Step 3: Prioritize and focus on critical relationships
Once the overall contract list is finalized, the next step is to prioritize based on contracted amount and other qualitative measures such as Day One business criticality and supplier or customer relationship. Categorization enables the contracts separation team to prioritize time and resources on contracts that are important to the transaction. For contracts deemed “critical,” creating supplier profiles, formulating what-if scenarios, and determining quantitative and qualitative negotiation levers will enable a seamless separation.
Technology suppliers may need special treatment. Unlike other sectors, technology sector organizations tend to have a large third-party application and infrastructure footprint and may rely heavily on external technology suppliers to take their products to market. In typical divestitures, some technology suppliers tend to exercise greater bargaining power, and thus separating contracts becomes challenging. Citing issues with implementing contractual changes and administrative overhead, suppliers may delay granting transition, duplication and assignment rights or insist on purchasing temporary licenses to support the transition services agreement (TSA) period.
To tackle such issues, organizations should prioritize these suppliers in the overall contract separation process and work with the supplier’s account representatives in a collaborative way to secure necessary separation rights. Using “bridging agreements” — through which the parent and the suppliers agree to amend the contract to authorize the DivestCo to either use the licensing seats or benefit from the services as a pass-through for the remainder of the contract — is a possible option. Upon completion of the bridging agreement, the DivestCo is often required to establish a new contract directly with the technology supplier.
Step 4: Perform contracts analysis and finalize Day One dispositions
Contracts analysis is a critical and elaborate effort that includes reviewing contract clauses to determine what rights are contractually available or what requirements must be upheld. For example, contract clauses may cover assignment rights, change of control, notification requirements, TSA (divestiture or right to use), duplication and termination rights.
We have seen that, generally, agreements are not centrally located. Instead, agreements are spread across organization units, geographical locations and individuals. This makes the contracts analysis process difficult and error-prone. Thus, functional areas are advised to take proactive measures in collating all contracts and agreements.
Involve key organization stakeholders who can help provide inputs to formalize contract dispositions, generally driven by the Day One operating model.
Step 5: Execute third-party communication and set up the DivestCo for success
Once the gaps between Day One disposition and contractual rights are determined, the process of customer and supplier communication can begin, with priority on critical contracts.
- Assignment notification templates need to be drafted by the legal department and provided to functions for customization. Multiple formats are often necessary, covering different scenarios, such as complete or partial assignment, notification-only vs. explicit supplier consent.
- For suppliers requiring partial assignment, determine assets and associated costs, including software licenses, telecom and IT equipment, contingent workers, real estate facilities and other elements to be transferred to the DivestCo.
- For Day One critical suppliers, determine the risk if rights to assign contracts are not secured, and create back-up plans to ensure business continuity post-Day One.
This step may prove complex given dependencies on external stakeholders. Suppliers or customers may not be timely in their responses to acknowledge any communication and grant requested rights. In the worst case, some suppliers may use this opportunity to charge a one-time fee for granting divestiture or assignment rights, or increase the licensing fee to supplement their revenue stream. Similarly, some customers may seek to exploit the transaction and increase their royalty or promotional fees.
Thus, it is important for the contract separation work stream to track all supplier and customer responses, follow up and escalate as required. If planned and executed right, all relevant contracts are either assigned, duplicated or ready for enabling transition services as planned.