Contract renewals are essential dates that must be tracked, monitored, and planned for. As per a report by the Aberdeen Group, 56% of “best-in-class” organizations renew their contracts. These best-in-class organizations are the top 20% of brands in the market.
Here’s why you should track agreement renewals:
- To avoid missing upcoming contract renewals
- To make renewal decisions on time
- To avoid auto-renewing unfavorable contracts
- To prepare and negotiate renewal agreements on time
This blog offers detailed information on contract renewal: what it is, how it can be managed, the process of renewing agreements, and how automation can streamline your renewals. Let’s start.
What is a contract renewal?
Automated tracking of contract renewal dates mentioned in the contract or maintaining a record of expiring contracts.
In cases where a renewal clause is present, the agreement is considered as an ‘evergreen contract’. In this clause’s absence, organizations have to manually track and manage renewals.
Either way, renewing a contract ensures the continuous validity and enforcement of the agreement. What needs to be decided is whether the renewed contract will work on the same terms as before or if it needs to be renegotiated with new terms and clauses.
In procurement, contract renewal allows a company to extend an agreement with a supplier. Renewal can be without renegotiation if both parties are satisfied with the current terms, or may prompt renegotiation before renewing. Either way, organizations can renew a deal with their preferred vendors and continue operations smoothly.
Moreover, most businesses confuse contract renewal with contract extension. Extending a contract is not the same as renewing it. Here’s how:
Differences between contract renewal and contract extension
Wondering what is the difference between contract renewal and extension? Check out this table and understand the difference between the two.
| Contract renewal | Contract extension | |
| Contract terms | Renewal modifies the contract terms or pricing based on changing market demand. | Extension temporarily delays the contract expiration date without impacting other terms. |
| Renegotiations | Various clauses of the contracts like pricing, service terms, conditions, and obligations can be renegotiated during renewal. | In contract extensions, the contract’s expiration date is delayed without any amendment in other terms and clauses. |
| Relationships | Renewal is useful for maintaining business relationships with long-term partners. | Extending contracts is useful for meeting short-term contracting requirements. |
Now that you know what renewal exactly is, let’s understand the significance of renewing agreements.
Why tracking contract renewals is important?
Renewal of a contract is way more than just the renegotiation and continuation of contracts. It:
1. Helps improve customer retention rates
As per a report by Forbes, there is a 60-70% chance of selling to existing customers while only a 5-20% chance of acquiring a new prospect. It signals loyalty and trust, reflects proactive engagement and reduces churn rate translating to consistent long-term revenue
A smart contract renewal strategy has automated systems to track contract expirations and send timely renewal reminders. Renewal phases are excellent opportunities for re-ups, boosting overall sales through upselling and cross-selling.
2. Sustains the business in the long run
Uninterrupted business operations give you an edge while unanticipated contract terminations can upend the supply chain. Automated renewal tracking can help you re-negotiate terms and integrate new systems, allowing you to focus on core work without onboarding new vendors from scratch.
Renewed contracts strengthen your business relationship with counterparties, offer predictability in operations, and help plan and allocate resources better. Augmented with early renewal incentives with alerts, automating contract renewals can encourage more favorable terms and ironclad business continuity.
3. Improves incoming cash flow generation
Contract renewals are crucial to maintaining and enhancing cash flows. Predictable revenue streams allow for financial planning, budgeting, and more informed investment decisions.
4. Reduces business risks
Renewal tracking serves as an opportunity for organizations to analyze their contracts, identify unfavorable contract terms and clauses, and make decisions to amend/terminate such contracts.
During renewal review, legal teams can revisit the previous contracts’ terms and clauses. This helps identify outdated clauses, risks, threats, and other discrepancies. By identifying these risks, organizations can save themself from unfavorable auto-renewals.
5. Helps gain a competitive advantage
Competitive leverage helps maximize profits and sustain business. One way to gain this advantage is to track upcoming renewal dates.
By knowing when your contracts are up for renewal and preparing a compelling agreement for the deal, you can continue business terms with well-performing vendors. This helps maintain the preferred vendor status, thus giving you a competitive advantage in the long run.
Tracking expiration dates and renewals can help analyze customer usage patterns, spot opportunities, and negotiate better contract terms—hence helping with cost savings. The costs associated with customer retention are significantly lower than that of acquiring new customers. Regular renewals also improve CLM and reduce CAC, indicating a sustainable business model.
5-Step contract renewal process
Wondering how to renew a contract? Once you have made the renewal decision, the process to refresh an agreement is straightforward. Here is the 5-step agreement renewal management process:
1. Initiate contract renewal
The first step is to be aware of upcoming contract expiration dates. Automated tracking of renewal dates mentioned in the contract or maintaining a record of expiring contracts. After knowing which contracts are about to expire in, let’s say, 90 days, businesses can initiate their renewal.
We recommend initiating the contract renewal process at least 90 days before the expiration date. Advanced renewal planning ensures that the new contract is ready before the previous one expires.
2. Discuss contract goals
Organizations can send automatic renewal notifications to external and internal stakeholders of the contract renewal plan. These stakeholders then choose to agree or disagree with renewing contracts.
If the counterparties agree, future objectives and goals can be discussed. This is a good time to identify how the new agreement can be amended to ensure the contract aligns with the evolving business needs.
3. Renegotiate the deal
The negotiation process starts after the new contract objectives have been defined. The parties involved renegotiate the contract’s terms and clauses, and the negotiation continues until both parties’ interests are fulfilled.
One benefit of renewing an existing contract is that the relevant parties don’t have to negotiate the contract from scratch. Only the sections of the current contract that are being amended need to be renegotiated, while other clauses stay the same, which saves time.
A 2021 study published on Springer Link found a negative correlation between renegotiation and renewal, concluding that renegotiating a contract reduces renewal chances. Thus, renegotiation is a critical stage and must be handled with care to ensure contract continuity.
4. Draft a new contract
Once both parties have reached common ground for negotiation, it is time to draft a new contract. The first option is to create a new agreement reflecting all the revisions and amendments in the original agreement.
Another option is to amend the existing contract to reflect the changes made during the negotiation. Either way, this stage helps prepare a new contract for approval.
5. Approve and sign
Once drafted, it is time for contract review, approval, and signing. Here, all the parties involved in the contract sign the document and enforce it. Generally, the renewed contract comes into force once the previous one has expired.
This is the complete contract renewal process. Executing this process manually comes with many risks and challenges. The coming section highlights the common problems in manual contract renewal and their solutions.
What are the common challenges in managing agreement renewals?
Renewing a contract requires tracking each agreement’s expiration and keeping track of the obligations and performance. Only then can the contract be renewed. When done manually, contract renewal brings various challenges, such as:
- Missed expiration dates: Manually managing agreement renewal means tracking all upcoming contract expiration dates on spreadsheets and email threads. Human error and missed deadlines from manual tracking and follow-ups can incur penalties.
- Delayed renewals: Manually renewing contracts delays the contract renewal process and delays cross-sell and upsell opportunities for the business.
- Costly auto-renewals: One missed deadline can trap businesses in an expensive contract for another year. Contracts with rigid terms are harder to negotiate and renew.
These are the challenges of manual contract renewals. So, how do businesses renew their contracts efficiently? The answer is renewal tracking automation.
Introducing automation helps manage contract renewals effortlessly. With intelligent contract renewal tools, you can avoid unwanted contract termination and expiration without breaking a sweat.
The next section will discuss some key benefits of automated contract renewal tracking.
What are the benefits of automated contract renewal?
Today, contract renewal management tools like HyperStart CLM offer smart functionalities to automate renewal tracking and eliminate manual processes. These tools help maintain excellent contract performance throughout the CLM process. Here’s how:
1. Never miss a renewal again
With contract renewal automation, businesses can leverage automated reminders to track contractual obligations like expiry and renewal. These reminders notify you whenever a contract is about to expire. Most automation tools offer a 30-day or 90-day prior notification, which gives enough time to initiate renewal and finalize a new contract before the previous one expires.
2. Auto-renew contracts
The auto-renewal functionality helps set basic agreements for auto-piloted renewals. However, with auto-renewal, the contract gets renewed on the same terms and clauses. Therefore, automatic contract renewal is excellent for agreements with a low contract value or where renegotiation is not required.
3. Speed up renegotiation
Renegotiation discussion can be accelerated through automation. Tools like HyperStart CLM offer prompt automated reminder alerts, preserving resources for more strategic worksmart features for contract approval workflow automation. Setting up a systematic workflow helps optimize the entire process of redlining and negotiation, thus boosting contract TAT.
4. Reduced administrative burden
Automated renewal tracking replaces chore work with core work, diverting valuable time and resources to more strategic tasks.
Never miss a renewal again
Avoid contract expirations, risks, and penalties. Track obligations effortlessly.
Book a Demo4 Best practices for contract renewals
Here are some best practices for renewing a contract efficiently:
1. Begin renewal discussions ahead of time
One of the most common mistakes businesses make is waiting for the contract period to end before initiating renewal. Whether a business manually renews its contracts or uses automation, it is important to start the renewal process on time. Doing so gives sales and procurement teams the leeway to renegotiate and get contracts approved internally.
2. Use contract data for renewal decision
Contract management software offers insightful contract data on contract management KPIs, which are obligation tracking and compliance data. Use these contract performance metrics to judge the counterparty’s performance and renew contracts with counterparties that have met all the obligations and contract requirements.
3. Automate contract renewal tracking
Renewal workflows can be cumbersome. However, with AI-powered contract management tools like HyperStart CLM, brands can automate their contract renewal workflow with great precision. This can speed up contract renewal negotiations and help eliminate delays.
4. Centralize contracts and contract data
Manual tracking of contract data results in missed contract renewals. When contracts are distributed across different systems, visibility is naturally compromised. With a central contract repository to track key terms, contract administrators can track all renewal dates, in one place. This ensures optimal contract visibility and avoids missing renewals.
These are some of the best practices businesses can adopt in their contractual processes. All you need now is a powerful automation tool for contract renewal management.
Automate contract renewal tracking and management with HyperStart CLM
Contract renewals can be difficult to manage. Be it saving work time and effort or tracking renewals automatically, automation plays a key role in the process. With HyperStart CLM’s contract tracking software, you can automate contract renewal tracking effortlessly.
HyperStart CLM brings you an AI-driven contract renewal tracking system to ensure you never miss a renewal again. Book a demo call with us today to learn more about how our solution can help you reshape contract management.
Frequently asked questions
Some of the most common challenges in manual contract renewal are:
- Difficulty tracking renewal date of contacts
- Lack of supporting data to back contract renewal decision
- Lengthy renewal process
Agreement renewal automation tools help overcome these challenges efficiently and offer various other benefits, such as easy contract drafting and automatic sign collection.
