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Escrow boosts developer competitiveness

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As the recession continues to bite, there’s one way of securing investment in IT in a cost-effective manner. Escrow Europe director Andrew Stekhoven says users should critically examine active software escrow agreement to weigh up the advantages of having one protect IT systems and business continuity.
A sound, commonsense approach to providing for business continuity, active software escrow provides cost effective relief and security for a business.
For company directors
Today, many companies – large and small – rely on core, mission-critical information technology processes that are dependent on software which they do not own but license to use from third parties, and therefore are subject to conditions or events beyond their control.
This reliance on third parties may not appear to present a problem, but companies who want to continue to use software important to their business where it needs constant support by a software supplier could be affected by an unforeseen development impacting on the software supplier’s business.
Supplier insolvency, a change of ownership or a new strategic priority (for example, discontinuation of support and maintenance) could leave them stranded and have an extremely serious, possibly catastrophic, impact on the financial and business health of the company.
Change of ownership is currently a growing threat in that larger ICT conglomerates such as Oracle with Hyperion, Siebel and Peoplesoft are buying up successful smaller companies sometimes for no other reason than to kill a competitive product, either directly by discontinuing support or indirectly by seizing annual maintenance revenue streams and increasing them unreasonably.
Without an active escrow arrangement the end-user of the software would have a gun to his head and/or be left with “orphanware”.
And, unfortunately, this risk is also excluded from all directors and officers (D&O) and loss of profit/business interruption insurance policies.
To manage the risk of a business’s absolute dependence on a software supplier, active software escrow provides the business with guaranteed access to the source code for its mission critical systems and is the most elegant solution for managing the multifaceted risks and due diligence obligations facing directors.
For larger software developers
The benefits of active software escrow for the software supplier are that it will reinforce ownership rights in the source code which, typically, is a most valuable asset. Other benefits include risk management and business continuity assurance, patent and copyright preservation, disaster recovery, and reduced dependency on employees.
With respect to patent, trade secret and copyright preservation, active escrow arrangements provide a company with documentation when securing a patent claim, significant assistance in an infringement suit, and robust proof to support an intellectual property copyright claim.
For disaster recovery, permanent loss of critical source code and related technical documentation is not an option. Having a most valued asset in escrow with a neutral third party provides users with an alternative to disaster in the event of an emergency. The active escrow agent will maintain a copy of the intellectual property stored off-site in a professional vaulting facility and available for restoration.
Finally, active escrow also reduces dependency on key employees who tend to “hoard” instead of “share” information.
For the SMEE software developer
Often, smaller ICT suppliers are precluded from tendering for major projects despite their expertise and intellectual property. This is simply because the contracting organisation believes it is less risky to deal with large, established firms than smaller concerns which may have the best-fit solution but do not have the resources to guarantee ongoing support.
In theory, it is more risky to deal with smaller organisations – the intellectual property often resides with just one or two people; what happens if they leave the company or are unable to fulfil their work obligations because of illness or death? The smaller company also doesn’t have the financial resources to ride out turbulent economies and business cycles.
Software escrow is an effective method of minimising the risk of conducting business with smaller companies; in effect putting them on the same playing field as their larger competitors.
A case in point is Genasys Technologies, a Stellenbosch-based IT company whose leading management and customer information system for the short-term sector – Software Key for Insurance (SKI) – is sold locally, has been able to open up new markets in the United Kingdom because it has an active software escrow agreement.
The risk of UK insurance brokers relying on a small software house over 10 000 kms away for a mission critical system was effectively taken out of the equation by the agreement. It bought this SMEE a huge amount of credibility and client satisfaction, as well as help grow the businesses.
For the legal firm or attorney
Historically, legal firms have held software in escrow for their clients. But, in this technologically driven world, this is no longer proving a viable revenue stream because:
* They are precluded from securing a high value fee-earning project because of a low value escrow contract that users have with another interested and affected party.
* The primary qualifying criteria for professional escrow (as set out in ISO9001) are that the agent may not be the software owner or end-user’s attorneys, may not be software owner or end-user’s auditors, and may not be the software owner or end-user’s bank.
* According to ISO9001, a professional escrow agent must ensure that consistent and robust source code verification processes and procedures are in place.
Instead of continuing to offer low fee-earning escrow, attorneys should consider moving into the more lucrative areas of escrow governance audits and operational risk management consulting, and working hand-in-hand with Escrow Europe.
It is currently not in the business of escrow governance audits and operational risk management consulting – its profit motive is focused on securing escrow contracts and driving work through its source code technical verification laboratory.
“With the global business world focusing on compliance and risk management, more and more South African companies are looking for ways in which they can keep pace with their international competitors or partners,” says Stekhoven.
“Active software escrow is an elegant solution that will more and more come under the spotlight. Investigating how escrow can minimise your risk, or increase your revenue streams, certainly deserves to be on your check list,” he concludes.