In any agreement, the contract period determines the length of the business relationship.
Some contracts are evergreen, while others have an expiration date or a renewal date.
So, imagine missing out on a contract renewal because of unprepared, spontaneous negotiation, poorly managed contract, or manually tracking key dates. You have missed an invaluable customer for a term. Now, consider the same scenario for another 100,000 contracts. That's a lot of money dripping out.
Renewing contracts is essential but only after weighing and identifying your favorable terms. That means you need buffer time, proactive reminders, and notifications.
This article will help you navigate the world of contract renewals. Also, it outlines the benefits of using contract lifecycle management software for prompt renewals and much more.
Let’s see what’s in store.
What is contract renewal?
Contract renewal marks the last stage of your existing contract lifecycle. When a contract reaches its expiration date, parties have the opportunity to either terminate or continue the business relationship.
In the latter case, you could probably negotiate new favorable terms while initiating the contract renewal process. Sometimes, stakeholders also carry forward existing contract terms for another period/tenure.
Renewals of contracts offer great chances to renegotiate. They have the potential to alter the nature of the business partnership for the following time frame. Today, businesses strive to create good contract renewal processes to prepare early for contract review, be proactive and not wait until a few days before the contract expiry.
Moreover, you could renew contracts either manually or automatically. Let's see how it differs.
Manual contract renewals
When business partners realize that an existing contract is nearing expiration, they could mutually agree to continue or cease it. If they correctly identified and tracked the renewal date and chose to keep the contract going, the next step is to take enough time to consider whether to make changes or adhere to the original terms.
And yes, manual contract renewals require personnel effort. Imagine tracking contract renewal dates for lump sum contracts in Excel or Notepad. These processes are prone to human biases or errors and are time-consuming.
Also if you miss these key dates, there are immense chances you lose out on customers or forsake revenue for a few days until the contract gets renewed.
In the case of automatic contract renewals, parties have a specific provision within their original contract that clearly defines negotiation possibilities and chances for termination. These contract renewal clauses cover detailed information like renewal period, initial period, effective date, and contract renewal date.
The contract renewal date is a fixed date before which parties should contemplate their interests in renewing or terminating the contract. Correspondingly, they share a notice in advance discussing new terms or explicit their goal to cease the relationship.
If the contract renewal date passes without notice, both parties get locked into a contract with older conditions/terms for another period. This concept is called lock-in, wherein you get locked (legally bound) into another period with contract terms from the previous contract.
Hint: When two parties reach an agreement, there is always a time frame associated. This term is what defines ‘contract renewal’. For instance, say Acme Corp and Organo Ltd get to sign a contract on July 29, 2022, for a term of one year. Then, the contract is up for renewal on July 28, 2023.
The significance of contract renewals and the hidden revenue opportunities
Contract renewals help you fortify existing contracts and boost your engagements with a customer or a vendor. You could renegotiate contract terms in light of your changing business landscape or events. With old customers in the mix, they promise a steady income for another period.
Organizations can also use renewals to lower rates, negotiate services, or upsell goods. They are also ideal for businesses to bargain for better benefits. You may give yourself enough time to prepare for such negotiations by simply setting a reminder for it.
Usually, you might create these renewal reminders using general-purpose tools such as Spreadsheets, Kanban Boards, or dedicated contract lifecycle management software.
When dealing with contract renewals, you're in an advantageous state altogether. Here are three reasons for it:
1. You have already evaluated the benefits the contract has previously offered.
2. You are aware of the challenges embedded in fulfilling prior commitments.
3. You adopt a proactive strategy and can plan your renegotiations.
Knowing these attributes puts you in a stronger position. You're more likely to obtain even more good terms. Further, contract renewal strategies are fundamental in accentuating your customer retention. It's much easier and less costly to upsell or retain existing customers than to attract new ones.
Hint: Contract expiration and control renewal date are essentially the same. Sometimes, when there's no contract renewal clause, you will only see the contract expiration date or end date. However, an explicit renewal clause comes with a contract renewal date.
Calculating the actual cost of missing contract renewals
The cost of missing a deadline or renewal date is enormously high. When you miss a contract renewal, you miss out on signing a favorable contract, and your customer relationships might get strained.
For instance, if your organization follows a manual contract renewal process, someone tracks contract renewal dates in Excel or a similar solution. Business contracts that expire on a fixed date need manual intervention for renewing. If a stakeholder managing important renewal dates leave the organization, the chances are high that you could miss out on renewing this contract. In this case, you lose money after losing the customer retention battle.
Here's another scenario to consider: Auto-renewal is not all juicy. It has some stripes too. You could get locked into another costly business arrangement for another period. If not for this renewal, you could have otherwise saved a ton by finding another suitable partner. Understanding these actual costs is crucial to achieving better contract renewal practices.
Drawbacks of the manual contract renewal process
Today, organizations need a solid framework to succeed with contract renewals on a large scale. It might not be easy to maintain sizable numbers of contracts using manual methods.
Remember, your contracts are with various levels of complexity, changing renegotiation dates, and numerous renewal conditions. The risks of missing a renewal date are significant when using manual contracting processes. It affects businesses financially and can slow them down in terms of growth.
Since manual renewal processes frequently miss valuable contracts, they are less desired. Inherent friction, longer waits, and surprise service interruptions are additional problems.
“In the past, many clients wanted to change how they manage contract renewals. They have transitioned from manual renewal tracking to automated processes with prior 90-day, 60-day, or 30-day reminder emails. You can automate reminders for specific teams or an entire department with SpotDraft.”
- Aditya Deepak | Growth Specialist
Upsides of automated contract renewals
Automated contract renewals let you know when to review your contracts and prepare for and initiate renewal. You have ample time to get ready with assertive renegotiation terms. Some advantages of automated contract renewal include:
Track upcoming contract renewals.
Contract reminder software automatically keeps track of various deadlines, details, and dates. Whenever a contract is up for renewal or expiration, it emails proactive reminders to the pertinent stakeholders. You could set automated reminders that notify you before any renewal deadline.
Avoid typical contract blunders.
Legal teams won't have to create contracts on short notice or rush through evaluations as they get notified in advance. As a result, there would be more time to do additional analyses as necessary and fewer chances of forgetting important information or making mistakes in the contract. This exercise will ultimately result in fewer redlines or minimum rounds of negotiations.
Stop money leaking out.
There is no paperwork involved because the contract renewal process gets managed digitally. Thus, service contracting should proceed more quickly than if manual renewal were to occur. As you prepare for contract renewals, you could better tackle inflexible terms. You can also strategize terms to eliminate existing unfavorable conditions.
Managing contract renewals with SpotDraft
CLM software saves money and time for businesses - it saves countless hours contract managers could otherwise spend analyzing renegotiation terms and finding renewal dates. It organizes clauses and renewal dates from a large number of contracts swiftly.
To be precise, contract reminder software such as SpotDraft provides multiple benefits and helps you:
- Receive automatic reminders to your emails.
- Renew contracts right within the reminder email.
- Make manual tracking irrelevant as it automates everything.
Let's get deep and find other advantages it offers.
Utilize a centralized contract hub.
Contracts are easy to track, housed in a central repository, and never lost. So, the hassle of missing renewal never pops up. Also, SpotDraft can automatically extract critical information like key dates from your contracts and present it to you in the form of a concise summary.
You could furthermore add custom tags to contracts so that they become entirely searchable. These personalized tags save time and help you identify contracts in a flash.
Get ready in advance for contract renewals.
SpotDraft allows you to set up recurring reminders for important contract dates. You can also use in-depth contract renewal management strategies. You get alerts, ensuring that you never miss a reminder or auto-renewal for a contract renewal.
With an intuitive contract reminder, you receive messages in advance, meaning your business team has more time to deliberate terms and propose amendments.
FAQs about contract renewal
1. What are some contract renewal best practices?
Use tools that help minimize or forgo the risk of not renewing a contract, so you don't lose revenue lines. Also, leverage processes that smash the undesired chance of getting auto-renewed without consent or discussion. Precisely, it is advised that you use contract reminder software to make the process of contract renewals seamless.
2. What causes missed contract renewals?
Primary reasons for missed renewals include -
- Losing sight of contracts.
- Manually tracking significant dates.
- Not having a centralized storage hub.
3. How to end an auto-renewal contract?
Set a time to speak with your counterparty and mutually end or terminate the contract. These discussions must be before the contract renewal date or within the notice period mentioned in the renewal clause of the original agreement. Failing to do so, you need to get additional consent from your counterparty.
4. What are some tips for successful contract renewal?
Renewal best practices vary across organizations. Ideally, it is helpful to constantly have visibility on these critical dates and context on contracts renewing in the next quarter. And before the renewal, speak to your customer, buyer, or seller and understand the renewal and new terms, if applicable.
5. What are the benefits of auto-renewal?
With auto-renewal, you could:
- Anticipate future sales for your company.
- Save time and paperwork.
- Lock in advantageous pricing for goods and services.
With your teams rapidly scaling and contracts firmly growing, keeping track of contract renewals may become more challenging. You may benefit from automated renewal reminders to avoid hiccups and surprises and build healthy customer relationships.