Don't shy away from Software Escrow

Offshore software development in India is no longer a strategic option for US based technology companies but is a must to remain competitive. This reality introduces many concerns regarding the stability of Indian software developers and the extent to which the client can count on continued maintenance and support of the ever-changing software. Thus, the client is likely to ask for the source code from software developers.

Is there a choice? Would you like to retain your source code, that is, your Intellectual Property instead of transferring it to your customer?

Perhaps you have already heard your customer, or any of your potential customers, having a reservation about giving you business because of your size or location. Perhaps you are losing business to older, more established competitors. Do you want to project the same level of assurance as your largest software competitors?

Software escrow could be the answer to these questions. Sometimes having excellent software is the most precarious thing that a small software company can have. Software business development executives in the United States use software escrow as an important tool in establishing those initial critical sales. Software vendors who utilize a professional escrow solution have a much easier time selling their software.

Software developers are often guarded about giving away source code. They do not, as a rule, offer the source code to an application, but if winning the contract depended on it, in most cases they would. You can ensure protection of your intellectual property and your company’s continuous and immediate access to software source code by using escrow.

Many licensors in these economic conditions are more than willing to agree to escrow the source code in order to be competitive in the marketplace. Reducing risk with escrow means that licensees can use start-up software vendors who may have a better product but more risk associated with their product or company. Offering a professional source code escrow agreement has allowed thousands of small to medium sized firms to compete on a more even playing field with the larger, more established software developers.

A licensee’s use of source code escrow means that it can take advantage of better, newer and/or cheaper software and technology alternatives without undue risks. Escrow has become a part and parcel of disaster recovery / risk management strategy.

In general terms, Escrow is the holding of assets by a third party. Software escrow means the software owner or vendor (the “licensor”) deposits the software source code with a third party escrow agent. Typically, the party licensing the software (the “licensee”) requests an escrow agreement to ensure maintenance and updating of the software in future. The software source code is released to the licensee if the licensor files for bankruptcy, fails to maintain the software or other defined events occur.

Software escrow ensures that your customer’s business is protected from your disaster, bankruptcy and other problems. It means that if you do not come through, another developer can step in, and maintain and update the vital software systems of your customer.

Gartner Group (Report on Business Continuity Planning, February 2003): “Gartner believes that it is necessary for all source code to be escrowed. Although software vendors may imply that they do not support escrow agreements, in reality they must do so to satisfy customer requirements. Any vendor that refuses should lose its preferred vendor status.”

Using software escrow involves three major areas of service: contract management, technical verification and audit trail protection. Contract management protects intellectual property by reviewing and executing effective escrow contracts, obtaining and examining source code and documentation, managing updates to the escrow account and executing proper releases of software source code.

Technical verification ranges from ensuring that the deposit is complete to testing the functionality of the software. At a minimum, your escrow agent should include an inventory assessment, physical inspection, virus check, and file listing of every source code deposit. This level of protection offers significant assurance to the client that the deposit is complete and accurate and washes the hands of the licensor such that they are not later accused of submitting incomplete materials. The escrow agent should offer additional levels of verification for further security.

Your escrow agent should have strict and specific procedures for accepting, reviewing, and time stamping all deposit materials such that the deposit of source code creates a clear audit trail of your product’s genealogy. This audit trail protection is a valuable tool in increasing the intellectual property for developers in patent, trade secret, and copyright protection.

The beauty of source code escrow is that it serves not only the interests of licensees but also developers. Deposit of source code escrow can help developers with copyright and trade secret protection. If another party later makes copyright or trade secret claims, escrow can provide a record of the licensor’s creation date and proof of efforts taken to maintain confidentiality of trade secrets.

Gosakan Aravamudan is the CEO of IP Procure,an Intellectual Property Consulting firm Email:gosakan@ipprocurement.com; www.ipprocurement.com Bea Wray is the CEO of SourceHarbor, a software escrow firm. Email:bea.wray@sourceharbor.com; www.sourceharbor.com