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I have discovered that my packaged software supplier is in financial trouble. How can I ensure access to the source code if the supplier goes bust?

When a bug triggers a software crash, organisations call on the supplier of the package to come up with a fix. But if the software supplier itself has gone bust, the only way for the organisation to solve the problem is to gain access to the source code and fix it itself or hire a services company to do so. However, any software licensee seeking access to the source will, almost without exception, have to join the back of a long queue of creditors and stakeholders.

Such a scenario can be avoided, however, if the source of business-critical applications is covered by an 'escrow' agreement. Under escrow (a word taken from the French meaning to securely deposit something with a trusted third party), the software supplier is asked to provide a copy of the source code to an escrow agent, such as the NCC Group.

The agent stores the code in a secure facility, with access limited to specially authorised personnel. Over and above the source code, suppliers will also often agree to place web site material, proprietary technology and design documentation with escrow agents.

The licensee is charged an annual fee for the agent to protect the code and chase for updates when required. The code is only released to the licensee after certain pre-defined 'trigger' events, such as the liquidation or receivership of the supplier, or the failure of the supplier to properly maintain the software. The cost for that is hardly burdensome. Indeed, escrow agreements can be put in place for less than the price of a business airfare to New York.

Rising demand

And in recent years, that has been money well spent. As the number of IT companies going to the wall has risen, so too has the number of times NCC and others have been called on to release source code to customers.

That is bad news for licensees and, of course, even worse news for software suppliers. Indeed, figures from the Department of Trade and Industry show that there was a 50% increase in the number of IT companies going into liquidation last year, and if anything the situation is likely to be even worse this year. We expect the present difficulties being experienced by many IT suppliers to continue for the foreseeable future. As a result, organisations must take proper precautions to ensure business continuity in the event of their software supplier goes bust.

Ideally, of course, they will have drawn up escrow agreements long before learning of their software supplier's financial difficulties. Apart from anything else, struggling companies may be reluctant to enter into an escrow agreement and this could lead to a lengthy legal battle to secure the source code and the rights to use it.

But for those businesses not covered by escrow agreements and worried about the financial stability of their software supplier, they should first select an agent that has the expertise to test the source code and ensure that the code could actually be used to build the application. A typical escrow agreement should include basic testing as standard. But it is recommended that a full verification test of the material placed under the agreement is undertaken to ensure the quality of the deposit.

Pre-emptive action

Once the agent has been chosen, the licensee must contact the escrow agent before calling their supplier. The agent will advise on the best course of action, based on the contractual arrangement that a business has with its supplier. In many cases, there is a section in the initial contract that gives the licensee the option of placing the application in an escrow agreement. The agent will also approach the software company and run through the aspects of the escrow agreement to ensure co-operation. After an agreement has been signed, the software company has 30 days to deposit the code with the agent.

Not all software vendors offer escrow agreements as a rule. At NCC, we have launched the Escrow Solutions web partnership in order to advise companies on which software suppliers set up escrow agreements as a matter of best practice. When a software supplier has an escrow agreement in place, the supplier can carry the Escrow Solutions approved logo on their website, showing that their software is protected. More than 120 companies have so far signed up to the partnership. A list of software suppliers that have joined this initiative can be viewed at www.nccglobal.com/webpartnership.

The best advice of all is to agree escrow terms at the time the software licence is negotiated. Businesses otherwise risk facing the expense of re-building their IT infrastructure if their supplier becomes an industry casualty.