Divesting is the strategic move de rigeur in everyone’s playbook these days. It has proven to be effective. Companies can streamline the operating model and redeploy proceeds from the divestment in growth areas, and they are choosing to channel the funds towards new technology investments or innovation.
Now is the time to start preparing your enterprise or focus on maximizing value in a potential deal. Divestitures are mostly a complex process that requires far more preparation than IT leaders expect, so be prepared, especially when it comes to the disentanglement of IT vendor contracts.
Not implementing a formalized disentanglement process or governance program can result in missed contract synergy opportunities and exposure to additional (and unnecessary albeit very real) risks and financial obligations. Many don’t think to involve the vendor management office (VMO) from the beginning of the divestment campaign, but their role is critical. They will be the ones to help you reach the end zone with the least obstacles.
In a recent divestiture exercise, a Fortune 500 US-based healthcare company with over $10 billion in annual revenue found itself in the middle of a highly complicated situation as challenges emerged: a sudden increase in rates due to lower volume, sudden software audits, over-licensing, confusion over data retention and ownership, and vendor’s refusal to separate, just to name a few. The company’s unpreparedness resulted, beyond the allocation due to the divestiture, in at least a 10% increase in the current and years forward IT fiscal year budget.
In the Fortune 500 ecosystem, a corporate divestment can run for 12 to 18 months, depending on the level of integration and complexities of processes and technologies between the entities.
The path to successful disentanglement begins with VMO
A successful divestment needs the VMO to effectively disentangle IT contracts without losing economies of scale, reduce risk, and expense for the retained entity. The approach must align with the strategic priorities of the divestor, and the technological and administrative roadmap of the enterprise.
Critical to a smooth transition is to identify and understand the interdependencies within the businesses, and its applications and hardware. Members of the VMO must have the ability to cross-talk and coordinate between legal, IT and business stakeholder, procurement, finance, and security. This ability is key to understanding the interdependencies between applications and hardware, as interfaces can be reliant on one another.
Wavestone US’ Sourcing and Procurement Transition Approach comprises identified sets of risks and mitigations steps to be considered during the disentanglement of contracts in a complex divestiture. There are four key areas of focus:
- Vendor transition planning
- Vendor contract analysis
- Vendor engagement
- Vendor contract deployment
During the vendor transition planning phase, the VMO has a heavy reliance on the transition service agreement (TSA). The TSA is the governing document on how the retained entity is expected to provide services to support the divested entity, and helps define the scope of the contracts, timing, and type of disposition of both software and hardware. The scope refers only to technology contracts, and the timing of the contract disentanglement is determined on whether the deal is in flight, completed, or approaching its renewal date. The type of disposition is based on whether the software or hardware contracts are entangled or not between the entities. The results of scope, timing, and type of the IT contracts will define the priorities and approach of contract disentanglement.
Use the Contract Disentanglement Prioritization flow chart below to help determine the priorities and next course of action.
- Priority 1: Complete negotiations for all in-flight contracts to avoid disentangling at a future date
- Priority 2: Develop contract separation strategy on contracts that require consent, and coordinate with renewal dates during the transition period
- Priority 3: Even though contract consents are not required, contract updates may be necessary (i.e. assignment)
- Priority 4: Address necessary updates and follow-up activities on unentangled contracts, to ensure alignment with the technology team strategic roadmap
The contract analysis phase is dependent upon the result of the final disposition of agreements, where the subsequent actions to take have been prioritized. Once the contract has been defined, key documents and contract changes are prepared. Consent and reverse consent, assignment and reverse assignment, and amendment documents for entangled agreements are created and administered based on each application’s disposition. Consent and reverse consent agreements provide the divested or retained entity, temporary application or hardware usage rights and services during the TSA period without additional charge. Assignment and reverse assignment documents transfer rights and financial responsibilities, under an original contract, from one party to another. With the document process in progress, each of the IT functional divestiture leads must ensure the technological divestiture process is timed accordingly with the VMO team’s contractual disentanglement process. Without this alignment, it can cause operational and financial obligation uncertainty between entities once the contract has been fully disentangled.
In the vendor engagement phase, the VMO team creates the schedule and strategy for contacting the managed vendors to track consents. Communication and discussions are initiated with key IT vendors in scope and priority, and vendor responses and questions are addressed to and monitored for the transition steering committee. There is a high level of collaboration between the internal resources (i.e., legal and IT leads) of both divested and retained entities in the coordination of contract disengagement. This cycle repeats itself with contract analysis as modifications and negotiations of consents, assignments, and new agreements are set in place.
The contract deployment phase relates to the administration and finalization of contract terms and conditions. The optimal situation would be “not to lose the economies of scale” by maintaining the original terms and conditions and to replicate the rates for the divested and retained entities. The splitting of counts on software and hardware providers can result in potential rate increases and changes of terms due to lower volume. Once all elements have been finalized with the buy-in of the IT stakeholder, business owner, security and legal, it’s time to sign off. The contract will then be submitted to the VMO for processing within the contract management lifecycle.
Even if you’ve gone through each step carefully, a smooth transition is by no means guaranteed. Here are some of the issues that may arise, and ways to resolve them.
Issue 1: As a result of contract disentanglement, there is a potential increase in rates due to separated usage counts and loss of economies of scale.
Resolution: Negotiate with vendors as a combined entity, but separate contracts administratively to leverage the economies of scale while maintaining autonomy.
Issue 2: Disentangling contracts, without understanding the “hooks” into other applications can result in the disruption of services.
Resolution: Thoroughly understand the interdependencies between application and data reliance, to ensure disentanglement of contracts do not negatively impact other interfacing applications.
Issue 3: Misalignment of IT leadership on the scope and usage disposition of entity applications and hardware.
Resolution: Ensure the correct business disposition and future usage of the application and equipment are aligned with IT leadership.
Issue 4: Vendor initiating immediate audits to create a baseline of license counts of applications before being reallocated between entities.
Resolution: Implement a software licenses optimization program to track licenses and accountability, and asset management system to locate hardware.
Issue 5: Contracts that don’t contain the assignment language will enable vendors to leverage their position over the customer.
Resolution: Update current contracts with assignment clauses, and investigate termination of convenience language relating to change of more than 10% to the enterprise business.
Issue 6: Lack of senior level management buy-in and support structure, resulting in high personnel turnover and no proper governance.
Resolution: Clarification in the TSA document providing the necessary support and steering committee governance, as personnel in both entities will be overutilized in balancing both the divestiture and daily operations.
As the trend of divestitures continues to increase in the coming years, the need for a repeatable methodology to disentangle the contracts without financial and risk exposure becomes more evident in today’s business ecosystem.
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