by Jim O’Brien
Protecting against supplier failures during the development process is a continuing challenge, but particularly so when proper consideration is not given to the impacts of such failures and steps that can be taken on the front end of the relationship to protect the purchaser. For a variety of different reasons, many times multiple sources for a development program is not a viable option. That being the case, escrow agreements have become a go-to risk mitigation process for both hardware and software development failure.
Escrow agreements can provide some measure of comfort if the development agreement: (i) properly defines the materials to be escrowed that provide the necessary property, data and rights to manage potential developer failures including licenses and authorizations, and (ii) requires the developer to make periodic escrow deposits of the escrow materials. These issues require the input of technologists within the purchasing company to properly define what data, information and rights are needed and the frequency of the deposits to properly protect the purchaser.
As important as any of the contract definitions and requirements, the purchaser must actually establish the escrow and enforce the deposit requirements. Many times wonderfully drafted escrow requirements in contracts go unenforced, and when development failures begin to evidence themselves, the purchaser finds it is too late, as the developer has become uncooperative.
Properly defining and diligently enforcing an escrow process is just one tool that purchasers can implement to attempt to mitigate the costs and impacts of development failures by suppliers.