Placing SaaS in Escrow (United States)

Response #1: We have simply said "no" as it is nearly impossible for anyone to run a full production implementation of my prior companies' SaaS products. Typically an escrow covers deposits of source code. The code is not compiled, not implemented, and there are always things that a good SaaS provider does that makes it very difficult to replicate. Unless the SaaS in question is a very simple service (i.e., a commodity product that is often cheap and where there is ample competition), the requests showcase just how much the potential clients here simply do not understand SaaS. I think it is worth the effort to educate such clients.

We used one particular vendor in the past. The client never needed the escrow, and it caused a headache to regularly deposit source code. I would suggest that there even be an upcharge to cover for engineering or IT time required to make source code deposits.¹

Response #2: I completely agree with an earlier response to this question. I have negotiated contracts with big telecommunication companies which have requested a complex SaaS solution, which is part of a managed service, to be put in to escrow. The answer we gave was no. This was indicative of the types of things they asked for throughout the negotiation due to their lack of understanding of what SaaS really entails.^¨

Response #3: I would agree with the other comments. From my discussions with our technical staff, even if customers received the source code, they would need half of our staff just to make it work. I have rarely been asked for escrow provisions, but have found that educating the other party on why it is not going to be an effective solution for them has worked.³

Response #4: We do not agree to software escrow for our SaaS offerings. Aside from the simple reasons of expense and difficulty, we argue that it is antithetical to the nature of the SaaS arrangement--they are not paying for an indefinite license and so there are not any trigger events that would justify them receiving full code access. Additionally, we argue that a critical aspect of a SaaS offering is the continual changes and updates such that a static block of source code would not capture the service offering or maintain functionality. Finally, we point out that most of our offerings utilize many tools, both internal code and external cloud services, that we do not have the authority to provide source code for, and so we cannot provide a source code escrow that would fulfill the purpose of allowing the client to take the code and continue operation of the service.⁴

Response #5: That the customer has no actual license to the SaaS solution is correct. The customer has only a right to access and use the service during the term of the contract. If the SaaS vendor goes out of business, customers would not have a right to the source code, the application or even the continuity of service (it would depend on your contract). However, customers may want to make sure that there is a proper continuity solution so that they can recover their data at any time. A number of service providers offer such archiving and escrowing services.⁵

Response #6: What clients really need is not just access to the software/platform but to their own data. So sticking your software in escrow accomplishes very little. I can see marketing this as a premium feature and charging for it, since there will be clients who will not take it, and it is only fair to have those that want it to help pay for the cost of it.⁶

Response #7: I agree with the sentiment that software escrows are relatively pointless. However, there are times in which they are necessary. If you are a start-up or other small company with limited funding and you are asking a client to take a leap of faith with your product over more established products or a disruptive product in the market place, then the software escrow gives the clients a source of comfort. The trigger on the escrow is insolvency. Realistically, if the escrow is triggered, the client would have to hire a portion of our team. However, if we are going out of business, then the employees are looking for jobs so it would be okay. We have also included a provision where the client could rent our servers until they could find another company to duplicate and operate the service.

 

We also include a provision that once the company was strong enough (in terms of customer volume), the escrow requirement would terminate.

 

Hence, depending on your bargaining position, a software escrow might tip the scale in your favor as it provides comfort to your client. The cost and inconvenience are offset by the good will it sets up in the business relationship.⁷

Response #8: The challenge with SaaS is that you also need the platform in addition to the software to maintain continuity, so if the software is hosted by a major provider like Amazon, Microsoft, IBM, or Google, you can also contact them about creating a mirror environment that you can take over and operate in case of a triggering event that would cause and escrow release. You may be able to negotiate that directly with your SaaS provider, who will in turn provide the directions to the hosting provider, rather than use a third party service. Your negotiating position will depend largely on the value of your SaaS business to the provider. You should also consider the relative risk of a potential problem, including the size, market share, and history of your provider, to decide if escrow is justified.⁸

Response #9: I have a different perspective from many of those who have responded so far. My company offers an extremely complex enterprise SaaS solution and we also offer source code escrow. It is entirely reasonable, and arguably mandated by their regulators, for our clients to request source code escrow. They pay for the escrow itself of course, which includes all of the source code and all of the instructions for building and deploying the SaaS within a new environment.

 

If customers so choose, we will go through an escrow exercise with them during which members of our technology team walk through the entire process of setting up and deploying the system from escrow in a new environment. We charge for this. If more customers requested the walkthrough, them we would need a more scalable solution (perhaps we would do one annual walkthrough via Webex or something similar).⁹