Another Universal Business Risk that Intel strives to mitigate is business interruptions. Escrow accounts are utilized to minimize potential risks to factory production that are due to a supplier becoming financially unstable or failing to provide adequate support for his or her manufacturing equipment and software. These accounts contain critical supplier intellectual property to sustain the customer's manufacturing environment. Account contents should include all necessary documents and/or software source code to allow complete self-sustaining support. In this section we explore some of the issues with effectively utilizing escrow accounts as a risk mitigation strategy, and offer some new innovative solutions. No disruption to production is our ultimate goal, and our hope is to never require access to the escrow account contents. Suppliers can benefit by establishing these accounts to ensure uninterrupted supply, which can lead to securing initial or future business.

Having third-party escrow accounts in place has created a false sense of security. Escrow account contents cannot be obtained when required, which impacts the ability to mitigate potential risks to production.

Intel has encountered instances where escrow accounts could not be accessed after a supplier filed for bankruptcy. Most courts protect creditors in bankruptcy situations and do not allow any account contents to be used if obtained within 90 days prior to the filing for bankruptcy.

When a supply disruption occurs, many issues need to be resolved. Manufacturing equipment spare parts inventory must be micromanaged to ensure adequate supply to each factory. Alternative sources for supply of the spare parts must be identified and qualified. The inability to access contents of an escrow account during a supply disruption makes sourcing of manufacturing equipment spare parts difficult (especially when patents are involved or the parts are manufactured internally by the supplier). Service expertise must also be available to resolve any issues with manufacturing equipment.

In response to situations where escrow account contents could not be obtained when needed, a team was formed to develop new ideas on how to deal with these issues. As a result of this effort new methodologies were developed for managing at-risk suppliers. The team developed proactive financial and performance triggers to access account contents prior to a supply chain issue.

High-risk proactive financial ratios were defined to allow the release of account contents in advance of bankruptcy. The ratios are net operating cash flow divided by current liabilities less than 10%, return on equity (net equity divided by total equity) less than 0%, earnings before interest, taxes, depreciation and amortization (EBITDA) divided by interest expense less than 1, and retained earnings divided by total assets 0%. Accounts are structured so that contents are released if any of these high-risk ratios are met.

Release of account contents based upon the proactive financial triggers allows time to address supply-chain issues and avoid any disruption to production. Based upon previous experiences where account contents could not be accessed, having these triggers in place would have allowed release of the account contents at least a year in advance of the supplier filing for bankruptcy. Having this time to source and qualify parts would have been a big advantage in minimizing or eliminating the potential risk.

In order to effectively use the proactive financial ratios, financial statements must be provided by the supplier on a timely basis to determine if ratios have been breached. If financial statements are not provided as agreed upon, account contents must be released to the customer.

It is also critical that favorable release conditions are negotiated with both the supplier and the third-party escrow account agent. The third-party escrow company must be able to ship the account contents as soon as the customer provides documentation that a release condition has been met. Any issues that arise from releasing the account contents must be worked independently by the customer and supplier (after the release has been made). Any delay in releasing the account contents takes time away from pursuing solutions to mitigate risk.

If performance release conditions are used they should be customized to the unique supplier and situation. Release conditions must be based upon the potential high-risk issues that would require immediate access to the account contents. An example might be a performance trigger of not meeting on-time delivery. Release conditions can also be defined with a specific amount of time for the supplier to resolve the breach before account contents are released.

Obtaining a license for the account contents is vital. It needs to be clearly stated in the escrow agreement that the license cannot be used unless a release condition is met. A license granted up front establishes the right to use the account content (even in bankruptcy situations). The license must also allow the right to make, or have manufactured, any spare parts necessary to service the equipment (even if the spare parts were not included in the escrow account). If a third-party is used to develop and/or manufacture the parts required, the supplier must help and/or establish a third party as a viable source.

In bankruptcy an automatic stay is granted, which would prevent the release of the account contents. Under the new release conditions, relief from the automatic stay must be granted. This helps to ensure account contents can be released after a filing for bankruptcy.

Proactive release of the account contents is very important with regards to bankruptcy. Anything that is obtained less than 90 days before the supplier files for bankruptcy is set aside, potentially rendering the released account contents within this window useless.

Account contents should include detailed instructions to navigate any account files, which is a step-by-step process to locate purchased parts, manufactured parts, and assemblies. The account should also include spare parts lists, a bill of materials, and specific manufacturing documents (electrical, mechanical, jigs, and special tools), detailed assembly instructions, software/firmware, and manuals for maintenance and training.

Risk versus required resources must be considered when determining what potential account content should be audited (see Figure 4). Both current and future risk should be taken into consideration. A supplier might be financially stable now, but what happens if a substantial amount of revenue is lost due to another supplier being selected for future process requirements? The installed base of tools must continue to be supported with spare parts and service.

Figure 4: Risks versus resources
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To enable an effective and efficient audit, the supplier needs to understand what the account will contain and the required format. Without proper planning for the audit, it will take a lot of extra time and resources to achieve the desired results.

Holding the account contents internally is being utilized with several suppliers. In one situation, proactive financial ratios were already outside of predefined limits when discussion began to put this type of account in place. Since the proactive financial ratios would not work in this situation, a creative solution needed to be found. The financially unstable supplier ended up providing Intel shrink-wrapped source code for their software. If there is any disruption to the manufacturing environment as described in the contract, Intel has the right to access and use the source code. Holding the shrink-wrapped software source code is a creative solution to minimize risk with this particular supplier.

Another option to consider is for the customer to hold the account contents internally with the same release conditions as a third-party escrow account. If the contents are held internally by the customer, the account contents must be protected (i.e., lockbox in a bank vault). Account contents cannot be released unless a release condition has been met and the proper authorization has been obtained as defined by the account agreement. This eliminates the cost of a third-party escrow agent.

The above-mentioned innovative concepts have been successfully implemented with Intel suppliers. Accounts have been established with proactive triggers and a mechanism for quick release of account contents, if a breach occurs. Specific terms and conditions have been negotiated with suppliers to limit potential release issues due to bankruptcy. A process has been defined and utilized to ensure effective and efficient account audits are conducted. Implementation of these changes made the escrow account process a viable option to minimize potential supply chain disruptions.

After bankruptcy is filed there is no way to ensure, with 100% confidence, that account contents can be obtained. This is why it is so important for release of the account contents to occur prior to any bankruptcy filing.

The tools outlined in this paper provide the framework for this kind of scenario, but creative solutions need to be identified based upon each situation and supplier. In potential high-risk situations, proactive strategies must be developed to allow enough time to establish alternate sources of supply and minimize risk.