How To Manage Contract Separation: Getting It Right
Contract separation can be a daunting task and a critical one for many businesses. Without an effective and well-managed process, so many things can go wrong. Compliance and regulatory risks, contracts wrongly assigned between the separating entities, high separation costs, they all can easily turn what seems an easy and straightforward project, into your worst nightmare.
Why do it
Is your business preparing to divest? Divestitures, carve-out sales, tax-free spin-offs are the typical business contexts where a smart, efficient, and timely contract separation will be required. Now some of your contracts may be very easy to separate; but there will be many that, if not separated with care, will cause you a lot of trouble.
Even if your organization has only just started identifying an asset or unit it may want to divest, planning the contract separation process early and well is key. If on top of that you are a global enterprise, you are likely to have many complex contracts that may be tricky to separate. The contracts may include specific clauses limiting their application to only one company. They may include software licenses that the divesting business unit cannot use without a breach of contractual terms. Your contracts may be all over the place, some online, some in folders or hard copies, some centralized, some not. You may have a large number of contracts, the portfolio being so messy that contract identification is tricky, and separating each contract could take a considerable amount of time.
What if you have delayed the process? What if your TSA’s (Transition Services Agreements) must be ready in a couple of months but you have not even started your contract identification yet? What if you have thousands of suppliers and contracts are yet to be separated and assigned to the correct business entity? What if some of your contracts are IT (Information Technology) contracts that have software share implications? What if contract documentation is hard to locate? What if your contracts are decentralized and spread across different entities or geographical locations? What if you are not using a contract management database that contains all your contracts in one place, or your database is not regularly updated and some contract information is missing? What if some contracts have expired and no extensions have been put in place? What if, what if, what if?
Well, if any of the above applies to you, it is not the end of the world. Although it is recommended companies should begin the contract separation process as early as possible (separating contracts may take as little as one month but can also easily take six or nine or a whole year), what really matters, is to have a plan and a strategy. If you have little time but a good strategy in place, you are more likely to achieve what you need, rather than the other way round.
What happens if you get it wrong?
You may have all the time in the world to complete your contract separation project (well, with most businesses a year at the best), but poor planning will make the process difficult, prone to errors, and add unanticipated costs for the business. Suppliers may seek to exploit the situation and use this opportunity to increase their fees, or push you to purchase additional licenses and so increase costs; this is especially true with large IT providers.
If suppliers’ permission was not sought to allow the carve-out and the divested business unit continues using the existing contracts, significant costs could be incurred. Suppliers can claim the contractual agreements invalid, which may cause service disruption or unexpected cost increase. Disruption in the existing supply and related third party contracts may result in loss of business continuity and stability.
Sounds scary? What is needed:
First, you will need to analyse the available data and resources. Then develop an excellent detailed plan of action and a cross-functional strategy. Which can both be empty words and will not do if your strategy and plan are not closely monitored, well-coordinated, and constantly adjusted to be in line with progress made and goals yet to achieve.
There is no reason why it should not be. If you have prepared well, defined the scope and potential issues, have a clear plan, a strategic approach, and stay focused on your objectives, your contract separation should be seamless.
Here are some of the basic steps that should be considered to make your contract separation strategy effective:
Identify suppliers and contracts due to carve-out. List all contracts ensuring all relevant contracts are included
Identify and understand the risks; develop a risk mitigation plan
Define the project scope and requirements. Understand if the available resources are sufficiently based on the number of contracts, ease of access, and the project timelines
Establish a contract separation workflow, project milestones, assign roles and responsibilities
Establish key stakeholders and ensure regular communication and cross-functional work, procurement working closely with IT, HR, Legal, Operations and other relevant teams.
Obtain support and alignment from senior stakeholders
Analyse and review contractual information and data available, identifying specific contractual terms and clauses that cover change of control and deal with the transition of services
Categorize and prioritize most important and critical contracts based on spend and risks involved
Engaging with the legal and other relevant key stakeholders, prepare the TSA (Transition Services Agreement) documentation so the contract agreements post-separation provide full-service continuity
Establish efficient and timely communication with suppliers, including supplier notification letters, tracking supplier responses, and signing of TSA’s
Lead supplier negotiations to minimize price increase and ensure business continuity
Track progress and monitor separate teams’ inputs
Regularly review and manage the risks
Ready to start?
Procurato provides high calibre procurement and contracts separation expertise, market knowledge, and the tools to help achieve your goals. We provide an impeccable procurement service and have strong knowledge and experience in contract separation – please contact us for further information or help.