Contract Disposition: The Financial Leverage CFOs Most Easily Overlook

The following is a guest article by Nate Buniva, partner at West Monroe. The views expressed are solely those of the author.

A large organization is divesting a sizable business unit. The buyer is a private equity firm that plans to operate the new company as a standalone entity. During the transition services agreement (TSA) period, the divested business will use Microsoft 365 under the seller's license. This raises important considerations for both parties: Can the seller transfer the rights to the new company? Can the seller renegotiate the license based on its reduced size post-transaction? Is this the right solution for the new business's future?

Now, multiply this scenario by hundreds or even thousands of contracts governing the technology and services needed to run both organizations. The decisions made (or not made) can have a significant impact on cost, profitability, compliance, operational stability, and more. The specific potential depends on the situation, but we have observed cost reductions of 40% to 60%. Even so, contract disposition remains one of the most overlooked financial and synergy levers in many M&A deals.

An M&A deal or spin-off creates a rare opportunity to revisit existing agreements, renegotiate contracts, cut stranded costs, maximize purchasing power, and find new suppliers, leading to substantial savings and unlocking synergies. However, contract analysis and disposition often take a back seat to closing the deal and integrating or establishing operations.

In times of economic uncertainty, cost efficiency is a top priority, and financial executives should ensure that contract analysis is central to the deal, not an afterthought.

Understanding the possibilities

In the divestiture scenario above, the TSA gives the new company the right to use existing technology for the duration of the agreement (typically about a year). This gives both parties some time to dig in and decide how to handle key contracts. The seller may achieve direct savings and avoid costs.

For example, by right-sizing contracts to eliminate license fees no longer needed, negotiating more favorable terms or pricing, or repurposing excess licenses elsewhere. The buyer has the opportunity to create the best environment for its strategy, driving faster value creation.

Contract disposition is equally important in a merger scenario. For example, the buyer may leverage increased volume to secure better pricing.

The potential is not limited to information technology. However, in our experience, IT is often one of the heaviest spending areas and is frequently the most complex part of a TSA—it is the hardest to separate or integrate, requiring significant effort to ensure operational continuity. This complexity brings both urgency and opportunity: IT-related contracts should be a top priority for analysis, as they typically have the greatest potential for immediate and lasting impact.

The problem: Many companies manage contracts poorly

Deal teams typically have a good handle on related spending, but they may not closely examine the cost-cutting opportunities from contract disposition because it requires a significant amount of time.

Mid-to-large organizations may have hundreds or even thousands of applicable contracts. Every technology—from desktop applications like Microsoft 365 and DocuSign, to enterprise software applications for finance and customer relationship management, to hardware resellers like CDW—involves contracts, often included in larger master agreements.

In our experience, few organizations maintain a centralized repository of these contracts. Even when they do, they often lack a structured central database or spreadsheet that captures key contract details such as spend, renewal terms, end dates, and termination clauses—information critical for a comprehensive view. In extreme cases, we have seen companies request copies from vendors. Most organizations fall somewhere in between.

Additionally, many companies lack visibility into actual license usage—which can be a significant source of waste, for example, if paying for software licenses for 10,000 users but only 1,500 are actively using the application.

Collecting and evaluating these insights is highly manual work, while there are many other tasks to complete at the same time.

Mobilizing for maximum impact

Ideally, organizations should do the groundwork in advance and be prepared when a deal possibility arises. Regardless, here are some key points to maximize the potential of contract disposition.

Involve the right people.Contract disposition should be a cross-functional effort requiring input from legal, IT, procurement, finance, and deal teams. Finance should play an active role on the steering committee to ensure alignment with cost and profitability goals.

Collect and review contracts.If your organization is involved in a deal, whether as buyer or seller, assign someone to start collecting and analyzing contracts to understand rights, pricing structures, and change-of-control clauses. Here, generative AI tools may help alleviate some of the burden. This is also a good opportunity to establish a formal contract repository if you do not already have one.

Determine actual usage of contracted services.Assessing how many people actually use the technology relative to contracted licenses is equally time-consuming. Create a master usage report to facilitate decision-making.

Prioritize disposition opportunities.If you are the seller, the above analysis will help determine which contracts to dispose of (TSA, transfer, entity ownership, etc.), as well as right-size or renegotiate to reflect future operations. If you are the buyer, this may be an opportunity to negotiate more favorable pricing for the larger combined organization.

Execute the disposition strategy.Do not underestimate the work involved. Vendor communications should be planned and thoughtful. Before starting discussions, it is crucial to understand rights, terms and conditions, and other details. In prosperous times, you may be able to "cut a deal" with strategic vendors. In difficult economic times, vendors may be less willing to deviate from written terms. When many contracts are involved, it is a good idea to establish a tracking mechanism to understand the value captured.

Do not miss the opportunity

As investors and management teams seek to drive returns in an uncertain market, contract disposition is a hidden, yet obvious, significant value lever. Deal and finance teams should proactively review contracts to uncover synergies and opportunities to reduce or avoid costs, and negotiate new agreements that align with future goals.

However, due to time pressures and the effort involved, few organizations give contract disposition the attention it deserves. Those that approach this effort strategically and thoroughly—following the strategies above—will not only impact current financial performance but also add agility and resilience to the road ahead.