Imagine a scenario where a missed vendor contract renewal spirals into a disrupted supply chain, halted operations, or even legal tangles.
These scenarios are not just hypothetical but alarmingly real.
This is the precarious edge on which many businesses balance. Missed contract renewals can have serious implications for your business.
In this article, we'll look at:
What vendor contract renewals are
Why effective contract renewal management is so important
What causes missed contract renewals
Five contract renewal contract best practices
What is a Vendor Contract Renewal?
Vendor contract renewal refers to the process of renewing an agreement between a business and its vendor. This process typically occurs towards the end of an existing contract's term.
The renewal may involve revisiting and potentially renegotiating the terms and conditions of the contract, such as pricing, delivery schedules, and service levels.
Renewal is a critical juncture, offering an opportunity to assess the vendor's performance, the value they provide, and whether the relationship continues to meet the evolving needs of the business.
What Causes Missed Contract Renewals?
Missed contract renewals can significantly impact a business, leading to service disruptions, legal issues, and financial losses. Common causes include:
A Lack of Visibility: Often, contracts are scattered across various inboxes, files, and databases, making it difficult to track renewal dates. This disorganisation can lead to missing critical renewal deadlines. Some contracts are likely to auto-renew in the background.
A Lack of Control: Poor renewal management processes, such as leaving contract reviews until the last minute, can create bottlenecks. These bottlenecks may result in missed renewal dates, as there isn't enough time to adequately review and negotiate contract terms.
Why is Effective Contract Renewal Management Important?
Missed contract renewals can have serious implications for your business such as:
- Losing a key vendor 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 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 contract or even the business's entire contract renewal strategy, the best practices outlined below should be implemented across your organisation.
Contract Renewal Best Practices 2024
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 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 vendor and contract management solutions which allow all relevant users to securely access the information they need - saving 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 decide 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. 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
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 or even time of year.
3. Implement automated reminders about contract renewals
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.
4. Automate contract renewal workflows
Contract renewal processes throughout your organisation may be manual at the moment. The processes may be time-consuming, frustrating and difficult to consistently repeat.
An automated workflow significantly enhances contract renewal management by introducing efficiency, accuracy, and timeliness. Gatekeeper, a Vendor and Contract Lifecycle Management (VCLM) Platform, offers a contract renewal best practice workflow to its users.
5. 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.
How Melbourne Racing Club took control of their contracts with Gatekeeper
Before working with Gatekeeper, Melbourne Racing Club manually tracked key dates, leading to contractual and commercial risk. After automating their contract renewal processes with a VCLM platform, renewals, contract expiries and key contract dates were easily addressed and could be simply tracked.
The legal risk was high – the risk that we were locked into contracts we didn’t want, key negotiation timeframes being missed, contracts existed that we didn’t know about. We wanted to move to a system which would ensure we could maintain the usual high levels of professionalism with our counterparties.” - Jacqui Ward, Senior Legal Counsel
Gatekeeper helped the club to create automated notifications that were triggered via parameters set by stakeholders. This not only minimised risk and reduced administrative overheads on teams, but also helped to minimise unexpected expenses. Read more about it in the case study below.
If you're ready to implement contract renewal best practices and want to know how Gatekeeper can help, book a demo today.