The following is a guest post from Nate Buniva, partner at West Monroe. Opinions are the author’s own.
A large organization is divesting a sizeable division of its business. The buyer, a private equity firm, intends to stand up the new company as an independent entity. The divested business will use Microsoft 365 under the seller’s license during a transition services agreement period. This raises important considerations for both sides—among them: Can the seller assign the rights to the new company? Can the seller renegotiate its license based on its smaller size post-transaction? Is this the right solution for the new business going forward?
Now, multiply this by hundreds or possibly thousands of contracts that govern the technology and services that run these two companies. The decisions taken (or not) could have significant implications for cost and profitability, as well as compliance, operational stability, and more. How much potential depends on the specific situation, but we have seen cost reduction reach the 40% to 60% range. Even so, contract disposition is one of the most overlooked financial and synergy levers in many mergers and acquisitions.
A merger or carveout creates 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. Too often, though, contract analysis and disposition take a backseat to getting deals closed and operations integrated or established.
With cost efficiency a top priority amid economic uncertainty, finance executives should make sure that contract analysis is front and center during a deal, not an afterthought.
Understand the possibilities
In the carveout scenario above, a TSA gives the new company the right to use existing technology for the duration of the agreement, typically around one year. That gives both parties a little time to dig in and figure out what to do with key contracts. The seller may be able to realize direct savings and avoid costs.
For example, by right-sizing contracts to shed expenses for licenses it no longer needs, negotiating new contracts with more favorable terms or pricing, or repurposing excess licenses for something else. The buyer has the chance to create the optimal environment for its strategy, driving faster value creation.
Contract disposition is just as relevant in a merger scenario. For example, the buyer may be able to take advantage of increased volume to achieve better pricing.
The potential isn’t limited to information technology. In our experience, however, IT is typically one of the heaviest spending areas and often the longest pole in the tent during a TSA — it’s the most complex to detangle or merge, requiring significant effort to ensure operational continuity. That complexity creates both urgency and opportunity: contracts tied to IT should be a top priority for analysis, as they often have the greatest potential for an immediate and lasting impact.
The problem: Many companies don’t manage contracts well
Deal teams will have a good handle on the spend involved, but they may not look carefully at the cost takeout opportunities from contract disposition given the substantial time required.
Mid-sized to large organizations can have hundreds or even thousands of applicable contracts. Each technology involved — from desktop applications like Microsoft 365 and DocuSign to enterprise software applications for financial and customer relationship management to hardware resellers such as a CDW — involves 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 — critical information for a holistic view. In extreme situations, we’ve seen companies ask vendors for copies. Most organizations fall somewhere in between.
Furthermore, many companies lack visibility into actual use of licenses — a potentially significant source of waste if, for example, you are paying for a software license for 10,000 users but only 1,500 people are actively using the application.
Gathering and assessing this insight is highly manual work when there is much else to accomplish.
Mobilizing for maximum impact
Ideally, an organization will have laid some of the groundwork and is prepared when the possibility of a deal starts to materialize. In any event, here are some keys to maximizing the potential of contract disposition.
Get the right parties involved. Contract disposition should be a cross-functional effort, with input from legal, IT, procurement, finance, and transaction teams. Finance should be active in the steering committee to ensure alignment with cost and profitability goals.
Gather and review contracts. If your organization is involved in a transaction, as a buyer or seller, assign a dedicated resource to begin gathering and analyzing contracts to understand rights, pricing structure, and change of control provisions. Here, Gen AI tools could help alleviate some of the burden. This is also a good opportunity to establish a formal contract repository if you don’t have one.
Determine actual use of contracted services. Assessing how many people are actually using technology relative to the licenses contracted is equally time intensive. Create a master utilization report to facilitate decisions.
Prioritize disposition opportunities. If you are the seller, the analyses above will help pinpoint contracts for disposition (TSA, assignment, entity owned, etc.), as well as rightsizing or renegotiation to reflect go-forward operations. If you are a buyer, this may be a chance to negotiate more favorable pricing for a larger, post-integration organization.
Execute the disposition strategy. Don’t underestimate the amount of work involved. Vendor communication should be planned and deliberate. It is important to know rights, terms and conditions, and other details 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, it is a good idea to establish a tracking mechanism to understand the value captured.
Don’t leave good opportunities on the table
As investors and management teams seek to drive returns in an uncertain market, contract disposition is a major value lever hiding in plain sight. Deal and finance teams should look at contracts proactively to find synergies and opportunities to reduce and/or avoid costs or and negotiate new agreements that align with future objectives.
Few organizations, though, give contract disposition the attention it deserves due to time pressures and the effort involved. Those that do approach this effort strategically and thoroughly — following the tactics outlined above — not only can influence financial performance today. They can increase agility and resiliency for the road ahead.
