Contract renewals are a critical aspect of business operations, often requiring as much care and attention as the initial contract negotiation. With investors and companies putting more and more emphasis on the retention of customers to improve lifetime value it is an area of business that you should spend a significant amount of time. A poorly managed contract renewal can lead to missed opportunities, unfavorable terms, a gap in revenue recognition, or even the termination of a profitable relationship. Here are some best practices for managing contract renewals effectively.
1. Start Early
One of the cardinal rules for contract renewals is to start early, the earlier the better. If you customers are on an annual renewal basis you should be getting started at least three months before the end of their contract. Waiting until the last moment can put you in a disadvantageous negotiating position. By starting early, you have ample time to evaluate the contract’s performance, identify potential improvements, negotiate changes, and avoid late renewal fees or the risk of contract termination. On top of this you should be building tracking into your data that tells you which customers are likely to churn and which are likely to stay with you. This could be in the form of how active they are or how embedded into the product they are.
2. Regularly Review Contract Performance
Continuous monitoring of a contract’s performance is crucial. Is the contract meeting its objectives? Are both parties fulfilling their obligations? Regular reviews can help identify any issues or opportunities for improvement, which can inform your approach to the renewal process. You should have this build into your account managers role and this health should be reported up in the organization so senior leaders know when they should get involved in renewal motions.
3. Evaluate the Relationship
Contract renewals are not just about the contract itself but also about the relationship between the parties. How has the partnership been working? Is the relationship valuable to your business?
One of the core things to understand here is whether or not you have a multithreaded relationship with the customer. Is it only one champion that is using your product or multiple? The more people you have beating your drum and telling the organization that your product is great the more likely you are to renew. An honest evaluation of the relationship can help you decide whether to renew the contract on the same terms, negotiate changes, or perhaps even seek a new partner. One of the core reasons that customers churn is because of a lose of champion and there isn’t anyone else to continue using the product.
4. Understand Market Conditions
Understanding the current market conditions is critical for contract renewals. Has there been a change in market prices or industry regulations? Or worse, is there a recession coming that will cut customers budgets?
Understanding where you stand in the market in terms of competitors is important also. Do your customers see you as a budget option? How does your contract compare to others in the market? This knowledge can provide leverage in negotiations and help ensure that your renewed contract remains competitive.
5. Clarify Renewal Terms
Before you initiate the renewal process, make sure you fully understand the renewal terms of your existing contract. This is where having a contract management system can be extremely useful, it makes it a lot easier for your team to access this data.
Some contracts have automatic renewal clauses, while others require written notice by a certain date. Understanding these terms can help you manage the renewal process smoothly and avoid potential pitfalls.
6. Engage Stakeholders
Engaging all relevant stakeholders in the renewal process is crucial. This includes not just the contract managers, but also those who interact with the contract in their daily operations. Their input can provide valuable insights into the contract’s performance and potential improvements.
When you are renewing a contract one of the other core things to do is to look to engage executive sponsors. The more senior buy in you have when going though the renewal process the easier it will be to close deals quickly.
7. Negotiate as Needed
Don’t be afraid to negotiate changes in the contract during the renewal process. If your evaluations have revealed issues or potential improvements, the renewal process is an ideal time to negotiate these changes.
When you’re renewing contracts it can be important to review the contract terms that were agreed upon when you first signed the contract. Did you agree to something that was outside of the normal because you wanted to get a deal across the line? This could be the best time to renegotiation and remove any unwanted clauses. Remember, a contract should be beneficial for both parties, so don’t hesitate to advocate for your needs.
8. Document Everything
Finally, make sure to document every step of the renewal process. This includes not just the renewed contract itself, but also any evaluations, discussions, negotiations, and decisions that take place during the process. Proper documentation can provide valuable insights for future renewals and help protect your interests in case of disputes. This will be beneficial to your CSM/CX team, especially if customer handover is required at anytime.
Contract renewals are a significant opportunity to enhance your business relationships and improve your contractual terms. By adopting these best practices, businesses can ensure that they approach the renewal process proactively, strategically, and effectively. Remember, contract management doesn’t end when the contract is signed; it’s an ongoing process that continues through renewals, ensuring that your contracts continue to support your business goals.
Contract expiration marks the end of the contract lifecycle and is as vital as any other stage of contract management. It requires careful handling to avoid risks, such as service disruption, data retention, legal liabilities, and potential loss of critical business relationships. Here’s a look at what are some of the best practices for handling contract expirations.
1. Keep a Detailed Contract Database
Maintaining a detailed contract database is critical. It should include crucial data such as contract parties, key terms, contract value, and, importantly, the expiration date. A well-managed database not only alerts you of upcoming contract expirations but also provides valuable data on your contracts that can let you know when contracts are going to expire, if you need to renegotiate and who the signer was on the first contract.
2. Set Up Contract Expiration Alerts
Missing a renewal is a bit of a cardinal sin, it is lost money from just not being prepared. To avoid missing an important contract expiration, it’s essential to set up alert systems. These systems send notifications well before a contract’s end date, we recommend up to three months prior in the case of annual contracts, providing ample time to take necessary actions such as contract review, renegotiation, or searching for alternative vendors.
3. Review Contract Performance
When a contract is nearing expiration, conduct a comprehensive review of its performance. Evaluate whether the contract has met its objectives, the quality of service provided, and the value derived from the contract. This review can guide the decision-making process on whether to renew, renegotiate or allow the contract to expire and how this reflects on the service provided. Could you have saved the contract with an earlier intervention? Was the customer not set up for success by the onboarding process? These are all things you can feed back into your processes.
4. Assess Business Relationships
Consider the relationship with the other party. Has the collaboration been smooth? Are both parties satisfied? If the relationship has been beneficial and you see potential for future business, it might be worth considering contract renewal or extension instead of expiration. Three of the key questions you should be able to answer here are:
What can I do to save this contract?
Will the customer come back at a future date?
If the champion has moved on to a new role at a different company will they purchase my product there?
5. Understand the how Market influenced the churn
Moving on from contract expiration, understand the conditions that attributed to it. Did they go to a competitor? Did they lose budget? Have there been changes in prices, industry standards, or regulations? An understanding of the market can help you understand if you are missing features from your product or if you need to adjust your pricing.
6. Plan for Transition
If the customer decides to let the contract expire consider that you need to focus on offboarding them correctly. Does their data need to be deleted, their IP returned? Review you contract to understand what this means for the close off of the contract.
7. Review Expiration Terms
Ensure that you fully understand the contract’s expiration terms. Does the contract include any penalties for non-renewal? Are there any obligations that extend beyond the contract’s end date? Did the customer need to give you thirty days notice? Being clear on these terms can help prevent any legal issues or financial liabilities.
8. Document the Expiration Process
Just like any other stage of contract management, it’s essential to document the expiration process. Record why the customer made the decision to stop using your product, how the transition was managed, and any lessons learned. This documentation can provide valuable insights for future contracts. One of the key teams that should review this data is your product team so they can understand the customers needs for the product.
Contract expiration is a crucial phase in contract management. It offers an opportunity to reassess business relationships, evaluate contract performance, and make strategic decisions that align with the company’s evolving needs. By following these best practices, businesses can ensure they navigate contract expirations smoothly, mitigating risks and capitalizing on new opportunities for growth and improvement. The end of a contract doesn’t necessarily signify the end of a business relationship; instead, it can be a moment to evaluate how well to you deliver your service and whether or not changes are needed.