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Nearly half of top UK firms do not use software escrow

Source code could evaporate if vendors go up in smoke

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Almost half of the 350 most valuable listed companies in the UK do not have software escrow agreements in place to give them access to technology if a supplier goes bust, according to an escrow services company.

NCC Group has said that just 189 of the FTSE-350 group of listed firms have escrow agreements in place, meaning that 46 per cent of the FTSE-350 do not.

It said that the 100 most valuable companies listed in the UK, the FTSE-100, performed better. It said that 82 of those companies had an escrow agreement on at least one piece of software.

Software escrow agreements place the source code of software with a secure third party. A list is drawn up of events that will trigger the release of that code. That list usually includes the software firm's bankruptcy, failures to adequately support the software customer, and a change in ownership over the software.

Source code is the underlying material which constitutes a software program. It is not usually available to customers and is essential for any changes to or support of the software. Making the source code available through escrow allows a customer to continue using a product and update it if one of the "trigger events" means that the original supplier is not performing that function.

NCC said that even the 54 per cent of FTSE-350 companies that do have escrow agreements are not fully protected.

"NCC Group’s research found that while 189 of the FTSE-350 have Escrow agreements in place, the majority only protect a small percentage of their business critical software," said the company. "As a result, they could be vulnerable to the risks of applications becoming unavailable when mergers, acquisitions or legal disputes arise."

NCC said that requests for escrow source code jumped by 150 per cent between 2008 and 2009, an increase that it said was due to the recession and to increased software industry merger and acquisition activity.

NCC's director of escrow solutions, Jon Leigh, told OUT-LAW Radio in 2008 that it released about 50 pieces of source code a year.

"The lack of protection among the wider FTSE-350 is extremely concerning, particularly in light of the challenging economic environment and the ever present cyber-security threats that could potentially have a huge impact on software suppliers and software delivered over the internet," said Mark Ormerod, managing director of escrow at NCC. "The issue also appears to be too low on the auditing agenda. Software supplier and availability risks should be established steps in the overall due diligence process, not merely tick boxes that get lost in an auditor’s report."

Escrow is most useful when the source code that is transferred is easily used by the customer company or by another technology firm employed by it to take over responsibility for it. This is not always the case, though, and software programming is not necessarily clear, consistent and reliable.

"It depends on people and the people might be programmers. It might be written a language which is reasonably accessible and it has been written in a pure form, so people who were not involved in its original creation can get to the code and do what they need to do with the code," software law expert Charles Park of Pinsent Masons, the law firm behind OUT-LAW.COM, told OUT-LAW Radio in 2008. "I think bad programming would make a mockery of quite a few escrow arrangements."

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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