Contract Renewals: Everything Your Business Needs to Know
- February 24, 2024
- 15 min read
- Sirion
Introduction
Contracts are crucial for enterprise operations. Every meticulously crafted contract negotiation shows mutual trust and potential for fruitful collaboration.
But the real magic often begins post-signature, when it’s time to revisit these contracts for renewal.
Far from being just a routine administrative task, contract renewals are the lifeblood of a thriving CLM enterprise, bringing tangible benefits that extend well beyond the ink on the paper.
However, when you poorly manage contracts, your business can miss critical renewal dates, which might cause business disruption.
In this article, we’ll delve into the world of contract renewals, how they can either enhance the value of your business or pose a risk to your growth, and how to manage them successfully.
What is a Contract Renewal?
A contract renewal is the process you go through to reinitiate a legal agreement – with or without renegotiated terms – once the current contract period ends. You can typically find the terms of these provisions under the renewal clause of a contract.
When you renew a contract, both parties decide to continue the agreement under existing terms or renegotiate and amend them to suit current business needs. Once both parties agree, you generate a new contract draft for another term.
Contract Renewal vs. Extension
Both contract renewal and contract extension refer to the continuation of an agreement beyond its original term, but they are used in different contexts and can have different implications.
A renewal event should not be confused with a contract extension, which focuses on both parties agreeing to operate under existing terms for a short but finite period beyond the expiration date.
Risk vs. Reward
As with many things in life, there are associated risks and rewards. Contract renewals underpin your business’s financial health, foster long-term relationships, help you get the most value out of your agreements, and present opportunities for growth through upgrades and cross-selling.
How Contract Renewals Provide Value:
- Recurring Revenue and Predictability – Each contract renewal means continued business and steady revenue. This predictability lets you make informed decisions about investments, hiring, and strategic initiatives. Predictable income streams, like those from contract renewals, stabilize the company’s financial outlook and help reduce volatility.
- Deepening Client Relationships – Each time you renew a contract, it’s a testament to your client’s satisfaction and trust in your services. Renewals provide an opportunity to nurture and deepen relationships, understand changing client needs, and show commitment to their success.
- Cost Efficiency – Acquiring a new customer or vendor involves significant costs – marketing, sales efforts, onboarding, and lengthy legal reviews. Renewing a contract (vs. starting from scratch with a new agreement) allows you to minimize these costs. Renewals, therefore, are typically more cost-effective.
- Opportunity for Upgrades and Cross-Selling – Contract renewal discussions are an excellent platform to introduce clients to newer features, additional services, or upgraded offerings. This adds value to the client by showing them how they can leverage the latest advancements and provides avenues for us to increase the contract’s size or introduce additional services.
How Missed Contract Renewals Create Risk:
Best case scenario – you nail your renewal deadlines and see all the above results. But missing a renewal date can pave the way for risks to your business. Here is what you want to avoid:
- Renewal of a contract without supplier data to assess past performance
- Lost opportunities to renegotiate terms, which may have become unfavorable in light of evolving business and regulatory requirements
- Auto-renewal of non-performing contracts, which would otherwise have been allowed to expire
- Missing a renewal date and operating outside of expired regulatory or compliance requirements
- Disruption of services or supplies, causing delays, increased costs, or even full-scale operational halts
- Loss of potential revenue or incorrect forecasting, which is especially concerning for contracts involving subscription-based services or recurring payments
Why Are Contract Renewals Missed?
So, if there’s so much risk involved, why are deadlines missed? In the contracting world, it’s not uncommon for deadlines to slip through the cracks.
Here are a few reasons why:
- Lack of visibility – Businesses often store contracts across multiple data silos. Old contract copies get lost in long email threads, offline file servers, or enterprise systems such as EPR and CRM. Without a centralized repository, you spend considerable resources manually aggregating and sorting through contract data when you need visibility into critical terms and conditions. As a result, you miss important expiration or renewal dates.
- Manual tracking of obligations – Traditionally, once a contract is signed, the focus immediately shifts to monitoring obligations and compliance with regulatory requirements. Without a dedicated mechanism to track renewal dates, you will likely miss a critical date.
- Absence of automated notification systems – Without an automated system to send alerts and reminders, stakeholders cannot maintain proactive awareness of renewal dates. This is especially true for larger enterprises that manage thousands of contracts simultaneously.
How to Prepare for Renewal Contract Negotiations
Whether conducting thorough research, gathering relevant data, or aligning strategies to secure the best possible terms for your business, preparing for contract renewal negotiations is crucial to achieving favorable outcomes. Here’s how to set yourself up for success in advance.
1. Don’t wait until the last minute
As discussed, companies lose out on critical business opportunities with every missed renewal. Negotiations take time and involvement from many parties, so leave time to negotiate or pull out of unfavorable deals.
2. Eliminate manual processes
With traditional manual methods, tracking renewal provisions simply isn’t practical. Many contract management and contract administration teams use spreadsheets and other rudimentary tools to log critical contract information. By leveraging automation, teams can phase out manual processes and enhance visibility.
3. Create a cloud-based contract library
If the original contract is favorable, preserving the terms of the contract can expedite the renewal process. The easiest way to do this is with a cloud-based repository acting as your source of truth. This allows you to create templates and establish a library of preferred contract terms, which can accelerate the drafting process.
4. Assess the market landscape
By understanding market trends and industry benchmarks, businesses can gain insights into the current state of the market and the competitive landscape. You can use this information to identify ways to improve and position the business as a valuable partner.
5. Communicate with teams and stakeholders
Involve all necessary internal parties early on in the renegotiation and renewal process. Doing so will allow you to understand the value and goals that the department owning the relationship may want to see in the next iteration of the contract.
Overcoming Challenges in Contract Renewals
Contract renewal negotiations can be challenging, but you can overcome and create a successful outcome with the right strategies.
Dealing With Common Obstacles
Common obstacles encountered during contract renewals include disagreements over pricing, scope of work, and contract terms. To address these challenges, open and honest communication is essential. By actively listening, understanding the client’s concerns, and proposing viable solutions, you can navigate these obstacles and find common ground.
Strategies for Difficult Negotiations
In instances where negotiations become difficult, it is crucial to maintain a calm and professional demeanor. Instead of approaching the situation confrontationally, businesses should focus on facts, data, and logical reasoning to support their position. Seeking compromise and being open to alternative proposals can pave the way for a successful contract renewal.
Contract Renewal Management Success
Ensuring contract renewal success involves continuous performance monitoring, evaluating contract performance metrics, and implementing a culture of continuous improvement. There are many ways to do this and options to explore.
Considering Auto-Renewing Contracts
Automatic renewals might seem like a convenient way to ease your workload, but might not always be the answer, as not all agreements should stay the course.
In reality, they can inadvertently lead to missed opportunities, increased costs, and reduced flexibility. It’s often in an enterprise’s best interest to review contracts periodically to ensure they align with current needs and market conditions.
Monitoring and Evaluating Contract Performance From Day One
The renewal process calls for in-depth contract review and risk assessment based on KPIs or key deliverables – throughout the lifecycle, not just when a deadline arises. Regularly monitoring and evaluating contract performance is vital to identify any gaps.
As you assess performance, identify areas that need improvement and address any concerns or contract issues. Gathering this comprehensive data allows you to enter negotiations armed with the necessary information to support new requests and ensure a fair agreement.
By tracking key performance indicators and soliciting client feedback, businesses can make more timely adjustments and demonstrate a commitment to delivering exceptional value.
Ensure On-Time Contract Renewal With CLM Software
As previously discussed, manual processes aren’t sufficient to ensure proactive contract renewal.
To address this problem, businesses can use cutting-edge CLM software to track renewal and expiration dates and develop better renegotiation approaches. Additionally, AI is now improving the CLM process beyond basic storage or data extraction.
Some advantages of AI CLM software include:
- Avoided service interruptions – Proactively monitoring renewal dates that result in timely contract renewals reduces business continuity risk.
- Smarter negotiation strategies – By harnessing performance data, businesses with AI-powered CLM tools can discover what is and isn’t working in their agreements and lead negotiations with prescriptive insights into past performance data, deviations, and missing clauses.
- First draft authoring with Generative AI – Use chat prompts to initiate first drafts of new contracts or set up pre-approved templates and clauses for AI to review and build company-preferred language around
- Automated workflows and fluid team collaboration – AI scans documents at scale to utomate routine tasks connected to contract renewal, such as approval and signature or highlighting changes made to a draft in minutes. This reduces errors and possible duplication of effort.
- Proactive notifications – Set up automatic alerts and reminders to help business users stay on top of upcoming or overdue tasks and contractual obligations.
- Improved business outcomes – AI autonomously highlights missing or problematic clauses to identify risks along the way – before they happen. This allows internal stakeholders to opt for contract termination and explore alternatives before deadlines.
Leverage the Power of CLM Software for Your Contract Renewals
Contract renewals are great opportunities to reevaluate counterparty relationships and assess whether existing contracts align with business priorities and objectives.
Continuous improvement is crucial for sustained success in contract renewals. By analyzing past performance, identifying areas of improvement, and implementing corrective measures, businesses can enhance the value they provide to clients and vice versa. This increases the likelihood of contract renewal and positions businesses as reliable and forward-thinking partners.
In conclusion, successful contract renewals require a strategic approach that requires understanding their importance and effective negotiation techniques.
If you leverage AI-native software, you can streamline the contract renewal process, enabling teams to stay both ahead of schedule and ahead of competitors. To learn more about effective renewal management, request a demo with a Sirion CLM expert.
Additional Resources
What Is Contract Value Leakage And How To Prevent It
