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Issue Date: February 2007

Fear of vendor bankruptcy no longer biggest driver for software escrow

February 2007

Fear of vendor bankruptcy is no longer the biggest driver in the software escrow market; potential mergers and acquisitions activity within the IT vendor community is the biggest cause for concern.

This is the opinion of Escrow Europe director, Andrew Stekhoven. Escrow Europe is one of the leading providers of active escrow services worldwide securing, verifying, updating and retaining deposits of software source code and associated documentation on behalf of users of both licensed and bespoke software products.
Stekhoven explained the switch: ″For several years during and after the global IT and software development boom, a fair number of users worldwide insisted on protecting the source code used by their software vendors because they were concerned that the software would be ′orphaned′ if the vendor′s business failed and it was forced to declare bankruptcy.
″They realised that, in the case of an ′orphan event′, the escrow agent would release the source code to them and they would be able to use it to maintain their systems and continue trading.
″Bankruptcy was a very real threat during those boom times because many of the vendors – while very proficient at designing and developing software – had few business skills, and seldom knew how to manage their rapid growth. The failure rate was high.
″Today, however, the IT vendor environment is relatively stable with large and small IT houses having survived up until now because they have very good software products, and solid, viable businesses. But, the pendulum has swung so that the threat is not that the vendor could go bankrupt but that it could be acquired by a competitor that has absolutely no intention of continuing to support two competing software products.″
Instead, the purchasing company will select to hitch its wagon to just one of the products and will abandon the other, forcing its users to disregard their prior investment in their systems and cross-over to a new – and possibly not wanted – technology. Just imagine. Your company selected software A over software B after a long evaluation process because you believed A best met your business objectives. Company B then acquires company A and simply advises you that it will cease to sell and support software A. Or it will support software A but only at a much-hiked maintenance fee.
If you had insisted on an active escrow agreement between you and company A, the source code for software A could be released to you by the escrow agent and you would be able to continue trading without succumbing to company B′s demands, either maintaining your systems or retiring them in a planned and responsible way.
″In our experience, the threat of an event that would trigger the release of the source code to the user community is such that the vendor will immediately return to the negotiating table. On this basis, the end-user at least has a negotiating position and can politely say to the vendor ′if you do not remove your gun from my head, I will file for a release of the source code′.″
Stekhoven′s point has considerable merit. For example, one of the stickiest issues of Oracle′s agreement to buy CRM firm Siebel was continued customer support.
Furthermore, points out the downside to software acquisitions saying ″These newly bulked up giants will increase your software maintenance and support costs. Just ask Eric Wilson, CIO for Raley′s, a California supermarket chain with more than $3 billion in revenue.
″At a National Retail Federation panel Wilson bemoaned his escalating software costs. He said that, if you take labour into account, Raley′s biggest cost is software maintenance. One of the company′s pet peeves is how much software maintenance has gone up over the years. It used to be 10% a year now it is 20 % and might just drive Raley′s to develop its solutions in-house.″
Zdnet asks who is doing the squeezing and then answers its own question – ″Everyone including Oracle and Red Hat.″
Stekhoven highlights that Escrow Europe′s standard release conditions includes reference to maintenance obligations.
Provided the licensee has a valid license agreement, Escrow Europe is obliged to release the material to the licensee if:
* The licensor ceases its business undertaking without validly assigning its maintenance obligations and its obligations under the agreement to a competent third party.

* The licensor suffers bankruptcy.

* The licensor does not comply with its maintenance obligations and/or its obligations under the agreement to such an extent that its failure to comply endangers the continuity of use of the licensed product by the licensee.

* The licensor has been subject to a take-over by a third party that does not continue the maintenance obligations or offers to accept them only on commercially unreasonable terms.
″You can see right away that escrow could be a lifeline for Raley′s Wilson,″ he says.

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