By Jim Ford, CEO, Guard-IT Corporation
For Small Business Texas, February 2, 2000
How many business owners invest in customized or proprietary software or other information technology (IT), purely at the mercy of its Developer? Nearly every one. How many business owners have had to reinvent the wheel because the Developer went out of business, discontinued the product or its service agreement?
Too many. Unfortunately, this is a common situation.
Developers are, by and large, honest and hardworking business people. However, the turnover and volatility inherent in the software development industry results in a bottom-line increase in costs – not to mention the sheer panic and frustration – for business owners without recourse when a custom software package and/or its Developer goes south (or to Bankruptcy Court, or wherever).
Traditional methods, like insurance or liquidated damage provisions in the software license agreement, don’t cut it. Insurance (i.e., cash payment upon declaration of a loss) is completely insufficient – the check will not and cannot replace the computer system by which the Licensee’s business lives and breathes! Liquidated damages (still another inadequate cash payment) are virtually impossible to predict and are subject to complete dismissal by a court or jury, should the scuffle between the Licensee and Developer go to court.
However, business owners need not despair and much less “wing-it” when contracting for custom software development. They can simply ask the Developer to provide the only real solution: third-party escrow of the software’s source code and its support materials and documentation. For under $2,000.00 including first-year maintenance, an escrow agreement can be prepared in a day or so, and eliminate the prospect of six weeks’ of sleepless nights during a development project.
Escrow binds the Developer and Licensee(s) under a legal contract that basically says, if the Developer goes south (or to Bankruptcy Court, or wherever), the Licensee may obtain an exact duplicate of the source code, documentation etc. from the third-party escrow company. The Licensee may then use internal or external programmers to support or repair the software.
Compared to the replacement costs, downtime, reinstallation and retraining required to build a new system from scratch, software escrow becomes a “no-brainer”, and a proactive win-win for all of the Parties. Not only is the Licensee’s benefit clear, but the Developer also gains intellectual property (IP) rights protection by the escrow, as the third-party agent can independently authenticate its ownership. What a deal!
As a closing tip, Licensees and Developers should not place their escrow with their own general counsel (or a brother-in-law with a fire safe). Should a dispute arise, it’s unlikely that either Party’s attorney will be viewed as an unbiased “keeper of the goods”. The Parties should seek and hire an independent company that specializes in escrow agreements.
Then, they can both get some sleep.
