Updated November 23, 2020:

A SaaS escrow agreement exists to outline how the software data will be delivered from the software as a service, or SaaS provider.

Source Code Escrow for SaaS – Friend or Foe?

Escrows for source code have long been a source of confusion among buyers. The concept is simple: If the software vendor has a meltdown on its mission-critical system, the customer receives a source code delivery, so they can continue using the software. Although the concept of software escrows is fairly simple, the process often doesn't work as smoothly as expected. The process of escrow for a SaaS product tends to be even more complex, but when properly implemented, it is more likely to be helpful and useful to customers.

For mission-critical applications, an escrow for a SaaS product is more important. If the vendor of the SaaS has a serious issue or fails, the functionality of the software may cease, and the customer could lose critical data. However, if there is a major problem with the vendor of installed software, the software should still remain functional on the system on which it was installed, at least until the system requires some type of major update or maintenance. Since there are so many factors at play with installed software, the likelihood of a positive outcome with released source code is low.

If a trigger event happens, such as the vendor going bankrupt or failing to keep up with required software maintenance, a customer would undoubtedly be concerned. Escrow would have had to have been established already. Oftentimes negotiations take place around software escrow, but the parties fail to set it up. If escrow was set up, the following would apply:

  • The delivery of the source code would need to happen promptly. If the vendor challenged the release, the dispute resolution process could take so long that the usefulness of releasing the source code would be gone.
  • The delivery would need to be up-to-date and complete. In some cases, deposits of source code aren't verified by the vendor, so when the customer opens the file, it's a mess that's impossible to use.
  • The customer or licensee needs to be able to use the source code. The documentation for source code is often complex, making it more difficult for the available programmer to use. Even when source code can be understood, the required effort and time of the programmer could make the use of the source code impractical.

SaaS Applications – The New Way

Escrow agreements for SaaS products are more complex, but this is for good reason. With a SaaS agreement in place, certain components must be available, in addition to the code. These include:

  • Object code
  • Correct hardware configuration
  • Necessary third-party connectors and products that contribute to the operation of the software
  • Data for the licensee, which typically resides on the SaaS servers

A software license agreement will usually allow the licensee to use and possess the software in object code form only. A SaaS arrangement keeps the customer at a larger distance from the code of the software since the customer only has remote access to the software hosted by the SaaS provider. The source and object codes remain in the possession of the provider.

Customers and licensees of SaaS usually don't mind not having access to the full software code, as long as the program functions at peak levels and in conformity with the specifications provided by the vendor. When a customer doesn't have the source code, the risk is higher that they won't be able to use the applications effectively. If the vendor or licensor rejects the SaaS agreement or software license as a debtor in bankruptcy proceedings, the customer could end up with software that doesn't work as it should.

Types of Escrows for SaaS Systems

Many SaaS licensees still request source-code-only escrow, but this comes with some drawbacks. With a SaaS product, you need all the codes and information for it to work properly, so a source-code-only escrow won't do much if the vendor stops supporting or offering the product.

Another option is mid-range SaaS escrow, which often includes:

  • Hardware configuration
  • Source code
  • Object code
  • Third-party connectors and products
  • Data

This type of arrangement can be a good option, but a customer must make sure it is properly implemented.

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