Avoiding Technology Pitfalls: How Software Escrow Can Protect Development Projects

In the second of two articles on use of software escrow in e-commerce projects, we take a look at how to avoid some technology pitfalls.

The first article, in the August edition of e-Commerce Law & Strategy, provided an overview of software escrow, advantages of using it, and details on escrow agreements and partnerships.

To recap, software escrow means that the owner or vendor of software or Web site coding (the “licensor”) deposits the software source code with a third-party escrow agent. Escrow is typically requested by a party licensing software (the “licensee”) to ensure maintenance and updating of the software in the case of bankruptcy or breach of the licensing by the licensor. In this case, the escrow agent releases the code to the licensee.

The issue is one for e-businesses to ponder, because medium and large enterprises are increasingly reliant on software systems, but face a conundrum: due to current market conditions, their software vendors are simultaneously less viable. So, if they make a large software investment, how can they protect themselves in the event that the software company goes out of business?

August's article gave practitioners some guidance on advising clients on how to protect themselves against such an event.

This month's article discusses how the escrow process can help ensure that developer and purchaser are protected during complex software or Web site development projects.

To illustrate this process, let's use an example.

Giant and Webworld Build a Web site

It's January and Giant Corp. has hired Webworld to create a new Web site. The site is to include the visible pages in HTML and PHP, as well as a shopping-cart system for purchasing Giant products and a back-end Oracle database to keep track of purchase and user data, along with the necessary information for the site's search feature.

Giant and Webworld will have important responsibilities. Giant's product and marketing staff will need to cooperate with Webworld to develop the content, images, branding and flow chart for the Web site. Giant's in-house programmers are also going to work on the “look and feel,” and do some coding for the site.

As for Webworld's responsibilities, the company will need to work with Giant's staff to develop the look and functionality desired, and to program and assemble the database in order to meet Giant's June 1 launch deadline.

Giant's Concerns

The first, and most pressing concern, is meeting the deadline. Giant has spent considerable capital for advertising and other means of promoting the Web site's June launch. It is imperative that the company meet the deadline because it is contractually obligated and because it has announced this date to business partners.

Second, the site must work. If the Web site hasn't been thoroughly tested and doesn't work well by launch, then poor media attention and customer reaction will follow, causing the company damage. In addition to losing customers, Giant might also lose business partners and suffer reputation damage.

Finally, Giant is adamant that it own all intellectual property rights in the Web site so that it has complete control over the future of its site.

Webworld's Concerns

The company's top concern is that it be paid. Webworld was eager to get a big contract and has been generous in pricing, not to mention that the company is making a small profit on the Giant project. It's crucial that Webworld is paid as agreed in order to cover advancing of funds to cover programming and software costs.

Second, Webworld is concerned about getting Giant's approval. Webworld is worried that Giant will be unclear about what the company wants, and might change direction, which would increase the project's scope and cost. Webworld's also worried about Giant programmers working with Webworld code. If Giant programmers change the code so that it doesn't function, then Giant could blame Webworld and refuse to pay. Also, if Giant took these actions, it could add so much time to the project that Webworld might miss the launch date and Giant could refuse to pay because of that.

Finally, Webworld is adamant that it own all intellectual property rights to the Web site and grant a liberal license to Giant. Ownership with license back clients is how Webworld regularly operates to protect the code and coding techniques its programmers use regularly on client projects. Without that ability, Webworld is out of business.

Escrow to the Rescue

Both parties can benefit from using escrow as part of payment for and delivery of Giant's Web site. Giant is worried that Webworld won't deliver and Webworld is worried that it won't get paid. In this situation, the escrow agent can hold Webworld's coding and Giant's payments, and release each according to agreed-on conditions.

Giant and Webworld should have agreed on work-product ownership, and grant each other a license. Also, they could agree on joint copyright ownership of the works, especially because programmers from both sides are contributing to the project.

Whatever their intellectual-property agreement, it would help both parties to record the code and content each has created during the project. By making deposits of each party's work at various milestones, each party will have a dated copy of what it had developed as of what date, just in case of a later dispute.

With code and payment in the hands of an escrow agent, they can be released after each milestone. That way, Giant is ensured phases of the project are on target and Webworld can be sure it gets paid as work is completed.

Conclusion

Your organization doesn't own the patent or copyright to e-commerce software it licenses. But you have invested millions of dollars in license fees, training, implementation and related efforts, and so, you want to reduce risk. Some important ways to minimize risks include thorough technology assessment, clear detailed specifications, properly administered software escrow and metering software. Establish an implementation roadmap that mitigates risk of your company faltering when you suddenly find yourself the proud new owner of intellectual property you didn't develop and code you didn't write.

In the second of two articles on use of software escrow in e-commerce projects, we take a look at how to avoid some technology pitfalls.

The first article, in the August edition of e-Commerce Law & Strategy, provided an overview of software escrow, advantages of using it, and details on escrow agreements and partnerships.

To recap, software escrow means that the owner or vendor of software or Web site coding (the “licensor”) deposits the software source code with a third-party escrow agent. Escrow is typically requested by a party licensing software (the “licensee”) to ensure maintenance and updating of the software in the case of bankruptcy or breach of the licensing by the licensor. In this case, the escrow agent releases the code to the licensee.

The issue is one for e-businesses to ponder, because medium and large enterprises are increasingly reliant on software systems, but face a conundrum: due to current market conditions, their software vendors are simultaneously less viable. So, if they make a large software investment, how can they protect themselves in the event that the software company goes out of business?

August's article gave practitioners some guidance on advising clients on how to protect themselves against such an event.

This month's article discusses how the escrow process can help ensure that developer and purchaser are protected during complex software or Web site development projects.

To illustrate this process, let's use an example.

Giant and Webworld Build a Web site

It's January and Giant Corp. has hired Webworld to create a new Web site. The site is to include the visible pages in HTML and PHP, as well as a shopping-cart system for purchasing Giant products and a back-end Oracle database to keep track of purchase and user data, along with the necessary information for the site's search feature.

Giant and Webworld will have important responsibilities. Giant's product and marketing staff will need to cooperate with Webworld to develop the content, images, branding and flow chart for the Web site. Giant's in-house programmers are also going to work on the “look and feel,” and do some coding for the site.

As for Webworld's responsibilities, the company will need to work with Giant's staff to develop the look and functionality desired, and to program and assemble the database in order to meet Giant's June 1 launch deadline.

Giant's Concerns

The first, and most pressing concern, is meeting the deadline. Giant has spent considerable capital for advertising and other means of promoting the Web site's June launch. It is imperative that the company meet the deadline because it is contractually obligated and because it has announced this date to business partners.

Second, the site must work. If the Web site hasn't been thoroughly tested and doesn't work well by launch, then poor media attention and customer reaction will follow, causing the company damage. In addition to losing customers, Giant might also lose business partners and suffer reputation damage.

Finally, Giant is adamant that it own all intellectual property rights in the Web site so that it has complete control over the future of its site.

Webworld's Concerns

The company's top concern is that it be paid. Webworld was eager to get a big contract and has been generous in pricing, not to mention that the company is making a small profit on the Giant project. It's crucial that Webworld is paid as agreed in order to cover advancing of funds to cover programming and software costs.

Second, Webworld is concerned about getting Giant's approval. Webworld is worried that Giant will be unclear about what the company wants, and might change direction, which would increase the project's scope and cost. Webworld's also worried about Giant programmers working with Webworld code. If Giant programmers change the code so that it doesn't function, then Giant could blame Webworld and refuse to pay. Also, if Giant took these actions, it could add so much time to the project that Webworld might miss the launch date and Giant could refuse to pay because of that.

Finally, Webworld is adamant that it own all intellectual property rights to the Web site and grant a liberal license to Giant. Ownership with license back clients is how Webworld regularly operates to protect the code and coding techniques its programmers use regularly on client projects. Without that ability, Webworld is out of business.

Escrow to the Rescue

Both parties can benefit from using escrow as part of payment for and delivery of Giant's Web site. Giant is worried that Webworld won't deliver and Webworld is worried that it won't get paid. In this situation, the escrow agent can hold Webworld's coding and Giant's payments, and release each according to agreed-on conditions.

Giant and Webworld should have agreed on work-product ownership, and grant each other a license. Also, they could agree on joint copyright ownership of the works, especially because programmers from both sides are contributing to the project.

Whatever their intellectual-property agreement, it would help both parties to record the code and content each has created during the project. By making deposits of each party's work at various milestones, each party will have a dated copy of what it had developed as of what date, just in case of a later dispute.

With code and payment in the hands of an escrow agent, they can be released after each milestone. That way, Giant is ensured phases of the project are on target and Webworld can be sure it gets paid as work is completed.

Conclusion

Your organization doesn't own the patent or copyright to e-commerce software it licenses. But you have invested millions of dollars in license fees, training, implementation and related efforts, and so, you want to reduce risk. Some important ways to minimize risks include thorough technology assessment, clear detailed specifications, properly administered software escrow and metering software. Establish an implementation roadmap that mitigates risk of your company faltering when you suddenly find yourself the proud new owner of intellectual property you didn't develop and code you didn't write.