Potential overlooked tool for website management: Contract Disposition

Rewritten Article:

Title: Preparing for Contract Disposition In M&A Deals: A Strategic Guide

Hey there! Today, we have a guest post from Nate Buniva, a partner at West Monroe. As usual, all opinions are the author's own.

A major corporation is dismantling a significant chunk of its business. This part is being sold to a private equity firm, who plans to establish the new company as an independent entity. During the transition period, the divested business will use Microsoft 365 under the seller's license via a Transition Services Agreement (TSA). This raises critical questions for both parties: Can the seller assign rights to the new company? Can the seller renegotiate its license given its reduced size post-deal? Is this the best course for the new business?

Now, imagine repeating this process across hundreds or thousands of contracts that govern technology and services for these companies. The decisions made, or not made, could substantially impact costs, profits, compliance, and operational stability. The potential benefits can range from 40% to 60%, but contract disposition is often overlooked in many mergers and acquisitions.

A merger or carveout provides a rare chance to revisit existing agreements, renegotiate contracts, reduce stranded costs, leverage purchasing power, and source new providers to generate substantial savings and unlock synergies. However, contract analysis and disposition frequently take a back seat to closing deals and integrating or establishing operations.

With cost efficiency paramount amid economic uncertainty, finance executives should put contract analysis at the forefront during a deal, rather than an afterthought.

Embracing the Possibilities

In a carveout scenario, a TSA provides the new company the right to use existing technology for the TSA duration, typically a year. This time allows both parties to explore their options, such as the seller realizing direct savings and avoiding costs by right-sizing contracts, negotiating new contracts, or repurposing excess licenses. Meanwhile, the buyer has an opportunity to create an optimal environment for its strategy, driving faster value creation.

Contract disposition is equally relevant in a merger scenario, as the buyer may be able to use increased volume to secure better pricing.

Go beyond information technology; in our experience, IT is typically one of the heaviest spending areas and often the most complex to untangle or merge, requiring significant effort to ensure operational continuity. The 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.

Confronting Common Challenges

Deal teams may have a good handle on spend but may not thoroughly explore cost takeout opportunities from contract disposition due to the substantial time required. Mid-sized to large organizations can have hundreds or thousands of applicable contracts for various technologies. In our experience, few organizations maintain a centralized repository of these contracts, if they do, it often lacks structure and fails to capture key contractual details like spend, renewal terms, end dates, and termination clauses— critical information for a holistic view. In extreme situations, companies may even ask vendors for copies of contracts. Most organizations fall somewhere in between.

What's more, many companies lack visibility into actual usage 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 during busy deal periods.

Achieving Maximum Impact

Ideally, an organization will have prepared for potential deals by implementing the strategies mentioned below. However, even in an unexpected deal scenario, the following keys to maximizing contract disposition potential still apply.

Get the right parties involved. Contract disposition should be a collaborative effort between legal, IT, procurement, finance, and transaction teams. Finance should lead the steering committee to ensure alignment with cost and profitability goals.

Gather and review contracts. Assign a dedicated resource to gather, analyze, and understand rights, pricing structure, and change-of-control provisions, using AI tools to help alleviate some of the burden. This is also an excellent opportunity to establish a formal contract repository if one is not already in place.

Determine actual usage of contracted services. Analyze technology usage relative to licensed users to facilitate informed decisions.

Prioritize disposition opportunities. Use the analyses to identify contracts for disposition, rightsizing, or renegotiation to align with future operations. If you are a buyer, this may be an opportunity to negotiate more favorable pricing.

Execute the disposition strategy. Manage vendor communication effectively, have a solid understanding of contract details, and track the value captured to ensure efficient execution of the disposition strategy.

Don't Overlook Opportunities

As investors and management teams seek to maximize returns in an uncertain market, contract disposition is a crucial value lever hiding in plain sight. Deal and finance teams should consider contracts proactively to find synergies, reduce costs, or negotiate new agreements that align with future objectives.

Few organizations give contract disposition the careful attention it deserves due to time pressures and effort required. Those who approach this effort strategically and thoroughly not only influence financial performance today, but they also increase agility and resilience for the future road ahead.

The analysis of contracts can have a substantial impact on the financial stability and operational efficiency of a new business formed from a merger or carveout.
During the transition period, the seller and the new company should carefully consider whether the seller can assign rights to the new company and whether the seller can renegotiate its license given its reduced size post-deal.
In a carveout or merger scenario, contract disposition presents opportunities to reduce stranded costs, leverage purchasing power, and source new providers to generate significant savings.
Finance executives should prioritize contract analysis during a deal, as it can lead to 40% to 60% returns, and failure to do so can compromise costs, profits, compliance, and operational stability.
In an unexpected M&A scenario, IT contracts are often the heaviest spending areas and the most complex to untangle or merge, requiring significant effort to ensure operational continuity.
To maximize the potential impact of contract disposition, organizations should collaborate across legal, IT, procurement, finance, and transaction teams, analyze and understand rights, pricing structure, and change-of-control provisions, and determine actual usage of contracted services.
As investors and management teams navigate an uncertain market, they should proactively consider contracts to find synergies, reduce costs, or negotiate new agreements that align with future objectives, increasing agility and resilience for the future road ahead.

Examining agreements through mergers and acquisitions offers a singular chance for cost reduction. However, many businesses fail to fully exploit this advantage.

Organizational savings can be maximized via mergers and acquisitions, particularly through reevaluating prevailing contracts. However, the majority of companies fail to fully capitalize on this prospect.

Potential overlooked tool for website management: Contract Disposition