Mergers and Acquisitions: Vendors and Contracts
Phase 1: Due Diligence
Assemble your TSA Team
The management of vendors and contracts is a significant part of the M&A process, and thus it also has the potential to be a problem-area. As covered in a previous article, due diligence is essential to any merger, acquisition, or divestiture, and this is particularly true at this stage. Due diligence teams have the responsibility to correctly assess vendor and contract management during pre-acquisition, throughout TSA negotiations, and beyond their close.
This can also be thought of as the information sharing phase, and you should take this opportunity to construct the contract inventory and, unfortunately, be prepared for the worst. It is not uncommon for companies to lose, misfile, or limit access to their contracts. Thus, it is important to have the necessary NDAs prepared and make sure that teams can gain access as becomes relevant.
Contract inventories should include:
- The number of active contracts;
- The number of active suppliers and customers under contract;
- The total annual spend with contract suppliers; and
- The total annual revenue received from contract customers.
Phase 2: Discovery
The next stage can be referred to as the Discovery phase, in which it is important to try and find any contracts with problem-clauses. This can be a time-consuming task, potentially up to weeks or months, but can be accelerated by the use of AI contract management software that will parse contracts and highlight clauses for attention.
Luckily, Cambridge Management Consulting can provide exactly that. We partnered with SyrionLabs to produce CMaaS: a cloud-compatible software which extracts metadata from your contracts in order to highlight and flag potential issues. This program will also generate ‘obligations’, i.e. opportunities for value in your contracts that may be hidden away or forgotten about after negotiations are complete. This negates the need for less reliable human solutions such as setting reminders, which can be lost during the transition phase.
This works on a three-fold system:
- Digitisation – assures complete visibility from your contract portfolio, manages risk and compliance, and produces contract intelligence.
- Performance – proactively tracks easily-forgotten details such as renewals and expirations, manages the aforementioned obligations, and maintains operational performance.
- Consulting – this is where Cambridge MC comes in; with our years of expertise, we can enhance collaboration, reduce cycle time, and create stronger and more compliant contracts.
Problem Clauses
Examples of clauses that can be problematic for acquisitions and divestitures include:
- Assignment limitations;
- Change of control restrictions;
- Contract usage limits;
- Early termination restrictions and fees;
- Governing law either not stated or considered complex;
- Notice requirements;
- Supplier exclusivity; and
- Ownership transfer limitations.
As part of the overall vendor management, teams will be looking for suppliers and vendors that provide similar services, often in the form of a consolidation review. To reach economies of scale, this is often a very important stage of value creation for M&A. Scale is vital and sometimes overlooked if it was not treated as a key strategic lever in the sale.
Know Your Vendors
Throughout contract management it is important to identify your tactical and critical vendors.
Critical vendors are those that must remain in place, and might be shared by both your parent and target organisations, or at least leased out for the transition period as licenses are being transferred before the final separation.
Tactical (also known as ‘strategic’) vendors are more easily changed and offer opportunities for economies of scale or consolidation to drive value.
There is also a third type known as operational vendors. These provide standard goods and services which are available from many different sources. Thus the failure of these vendors may cause some inconvenience but nothing unmanageable.
What Can Go Wrong?
As alluded to, the biggest difficulty throughout contract and vendor management, and the key takeaway of this article, is losing value due to a lack of due diligence. It is easy to mistake the negotiation phase as the difficult part and then tuck the contract away once it is done, but this is how value is lost, such as through service credits or late payment charges. This is where CMaaS is here to help and take care of these details for you, but there are several other things you can do to mitigate potential obstacles:
- Identify quick wins – this will build momentum and thus help to carry the schedule forward.
- Create a dashboard of vendors – this makes choices academic and allows teams to make better decisions.
- Categorise critical and tactical vendors – this provides clarity and helps to prioritise the critical vendors.
To find out more about our M&A services, go to our M&A homepage.
If you have a specific question or would like to talk to one of our experts, please get in touch.
About Cambridge Management Consulting
Cambridge Management Consulting (Cambridge MC) is an international consulting firm that helps companies of all sizes have a better impact on the world. Founded in Cambridge, UK, initially to help the start-up community, Cambridge MC has grown to over 150 consultants working on projects in 20 countries.
Our capabilities focus on supporting the private and public sector with their people, process and digital technology challenges.
For more information visit
www.cambridgemc.com or get in touch below.
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