A divestiture is a process where a company sells, liquidates, or spins off a business unit or subsidiary to streamline operations, reduce debt, or reallocate resources. It often involves the sale of assets, and it can be part of a corporate restructuring or downsizing strategy.
In some cases, divestitures are made to comply with regulatory requirements or to exit from non-core businesses. The goal is typically to enhance the financial health and focus of the parent company. For instance, in the context of IT, a divestiture might involve negotiating rights and managing contracts to minimize disruption and costs associated with the separation of IT services following a corporate split.
Benefits of a Divestiture
The benefits of a divestiture can be numerous and can vary depending on the context and goals of the company involved. However, some general benefits include streamlining operations, as divestitures can help a company focus on its core competencies by shedding non-core or underperforming business units. Selling assets can provide a significant influx of cash, which can be used to pay down debt, invest in core operations, or return capital to shareholders. This can aid the company’s overall financial health as well as regulatory compliance, since divestitures can be used to comply with antitrust regulations or other legal requirements. By divesting non-core assets, a company can potentially increase its overall value, because it becomes more focused and efficient. This helps with value creation as well as risk management, since divestitures can reduce the complexity of a company, thereby making it easier to manage and less vulnerable to risks.
Avasant’s Role in Divestitures
In the context of divestiture, the role and scope can be quite extensive and multifaceted. The Avasant team had various roles in a particular holding company and divested entities. This ranged from managing our client’s day-to-day procurement activities or implementing strategic sourcing. The following presents some of the major roles and responsibilities undertaken by the Avasant team:
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- Contract separations and renewals, which involved operating as a managed service with minimal leadership oversight and providing dashboard control for plans, schedules, action items, and supplier status. The immediate need was to transition IT sourcing from the company’s IT sourcing to Avasant, which required organizing teams by product category and supplier, and shadowing the company’s IT sourcing counterparts to understand existing work methods, contracts, and negotiation planning processes.
- Conducting workshops for clients that identified roles that were in scope or out of scope during a divestiture. This involves a critical assessment of impacted employees, their criticality, and the risk of them leaving the organization.
- Streamlining of contracts to ensure minimum disruption — the goal here was to take actions to meet changes in the IT budget while minimizing commercial friction and costs introduced by IT suppliers. This required negotiating divestiture and affiliate rights before the split to ensure savings by extending terms and moving to new commercial models.
Challenges of Contract Negotiations
Contract negotiations can be complex and challenging, involving multiple facets such as developing a negotiation strategy, providing legal support to address performance and contractual issues, structuring contracts and Master Service Agreements (MSAs), ensuring data privacy and GDPR compliance, and optimizing software licenses. Avasant, for example, offered support in these areas by leveraging its experience and resources to help clients achieve their objectives. Some of the major challenges that arose during these divestiture projects were:
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- Ensuring a good client-provider relationship, which hinged on a contract that is fair and equitable to both parties. Avasant’s approach included building on existing contracts, analysing them for industry standard alignment, addressing gaps, and making recommendations during negotiations. Avasant also assisted clients with negotiation strategy and training, managed the negotiation schedule, and facilitated discussions between relevant parties.
- Transition services between two groups: As seen in the case of IT sourcing moving from the company’s IT sourcing to Avasant Consulting, this required organizing teams by product category and supplier, as well as having understood existing work methods, contracts, and negotiation planning processes.
- Negotiation skills: Negotiation readiness was critical, and it involved a structured approach with a clear schedule and preparation, including research and evaluation. The negotiation lead played a pivotal role in coordinating various aspects such as contracts, client policies, fees, fee reduction, HR/rebadging, and pricing.
Supplier Intricacies and Challenges in a Divestiture
In the context of divestitures, clients as well as suppliers face several challenges regarding separation agreements. Suppliers may face uncertainty about future demand and supply chain needs, making it difficult to secure long-term contracts or commitments. This uncertainty can stem from not knowing how the divested entity will perform independently and what its future procurement strategies will be. The divested entity may lose the bargaining power and economies of scale it had as part of the parent company, potentially and eventually leading to less favorable terms from suppliers.
Suppliers might also react unfavourably to the change, which could disrupt the supply chain or lead to requests for renegotiation of current agreements leading to lengthier negotiation processes. Divestitures often result in employee turnover, which can lead to a loss of valuable expertise, particularly if key personnel with specialized knowledge of supplier contracts and negotiations leave the company. These challenges can complicate the process of reaching and executing separation agreements, as they add layers of complexity to negotiations and may affect the continuity of supply and operations. Effective communication, strategic planning, and a clear understanding of the new entity’s needs and capabilities are crucial for managing these challenges.
Mitigation of Supplier Challenges
To mitigate supplier challenges during a divestiture, there are certain elements that can be implemented to minimize these. A disentanglement plan can be implemented. This is a high-level plan during the transition that includes strategies for optionally transferring the captive at the end of the term. This plan should be developed in consultation with the divesting entity and reviewed for approval. Robust governance and compliance plans can be implemented for managing vendor portfolios, spend, and services, and third-party risk to increase value and accountability across the vendor ecosystem. Additionally, a contract management partner can be engaged to navigate contract separation, reduce reliance on transitional service agreements (TSAs), and optimize value while managing costs. Processes can also be standardized to ensure a seamless transition and pave the way for future growth. This includes effective communication and robust data management as well as an expert legal team can be utilized to navigate the complex legalities of divestiture and establish a compliance framework.
Lastly, vendor performance management can be used to document and report on achievement against service level agreements (SLAs) as well as financial review to conduct a thorough review of financials to understand the implications of the separation on the financial health of both entities. These strategies can help in addressing the logistical complexities, uncertainty, loss of bargaining power, supplier relations, and employee turnover challenges that suppliers may face during a divestiture.
Conclusion
Divestitures are strategic moves that involve the disposal of non-core assets or business units to enhance operational efficiency, discover hidden value, and concentrate on core competencies. It is important to implement a set of solutions such as process standardization, enhanced communication, adaptability, data management, and legal and regulatory compliance to mitigate the risks inherent in divestitures during negotiation challenges and supplier intricacies.
By Daniella Sirjoo, Consultant, and Kayla Noel, Senior Consultant