The Rise of Insolvencies in Australia and How Software Escrow Can Protect Businesses from Vendor Insolvency

 

Australia has seen a significant rise in corporate insolvencies this year. Data released by the Australian Securities & Investment Commission (ASIC) in July revealed that the number of external administrations grew by 39% in 2023–24 compared to the previous year.

Australian Tech Company insolvency examples:

  • Euclideon: A 3D data visualisation company that was placed into administration in February 2024. Grant Thornton were appointed as administrators and the company’s intellectual property is now for sale.
  • Plutora Australia: An Australian tech company backed by one of the largest banks, went into administration in April 2024 with a debt of $37.3 million.
  • Redback Technologies: An inverter and battery company that entered voluntary administration in March 2024 to secure new investment. Redback Technologies returned to operations under new ownership after the voluntary administration period.

This dramatic increase in insolvencies across Australia highlights the growing financial pressures businesses are facing, from rising interest rates, inflation and the aftershock of the pandemic, leaving many companies vulnerable to insolvency.   

For businesses dependent on third-party software, a vendor’s insolvency can bring operations to a grinding halt, with tragic consequences. However, a proactive approach like software escrow can help mitigate the risk of vendor insolvency, ensuring business continuity and peace of mind.

This blog explores what software escrow is and how it can serve as a crucial safety net to businesses in Australia. By understanding the benefits of software escrow, businesses can better protect themselves against the risks of vendor failure, ensuring continuity and resilience in the face of financial uncertainty.

How Software Escrow Can Mitigate Vendor Insolvency Risk

Software escrow, also known as source code escrow, is a three-party agreement between a software developer (the depositor), the end user (beneficiary) and the 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.

Similar to software escrow, where critical software source code is stored with an independent third party, we also have a solution called SaaS escrow. Important in this cloud dependant world, SaaS escrow applies the same logic of software escrow but to the entire cloud environment including the data hosted within a SaaS application. It allows businesses to protect their data that resides within SaaS applications hosted by a third party, protecting them against data loss.

Here are some key ways software escrow and SaaS escrow can mitigate the risk of 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 protects 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 includes 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: A Safety Net in Uncertain Times

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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About The Escrow Company

The Escrow Company, based in Atlanta, USA is the US division of Escrow London, a global software escrow and SaaS escrow company with offices also in London, UK, and Sydney, Australia.

We have invested considerable resources into innovation to reinvent software escrow for a SaaS world. The Escrow Company provides a range of SaaS Continuity escrow solutions suitable for AWS, Microsoft Azure and Google Cloud hosted SaaS applications. We support a wide range of clients includes major law firms, banks, central banks, insurance companies, technology companies and government organizations.

To find out more about our software escrow and SaaS escrow solutions, visit our  YouTube channel.