Every day, news outlets report more layoffs, economic uncertainty, and a looming global recession in 2023. While the tech giants are announcing massive layoffs, smaller companies and SaaS startups may be forced into bankruptcy or insolvency. If you depend on a vulnerable software or Software-as-a-Service (SaaS) company for your business-critical applications, what’s your recourse?
This article will explore how software escrow (for on-premises software applications) and SaaS escrow (for cloud-based applications) provide safeguards against business disruption when vendors are no longer able to support their applications. These escrow strategies also give smaller vendors looking to maintain their business a way to minimize risks for their customers and level the playing field with larger vendors in the eyes of their customers.
According to CB Insights, “Funding, the lifeblood of startups, has dropped dramatically in 2022, leaving private companies strapped for cash and more prone to collapse. Global funding hit $74.5B in Q3’22 — less than half of quarterly funding at the end of 2021. And in Silicon Valley, the cradle of startup innovation, funding fell to its lowest level since Q4’19.” Although this data does not specifically look at SaaS companies, it is an indicator of the startup market as a whole.
“B2B SaaS experienced unprecedented levels of growth during the pandemic, with revenue more than tripling over the last two years,” according to an article in VentureBeat. “However, B2B SaaS has a lurking problem … churn and downgrades. … With new sales struggling to keep up with accelerating churn rates, companies will start to lose revenue along with customers, and exacerbated by a recession, may find themselves in serious trouble.”
Yet, some sources say a recessionary environment is a good one for SaaS. “Economic uncertainties in North America and Europe are likely to raise demand for SaaS solutions,” according to a Mint article. “Revenues may grow at a brisk pace from here on, as more companies plan to migrate to Cloud and adopt tech-enabled services to cut costs.”
Neha Gupta, a principal research analyst at Gartner, was quoted in the article and said, “Enterprises will accelerate adoption of cloud solutions giving them flexibility to pay just for the capacity and consumption they need. … Consistent with prior cycles, it is likely that solutions such as customer experience, digital commerce, analytics, collaboration, automation, and marketing will witness growth during the downturn."
Ultimately, this is SaaS’s first recession – and much is unknown. In a Forbes article, Capgemini VP Kevin Stoll states, “Because global downturns are uncharted territory for many SaaS companies, executives must now make long-term investment decisions for which there is little to no precedent.”
If you are a subscriber to SaaS services, you need to be even more vigilant about building-in safeguards for your business-critical SaaS applications in a down economy. SaaS escrow is a risk mitigation solution that gives you access to your application and data, operational knowledge of your production environment, or a replicated snapshot of the live cloud-hosted environment in the event of vendor failure.
As you assess the resilience of your supply chain, look at the financial stability of your third-party SaaS vendors. Seek out suppliers that proactively deliver risk mitigation and business continuity assurance. This can include implementing robust onboarding and procurement policies that include escrow and verification as part of supplier contracts. This serves as an extra layer of protection in case your SaaS vendor declares bankruptcy, becomes insolvent, or otherwise cannot support your application (as outlined in your escrow contract’s release conditions).
The move to cloud-based applications can come with perceived risks for many customers. With today’s recessionary outlook, the pressures are even more intense and SaaS startups are concerned with cash flow, churn, building lasting relationships, and achieving sustainable growth. As you enter new business agreements, think about proactively embedding SaaS escrow services into your offering as an added assurance for your customers and a way to create value to build those customer relationships.
No one knows what lies ahead, but partnering with an escrow agent like NCC Group lets you gain the confidence of customers and get ahead of the conversation about cloud resilience.
SaaS growth has been on an upward trajectory, and the pandemic provided a further push for cloud services to support collaboration tools around remote work and remote health services. The worldwide public cloud services market (including IaaS, PaaS, SaaS – SIS, and SaaS – applications), grew 29.0% year over year in 2021 with revenues totaling $408.6 billion, according to IDC.
Rick Villars, group vice president, Worldwide Research at IDC commented, “For the next several years, leading cloud providers will play a critical role in helping enterprises navigate the current storms of disruption (inflation, supply chain, and geopolitical tensions), but IT teams will also focus more on bringing greater financial accountability to the variable spend models of public cloud services.”
As this uncertain economic environment plays out, consider SaaS escrow and verification as safeguards for the applications and data you depend on to run your business. Or, as a SaaS vendor, consider the benefits of an up-front discussion about resilience to get all the concerns on the table. In addition, be certain that your software escrow agent is an expert in security and has the experience, longevity, and stability to withstand tough economic times.
Learn more:
