An estimate from PwC outlines that the average company has between 20,000 and 40,000 contracts active at any one time.
Even if your business has only 1/20th of the lowest estimate in play, that’s still 1,000 contracts to monitor, assess, and potentially renew each year.
It's no wonder, then, that many small businesses suffer the consequences of poor or non-existent renewal management protocols.
In this article, we’re going to show you how to avoid falling into the same trap.
We’ll dive into the importance of renewal management, outlining what’s typically involved and covering four important strategies for more effective, smarter contract renewal processes.
What is renewal management?
Renewal management is the practice associated with managing contracts and agreements as they expire or come up for renewal.
For example, you might buy your accounts payable automation software on an annual subscription, meaning the contract would be up for renewal each year.
Renewal management, in this case, would involve analyzing the value received from that software license, potentially reviewing other options or renegotiating with your supplier before signing a new agreement.
The importance of renewal management
Without effective renewal management processes in place, there’s a lot that can go wrong.
Imagine not renewing your utilities contract, and one day arriving at the office to find that your electricity has been cut off, halting all production.
In some cases, there are clauses built into contracts that many business leaders don’t realize will impact them come the date of expiry.
For instance, you might have a preferred negotiated rate within your internet provider for the 24-month term of the contract, which then increases to the market rate when the agreement expires and the relationship turns into an open contract.
This has a major negative impact on operating expenses and can wreak havoc on your ability to budget effectively.
In other scenarios, contracts renew automatically.
This avoids the possibility of an outage but also means that you lose the opportunity to renegotiate and secure more favorable terms.
We’ll discuss auto-renewals in more detail shortly. For now, let's explain a bit more about what goes on in renewal management itself.
What’s involved in renewal management?
Renewal tracking
The most important component of effective renewal management is the monitoring of agreement expiry dates.
This can happen in a simple spreadsheet or in a more advanced renewal management software solution that can provide automated notifications as expiry dates approach.
For example, you might wish to be notified a full six weeks before the contract expiry date, giving you plenty of time to engage in the following steps — like a needs review and negotiation conversation - before the contract ceases to be valid.
Needs review
A needs review is something that takes place as part of the procurement and purchasing process, where the procurement team establishes what needs the business has and how the given goods or services required will solve them.
Needs change over time, which means a new review of needs should be conducted before signing off on a contract renewal.
This process requires a lot of cross-department communication and collaboration.
For example, when renewing a sales engagement platform, the procurement team may need to consult with the VP of Sales along with the finance team on budgeting matters.
Value vs. cost analysis
Part of that collaboration between the finance and the procurement team is the execution of a value vs. cost analysis.
Here, you’re essentially assessing whether the value you get from a tool (for example, time saved from an accounts receivable automation platform) outweighs the cost of the tool.
To perform this effectively, procurement will need to dive into user data (more on that shortly) as well as collaborate with finance to prepare a budget and adjust forecasts as required to accommodate software renewal needs.
Supplier performance review
Before signing off on the contract renewal, it's good practice to review the vendor’s performance track record to confirm they have been living up to the terms outlined in the existing contract.
For instance, when assessing a software license renewal, you may wish to review performance data related to software uptime and support ticket response and resolution timeframes.
Vendor/competitor analysis
In many cases, you’ll be happy enough with your existing vendor to continue the working relationship and simply renew the contract.
Often, this is the easier approach since it doesn’t require any changes to current business operations.
In other scenarios, however, you may deem it necessary to consider replacing the supplier, in which case you’ll need to engage in market research, analysis of options, and vendor vetting processes.
Approval workflows
Finally, contract renewals, like all purchases, typically require sign-off from the appropriate authority.
Your procurement software or purchase order system should be able to support automated approval workflows, making it simple and fast to route requests to the right person and receive approval to renew that contract.
4 strategies for smarter renewal management
Looking for ways to improve how your business manages contract renewals?
Implement these four best practices.
1. Turn off auto-renewals
Auto-renewals might be convenient — they don’t require you to resign a contract or engage in any other approval workflows — but they are risky.
This form of contract renewal often leads to software subscriptions you don’t need, creating budget overruns and reducing profitability.
Instead, it’s a better practice to turn off auto-renewals as long as you do this step in conjunction with the next one.
2. Centralize contract and spend tracking
Set up some form of contract expiry data tracking process.
A dedicated contract management platform like PandaDoc or SpotDraft is an effective way to automate notifications.
Otherwise, a simple Google Sheets or Excel spreadsheet should do, alongside a specialized calendar that notifies you when agreements are coming up for renewal.
While you’re at it, get to work centralizing your company spending data as well to make it easy to analyze expenditure with the vendor as part of the renewal consideration process.
BILL’s Spend & Expense makes it easy to track payments and allows you to create virtual cards for each software tool you use, making the billing process easier and providing greater spending visibility.
3. Analyze user data
As you’re considering renewing a given piece of software, take a look at how your team members are using the product and whether they are getting significant value out of the investment.
Are they logging in daily or rarely? Is the platform widely adopted, or only used by a few account holders?
By digging into this data, you might identify an opportunity to reduce the number of licenses you’re paying to reflect the number of active users. Alternatively, if your user count has grown since you first started using the tool, this could be an opportunity to use the data to negotiate a better rate.
4. Refine your negotiation skills
Sharpening up on your negotiation skills before entering a renewal conversation is one of the most powerful ways to reduce costs while maintaining an existing vendor relationship.
Points you can use in your favor when asking for a discount include:
- Increased user count since the contract was initiated
- Your history of on-time payments
- A willingness to commit to a longer-term contract
Streamline renewal management with BILL
Renewal management is an important component of the broader procurement process.
Effective renewal management can help lower costs, prevent you from paying for software you’re not using, and improve your ability to budget effectively.
Solutions like BILL can support the renewal management process by allowing you to dive into spend analytics and automate approval workflows.
Streamline renewal management with BILL today.
