Missing a contract renewal is easily done, especially in a growing 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.
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.
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 all the contracts for a business, what’s the best way to avoid missing renewal dates and to use them for your benefit?
Step 1 - Record All Contract Dates Centrally
For the purposes of this article, we’ll focus on renewal dates but please feel free to download our Complete Guide to Contract Management to find details of other key dates and information you should be capturing for each contract.
Firstly, a definition: According to the Collins Dictionary, a renewal is “an official increase in the period of time for which it (the contract) remains valid”.
Building on that, the 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.
Step 2 - Build in time for a contract review
How helpful is it to be told on the 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. Therefore, you need to add in a further date to your system to kick off a contract review process, which gives sufficient time to complete all the necessary steps.
It’s up to you to determine how long that it 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 make the most of the renewal opportunity.
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 management solution that not only records key dates but will also trigger reminders to relevant parties and then follow prescribed workflows.
Step 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 a clear strategy for negotiation and an understanding of what you’d like to update (if anything) in the contract.
You can read our related article on negotiating with suppliers for some specific negotiation tips.
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 simple steps, you significantly reduce the risk of being underprepared for renewals or even missing them 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.
For more helpful information on contract management, you can read our related articles: