Rising tech insolvencies in Australia: How businesses are using software Escrow to shield from vendor risks
In recent years, Australia has witnessed an alarming surge in corporate insolvencies, sparking widespread concern across sectors. According to the Australian Securities & Investment Commission (ASIC), the number of external administrations in Australia rose by a striking 39% in the 2023-24 financial year. This sharp increase highlights a growing vulnerability in the corporate landscape, driven by factors such as rising interest rates, inflation and the lingering aftershocks of the pandemic. Many companies are now struggling with financial pressures that are pushing them to the brink, leaving customers, suppliers and other stakeholders at risk.
In the tech sector, several company insolvencies have underscored the severity of the issue. For instance, Euclideon, a company specialising in 3D data visualisation, entered administration in February 2024, with administrators now overseeing the sale of its intellectual property. Similarly, Plutora Australia, which was backed by one of the country's largest banks, fell into administration in April 2024 with debts totalling $37.3 million. Another example is Redback Technologies, an inverter and battery company that entered voluntary administration in March 2024 in search of new investment and later emerged under new ownership.
As more businesses face insolvency, the question arises: How can companies reliant on third-party software ensure they are protected from the effects of their vendors' financial difficulties? One solution lies in software escrow, which offers a robust safety net to guard against vendor insolvency and helps maintain business continuity in uncertain times.
Understanding Software Escrow: A Critical Safety Net
Software escrow, often known as source code escrow, involves a three-party agreement between a software developer (the depositor), the end user (the beneficiary) and an independent software escrow agent. The objective of a software escrow agreement is to provide comfort to the end user that if the software developer is unable or unwilling to support the software, the code can be released to them.
In addition to traditional software escrow, SaaS (Software as a Service) escrow has gained popularity, especially as businesses increasingly rely on cloud-based solutions with applications hosted by software vendors in AWS, Microsoft Azure and Google Cloud. SaaS escrow extends the traditional software escrow arrangement to cover not only source code but also the entire cloud environment, including databases and other assets stored within SaaS applications. This enables businesses to safeguard their data and cloud infrastructure, ensuring that even if a SaaS provider goes under, operations can continue uninterrupted.
Due to the rise in software vendor insolvency, we're now witnessing software escrow trigger events every month. Just a few years ago, these events were rare. As businesses grow increasingly reliant on software providers in today's fast-paced digital world, software and SaaS escrow becomes crucial for maintaining business continuity and peace of mind, allowing companies to operate confidently without fearing vendor insolvency risks.
How Software Escrow Protects Businesses from Vendor Insolvency
Here are some key ways in which software escrow and SaaS escrow can help businesses mitigate the risks associated with vendor insolvency:
Business Continuity: With software escrow and SaaS escrow, you ensure that your business operations continue running as normal, even if the software provider ceases to support the product. Having access to the source code, other critical assets or even access credentials to a production cloud environment, businesses can maintain, update and troubleshoot the application, ensuring business continuity.
Risk Mitigation: Software escrow and SaaS escrow agreements mitigate risks associated with vendor dependency. They provide a safety net, reducing the potential impact on your business operations due to vendor-related issues.
Investment Protection: Businesses invest significant resources in integrating and customising software solutions. Software escrow and SaaS escrow protect this investment by ensuring that they are not left in the lurch if the vendor fails to deliver.
Regular testing and validation of software – Software escrow and SaaS escrow typically include regular verification and testing services which are important to ensure the source code deposit will be accessible and usable if ever required, with supporting documentation that can assist with recovery.
When Should a Business Consider Software Escrow?
Any business heavily dependent on third-party software should consider establishing a software or SaaS escrow agreement, especially if the software is business-critical. The rising number of insolvencies in Australia makes this an increasingly relevant consideration for businesses across all industries.
Businesses should particularly consider software escrow or SaaS escrow when:
- They rely on bespoke or custom software: Customised software, whether on-premise or on the cloud, can be challenging to replace, making access to the source code essential in case of vendor failure.
- The software vendor is a smaller or newer company: Start-ups and SMEs may be more vulnerable to economic downturns, increasing the risk of insolvency.
- The software is vital for daily operations: If a software failure would severely impact business operations, the peace of mind that software escrow and SaaS escrow provides can be invaluable.
Conclusion: Taking Precautions in an Uncertain Landscape
With insolvencies in Australia rising, businesses need to be proactive in protecting their operations from the risks associated with vendor insolvency. Software escrow and SaaS escrow provide a reliable and practical solution that safeguards business continuity by ensuring access to critical software and other critical assets in the event of a vendor's financial demise.
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