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What is Business Software Escrow

Written by Andrea Hill on . Posted in Business & Ethics

. . . and why should I worry about it?

Contract iStock 000007130684SmallSome software you buy, and some software you borrow.  

For instance, when you buy a copy of Microsoft Word or Intuit Quickbooks, you are buying that license to use for as long as it works for you (and as long as you don't violate the terms of the agreement by doing something like installing it on a lot of different computers instead of the one you bought it for). If you want to take advantage of upgrades and new features, you buy a new copy. You haven't bought the software code - just the application.

Some software, primarily more complicated software like business systems (Great Plains, Oracle, iDiamondCloud, Navision, The Edge, Hansaworld, Diamond Counter, Jewels2000, etc.), is typically licensed for a period of time. Your license will come with certain requirements (number of users), certain expectations (like how much you will pay each year, or not sublicensing or transferring the software), and certain benefits (updates, support, improvements, bug-fixing).

This article isn't intended to tell you about how to negotiate your software license - that's a really big article. I just want to make you aware of one element that should always be included in your licensing discussions:  Escrow. Just like you may escrow money for real estate taxes and home insurance in your mortage payment, you should have an agreement that provides escrow for your software code. An escrow clause allows for a fully uncompiled copy of the code to be held securely by a third party, typically requires an updated version of the code to be stored on an annual or semi-annual basis, and has terms that define the conditions of release to the licensee.

Why Do You Need an Escrow Clause?

Many mortgage bankers want homeowners to escrow real estate taxes with them, because they know that if the homeowner gets behind on taxes the municipality will have a claim on that property - a claim the bank doesn't want them to have. Mortgage escrow is a security feature for bankers.

Likewise, when you make a signficant investment in software, you need security too. Your investment won't just be in terms of licensing costs, it will also be your investment of time to learn the software and time to adjust business practices - and in many cases this investment is equal to or greater than the cost of the software itself. Then, the more years you use the software, the more enmeshed in your business that software becomes.

So what if the software provider simply ceases to exist? What if they stop providing updates or improvements for an extended period of time? What if the software provider goes into financial distress? What happens to your software?

You Don't Have the "Real" Code - You Have a "Working Copy" of the Code

Are you thinking that you could just have a new developer pick up where the software provider left off? Not likely. You see, in nearly all cases of commercial software licensing, you don't have the "real" code, you have a compiled version of the code. You have the part of the software that works - that does something - not the part of the software that provides all of the instructions to make the code work.  The other part - the programming part - software developers carefully protect. 

So if your software provider goes belly-up or fails you in their obligations, you need to have two options available to you. The first option is to consider a different software and go through the process of change (and if you don't have an escrow agreement, this is your only option). But if you have the software in escrow, you have the option to take control of the code, hire or contract your own developers, and continue tweaking, bug-fixing, and improving it.

This aspect of source code escrow is just a tiny part of the overall software licensing process, but it's an important element that is nearly always forgotten unless a business owner thinks to include a lawyer in their licensing agreement. Don't let software vendor failure leave you with only one option - make sure you include an escrow clause and protect yourself as well as possible. 

Here is a link to an excellent article on software licensing. Save the link - you may not need it now, but it will come in handy as soon as you do.