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Your Data Is Important: Escrow Agreement As Protection if Your Software Provider Goes Out Of Business

While escrow agreements are most commonly associated with the property market, this specific form of contract can also be utilized within a number of alternative industries. Escrow agreements are, for example, frequently used within the finance sector, and in some areas of recruitment. However, perhaps one of the most beneficial uses of this type of contract for small and medium sized businesses who regularly outsource their processes is in software provision, helping to protect your valuable data and ensuring that a solid protection and contingency plan is in place should progress not occur as expected.

What is ‘Escrow’?

Escrow is a form of contract whereby a transferable asset is independently held until an agreed time. The ‘asset’, in this instance, can be anything from funds to a property, although in terms of software ‘asset’ usually refers to source code and other related data. The ‘agreed time’ aspect is also highly variable, and can refer to a specific time, to a set of criteria being met by one or both parties involved in the transaction, or to a specified event, such as a software provider going out of business, the provider failing to meet necessary milestones in the development, delays due to illness, or anything else.

Why is Escrow Needed?

Although there are many different reasons for having an source code escrow contract in place, these reasons can all be boiled down to one very important aspect: protection. The aim of an escrow agreement in software is to protect both the client and the software provider, ensuring that there is equality and support on both sides of the transaction. It is also the aim to provide both parties with peace of mind that, should an unexpected bump in the road be hit, the necessary paperwork is in place to facilitate the continuation of each business while simultaneously minimizing any losses/risks that may be incurred.

For the client…

When a business requests a tailored software solution to improve internal processes, they are placing their trust — and their confidential business data — into the hands of their chosen software provider. In most situations, the provider completes the job without any notable issues. However, should that provider fail to get to completion for whatever reason, it is important for the client to know that their data is important, and that it is protected, and to be able to gain access to any source code that has already been developed. This can be a significant step towards minimizing the risk of security breaches.

For the software provider…

Clients who have requested tailored software solutions may sometimes request access to the source code prior to completion of the project. While it is simple to understand the reasons behind requests such as this, it is rarely practical for a provider to grant them. Again, security breaches are a major concern, along with use of the code before it is ready, potentially resulting in client risk and subsequent poor relations between both parties. However, one of the greatest risks for a provider is the transfer of existing code to another provider should a client make the decision to terminate a contract at any time.

How Does Escrow as Protection Work?

Escrow as protection should a software provider go out of business is more straightforward than it may seem. Any data provided by the client, and any code developed by the provider, will be maintained by an independent third-party holder, whereby neither transactional party can gain access to unnecessary information. Ultimately, neither party will be able to access each other’s legal and rightful property until an agreed time or event. In terms of software escrow, this event will usually be completion of the project in question, at which source code are released to the parties.

Who Holds Your Data?

In many cases, the third-party holder of your data will be a dedicated specialized escrow agent. Businesses should, where possible, arrange for an escrow agreement with a well establish escrow agent that has a proven track record.  The idea is to find an escrow agent that you can count for the entire life of the escrow.

Ensuring a Smooth Process

When working with a dedicated and experienced escrow agent, businesses will be provided with the information they need to draw up a solid and beneficial escrow agreement as protection, alongside their selected software provider. However, in general there are a few aspects which can help to make the process smoother, simpler, and more enjoyable for both parties. These are:

  • Selecting an escrow agent with experience in software escrow as a protective measure
  • Ensuring efficient transfer of any necessary data/code to the escrow agent
  • Being clear and straightforward with regard to the criteria/conditions for property release
  • Promoting the importance of timely updates to data/code as and when necessary

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