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Why Do I Need an Escrow Agreement?

It is fair to say that no company is immune to the changes in circumstance. The recent failure of 2e2 only supports this position. While it’s easy to believe ‘it won’t happen to us’, should the worst happen it can be catastrophic for your organisation.

An escrow agreement is there to protect you should your software supplier cease trading. It can also be triggered by other events, which would be outlined in your escrow agreement. These can include support and/or maintenance for your software being discontinued. It means that you are able to continue to access and use your software.

With an escrow agreement in place, you are protecting your business from perhaps suffering a similar plight to your software provider. The impact of losing business critical software and data can be devastating.

How does an escrow agreement work?

An escrow agreement is a contractual agreement between the end user, the software vendor and the escrow agent. (In the case of SaaS escrow, the agreement is between the end user, the software vendor, the hosting company and the escrow agent.)

The agreement sets in place all of the terms. While the escrow agreement is in place, then the software source code remains deposited with the escrow agent. Should your escrow agreement be triggered, because the terms of the agreement have been broken, then the escrow agent would release the software source code to you, the end user. This enables you to continue to access and update your software going forward.

What are the benefits of an escrow agreement?

When considering the value of an escrow agreement, you should consider not just the chances of your software supplier going out of business but the cost implications should this happen. Here are some of the key questions to consider:

  • How much have you already invested in the product – protecting your investment?
  • What is the cost of purchasing a replacement product?
  • How long would it take you to purchase and implement a new product? Consider the evaluation, presentation, implementation, and change.
  • How many man hours would be taken up by purchasing a replacement product?
  • How valuable is the data that the software product controls and what is the subsequent cost, should this software not be available?

An escrow agreement would protect you from these unexpected costs. It enables you to manage the risk of your software vendor no longer being able to supply you with the software, protecting your business critical processes and data.

I hope this helps provide some food for thought. If you have any other questions or you want to find out more about escrow agreements, please contact us.

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