What do you do if your enterprise app vendor goes under?

Oct 27, 2000
Matthew Osborn

Although it is highly unlikely that SAP, Oracle, or PeopleSoft is going to cease operations, many organizations are looking for ways to protect their enterprise resource planning (ERP) investment in case application support becomes unavailable. As a senior IT strategist, you are responsible for developing a contingency plan in case that should happen. Industry experts suggest that your contingency plan address these questions:

How is vendor viability calculated?
How far into the future should your contingency plan cover?
Should a code escrow agreement be included in your contingency plan?

What should a contingency plan include?
"Users should have identified resources that can provide support if the software company goes under. Usually, as a company nears the end, groups of employees or third parties seize the opportunity and will provide different types of services, from enhancements to education to consulting," said Sharon Ward, director of enterprise business applications at the Hurwitz Group. "It's important to have these resources in place and to know the specific services they can provide. It might also be a good idea to cultivate a strong relationship with key employees of the vendor who are instrumental to your implementation, ensuring that they keep in touch should circumstances change. They may be willing to do some work on a contract basis even if they are employed elsewhere."

Key components of a contingency plan

Keep documentation updated
Outline likely scenarios
Determine probability
Establish countermeasures

How do you determine vendor viability?
Vendor viability can be difficult to assess. "Vendor viability is hard to evaluate from the outside. Support contracts and services revenue often mean that vendors take a really long time to show problems, and you can be caught unaware if you're not looking at the detail. Evaluate your vendor's viability not just on total revenue. Dig into the numbers," said Ward.

Ward recommends that you answer the following questions when determining vendor viability:

How much is new license revenue to new customers, not just add-ons to existing customers or revenue from services and support?
How many new customers did they actually acquire?
How much advertising are they doing? More or less than in the past?
How much press attention are they getting?

How far out should you plan?
"We [Gartner] recommend three to five years out, but it depends on where you are in the life cycle of an ERP," said Gartner ERP analyst Chad Eschinger. (TechRepublic is an independent subsidiary of Gartner, an IT consultancy based in Stamford, CT.) "If you are just implementing the application, then you want to have a three- to five-year plan. If you are at the end of the application life cycle, meaning the end of core usefulness, you should have a plan for four to five years out," said Eschinger.

Are code escrow agreements effective protection?
A code escrow agreement is formed when you and the software vendor agree to deposit the application's source code in a third-party, neutral depository. The agreement calls for code and documentation to be made available to the purchaser in the event that the vendor can no longer provide services.

If your application is mission-critical, then a code escrow agreement may not offer the type of protection that your organization needs. "They [code escrow agreements] are good if you've been sleeping, and the vendor completely disappeared while you weren't looking. It takes so long for most vendors to actually disappear because of service and support revenues that if you're caught unaware, you should be ashamed," said Ward. "An escrow agreement will only come in handy if you need to extend the life cycle of your existing implementation beyond the two years of your contingency plan. If you're paying attention to the signs, you'll have more than that time before the vendor goes away completely."

Ward points out that if the application has been modified, then code escrow agreements are even less effective. "They're almost totally useless if you've done modifications, because those are rarely well-documented enough to be retrofitted to the 'vanilla' escrow source without major headaches. In most cases, you'd be better off devoting those resources to finding and implementing your next-generation solution," said Ward.