A well-managed contract renewal process guarantees service continuity for customers and revenue capture for vendors. On the other hand, failure to properly handle renewals could leave you trapped in a costly contract you may no longer need. It could also result in service interruptions or missed opportunities.
Managing contract renewals effectively is no walk in the park, especially if you’re still working with outdated tools like spreadsheets and email reminders. This article will guide you through the most effective ways to manage contract renewals. It will also show you the pitfalls to avoid. But first, let’s go back to the basics and discuss what contract renewal is about.
Contract renewal: What is it and why is it important?
Contract renewal is a stage in the contract lifecycle when an agreement ends, and the parties decide to resume the contractual terms for a new period. The parties may implement the process through automatic renewals or with contract reviews and renegotiations.
Sounds a lot like contract extensions, right? Here’s how it’s different.
Contract renewal is drafting a new contract to replace the previous one. The contract extension is prolonging the existing agreement. Contractual relations resume in both cases but differ significantly in terms of origin and legal implications.
Contract extensions usually keep the same terms but make them applicable for longer. Contract renewals, however, require a brand-new agreement, either an identical copy or a modified version of the expiring contract.
Contract renewals can be complex, but they deserve your full attention. We rounded up some of its key benefits below.
Reconsider the merits of the agreement
Renewal lets you revisit the contractual clauses and weed out those no longer beneficial to the parties. Take the opportunity to weigh whether you’re better off renewing or scrapping the agreement altogether. Be especially mindful of your company’s evolving strategy and updated pricing. Consider whether the contract still brings value to your organization in light of any changes.
Improve the terms
Your organization’s strategies and operations evolve. Make sure your renewal of the contract reflects these changes. Revise or add clauses and conditions that align with the new standards and goals. Take the chance to renegotiate key details like service-level agreements, payment terms, and bulk discounts.
Strengthen business relationships
Contract renewals let you make the most out of existing business relationships. Automatic renewals guarantee continuity, while a proactive approach ensures that contractual terms are still beneficial to all parties. Well-managed renewals save valuable time. They also enable your team to reach out to more partners or clients and nurture new relationships.
Considering the benefits you can get from contract renewals, it’s a stage of the contract lifecycle you simply can’t take for granted. We’ll show you how to manage the process well.
Effective ways to manage the contract renewal process
Renewing a contract involves more than just extending its period of validity. Take the following action to go through this process with success.
Store contract dates in a central location
To optimize your contract renewal process, you need to be fully aware of any upcoming renewal dates. Stay informed by recording the dates in one central location and setting alerts.
The worst-case scenario is to realize you have to renegotiate the terms of a contract long after its renewal was set in motion automatically. Or to discover that you failed to renew the agreement altogether. Sometimes automatic renewals reset contracts that are supposed to be terminated, destroying the company’s budget.
Review the contracts thoroughly
Set aside enough time for a thorough review. Putting the review off until the last minute can negatively impact your business.
Take the time to analyze the issues that popped up in the past contract period and revise the relevant terms. Explore more cost-effective alternatives. A new agreement should reflect the changes in your organization and take your performance to the next level.
Ensure the contracts remain compliant
You’re likely to make changes to the contract terms and conditions as you craft new agreements. Revisit your corporate policies and relevant federal and state regulations to ensure the renewed contacts remain compliant.
To do this, you may have to enlist the services of legal counsel. It also helps to have experts regularly revisit your templates and make bulk updates to keep them in line with any changes to corporate policies and pertinent laws.
Leverage your strengths
A thorough contract review will show you the points you can leverage to secure better terms. You get to show up at the negotiation table with winning cards and a strong strategy. Ultimately, you might even decide that you’ll gain more from scrapping the deal altogether.
Whether you’re tracking renewal dates or studying contractual terms, you need to find a way to make the job easier. Let’s explore two main ways you can make the contract renewal process a lot less rigorous.
Two Ways to Simplify the Contract Renewal Process
The contract renewal process can be time-consuming and resource-intensive. But there are ways you can lighten up the load.
Going for automatic contract renewals
One way to avoid a rigorous renewal process is by going for auto-renewing contracts. With this arrangement, contracts are automatically renewed after a specific period without requiring any manual input. A contract will remain valid unless one of the parties issues notice to terminate it.
Auto-renewals don’t always offer the best solution, though. Let’s consider their pros and cons.
When should you go for auto-renewals?
Consider opting for auto-renewals in the following cases:
- When the current contract terms work perfectly. Automatically renewing contracts work best when the agreement is in tip-top shape. Since you don’t need to make any changes, auto-renewals only bring benefits, such as sparing you grunt work and lengthy renegotiations.
- When you can’t afford any service interruption. Auto-renewals are preferable if they cover services and products you need to receive in steady streams. This is usually the case when any service interruption means your business won’t be able to function as usual.
- When you need predictable revenue. Businesses with subscription-based offerings benefit from auto-renewals in the sense that they’re guaranteed steady streams of income without having to release their costly army of sales agents.
Auto-renewals may work well in certain cases, but sometimes, they bring more damage than value.
When should you avoid auto-renewals?
There are certain situations when you’re better off avoiding auto-renewals. Think of the following:
- When the products or services no longer bring value. Contract renewals can be problematic for parties seeking to terminate the contract. Missing the renewal deadline means getting locked into another year of unwanted expenses.
- When you need new contract terms. Even parties willing to resume the agreement can find automatic renewals troubling should they wish to modify some of the contractual terms.
- When you’re dealing with many different complex agreements. Automatic renewals can reactivate large volumes of contracts that you might find hard to track. It can keep you locked in agreements that don’t ensure the best deals or performance.
What if you’ve already signed up for auto-renewals, but they’re no longer the best option for you?
To terminate an auto-renewal contract, you must notify the other parties in a written form. You must do it within a certain period set by the renewal clause. Failing to meet this requirement means having to gain the consent of the other parties to stop the auto-renewal. And it won’t be an easy feat if contract termination is not in their best interest.
Relying on contract management tools
If you decide not to automatically renew your agreements, tackling the contract renewal process means you’ll have to track and analyze a myriad of renegotiation terms, variables, and dates. If you handle it manually, the risk of error or budget overrun soars.
Legal teams using outdated tools like spreadsheets and decentralized databases have trouble sorting through contract clauses and keeping up with renewal dates. If they’re lucky, they can still get the job done but waste too much effort. In other cases, renegotiations and renewals just fall through the cracks.
Organizations can hold their own by using contract management tools that automate the contract renewal process. These tools offer advanced functionalities like storing all files in a single repository, sending alerts for upcoming renewal dates, organizing information through indexing, and renewing contracts with a few clicks. All of them let you optimize your renewals.
Contract renewal can be a complex and lengthy process. But given the important role it plays in strengthening your business relationships and keeping you out of legal trouble, it’s not something you can shrug your shoulders at. Make sure you’re managing the process effectively. Track the renewal dates, review the contractual terms thoroughly, and gain leverage for renegotiations.
Knowing when it’s a good time to rely on automatic renewals and when it’s not is also a must. In any case, you should be equipped with tech tools like contract lifecycle management software. It tracks renewal dates for you and stores all files in a single repository. You can explore your options with a free demo.
To manage the contract renewal process effectively, you must store the contract dates in a centralized location to track them easily. You should also set aside enough time to review the contractual terms and renegotiate them if necessary.
The contract renewal process aims to replace an expiring contract with a new one that keeps the same clauses or includes certain modifications.
Get your legal team to review the terms and ensure everything works in your favor. Afterward, you can collaborate with the other parties to gain their approval or renegotiate the conditions. Get everyone on board to prevent any contradictions or issues.
The contract management process can be broken down into the following stages: contract request, authoring, negotiation, approval, execution, obligation monitoring, renewal, amendments, and expiration.