in England and Wales going into administration in the final quarter of 2008," said an NCC statement. "Over the first quarter of 2009, this number is expected to rise even higher."

Park said that companies should choose their software suppliers carefully in the first place, and that there is currently a trend towards buying from bigger, better-funded companies. But once that decision has been made, companies should make sure they make direct contact with the people who can make their software work.

"Invest in the relationship with the supplier, keeping in regular contact is the best way to find out on the ground what the situation is," he said. "When you've got key parts of the business running on bespoke systems developed by a small business, take the opportunity to get to know individuals that you might need to contract with if things go wrong."