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Chris Smith and Christian Dodder
Escrow Associates, LLC
What you will learn
1) How to understand the changing role of technology
escrow for your clients.
2) That an alarmingly high percentage of technology
escrow agreements are not in compliance with the
legal terms agreed to in the license agreement.
3) How to address this issue through periodic auditing of
both legal documents and escrow materials.
Executive summary
This paper demonstrates the importance of technology
escrow auditing for clients that rely upon licensed
technology assets to conduct business. While the
practice of implementing a technology escrow
agreement has become common among enterprise
software transactions, this paper also shows why and
how those agreements and materials should be
audited, to dramatically improve the quality of escrow
services. In a step-by-step guide, we explain the steps
of auditing IP escrow agreements, so that lawyers can
strengthen client relationships and improve client
positions in these turbulent economic times.
Contents
Introduction ....................................................................................3
Understanding the role of technology escrow ......................................3
Addressing the growth of SaaS .........................................................3
Knowing what your clients fear .........................................................4
Building your practice by protecting your clients .................................4
Know why escrow agreements fail .....................................................4
Save clients from the common denominator .......................................5
Use escrow auditing to strengthen relationships ..................................5
Follow the steps to safety .................................................................5
1) Review client needs and commitments ...........................................5
2) Obtain agreements and summaries ................................................6
3) Make sure agreements meet commitments .....................................6
4) Review deposited materials against delivered technology .................6
5) Provide a summary of enterprise-wide compliance ..........................6
6) Consolidate escrow agreements with one provider ..........................6
Conclusion ......................................................................................6
Contact information .........................................................................7
Author Biographies ..........................................................................7
Chris Smith, President .....................................................................7
Christian Dodder, CEO ......................................................................7
References .....................................................................................8
Introduction
Everyone is thinking about the economy. Your intellectual property clients are thinking about it, cutting
budgets and wondering if they will need as much legal counsel this quarter. As developers also find
themselves in financial difficulties, your clients should begin to prioritize IP protection with escrow
agreements to protect against the increasing likelihood of software vendor failure. The good news is
that IP lawyers can strengthen their client relationships and protect their clients at the same time, by
performing regular escrow audits, and by informing clients about how the economy is changing the
nature of the risk they face from their technology assets.
Understanding the role of technology escrow
Technology escrow is not only a way for your clients to protect IT assets, but also a valuable legal
decision made to protect your clients’ operational future, in the event that their vendor ceases to be
available, for whatever reason. In an escrow agreement, an agent, such as Escrow Associates, securely
stores key components of licensed technology, ensuring that your clients will have the information and
resources necessary to maintain or replicate licensed technology.
After surveying the market, research firm Forrester openly promoted escrow agreements in January of
2009, reporting that, to protect their licensed technology, firms would benefit from entering into
agreements with “escrow, or escrow-like mechanisms1” since “most [licensing] contracts do not include
the … protection mechanisms found in on-premise contracts.”
Addressing the growth of SaaS
One of the reasons that Forrester is openly promoting escrow is the growing prevalence of SaaS, or
Software as a Service. In SaaS agreements, companies enter into an agreement with a software
developer, who provides access to software services on
a subscription-based model.
The explosive growth in this market, as shown by the
sidebar, is just the sort of situation that calls out for
escrow services. Since these software developers are not
providing ownership of the technology in question, if
they become unavailable, your client instantly loses a
vital business operations mechanism. However, with an
escrow agreement in place, they can secure access to
their vital business software.
1 Any language in an agreement that mandates technology assets be held by an independent party, to be delivered
to the customer in case the vendor becomes unavailable.
“… SAAS WILL GROW FROM MAKING UP JUST
OVER 1% OF THE $18 BILLION IT
MANAGEMENT SOFTWARE MARKET IN 2008
TO 10% BY 2013, BY WHICH TIME MANY OF
THE BRAND SAAS PROVIDERS COULD BE WELLESTABLISHED.”
– FORRESTER RESEARCH
Knowing what your clients fear
Your clients are worried about the following issues pertaining to their vital business technology license
contracts—and if they are not, now may be an ideal time to bring up these potential scenarios:
· Developer insolvency – In a slower economy, some developers are having trouble collecting
funds from clients and investors, which can lead to insolvency or bankruptcy.
· Emergencies affecting the development team – Emergencies and disasters are always a
business risk.
· License agreements – Although licensing agreements outline ownership and other issues, they
often do not contain language that delivers technology and materials in emergency situations.
· Financial and operational stability – Most companies will not be able to operate without all of
their licensed technology. Ensure their operational future with regular auditing.
Building your practice by protecting your clients
The escrow agreement is only half of the technology escrow equation. All legal agreements rely on
independent verification that commitments are being met by all parties, and escrow agreements are no
exception. Strengthen your client relationship, and your clients’ position, by providing periodic escrow
auditing services.
Know why escrow agreements fail
To protect your client’s best interest, you have an obligation to make sure that your client agreements
don’t fail. Although your clients may feel that they can trust their vendor or their licensing agreement,
the fact is that they need your legal expertise to make sure they get the materials they need, when they
need them. Through the escrow auditing process, you can mitigate the possibility of the top three
problems with failed escrow agreements.
1) Oversight – Many depositors overlook escrow commitments made in license agreements. As
legal counsel, you can help your clients spot oversights before they become problems for your
client.
2) Fidelity – The fidelity of escrow deposits can drop over time, as developers and clients trust
each other, and become lax about keeping materials up-to-date. Don’t let your clients lull
themselves into a false sense of security. Mandate and expect regularly verified deposits.
3) Expertise – Escrow agents lack the legal power to require escrow materials from the Depositor.
Your clients need your legal expertise to help them fix broken commitments.
Save clients from the common denominator
The statistic cited in the side bar illustrates the problem with most escrow agreements. While the legal
commitment may be in place, the escrow agreement is significantly less valuable when the materials in
the escrow account will not replicate the licensed technology. Gross negligence is not the only way that
this happens. Often, depositors make simple mistakes along the way, unwittingly depositing less than
perfect materials into escrow. To be fair, many developers feel their own internal systems are so robust,
the escrow should never be in play—but that’s exactly why it exists: to protect against the unexpected
and unforeseen.
Incomplete escrow materials can mean anything, from
one missing source code file, to a page missing from
documentation, to a lack of development environment
application code to open the source material, to a lack of a
database in place that the application can work with. But
the problem is clear. Without all of the information, the
operational future of your client is at risk, and yet the
majority of escrow accounts are missing something
important. An escrow audit addresses and discovers those
missing files.
On December 9, 2008, Altman Weil released the results of a survey showing that “75% of responding
General Counsel indicated that their law departments are facing budget cuts averaging 11.5% for 2009.”
If your clients are facing budget and department cuts, give them the ammunition they need to fight for
your services. Show them real results from the following step-by-step guide to performing an escrow
audit.
Use escrow auditing to strengthen relationships
What follows is our step-by-step guide to strengthening your client relationships with complete escrow
compliance auditing.
Follow the steps to safety
“ACCORDING TO IRON MOUNTAIN, 97.4
PERCENT OF ALL ANALYZED ESCROW MATERIAL
DEPOSITS HAVE BEEN FOUND INCOMPLETE
AND 74 PERCENT HAVE REQUIRED ADDITIONAL
INPUT FROM DEVELOPERS TO BE COMPILED.”
– CIO.COM, FEBRUARY 2008
1) Review client needs and commitments
Some agreements fail simply because the commitments outlined in the escrow agreement don’t match
the real needs of the client. What documentation will your client need to make the technology work
without the developer? Which staff members have special expertise vital to implementing the
technology? Analyze your clients’ needs in detail, and make sure that those needs are met by developer
commitments.
2) Obtain agreements and summaries
Request to see a copy of the escrow agreement and the escrow account summary. These should provide
you with detailed information about the location and contents of the account, as well as deposit
schedules.
3) Make sure agreements meet commitments
Go through the escrow agreement, line-by-line. Make sure that the language of the escrow agreement
matches up with the commitments from the license agreement. Very often it does not. If there are any
points of contention, present them to your client. Recommend amendments or offer to negotiate a new
agreement that meets all their needs.
4) Review deposited materials against delivered technology
Compare the deposited materials against the current technology being used by your client. Having the
right materials in escrow ensures that, in the event of dispersal, your client will receive useful materials
and that vital operations will continue to operate as planned.
5) Provide a summary of enterprise-wide compliance
Address the agreement with each vendor individually, and then compile a master list of vendors that are
in compliance. Make a separate list for vendors that are out of compliance. Make suggestions to your
client about best practices with non-compliant vendors.
6) Consolidate escrow agreements with one provider
Help your client to design a master escrow agreement document which can be edited to fit the specific
needs of each situation. Standardize their escrow terms and processes, making future agreements
faster, easier, and more accurate.
Conclusion
In today’s economic climate, it’s just good business practice to be more diligent with regards to
operational continuance planning. As a vital part of that planning, escrow auditing ensures that your
clients will be able to function if there are issues in their relationship with the developer down the road.
By verifying their escrow agreements and contents, you strengthen your client relationships, ensuring
that your IP practice is strong enough to weather the economic times with new, useful services.
Contact information
Want to learn more about the importance of escrow auditing, and how you can use it to strengthen your
client relationships and your practice? Contact Escrow Associates today.
We have the experts and services that it takes to ensure your clients’ operational future.
http://www.escrowassociates.com/contact.html
1.800.813.3523
Author Biographies
Chris Smith, President
Chris is a founding member of Escrow Associates, LLC. With more than a decade of
experience in the software and technology escrow industry, Chris is an expert on business
services related to the protection of technology assets. He has spoken before dozens of
organizations including Fortune 500 companies, legal conferences, and technology
procurement coalitions and leading Intellectual Property law firms all over the world.
Christian Dodder, CEO
Prior to co-founding Escrow Associates, LLC, Christian was instrumental in developing the
standard of Technical Verification Services in the escrow industry for Fort Knox Escrow
Services, Inc. His methods both streamlined the process as well as dramatically reduced the
costs associated with testing an escrow deposit for completeness and accuracy.
Christian offers a decade of experience in the software and technology escrow industry.
Christian has transformed many of the services that users of software and technology
escrow services benefit from every day.
References
CIO.com -
http://www.cio.com/article/187450/Source_Code_Escrow_Are_You_Just_Following_the_Herd_
Forrester -
http://www.itworld.com/saas/60884/forrester-be-careful-negotiating-saas-contracts
http://www.forrester.com/Research/Document/Excerpt/0,7211,45857,00.html
Altman Weil -
http://www.altmanweil.com/index.cfm/fa/r.resource_detail/oid/a6766e0b-37d3-4478-b505-
f989a4e5bd78/resource/75_of_Law_Departments_Face_Budget_Cuts_in_2009.cfm
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