How to Effectively Manage Contract Renewals in 2024

Dealing with contracts is one of the most typical business practices for companies. But without proper planning, renewing contracts can pose a host of problems, including:

• Expensive unwanted extensions
• Lack of central recording of contracts
• Management changes
• Bad fluctuation between teams

A contract renewal period can easily be missed, especially if your company is expanding rapidly and managing more complicated contracts.

Following a series of best practices for contract renewal makes it possible to set priorities and allow enough time for renewal so that no opportunity for modernization is lost. Read on to find out everything you need to know about contract renewal.

What is a Contract Renewal? Why is it Necessary?

In the context of contract management for companies, contract renewal means the extension or renewal of an existing contractual agreement between two or more parties beyond its original term. This can happen for a variety of reasons and often involves renegotiating certain terms of the agreement.

Contract renewals are an important aspect of business processes as they offer continuity and predictability in business relationships that go beyond short-term agreements. They offer both parties a range of benefits, such as stability, lower costs associated with initiating new contracts, clearly defined expectations and obligations, and greater trust between the parties involved.

How Does Poor Contract Renewal Management Lead to a Loss of Revenue?

Revenue losses are unintentional, undetected, and avoidable losses of business income. Similar to a physical leak, money can also be lost due to leaks. Even though the lost income isn't very high, these tiny amounts add up over time and have a big impact on the bottom line.

Poor contract renewal management can lead to revenue losses in several ways. First and foremost, it can result in contracts expiring without proper renegotiation or updating, resulting in missed opportunities for additional revenue streams. In addition, poor contract renewal management can lead to misunderstandings between parties regarding payment terms or delivery expectations, which can strain relationships and affect future business prospects.

According to the Harvard Business Review Inadequate contract management, in particular errors in manual contract review, results in a loss of 5 to 40% of the contract value. Manual contract verification is susceptible to inaccuracies when performed by a human eye. It is a time-consuming task that requires attention to special features, such as important due dates, automatic renewal periods, and contract keywords.

Reasons Why Contract Renewals Are Missed

Organizations often miss deadlines for contract renewals due to various factors that impact their contract management processes. One of the main reasons why companies are struggling to comply with their renewal contracts is poor contract management practices. Ineffective communication, lack of transparency and accountability, and disorganized systems are some of the factors that contribute to exceeding deadlines.

In addition, the inadequate use of modern technologies and automation tools plays a crucial role in reducing the effectiveness of the renewal process, leading to delays or missed deadlines. Companies that still rely on manual processes or legacy systems are more susceptible to errors or obstacles in meeting their contractual obligations.

5 Best Practices for Contract Renewal

Effective contract change management is essential, as 60 to 80 percent of all transactions revolve around contracts. Let's look at some best practices that your organization can use to maximize the value of its contracts and reduce risks.

1. Don't put off reviewing and renewing contracts until the last minute

• Legal teams often underestimate the time and effort required to review and renew contracts. It is common practice to set a reminder at least 30 days before the automatic renewal so that there is enough time to allocate employees, organize documentation, and reach an agreement on what, if anything, needs to be changed. Companies often keep an Excel spreadsheet or an event calendar and check both regularly.

2. Build an effective contract renewal team

• When you're dealing with hundreds of documents and tight deadlines, you don't want to waste time searching for contacts, email addresses, email chains, and other details every time you need to get feedback on a draft or send a document for execution.

3. Create libraries with preferred clauses, conditions, and templates

• If the original contract is beneficial, maintaining the terms can speed up the renewal process, but this can be challenging for companies that rely on hard copies. Companies that use a cloud-based repository can set up a library of preferred contract terms and create templates. Clause and template libraries can speed up the preparation of business contracts.

4. Make sure you keep documents

• Someone in the company should be responsible for keeping a file with suppliers' prices and opportunities and researching comparable goods and services on the market in order to be able to negotiate from a position of strength. The same goes for recording delays, disagreements, mistakes, and other issues so that decision-making can be supported at the time of renewal.

5. Free yourself from the hassle that manual processes cause

• Tracking renewal accruals is simply not feasible with the old manual processes. However, companies can eliminate manual processes and improve transparency by introducing automation. Manual tracking and data entry is effectively eliminated by using a CLM platform. Other typical contract renewal activities, such as approval and signing, can also be automated, preventing errors and potential duplication of work.

What Do Automatic Contract Renewals mean?

Opting for automatically renewing contracts is an approach to avoid a cumbersome renewal process. With this structure, contracts are automatically renewed after a predetermined period of time without the need for further involvement. As long as one of the parties does not cancel the contract, it remains in force.

It is often referred to as ”Evergreen or self-renewal clause“ referred to in a contract and is typically found in service and loan agreements in a business context.

If you would like to learn more about the main differences between contract renewals and contract extensions, we recommend our article on the subject

Are Contracts With Automatic Renewal Enforceable?

When evaluating a specific automatic renewal contract, it is important to consult local laws and case law, as some jurisdictions impose restrictions on automatic renewal clauses and/or stricter notification requirements in specific contexts (such as consumer contracts, residential rental agreements, and collective agreements). However, according to the usual contract rules, automatic renewal clauses in service contracts are generally enforceable.

What is Contract Renewal Reminder Software?

Contract renewal software is often adaptable, easy to use, and intuitive, and provides comprehensive contract life cycle management features. The following features of the software can support your contract renewal process:

• Optimized document storage, retrieval and versioning through cloud-based secure contract storage
• Notifications about upcoming automatic renewals, contract expiration dates, milestones, and commitments
• Improved security measures, including audit trails, permissions-based access, and more
• Monitor and track performance so you can keep an eye on the status of your renewal contracts
• Integrate electronic signatures for quick signing on any device
• Integration with a wide range of business solutions and software applications