Please Release Me

Common among high-tech companies today is a complex matrix of relationships as everyone struggles to keep up with the break-neck pace of the industry. Small software developers are selling their technology to large vendors. Alliances are forged between two or more companies to develop and market similar products. Put resellers into the mix, and soon it's hard to tell the vendors from the licensees. And all of these activities require ongoing support of proprietary software by the technology owner. With business cycles turning on a dime, there's pressure to expedite negotiations, and while a software escrow agreement might appear to slow things down, it can not only speed up the process but it could save hundreds of thousands of dollars and years of development.

Take a typical progression of events. Management has agreed that a recently developed technology — perfect for your industry — would put you ahead of the competition. The demos were impressive, testing has gone well, bugs have been fixed and you have rolled it out to hundreds or thousands of work stations. You've spent a considerable amount of time, energy and money selecting the right software and training employees to use it. All is well until you learn the vendor is suddenly in deep financial trouble. Access to the source codes and documentation is the only realistic solution. Just ask Amoco Corp.

When the Chicago-based oil and chemical company went shopping for desktop imaging software, it decided to buy the most appropriate technology available -- even though it came from a largely unproven software developer. The product not only met Amoco's needs to handle large and oversized document imaging to comply with prospective new federal regulations, it also served as a building block in Amoco's long-range plans to convert from a main frame system into a client-server environment. It was to play a critical role in a large-scale project that would impact 15,000 Amoco employees and cost $10 million or more to deploy.

Vendor Goes Out of Business
Implementation had begun with several hundred desktops in the Houston area when the bad news came. The software company reported having severe financial problems, and it announced that it had become a likely takeover target of a large European company. It soon gave Amoco notice it was going out of business.

"To lose the technical support for this software would have been a huge blow to us," said Geoffrey Wood, attorney and senior analyst for Amoco's IT acquisitions group. "We were already using it to store documents online and to index them. We were creating an electronic document management system that we were beginning to use for all types of things, including storing engineering plans online in the event of a disaster emergency, and we were in the process of spreading its use, with great plans for further office automation."

But Amoco was prepared for such circumstances. The company recognized that while the vendor had excellent technology, it had only been in business for a couple of years.

"The company's newness and their marginal financial stability prompted us to negotiate a solid source code escrow agreement," Wood said, noting that for years Amoco has had confidence in using DSI as its escrow agent.

Amoco requested that two main points be included in its escrow contract, which Wood says have now become standard in future escrow agreements. "First, we added a 'poison pill' clause that basically says if they get taken over by a vendor we don't care to do business with, we have the option to acquire the source code from the escrow agent and maintain the product ourselves. Second, we added the 'Amoco decides' clause, which says we decide when a release condition (such as bankruptcy) has occurred and that the source code will be released. If the vendor thinks a decision to release is unreasonable, we agree to arbitrate or litigate the issue of damages we cause. But, initially, we get the source code because we'll need it fast."

Source Code Release Fixes Problem
In this case, Amoco received the source code within two weeks of its request. A few months later, the software vendor sold the rights to the source code to a European company that could provide technical support, but Amoco could not have waited that long. Besides, Wood said that having the source code and the ability to the maintain the technology themselves opened a whole new set of opportunities.

"Escrow gave us a lot of leverage with the new owner of the software and with other vendors competing for our business," Wood said. "Some were offering us different levels of free licensing to replace the product that was discontinued. We eventually accepted an offer for new software that we could not refuse."

On the flip side, Wood said that without the escrow, Amoco would have been at the mercy of the company that eventually bought the rights to the software — either accepting a maintenance contract on their terms or be forced to turn to an alternate vendor and abandon the use of its current software. "Instead, we had leverage in price negotiations and in the terms and conditions related to the quality of support."

Advice
Wood's advice to others? "Look at your long-range needs. How critical is this software system to your business operations? And remember, in a release situation, time will be of the essence."

Actual escrow releases are relatively rare. DSI performs about 18 releases a year. Many times, just initiating the release process brings the companies together to negotiate a solution to their difficulties. Because DSI has participated in several hundred release situations over many years, we have the first-hand experience needed to foresee the problems that can arise. We would be happy to give you details about contract options that will protect all parties involved.