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Everything You Need to Know About Contract Renewals
Contract Renewal Basics
Contract renewal can be defined as the process that focuses on ensuring that a legal agreement is reinitiated – with or without renegotiated terms – once the current contract period comes to an end.
The provisions for this are usually defined under the renewal clause of a contract.
If a contract is renewed, both parties can choose to either continue the agreement under existing terms or renegotiate and amend them to suit current business needs. Once an agreement has been reached on this matter, a new draft is generated for another term.
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.
However, if contracts are poorly managed, enterprises can end up missing critical renewal dates, which in turn might cause business disruption.
A missed renewal date might also pave the way for risks such as:
- Renewal of a contract in the absence of 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.
To avoid such pitfalls, we’ll explore several practices which can be implemented through a contract lifecycle management platform, along with consequent benefits.
Why Are Contract Renewals 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: Contracts are often stored across multiple data silos. Old contract copies might be lost among email threads, offline file servers, or enterprise systems such as EPR and CRM.
Due to the absence of a centralized repository, many companies end up spending considerable resources on manually aggregating and sorting through contract data when visibility into critical terms and conditions is required.
As a result, important expiration or renewal dates could be missed.
- Manual tracking of obligations: Traditionally, once a contract is signed, focus immediately shifts to monitoring obligations and compliance with regulatory requirements. Without a dedicated mechanism to track renewal dates, it is more than likely that businesses might miss a critical date.
- Absence of automated notification systems: Without an automated system to send out alerts and reminders, stakeholders are unable to maintain proactive awareness of renewal dates.
4 Contract Renewal Best Practices
Given the fact that contracts are central to 60 to 80% of business transactions, effective renewal management is a must. To help you derive the most value from your contracts and minimize risk, let’s look at some best practices your business can implement:
1. Don’t wait until the last minute to renew
With every missed renewal, companies lose out on critical business opportunities to renegotiate or pull out of unfavorable deals.
Legal departments are often stretched thin, which is why manual modes of tracking renewals could lead to missed deadlines. It is important to note that automatic renewals are not the answer either, as not all agreements should stay the course.
Best-in-class AI-driven CLM platforms like SirionOne can help streamline renewal management. Typical CLM platforms offer users the ability to configure threshold-based automated alerts and notifications, which are triggered as soon as the target contract’s renewal date comes within a defined range.
Once that happens, relevant stakeholders are notified of upcoming dates and are advised to take action.
2. Eliminate manual processes
When done through 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.
This is often done across multiple data silos, where information is bound to get lost or misinterpreted.
However, by leveraging automation, teams can phase out manual processes and enhance visibility. Using a CLM platform, manual tracking and data entry are effectively eliminated.
Other routine tasks connected to contract renewal, such as approval and signature can also be automated, reducing errors and possible duplication of effort.
3. Create libraries of preferred clauses, terms, and templates
If the original contract is favorable, preserving the terms of the contract can expedite the renewal process.
This may be difficult for businesses that rely on paper copies.
On top of an extensive contract portfolio, hard copies may be lost or misfiled, prolonging the steps needed to secure a successful renewal. The end result is another missed opportunity.
Meanwhile, companies who use a cloud-based repository can not only create templates, but also establish a library of preferred contract terms. Clause and template libraries can accelerate the drafting process for commercial agreements.
For renewing more complex agreements, templates offer a good starting point. Preferred company positions can be preserved in new contract drafts.
In addition to simplifying contract setup, CLM software also enables better collaboration among stakeholders during the drafting process.
4. Take a data-led approach to negotiate more favorable terms during renewal
Another vital but underutilized practice is contract intelligence gathering.
To understand the costs and benefits of the original and/or previous contract terms, the renewal process calls for in-depth contract review and risk assessment.
Risk discovery is paramount throughout the lifecycle—not just when a deadline comes up.
To this effect, enterprises can leverage insights based on past supplier performance data to inform renegotiation strategies ahead of time.
Benefits of Ensuring On-Time Contract Renewal with CLM software
The contract renewal process is more than about good scheduling. It’s a vital step in the contract management process. As we’ve already 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.
Some advantages of CLM software include:
- Avoid service interruptions: Proactive monitoring of 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 what isn’t working in their agreements and use this data to negotiate favorable terms.
- Improved business outcomes: Teams can prepare for renewal events in advance, potentially discovering unidentified risks along the way. Further, if the original agreement and/or counterparty performance are suboptimal, internal stakeholders can opt for contract termination and begin exploring alternatives before deadlines. This will minimize fallout on operations and ensure smooth transitions.
Leverage the Power of CLM Software for Your Contract Renewals
Contract renewals are great opportunities to reevaluate counterparty relationships and assess whether existing contracts are in-line with business priorities and objectives.
That’s exactly what effective renewal management powered by leading Contract Lifecycle Management software like SirionOne enables.
By leveraging SirionOne’s AI-driven software, the contract renewal process can be streamlined for better task management. Cost-efficient scheduling, proactive notifications, automated workflows, and fluid collaboration enable teams to stay both ahead of schedule and ahead of competitors during every contract renewal.
To learn more about effective renewal management, businesses can request a demo with SirionLabs.