Missing a contract renewal is easily done, especially in a growing or complex business.
It can happen for any number of reasons, including:
- Personnel changes during the contract period meaning that the original key contacts are no longer in place
- A poor handover from the original team handling the contract negotiations to the team that will be working day-to-day on the contract - eg from Purchasing to Manufacturing.
- A lack of centralised record-keeping for contracts meaning that there’s no single view of all the agreements in a business.
- Rapid company growth that leads to a shift in focus away from a particular contract area.
- Lack of clear accountability for contract management across the business.
- A lack of contract review, with many auto-renewing in the background.
Whatever the reason, it can have serious implications for the business such as:
- Losing a key supplier if the contract runs down without you realising.
- Renewing a contract you didn’t need because nobody realised that there was an auto-renew clause in it.
- Missing contract renewal opportunities that could add value to your business
Now, while it’s unlikely that a key vendor would simply stop supplying goods and services on a specific date without flagging it up in some way, it’s possible that they have a similarly fallible system to yours and that it slips through the cracks.
What is more likely is that the renewal date passes and once someone realises, you then get in contact to discuss it. The chances are the service or supply of goods won’t stop and you can continue.
However, the key problem with this is that the opportunity to negotiate and appraise the supplier from a position of strength has most likely gone.
At this point, you’ll either be contractually committed for another fixed period of time or you could be into a shorter rolling contract period that leaves both sides with the ability to walk away with reduced notice.
This second scenario could, potentially, be advantageous for you but it could also leave you exposed if your supplier elects to walk away and you don’t have sufficient time to secure a replacement.
So, if you’re responsible for an individual contract, a department’s contracts or even the business's entire contract renewal strategy, the best practices outlined below should be implemented across your organisation.
Contract Renewal Best Practices to implement in 2023
In this article, we look at three contract renewal best practices your business should follow:
- Record all contract dates centrally
- Build in a contract review process and make time for it
- Negotiate from a position of strength
These best practices will help your business to enhance its contract renewal strategy whilst protecting your business from revenue leaks and unexpected auto-renewals.
1 - Record All Contract Dates Centrally
A renewal date is the date by which a decision must be made to either increase the period (renew) or to close out the contract. The recording of this date into a centralised register is crucial to being able to manage renewals effectively. However, this won’t always be written explicitly into a contract.
Typically, you will find the dates that the contract is valid from and until written into the agreement. The ‘valid until’ date will generally not be the same as the renewal date."
Instead, you will likely need to search for the notice period and then derive the renewal date using that and the ‘valid until’ date. Let’s say it’s a 30-day notice period, you will need to subtract 30 days from the ‘valid until’ date and then record the resulting date in your central register.
Many businesses that do capture the key dates of their contracts end up storing them in a variety of locations. They might be in a spreadsheet, in an inbox or captured in a shared drive. But these silos can mean that not every stakeholder across the business has awareness of the renewal date.
This can lead to missed renewals causing your organisation to pay for a service it no longer needs or paying more than a competitive market rate for goods already being delivered."
A best practice for businesses that want to manage contract renewals more effectively is to restore visibility by storing all key dates in a centralised repository. This feature can be found in contract management solutions which allow all relevant users to securely access the information they need - saving them hours of administration often involved with locating agreements.
2. Build in time for a contract review
How helpful is it to be told on the contract renewal date that you need to make a decision as to whether you should renew the contract?
It’s marginally more helpful than being told after the date has passed but not particularly helpful. In order to make an informed decision as to whether to review the contract, you’ll need to first:
- Assess the ongoing value of the contract
- Determine if there are any more cost-effective alternatives in the market
- Review contract service levels and any disputes that may have happened during the contract period
- Speak to key contacts within the business to see how the relationship is going
To complete all these tasks, you’ll need more than one day. Contract renewal best practices involve giving your business enough time to complete the relevant activities. When planning your internal processes, add in a further date to your system to kick off a contract renewal workflow to create this opportunity.
It’s up to you to determine how long that is for your business. It might vary by:
- Contract value
- Business area
- Time of year
Once you have the explicit end date of the contract recorded, you’ve derived the renewal date and then added in a date to commence a contract review, you’ll have the framework in place to build your contract renewal strategy.
One key thing to point out is that having the dates recorded is only the first part, you need to have a system in place that will prompt you to take action on the necessary dates.
This system might be as simple as checking an Excel sheet regularly and reviewing the dates in it.
Alternatively, you may wish to invest in a dedicated contract reminder software that not only records key dates but will also trigger reminders to relevant parties and then follow prescribed contract workflows.
3. Negotiate from a position of strength
Understanding the state of the current contract, its value to the business, your supplier’s pricing and capabilities relative to comparable products in the market and the shared history of issues and disputes, gives you a full picture at the right time so you can decide whether you would like to renew it or not.
Assuming you would like to renew, you can engage your supplier with contract negotiation best practices and an understanding of what you’d like to update (if anything) in the contract.
However, by having all the relevant information to hand, in good time, you put yourself in the best position to get what you want from the renewal.
If you’re time-constrained then it makes sense to prioritise conducting all these activities only for the highest value contracts that your business has."
For lower value contracts, or contracts where there are many alternative solutions, you may settle for simply understanding when all the key dates are to begin with and working on the assumption that these are low-risk relationships.
By following these three contract renewal best practices, you significantly reduce the risk of being underprepared or even missing the date completely.
You're then on the front foot for potential negotiations and are able to see what the wider market is offering in case you elect to work with a different supplier.
Using cLM software for Your Contract renewal Process
If your business has a low-level of maturity when it comes to managing contracts and their renewal dates, you'll find yourself caught in the administrative burden of collating all your data from multiple sources.
You could also end up working from inaccurate dates if contract metadata has been overwritten, entered incorrectly or even missing. So how can you ensure accuracy, timeliness and a strong negotiating position without extra burden?
Contract renewal best practices can be enhanced by having technology in place that will allow your business to:
- Easily extract and upload contract metadata into a central repository
- Receive automated alerts ahead of renewals to help you act in time
- Gain complete visibility of vendor spend and performance
- Identify opportunities to realise greater value from existing vendors at the renewal phase
If you're ready to improve your contract renewal strategy and want to know how Gatekeeper can help, book a demo today.
