Navigating Contract Management in Divestitures

Managing contracts during divestitures is a challenging process that needs careful preparation and implementation. Early artificial intelligence (AI) integration can improve accuracy, expedite procedures, and yield insightful information, which will make managing intricate contracts and guaranteeing compliance simpler.

In order to guarantee service continuity, businesses must negotiate supplier contracts while addressing the practical difficulties of separating systems, staff, and functions. Redistributing intellectual property rights, segregating revenue structures, and untangling customer contracts are all examples of successful tactics. For a smooth transition and uninterrupted operations, supplier agreements, Transitional Service Agreements (TSAs), and clear communication are essential. Organizations can lower risks, improve contract management tactics, and attain more effective results in divestment situations by utilizing AI.

Complexities of Managing Contracts During Divestitures

Carefully disentangling overlapping agreements and confirming that both the parent organization and the entity being divested can function autonomously is essential for handling contracts during divestiture processes. One of the significant challenges involves separating customer contracts that cover various business units or divisions. For example, in the technology sector, customers often consume services across different units, creating dependencies that require sophisticated untangling mechanisms.  Additionally, dealing with integrated revenue structures adds another layer of complexity. In order to guarantee proper revenue attribution and reduce business interruption, companies frequently employ intricate revenue models, such as usage-based pricing and multi-service packages, which must be carefully separated. Furthermore, as intellectual property rights and licenses are frequently shared across several contracts and business divisions, the requirement to reassign them can provide an additional degree of complexity.

Throughout the divestment process, maintaining trust and controlling expectations depend heavily on effective stakeholder communication. Stakeholders may receive contradictory messages from divestitures, raising questions about the brand identity and future course of the divested company. Customers may perceive possible service interruptions or product discontinuance, while investors may voice worries regarding the strategic rationale behind the choice. All parties concerned must communicate honestly and openly in order to address these problems. Furthermore, it is crucial to motivate and retain key staff during the divestment process because their departure could lead to the loss of crucial expertise.

TSAs are service agreements between buyer and seller companies (or divested entities) to ensure business continuity after the closure of a divestiture. One of the key challenges with TSAs is separating systems, data, infrastructure, and people identified to go with the divested business. The difficulty lies in the fact that many IT capabilities were designed to support a shared services structure, not rapid separation. Additionally, vague service descriptions, inflexible transition period terms, and inaccurate cost estimates can further complicate the TSA process. Effective negotiation of TSAs is crucial to ensure compliance and mitigate risks during the transition.

Supplier negotiations during divestitures present distinct challenges due to business restructuring. Suppliers may face uncertainty about future demand and supply chain needs, making it difficult to secure long-term contracts or commitments. The divested entity may lose the bargaining power and economies of scale it had as part of the parent company, potentially leading to less favorable terms from suppliers. Additionally, suppliers might also react unfavorably to the change, which could disrupt the supply chain or lead to requests for renegotiation of current agreements. Effective communication, strategic planning, and a clear understanding of the new entity’s needs and capabilities are crucial for managing these challenges.

Managing contracts in divestitures involves navigating the complexities of stakeholder management and communication, negotiating TSAs to ensure business continuity, and addressing the challenges of supplier negotiations. By employing effective strategies and maintaining a focus on operational continuity, companies can achieve a smooth transition and position themselves for future growth and success.

Logistical Challenges of Separating Systems, Personnel, and Functions

Separating systems, personnel, and functions before a divestiture presents significant logistical challenges that require careful planning and execution. Ideally, divested entities should operate independently without relying on the parent company. However, a Transitional Service Agreement (TSA) must be used to manage any dependency on the parent company’s IT infrastructure. In this process, IT systems and infrastructure are replicated and separated, application portfolios are transferred and transitioned, and standalone systems are created. While negotiating TSAs guarantees continuity, it can be expensive and time-consuming, requiring system integration, data migration, and possible downtime. Before services are fully migrated, the newly divested company must create and oversee a thorough plan to guarantee that each team has the required personnel, procedures, technology, and contracts in place.

The employees’ cultural adjustment to the new organization is another major obstacle. Harmonizing disparate business cultures and management philosophies is necessary to establish a harmonious workplace. When the divested subsidiary has a different corporate culture from the parent company, this might be very difficult. Maintaining morale and productivity during the change requires making sure that employees feel appreciated and involved.

Additionally, establishing new job contracts and benefit packages is frequently a part of personnel separation. Since the terms and conditions of employment must align with the policies and procedures of the new organization, this can be a difficult and time-consuming process. Retaining critical talent and reducing turnover requires that employees get competitive and equitable pay and benefits.

Strategies for Negotiating Supplier Contracts and Ensuring Continuity of Services

To guarantee service continuity both before and after a divestiture, that is, before and after the spin-off, it is essential to negotiate supplier contracts effectively. To find possible hazards and areas for renegotiation, one tactic is to thoroughly evaluate current contracts. This entails figuring out the best alternative to a negotiated agreement (BATNA), comprehending the corporate objectives, and creating efficient communication plans.

Setting up explicit contract goals and governance frameworks is another crucial tactic. In order to guarantee that supplier contracts are handled successfully and efficiently, governance structures offer a framework for responsibility, decision-making, and supervision. To make sure suppliers fulfill the necessary requirements, this entails establishing performance criteria, specifying the deliverables and scope, and conducting frequent performance evaluations. Utilizing technology and contract management solutions can also improve contract visibility and compliance while expediting the negotiating process.

Successful management of supplier relationships is essential for negotiating contracts and guaranteeing service continuity. Developing robust relationships with suppliers creates a partnership atmosphere, making them feel appreciated and engaged in the business collaboration. This collaborative approach can be especially advantageous during the transition to a divested entity, as it motivates suppliers to uphold their dedication and assistance.

Sorting suppliers based on their importance and potential impact on the company is essential to reducing risks and ensuring service continuity. Developing unique tactics and procedures for every category helps handle possible disruptions from difficult suppliers. For instance, essential suppliers should be equipped with strong contingency plans and undergo frequent performance assessments, whereas suppliers deemed less critical may only need basic monitoring processes.

By combining strong supplier relationships with strategic risk management, businesses can negotiate more favorable contract terms and ensure a stable supply chain, even in challenging circumstances. This holistic approach not only enhances supplier cooperation but also safeguards the business against unforeseen disruptions.

Use of AI in Divestitures

AI in contract management is transforming the way businesses handle contracts by automating tasks such as contract creation, review, compliance tracking, and risk assessment. This not only reduces administrative costs but also accelerates contract cycle times and boosts compliance. AI-powered solutions can assist in mitigating contract leakage, ensuring financial protection and better decision-making. Platforms like AvaSense, as illustrated in Table 1, help businesses leverage AI to streamline contract workflows, enhance efficiency, improve accuracy, and ensure compliance.

Table 1 AvaSense Benefits in Contract Management

AI supports finance teams in enhancing efficiency, improving contract accuracy, and safeguarding financial interests, enabling more informed and strategic decision-making. By integrating AI into contract management processes, companies can navigate the complexities of divestitures more effectively, ensuring operational continuity and minimizing business disruptions.

Conclusion

Navigating contract management in divestitures requires meticulous planning and strategic execution. Leveraging AI and tools like AvaSense can streamline processes, enhance visibility, and improve accuracy. Strong supplier relationships, proactive risk management, and transparent stakeholder communication are essential to minimizing disruptions. Companies can achieve a smooth transition and position themselves for future growth by employing effective negotiation strategies and focusing on operational continuity.

By Gyanesh Gohel, Associate Director, and Daniella Sirjoo, Senior Consultant