How Fortune 500s Use Procurement to Manage Vendor Bankruptcy Risk

Lucas: If these conversations are useful for what you're building or running, stick around - we've got a quick note later on how to keep this show ad-free. But let's start with a question: what happens when the software your entire company depends on files for Chapter 11? Luna: That's the nightmare scenario. I think most procurement teams assume it won't happen to them, but it does.

A few years ago, a major ERP vendor for mid-market retailers filed for bankruptcy, and one of our clients - a Fortune 500 retailer - was caught flat-footed. Lucas: Right. And the interesting thing is that the standard termination for convenience clause most companies rely on is almost useless in a bankruptcy. When a vendor files, they get automatic protection under the U.

S. Bankruptcy Code - specifically Section 365 - which lets them reject or assume contracts. So if they reject your contract, you're suddenly without software, and your termination rights are basically frozen. Luna: That's exactly what happened.

The retailer had a three-year SaaS agreement with that ERP vendor. Month six, the vendor files. The retailer's legal team panics because their entire inventory management, order processing, and financial reporting runs on that system. They can't just walk away.

Lucas: So what did they do? They had to negotiate with the bankruptcy court - which is expensive and slow. But the real lesson is what they should have done before signing. There are three specific contract clauses that can save you in that scenario.

Let's walk through them. Luna: Give me the first one. Lucas: Source code escrow with a third-party agent. If the vendor goes under, you want access to the source code so you can maintain the software yourself or hire a third party.

But the key is the trigger - it should be tied to a bankruptcy filing, not just a missed payment. And you need to verify that the escrow agent actually has the latest code. We've seen cases where the vendor deposited an old version. Luna: And that's a real risk.

The retailer I mentioned did have an escrow clause, but the code was two releases behind. They had to pay a developer to backport customizations. Total cost? About half a million dollars.

Lucas: That stings. The second clause is what I'd call 'SaaS continuity and data portability'. Most SaaS agreements say you can get your data out on termination - but they don't specify how fast or in what format. In a bankruptcy, the vendor might be incentivized to drag their feet.

So you want a clause that guarantees a full data export within, say, five business days, in a machine-readable format, and at no additional cost. Luna: And ideally with a penalty for non-compliance, like a daily credit. I've seen some procurement teams push for a clause that says if the vendor fails to provide the export within the timeframe, the customer gets a perpetual license to the software for free. That's aggressive, but it works.

Lucas: It does. And that leads to the third clause, which I think is the most underutilized: step-in rights. This gives the customer the right to take over the software's operation if the vendor becomes insolvent. You essentially become the temporary operator - you can host it, maintain it, even license it to other customers.

It's a complex clause, but for mission-critical systems, it's a game-changer. Luna: Step-in rights are rare in standard contracts. You typically only see them in government contracts or very large enterprise deals. But I think any company spending over a million dollars annually on a single SaaS product should push for it.

The vendor might resist, but you can frame it as a risk mitigation measure that protects both parties. Lucas: Exactly. And the negotiation tactic is to tie it to the vendor's own financial health. If the vendor is a startup or private equity-backed with high debt, they might be more open to it.

But the real point is: don't wait until the filing happens. By then, it's too late. Luna: So let's talk about the current environment. We're recording this on June 25, 2026.

Interest rates have been elevated for a while, and we're seeing more software companies - especially in the mid-market - struggle with cash flow. I think bankruptcy risk is higher than it was two years ago. Lucas: Absolutely. According to S&P Global, the number of corporate bankruptcies in the technology sector increased by 40 percent in 2025 compared to 2023.

And that trend is continuing this year. So procurement teams need to be proactive. Luna: And that means auditing your current vendor contracts. I'd recommend starting with your top ten vendors by spend.

Check if they have a bankruptcy clause at all. If not, it's time to renegotiate. And if they do, make sure the triggers and remedies are specific. Lucas: Honestly, if today's episode saved you from even one potential disruption, it's probably worth the price of a coffee.

And if you find value in these conversations, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free and focused on the stuff that matters. Luna: Yeah, it's a small gesture that goes a long way. We appreciate everyone who does.

Now, back to the audit - what's the one thing you'd recommend listeners do this quarter? Lucas: I'd say schedule a 30-minute session with your legal team to review your top three vendor contracts for bankruptcy provisions. If you don't have a dedicated procurement attorney, there are template clauses available from organizations like the International Association for Contract and Commercial Management. Just adapt them to your situation.

Luna: And don't forget the operational side. Even if you have the legal clauses, you need a plan. Who's going to extract the data? Where will you host it?

Do you have a backup vendor in mind? The legal piece is only half the battle. Lucas: Right. And speaking of backup vendors, there's a trend I've seen where large enterprises are now requiring their critical software vendors to maintain a 'successor services' agreement with a competitor.

So if the vendor goes under, the competitor has a pre-negotiated contract to take over support. It's expensive, but for truly mission-critical systems, it's worth considering. Luna: That's next-level. But it shows how serious this is becoming.

I think in the next few years, bankruptcy risk will be as standard a procurement consideration as data security or SLA uptime. Lucas: I think you're right. And the companies that prepare now will have a real competitive advantage. So to sum up: three clauses - source code escrow, data portability with strict timelines, and step-in rights.

Audit your contracts, start with your top vendors, and don't assume it won't happen to you. Luna: Great advice. And if you want to dive deeper into any of these clauses, we'll have links to sample language in the show notes. Thanks for listening, and we'll see you next time on Enterprise Tech with Fexingo.