It’s been almost three years since the start of the pandemic. During that time, and since, organisations have been forced to rethink their operations. Whether that’s through turning to digital solutions to meet remote working and customer demand, merging with or acquiring new businesses to fill gaps that have been found, or needing to restructure or sell certain parts of the business to become more efficient and/or effective.
As with most sectors throughout the pandemic, insurers have been quick to adopt new technologies and are actively buying, funding, or partnering with companies that provide product innovation and greater agility. And in addition to the large M&A activity – in 2021 over 400 mergers and acquisitions in the insurance sector were completed according to Clyde & Co’s Insurance Growth Report(1) – insurers and reinsurers have also been looking at niche offerings that can strengthen their core proposition. And beyond the big strategic buy outs and sell offs companies are also looking to strengthen their position by structuring themselves to become more efficient in the wake of new client demands. Quite simply – transformation has become big business in the sector.
These activities are designed to bring significant opportunities and contract negotiation/renegotiation is one of them.
Regardless of whether a business is being sold, bought or restructured the process to review contracts or spend in general are similar and require a strong understanding of both benchmarked data and how a contract is structured.
How to start a contract review
There are several considerations when looking at your supplier base as you implement significant changes to your business.
- Firstly – what contracts are there and who are they with? If it is a M&A deal this is required from both businesses so you can compare like for like on the services provided.
- How much is being spent on supplier services? Are the services provided comparable to what your new needs are or will negotiation for new terms be required?
- Can you locate the physical contract? From our experience it’s surprising just how many companies can’t, given that there could have been years of extensions and confirmations via email chains. This means you may need other documentation such as those email chains that confirm changes to terms, side letters which include addendums to contracts or invoices that indicate spend.
- What termination agreements are in place for your suppliers? Does the supplier have a clause in their contract which allows them to change their agreement if the company they are supplying is bought out or merges?
- If you’re looking to terminate a contract when is the right time to do so? Clauses could include early contract exit charges which outweigh savings made if terminated too early.
- In a buyout situation how straightforward is it to renegotiate terms if one supplier is supplying both companies?
- Do potential new suppliers meet the host company’s regulatory and compliance requirements? Do you need to do your due diligence on new suppliers?
From an M&A perspective
There are some additional considerations to be taken into account if your business is being bought or merged or indeed if you are the buying company.
As part of the conversations that form the structure of M&A deals are the synergies that will be made which could be up to a 20% reduction in contract cost. These synergies are not unexpected – for example, you wouldn’t want to be trading through two platforms.
This means there’s the not so small matter of identifying all the suppliers of the purchased company and deciphering their contracts to review against your own to ensure you’re getting the best deal in line with the strategic objectives of the purchase.
In most cases an acquisition will fall into two parallel buckets:
- A transitional services agreement (TSA) where essential services such as IT are provided by the selling company for a fixed period. This allows both the buying and the selling company to use the same suppliers ideally with the same service level agreements.
- Non TSA agreements. Ultimately lower priority services such as subscriptions or reviewing contracts which either need to be terminated or renewed under the new company.
TSA’s tend to be critical contracts which need a confirmed decision of future service within 12 – 24 months. If the buying organisation does not review these contracts within the timeframe, they’ll need to negotiate an interim deal which will often prove costly. In some cases, the selling company could force the buying company’s hand to stop working with that supplier leaving them exposed to huge risk.
Alternatively, the two organisations could have the same supplier delivering the same service which brings some different scenarios:
- The service and cost are comparable – discussions will be required to increase the service.
- The service and cost are fair given one company may be larger than the other and will need more services – discussions will be required to broaden the scope.
- One of the companies could be on considerably unfavourable terms – and if that’s the buying company on those terms then a difficult conversation needs to take place.
Negotiation is going to be an essential part of these discussions and it’s worth noting that when there are two suppliers in the fray one is at risk of losing significant business which could have a knock-on impact on their revenue and workforce. Therefore, it’s important that contracts are terminated properly and fairly. After all, you never know if you will want to work with them in the future.
There’s much to consider regardless of the organisational change that you’re making and it’s not easy to manage it all in-house from both a resource perspective and often an emotional one. Are you comfortable negotiating with suppliers who you’ve come to know well? Will you be prepared to let a long-term supplier go because other suppliers can provide a more cost effective and productive service?
It can be challenging and that’s where Procurato can help.
Related reading
A contract review in the context of a merger or acquisition surfaces the estate – what exists, what it costs, where the risks sit, but the harder question that follows is where the genuine savings and rationalisation opportunities are across the combined spend base. That requires a more structured lens than a contract audit alone can provide. Our article on procurement opportunity assessments sets out how this analysis works in practice: how to interrogate spend data across a supplier base to identify the categories, contracts and relationships where value is being left on the table, and how to prioritise action in a way that reflects the commercial and operational realities of a business in transition.
How Procurato can help
The challenges this article describes, locating contracts across two organisations, navigating TSA timelines, identifying overlapping suppliers, and managing the negotiations that follow, are precisely what our Post-Merger Integration & Carve-Out Support service is designed for. We bring both the procurement methodology and the practical experience of working through M&A and restructuring programmes in the insurance sector and beyond: auditing the combined supplier estate, prioritising contracts by risk and value, managing supplier conversations, and delivering the savings that formed part of the original business case. If you are in the middle of a transaction or preparing for one, we are happy to talk through where we can help.
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