Software escrow agreements can play a major role in developing a business environment in which South African SMMEs can flourish. This is because an escrow arrangement governing the source code developed and maintained by the SMME essentially nullifies tender evaluation and scoring processes dealing with company size and financial backing, says Escrow Europe MD, Andrew Stekhoven.
With these criteria nullified, small software and systems developers run out onto the same playing field as much larger companies with their bigger reserves and healthier cash flows. In brief, escrow transforms an SMME into a Goliath killer.
Often, smaller ICT suppliers are precluded from tendering for major projects despite the attractiveness of their expertise and intellectual property (and often, keener pricing). 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 may not have comparative resources to be able to guarantee ongoing support, etc.
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.
However, software escrow is a highly cost 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 the terminal for Gates D at Schiphol Airport, the Netherlands’ main air-gateway and one of the world’s busiest transport nodes. Each terminal at Schiphol operates as an independent profit centre, and the Gates D terminal is considerably more profitable than the others. This is partly because the terminal authorities were able to implement a powerful but low-cost access control system, developed and maintained by a team of only two ICT engineers, essentially SMME ICT vendors.
A comparable system from one of the larger software houses would have cost significantly more to implement and maintain. Thanks to an active escrow agreement, which provides terminal managers with a guarantee of business continuity, it was possible to entrust this mission-critical application to a lower-cost supplier.
The risk of relying on just two men for a mission critical system was effectively taken out of the equation by the active software escrow agreement.
Increasingly, the adoption of the SaaS (Software-as-a-Service) software deployment model is boosting the need for tried and tested methods of protecting access to source codes as well as data.
This is because the SaaS model – in which the software a company uses to run its business processes is hosted by a vendor or service provider and made available over a network, most often the internet – stores user data on third party systems, with third party licensors, within their physical walls and managed by their staff.
As a result, the user can lose control over his own data should the supplier no longer be able to meet its delivery obligations.
In an ever-changing marketplace, young and small software development companies can abandon their products for myriad reasons – insolvency, the sale of the company to a competitor, etc. This leaves its customers with an unsupported, un-maintainable product.
Larger companies, too, are not beyond risk within the world of mergers and acquisitions, and ‘orphanware’ – the name given to abandoned products – can easily be the prodigy of a well-established parent, leaving the customer with sometimes substantial direct and indirect cost and affecting business continuity.
So, given the very real incidence of orphanware out there, particularly within the SaaS environment, how do you protect your company against being left holding the baby?
You can avoid contracting with smaller companies or start-ups, especially for mission-critical functions, and opt for established companies with lengthy track records. But, this is not always an option. And, what if the established companies can’t offer you the custom-fit system that you need?
Certainly, one of the most elegant ways of managing the risk of your business’s absolute dependence on information technology is active software escrow.
SMMEs can buy themselves a huge amount of credibility and client satisfaction, as well as help grow their businesses, utilising active escrow. Those SMME ICT suppliers who think escrow is not for them, should consider just two questions:
* How many deals have I lost because my potential clients were concerned about my sustainability or the size of my operation?
* How many more sales could I have made had I deposited my IP in an escrow agreement?
Active escrow is a highly effective, low cost measure to ensure that SMME Software vendors will not be excluded from business opportunities and discriminated against due to their small company status.
It allows for client companies to engage with SMME Software vendors in the knowledge that they are have protected against ‘orphanware’ emergencies and are able to work with the supplier they want.