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Hey Alex,
Thanks for the follow up!
I did continue working on this, and got to a point where I'm happy with how it is working. I was in contact with Karl about it too via email, and sent him some details, but for reference for others who find it useful..
We went with the solution of putting the config into separate files, using the 'configSource' option as needed to specify references to external files.
Further to that, we created an extension for Otter to allow us to manage the settings in those files - similar to how the 'EnsureAppSetting' thing works, but allowing an XPath expression to be used to identify the precise element in the config file to check. That meant we could use it for e.g. files that hold connection strings.
(I do intend to publish that extension to the Den at some point - haven't so far gotten around to it though).
Let me know if you would like any more detail on what we're doing!
Thanks,
Andrew