Escrow For SaaS?

When SaaS was a new technology, software escrow was a popular inclusion in contracts. Is this is still the case? Should source code escrow exist in contracts between licensors and licensees?

What is escrow?

Normally you do not own or have any rights to the software (including source code) that you are accessing, under the terms of a regular SaaS agreement. This does not usually become an issue until technical problems start to arise, i.e. unexpected service interruptions, downtime, loss of application functionality and loss of data. This can add significant costs to your business and you remain reliant upon the software supplier to resolve these issues, unless you have an escrow agreement in place. Escrow is when the software source code is held by a third party – an escrow agent – on behalf of the customer and the supplier.

How does it work?

The software provider gives all of their code to a third party and if the provider goes out of business, the third party releases the software to those with an existing escrow agreement. So the theory is that you can set up your own servers to run the software - but the reality may be very different!

Limitations of escrow agreements

However, having the right to use the software and actually being able to use the source code are very different things! Certain things should be considered by customers before entering into an escrow agreement. For example: is the software critical to your organization, and if not, do you really need an escrow agreement? Do you have the technical ability to understand and use the source code in the event of an escrow release? Other things such as the cost of setting up the escrow agreement and the ongoing renewal fees should also be taken into account.

The bottom line: there is no point having access to the source code if you cannot actually use it, as access alone will not ensure business continuity. Companies often choose a SaaS product for the exact reason that they do not have the expertise to maintain a desktop software version or create their own. So what is the liklihood of the same company being able to manage the software source code? Chris Smith from Escrow Associates thinks only 5-10% of all software escrow accounts are ever released to the End-User. Does this make it a good investment?

So why use escrow?

There's no guarantee your SaaS provider will always be there. The reality is that there are no guarantees that any company that is here today will be here tomorrow. As a number of SaaS hosting providers have expressed, software escrow is no longer fashionable. Companies have offered it but have had few takers, on the basis that if a buyer were concerned about the stability of a SaaS product, they probably wouldn’t want to use it in the first place. That said, escrow is still a useful tool when negotiating SaaS contracts. One way to ensure that demand for SaaS will remain healthy is to have a SaaS escrow in place as a contingency plan that responsibly addresses disaster recovery and business continuity concerns. And although software and technology escrow agreements may be seen as an insult or undue burden by some software companies, they can actually help win more customers by establishing trust during the sales process. All in all, escrow (among other SaaS security measures), make data availability one of the most compelling advantages of SaaS over traditional desktop applications, but it is up to you to decide if it is worth the initial investment.