The COVID-19 pandemic has brought supply chain resiliency into sharp focus. New Gartner research shows that only 21% of supply chain organizations believe they have a highly resilient network today. The analyst firm believes “increasing resilience will be a priority for many supply chain leaders as they emerge from the current crisis and reset strategies to anticipate disruptions as the ‘new normal’ going forward.”
Companies are working to protect their supply chains to ensure they have sufficient raw materials and dependable suppliers. But don’t forget — your supply chain also relies on technology. Technology assets, including software, are a critical component in every business today — whether your company makes paper towels or integrated circuit chips for laptops.
So, as you plan for the physical goods flowing through your supply chain, you must also plan to safeguard the intangible goods as well. With intangible goods like software, the logistics of moving an item from one place to the other is not a concern. However, the vendor management aspect of supply chain management is still a very real issue. For instance, what happens if the vendor for your customized business-critical software goes bankrupt? How do you keep operations up and running?
A software escrow agreement helps protect companies that license software, especially in terms of working with vendors in their supply chain that might be small or unproven. Most companies that license business-critical software or technology realize the benefits of software escrow, but they may not have the most effective or well-managed agreement in place. Today, everybody has less time and less money, so it’s important to get escrow right the first time.
Risk Minimization for a Resilient Supply Chain
Two of the main threats many businesses are dealing with now are financial risk and stability risk. When you license software or technology or subscribe to a SaaS application in the cloud, you rely on someone else for a critical component of your business. Often, software developers are smaller companies, and they may be figuring out how to keep their businesses afloat right now. That puts the software element of your supply chain in a precarious position.
“Don’t single source” is one of the maxims of a resilient supply chain. With software, however, it usually doesn’t make sense to have two vendors create a custom application for your business-critical operations. However, what does make sense is to have a backup plan where the software source code is readily available to hand over to another vendor (or to maintain in-house) if your chosen vendor goes bankrupt or can no longer support your software. This is accomplished with an escrow agreement; when the escrow release conditions are met, the licensee gains access to the developer’s source code — mitigating the vendor risk.
Best Practices in Software Escrow and how it supports the Supply Chain
Even if you already have a software escrow agreement in place, now is the time to make sure you protect it and all those little loose ends are taken care of. You don’t want to assume everything is running fine and find out too late that it isn’t. Here are some questions to ask:
- Do you have a signed software escrow agreement in place?
- Who manages the agreement in your company?
- Is your designated contact up to date?
- Are all your business-critical applications protected?
- When was the last deposit of escrow materials?
- Have you verified that the escrow deposit contains what it should?
- Are you effectively managing your escrow agreement with the escrow agent to make sure it is doing what it is supposed to do?
In discussing potential bankruptcies caused by COVID-19, The National Law Review states, “It is important to note that an escrow agreement is a ‘supplementary agreement’ under section 365(n), and as such a licensee’s rights under the escrow agreement continue to be enforceable in a bankruptcy situation.” Essentially, as more and more companies are impacted by the financial fallout from the COVID-19 crisis, solutions like software escrow help to mitigate these risks for licensees doing business with financially distressed companies.
As you examine your supply chain resiliency, ensure that your intangible assets are part of the picture. Managing software vendor risk is essential, yet attainable, as outlined in this Enterprise Escrow Best Practices report, and it is a relatively low-cost way to mitigate risk.
This article originally appeared in Supply Chain Best Practices.
