South African companies – large and small – should consider the advice of The National Law Review and look to software escrow to protect themselves from Covid-19 pandemic licensor bankruptcies.
This is the suggestion from Escrow Europe founder, Andrew Stekhoven, who established the company’s South African office over 15 years ago. Escrow Europe is currently the country’s longest-established provider of active software escrow services as well as its only BEE, ISO quality and Microsoft Dynamics Certified Provider of active software escrow.
The National Law Review was first developed as an easy-to-use resource to capture legal trends and news as they start to emerge, and is today one of the world’s highest volume business law websites.
Acknowledging that it has a strong focus on legislation in the United States of America, Stekhoven nevertheless maintained that its advice has global relevance.
“The National Law Review recently wrote that increased bankruptcy filings as a result of the current COVID-19 pandemic are a virtually certainty (https://www.natlawreview.com/article/licensees-and-licensors-need-to-prepare-potential-bankruptcies-caused-covid-19),” he says.
“While it honed in on what protection is afforded licensees and licensors of intellectual property, it did mention that – in the context of software licenses, including possibly hosted Cloud-based arrangements – licensees should consider ‘a separate source code escrow’. It continued: ‘This is particularly important where the licensed software is critical to the licensee’s operations and where the licensor is also responsible for providing needed support and maintenance services.’
“Very smart advice,” said Stekhoven, “but it doesn’t pertain to all companies and all software. How do you – as a company director or small business owner – know if your company’s operations need the protection of a software escrow agreement and what steps should you take to obtain that protection?”
Here, Stekhoven has four key points for consideration:
* Determine how many mission-critical applications currently running within your organisation are licensed, and therefore contain technology or intellectual property beyond your control. If your organisation only runs ‘off the shelf’ software applications, you can safely assume that you don’t need escrow. On the other hand, if software created by a potentially financially unstable developer impacts your revenue and productivity as well as public safety, etc, you need to consider software escrow.
* If you do have software escrow agreements in place, make certain that these will ensure business continuity in the event of a release event or condition. This is a vital step because research shows that as many as nine out of every ten traditional source code deposits held in escrow are useless. The reason for this potentially ruinous failure is that conventional (or passive) escrow deposits are not verified by technical specialists. The software is assumed to be complete and deployable, but usually there is no check on whether or not this is the case. An infinitely superior option to conventional passive escrow is the more rigorous active escrow. Here the escrow agent subjects the material on deposit to consistent standards of technical verification, at least once a year, and provides a report which warrants that the deposit contains what the supplier has committed to lodge, thereby providing proper reassurance that it is complete, up-to-date and is most likely to be usable.
* If you do not have escrow agreements in place, ask your developer or software provider if they have escrow. If the answer is ‘yes’, scrutinise the terms and conditions of the escrow agreement and ensure it specifies exactly what you will need to continue to support the application in the event the vendor ceases to exist, and make sure these specifications are adhered to. If the answer is ‘no’, insist that the vendor and your company enter into an agreement.
* Take control of the negotiations. Make sure you have read and understood all provisions written into the escrow agreement. Ensure that the agreement enables you to access the deposit materials when you need them. Scrutinise release conditions and the release process to make sure that there are no loopholes preventing the escrow agent from completing his task.
As mentioned above, active escrow is by far the least risky option to select. Verification testing is a common service provided by most good escrow agents.
“Many companies’ core, mission-critical systems are dependent on software which is licensed from third parties rather than owned in-house, and therefore subject to conditions or events beyond the licensees’ control,” concludes Stekhoven.
“Reliance on third parties may not immediately appear to present a problem but an unforeseen development – such as a change of ownership or strategic priority on the part of the software licensor, or financial instability and bankruptcy – can have extremely serious, possibly catastrophic, effects on the health of the end-user organisation. Active software escrow is an elegant way to mitigate the risk.”