TSA Renegotiation
Find the stranded cost before it finds you. Renegotiate the terms.
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Stranded cost quantification answers the question buyers ask too late: what does the business actually cost to run once the TSA is gone? When a service exits, the underlying need stays, and the buyer must replace it, often at a price the blended TSA charge never revealed. Sizing that gap before it lands is one of the most overlooked parts of disciplined TSA cost reduction.
A stranded cost is the cost that remains in the business once a transition service ends. The service exits, but the function it supported does not. The buyer still needs payroll run, networks managed, and books closed, so it has to stand up its own capability, and the cost of that capability is what the TSA was quietly covering.
Stranded cost appears on the buyer side of a carve-out, not only the seller side. While the seller carries the cost of services it can no longer fully absorb, the buyer faces the cost of replacing services it never had to build. Both are real, and the buyer side version is the one that lands on the new business.
The danger is that the TSA charge hides this cost behind a single blended number. The buyer sees one price for a service and assumes that price is the cost of the function. It is not. The true standalone cost only emerges when the service exits, which is the worst possible time to learn it.
Stranded costs surprise buyers because the TSA charge and the standalone cost are different numbers, and only the charge is visible. The seller may be providing a service efficiently at scale, so the charge can sit below what the carved out business will pay to run the same function alone. The buyer mistakes the charge for the cost.
Scale is the usual reason for the gap. A function that the parent ran across a large enterprise loses its economies when it shrinks to one carved out business. The same activity now carries minimum staffing, less favorable vendor terms, and fixed infrastructure spread over a smaller base. The unit cost rises even though the work is unchanged.
There is also a timing trap. Some stranded costs arrive before the saving from exiting the TSA, because the buyer must build the replacement capability while still paying for the service. A buyer who has not modeled this overlap can find the standalone cost and the TSA charge both hitting the same period.
Quantifying stranded cost means building the standalone cost of each function from the ground up. For every service the TSA covers, work out what the business will actually need to run it alone: headcount, licenses, vendor contracts, and infrastructure. That target operating cost is the real number the TSA charge has been standing in for.
Then compare the two. Subtract the cost the TSA was covering from the standalone cost, and the difference is the recurring stranded cost the business will carry after exit. Add the one time cost of standing up the capability, the implementation, migration, and setup, and the picture is complete for that function.
Doing this function by function turns a vague worry into a number the buyer can act on. It shows which functions carry the largest standalone premium, where the one time stand up cost concentrates, and how the total compares to the deal assumptions. The exercise is detailed, but the alternative is discovering the number after close.
Stranded cost concentrates in the functions most sensitive to scale. IT is the usual leader, because infrastructure, licenses, and security carry heavy fixed cost that does not shrink with the business. A function the parent ran cheaply at enterprise scale becomes expensive when one carved out entity must fund it alone.
Procurement is another common source. The carved out business loses the parent buying power, so vendor terms worsen across software, services, and supplies. The TSA charge captured the parent rates. The standalone cost reflects the rates a smaller buyer can negotiate, and the gap can be substantial across the spend base.
Overhead functions complete the picture. Finance, HR, and management layers all carry minimum viable staffing that does not scale down neatly. A small carved out business still needs a controller, a payroll capability, and a help desk, and those minimums can cost far more per unit of activity than they did inside the parent.
The value of quantifying stranded cost early is that it becomes part of the deal model instead of a post close surprise. A buyer that knows the standalone cost during diligence can price it into the investment case and avoid the unpleasant discovery that the business costs materially more to run than the TSA charges implied.
Early quantification also shapes the exit. Some stranded costs can be reduced by how the buyer designs the target operating model, renegotiates vendor contracts, or sequences the transition. A function planned deliberately can land at a lower standalone cost than one stood up in a rush at the moment its service exits.
The principle is the same as the rest of cost discipline: see the number before it arrives. A buyer who quantifies stranded cost, plans the offset, and sequences the build of each capability turns an unmanaged surprise into a planned line. That is the difference between a clean exit and a business that emerges from the TSA more expensive than anyone budgeted.
Stranded costs are the costs that remain in the business after the TSA ends but that the transition service was covering. When a service exits, the underlying need does not, so the buyer must stand up its own capability. If that capability costs more, or arrives late, the difference is a stranded cost the TSA was hiding.
Because the TSA charge masks the true standalone cost of running a function. While the seller provides the service, the buyer sees a single blended price, not the people, licenses, and infrastructure required to replace it. The gap appears only when the service exits and the real cost lands on the business.
Compare the standalone cost of each function after exit against the TSA charge it replaces. Build the target operating cost from headcount, licenses, contracts, and infrastructure the business will actually need, then subtract the cost the TSA was covering. The difference, plus any one time stand up cost, is the stranded cost exposure.
During diligence and before signing, so the standalone cost is part of the deal model rather than a post close surprise. Quantifying stranded costs early also shapes the exit plan, because some costs can be avoided or reduced by how the buyer sequences the transition and designs the target operating model.
Capture standalone and stranded cost alongside the service charges.
Read the article →The concept behind the number, explained for buyers.
Read the article →Where transition cost, and stranded cost, concentrate by function.
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Seven buyer-side moves to exit a Transition Services Agreement on time and below budget. The mark-up, the extension-fee curve, exit sequencing, and the 11-month calendar.
Quantify dis-synergy before signature and build the elimination into the exit. Stranded cost is invisible until the TSA ends and the invoices keep arriving.
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