“I need help managing my vendor contract renewals”.
That’s what we’re hearing time and time again each day. Contract renewals sound so simple on paper. A contract is due to end on a specific date and you must decide what happens.
- Renew the contract as is
- Renew the contract with changes
- Terminate the contract (if you’re required to give notice)
- Let the contract expire (if you don’t need to give notice)
- Extend the contract if you have an extension clause in place
To do all of these requires that you have the basics in place such as:
- You know all of your vendors
- You know all of your vendor contracts
- All contract start, end, and notice period dates are known
- You have a system that alerts you to the upcoming end of a contract
- You have a way of working the renewals
- You have dedicated contract owners
See, it gets complex and fast.
We all know the above, despite sounding simple, is hard to achieve. We then need to consider the negotiation phase and make sure we have the required leverage to get what we need.
So we wanted to give you some practical tips you can put into play immediately.
I’m Daniel Barnes, Community Manager here at Gatekeeper.
I’ve put together some of my thoughts around this and asked Patrick O’Connor, Procurement & Contract Legend and CEO of Gatekeeper, alongside Rod Linsley, Procurement & Contract Legend and Subject Matter Expert at Gatekeeper to share some of their tried and tested vendor contract renewal tips with you.
Patrick O’Connor, CEO of Gatekeeper
Tip 1: Negotiation Tension & Migration Dates
When looking at renewal for large operational expenses like IT costs, building negotiation tension relies less on notice period dates and end dates become less relevant - instead, you need to think of migration dates.
For example, you want to secure a better price for support for IT infrastructure. You need to ask yourself the question, 'If we were to move support to another supplier, how long would this take?'.
There are many factors here, like finding a new supplier via RFP, migrating the service, training the internal team etc.
This will also take longer than you think. Let's say it is going to take six months. In this case, you need to be negotiating with the supplier nine months before the renewal date to build real competitive tension.
Remember that the incumbent supplier also knows how long it will take to move to a competitor. If you are only having a renewal conversation one month before the end date, they know there is a 0% chance of you moving in time, so there is no competitive tension.
Takeaway: Don't think of end or notice period dates. Plan by migration dates.
Tip 2: Leverage your Buying Power
Vendors love to divide and conquer. If you are a mid-sized or Enterprise scale business, you are likely spending more with suppliers than you think. This is especially true if your business has been acquisitive or has many legal entities.
You can easily end up with a 'many-to-one' relationship with the vendor
The vendor has a 'one-to-many' relationship with you.
To get a handle on the total spend across all of your entities, leverage this simple approach: send the vendor a formal request for the total spend from all of your entities as a table and data extract."
You can then look at formalising a new master agreement across all of your contracts and renewal and should secure a minimum of a 20% reduction in costs.
Takeaway: Get the vendor to give you a true view of all spend. The very act of asking for this can prompt them to up their levels of engagement and support in the interim.
Tip 3: Contracts that don't exist, don't exist
Contracts are difficult to manage.
If the vendor has not invested in a good quality Vendor and Contract Lifecycle Management (VCLM) solution, they will be struggling to keep a handle on all contracts that have been executed.
A good technique in managing contract renewals is to take a feed from your Accounts Payable, and formally request signed copies of all related contracts from the vendor."
This also has the added benefit of validating any contracts you have on record. You can often find that the vendor has an incomplete record of contracts or some are missing. This is a great starting point for a renewal negotiation.
Takeaway: Contracts are hard to manage for the vendor as well. This can play to your advantage in renewal negotiations.
Rod Linsley, Vendor and Contract Management Subject Matter Expert:
Tip 4: Create a Contract Renewal & Termination Review Process
Establish a contract renewal & termination review date as part of the implementation of every new contract with a fixed term. This review date should precede any contract renewal or termination notice date by a variable period based on factors like the:
- Purpose of the contract
- Complexity of the contract
- Complexity of the operations needed to achieve the contract’s purpose
- Importance of the contract to the organisation
- Availability of viable alternative vendors
- Time taken from original requirements specification to execution of the contract
- Complexity of transitioning to a new vendor
Tip 5: Create a Standardised Contract Renewal Checklist
Establish a standardised contract renewal checklist to help guide, justify and document the renew or terminate decision.
This checklist should cover fairly standard and obvious reasons why you:
- Wouldn’t renew, eg any requirement, unsatisfactory vendor performance
- Shouldn’t renew but might have to, eg no viable alternative vendor
- Want to renew but are unable to, eg funding difficulties, the vendor won’t negotiate about your concerns
- Can renew without much hassle.
Daniel Barnes, Community Manager
Tip 6: New Vendor Terms for the Renewal
SaaS companies like to update their terms often. This happens on a bigger scale when that company has been acquired. I’ve always asked my Procurement Team to focus on finding out if the vendor is updating their terms for the renewal (if I don’t have a 1-1 relationship with the vendor yet). Why?
Because I’ve been sent terms at the eleventh hour or a renewal that have hamstrung me.
These changes can be massive and it effectively means you have to stop all of your current activities, which causes friction in other parts of the business, threatens to hold up a renewal, and means you’re in reaction mode.
To mitigate this, make sure your legal team (including your contract managers) builds those vendor relationships. If legal has the relationship, they’ll likely be able to email or call your vendor’s legal person and figure this out in seconds which enables you to push on with the renewal.
Typically, the ability to build these relationships with vendors from a legal angle comes from two areas:
- Visibility of the renewal which is difficult to have without a dedicated VCLM platform. Legal cannot work on building relationships with vendors unless they can see they have a contract with them.
- You have a “mature” way of working across vendors and contracts. Maturity levels can relate to the approach you take, your processes, having good data, and a focus on vendor relationships. This takes time but it’s a no-brainer to focus on it.
Takeaway: Create a proactive procurement and legal process that puts relationships high up on the priority list.
Tip 7: Vendor Performance Matters
One of my first responses to any ‘go ahead’ from my colleagues on a renewal is to look at the vendor’s performance during the previous term.
I want to know where they were good and where they were poor (and everything in between).
If they’re weak on a particular obligation, I’m going to consider that as a new service level agreement within the contract.
Service credits can come into play here, enabling you to withhold a portion of the contract value back if the required performance level isn’t met. This alone can help improve the poor obligation management of the vendor.
For areas where the vendor is crushing it, I will tuck that away and keep it in mind for any other vendors we have that are struggling in those areas.
If Vendor A is crushing it, why is Vendor B being crushed by it?
You can open up a lot of improvements by tracking vendor performance and using it to improve the contract terms to ensure you’re getting everything you need.
How do you track vendor performance? It depends on your setup. In Gatekeeper, I’d set up a contract review workflow. The frequencies of contracted reviews or SLAs would dictate when each of my vendor contracts would go through that process to collate the information needed.
Takeaway: Understand how your vendor has performed and renegotiate the contract as needed to improve future performance.
Renewing vendor contracts can be complex.
Simplify the process by planning by migration dates instead of end dates, leveraging buying power, and creating a standardised contract renewal checklist.
Consider vendor performance and build strong relationships to ensure smooth renewals.
Gatekeeper offers contract renewal capabilities so if you're interested in developing your capability around this, book a demo today.