Risk Management for Software Investments
Investments in software involve special risks. In view of numerous bankruptcies in the software sector, software users’ demands for security have grown significantly. The long-term reliability of a software product is now one of the most important purchasing criteria. Escrow agreements help users and vendors alike by assuring the investment so that customers can buy with confidence.
Grave Consequences
The software market is still traumatized by the burst of the dot-com bubble and the bankruptcy of thousands of IT start-ups. If a software vendor can no longer support a product, its customers can also be in danger: software that can no longer be updated must be replaced as fast as possible. The product becomes useless, the investment is lost, business processes are impaired, and costs rise.
Risks Paralyze the Market
To gain investment security, many software users have taken to reviewing their suppliers’ financial statements to assess their viability. This can delay or even prevent investments. As a result, software manufacturers find sales harder, and the number of bankruptcies grows still further.
Software escrow means that the source code of a software product is held in trust for the stakeholders by a neutral third party. If the manufacturer becomes insolvent or is unable to fulfil his service obligations, the assets in escrow are released to the user. The conditions for the disclosure of the source code are strictly defined by an escrow agreement.
The buyer is thus sure of being able to continue using the software no matter what happens to the vendor, and the vendor’s trade secrets are protected against unauthorized access.
Source code is the detailed plan of a software product, written by software developers in a programming language. A program called a compiler translates the source code into machine language for release so that the software can run on computers. All software maintenance, modification and improvement is performed on the source code. The source code is the software manufacturer’s most valuable asset, and must be protected from disclosure. But if the manufacturer disappears from the market, the internal knowledge of the software may also be lost.