Possible unseen advantage in web management: Contract Disposition
Rewritten Article:
Hear this from Nate Buniva, partner at West Monroe. This piece is all his own opinion.
A major corporation is shedding a substantial division of its business. The buyer, a private equity firm, plans to establish the new company as an independent entity. During a transition services agreement period, the divested business will use Microsoft 365 under the seller's license. This raises several questions for both parties, such as whether the seller can assign the rights to the new company, and if the seller can renegotiate its license based on its shrunken size post-transaction. Is this the ideal solution for the new business?
You multiply this scenario by hundreds or even thousands of contracts controlling the technology and services these two companies rely on. The decisions made (or not) can have substantial implications for cost and profitability, as well as compliance, operational stability, and more. The potential impact depends on the situation, but we've seen cost reduction reach up to 60%. Often, contract disposition is overlooked in many mergers and acquisitions.
A merger or carveout provides a rare opportunity to revisit existing agreements, renegotiate contracts, cut stranded costs, maximize purchasing power, and source new providers to yield substantial savings and unlock synergies. However, contract analysis and disposition usually take a backseat to closing deals and integrating or setting up operations.
With cost efficiency a top priority amid economic uncertainty, financial executives should prioritize contract analysis during a deal, not treat it as an afterthought.
Seize the Moment
In a carveout scenario, a TSA grants the new company the right to use existing technology for the agreement duration, typically a year. This gives both parties some time to evaluate and decide what to do with key contracts. The seller may be able to secure direct savings and avoid costs.
For instance, by right-sizing contracts to shed unnecessary expenses, negotiating new contracts with more favorable terms or pricing, or repurposing excess licenses for something else. The buyer has the chance to create an optimal environment for its strategy, driving faster value creation.
Contract disposition is equally relevant in a merger scenario. For example, the buyer may capitalize on increased volume to achieve better pricing.
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The Challenge: Poor Contract Management
Deal teams have a good grasp of the spending involved, but they may not scrutinize cost reduction opportunities from contract disposition given the time required. Mid-sized to large organizations can have hundreds or even thousands of applicable contracts. Each technology (Microsoft 365, DocuSign, financial management software, hardware resellers) involved requires a contract, often part of larger umbrella agreements.
In our experience, few organizations maintain a centralized repository of these contracts. And even when they do, it often lacks a structured, centralized database or spreadsheet that captures key contractual details like spend, renewal terms, end dates, and termination clauses - essential information for a comprehensive overview. In extreme situations, we've seen companies ask vendors for copies. Most organizations fall somewhere in between.
Additionally, many companies lack visibility into actual license use - a potentially significant source of waste if, for example, you pay for a software license for 10,000 users but only 1,500 people actively use the application.
Gathering and assessing this data is labor-intensive.
Seize the Opportunity
Ideally, an organization will have prepared some groundwork and is ready when the possibility of a deal arises. In any case, here are some keys to maximizing the potential of contract disposition.
Get the right people involved. Contract disposition is a cross-functional effort, requiring input from legal, IT, procurement, finance, and transaction teams. Finance should be actively involved in the steering committee to ensure alignment with cost and profitability goals.
Gather and analyze contracts. In a transaction, designate a dedicated resource to start gathering and scrutinizing contracts to understand rights, pricing structure, and change-of-control provisions. Here, AI-driven tools can help alleviate some of the burden. This is also an opportune moment to establish a formal contract repository if one doesn't exist.
Determine actual use of contracted services. Assess the number of people using technology relative to the licenses contracted to make informed decisions.
Prioritize disposition opportunities. If you're the seller, the analyses above will help identify contracts for disposition (TSA, assignment, entity-owned, etc.) or rightsizing or renegotiation to reflect go-forward operations. If you're a buyer, this may provide an opportunity to negotiate more favorable pricing for a larger, post-integration organization.
Execute the disposition strategy. Don't underestimate the sheer volume of work involved. Vendor communication should be well-planned and deliberate. It is essential to understand rights, terms, and conditions before starting discussions. In good economic times, you may be able to work things out with strategic vendors. In tougher times, vendors may be less willing to stray from documented terms. Where many contracts are involved, track the value captured to understand the impact.
Don't leave valuable opportunities untapped
As investors and management teams strive to drive returns in an uncertain market, contract disposition offers a significant value lever hiding in plain sight. Deal and finance teams should examine contracts proactively to find synergies and cost-reduction or avoidance opportunities, or negotiate new agreements that align with future objectives.
Few organizations, however, give contract disposition the attention it deserves due to time pressures and the effort involved. Those who approach this effort strategically and systematically - following the tactics outlined above - not only can impact financial performance today. They can boost agility and resilience for the road ahead.
- Nate Buniva, a partner at West Monroe, suggests that financial analysts should prioritize contract analysis during mergers and acquisitions, as it can yield substantial savings and unlock synergies.
- In a carveout scenario, the seller may be able to secure direct savings and avoid costs by right-sizing contracts, negotiating new contracts with more favorable terms or pricing, or repurposing excess licenses.
- A buyer, in both carveout and merger scenarios, can capitalize on increased volume to achieve better pricing and create an optimal environment for its strategy, driving faster value creation.
- Poor contract management, characterized by a lack of centralized contract repository and visibility into actual license use, can hinder cost reduction opportunities in mergers and acquisitions.
- To maximize the potential of contract disposition, it is essential to gather and analyze contracts, determine actual use of contracted services, prioritize disposition opportunities, execute the disposition strategy, and, most importantly, involve the right people, including finance, in the process.
- Financial executives should proactively examine contracts to find synergies, cost-reduction opportunities, or negotiate new agreements that align with future objectives.
- Approaching contract disposition strategically and systematically can not only impact financial performance today but also boost agility and resilience for the road ahead, making it a valuable lever for investors and management teams in an uncertain market.
