What are contract renewals?
Contract renewals occur when parties choose to continue with a business contract. In this final phase of the contract lifecycle, the original term comes to an end at a previously set date. Based on guidelines laid out in the original agreement, the contract may automatically renew or it might need to be manually reevaluated and resubmitted.
The contract renewal phase is an opportunity for a customer to reevaluate whether a service or subscription is working for them. It’s also a time when a company can look to renegotiate terms to improve costs, efficiency, and overall satisfaction for both parties.
Contract management software can help organizations automate processes and improve workflow at all stages of the contract lifecycle. For subscription-based contracts, many software-as-a-service (SaaS) companies turn to subscription billing software to automate the processes involved in managing contract renewals.
Types of contract renewals
There are two main categories of contract renewals. Each type has its own advantages and disadvantages.
Automatic renewals
Start immediately at the end of the previous contract, as outlined in the terms of that agreement. This type of renewal is more efficient for both the company and the customer, but there’s less flexibility in the negotiation of terms.
Manual renewals
Require initiation by both parties. While it allows both parties the time to review and renegotiate, it can also result in delays and lapsed service.
Why are contract renewals important?
Navigating the contract renewal period in a successful way leads to many benefits for a company. Some of these advantages include the following.
Better business relationships
Renewals present an opportunity to close another deal with an existing client, promoting a sense of reliability and trust. If the contract has been renegotiated to better fit the client’s needs, the client is even more likely to develop a sense of loyalty.
Saves time
Renewing contracts with existing clients saves time versus sourcing new leads and onboarding customers. A company with a better renewal management system is also more efficient in locating contracts, securing digital signatures, and automating billing.
Reduces cost
The time spent looking for leads is often costly as well, resulting in increased ad spend. The more success a company has in the renewal phase, the lower its cost per lead (CPL).
Increase in revenue
A subscription-based service company with an organized approach to renewals has fewer lapsed contracts and more continuous income.
Contract renewal best practices
When managing contract renewals, keep the big picture and the tiny details in mind. Consider following these best practices within an organization or team.
Contract review
Since the renewal phase occurs at the end of the lifecycle, this is the perfect time to reflect on what worked – and what could be improved. Ask how the terms of the agreement could be changed to better fit the needs of both parties.
Contract organization
Many organizations store contracts in various places, from physical filing cabinets to cloud-based storage and email. Keeping all documents in a single place makes them easy to locate when it comes time for renewals.
Contract deadline management
Keep track of upcoming deadlines for contract expiration dates. If the contract doesn’t auto-renew, initiate contact with customers at least 30 days before that date to start the manual renewal process. This allows plenty of time for both sides to renegotiate and complete the contract without added stress.
Find the right contract management software
As mentioned previously, SaaS companies or others with many contracts to manage should shop for contract management software with the right combination of features. The perfect tool saves time and keeps track of renewals and all other steps of the contract lifecycle.
Contract renewals vs. contract extensions
These terms are sometimes used interchangeably, but they differ in usage. Contract renewals result in a brand-new contract between two existing parties, although it’s likely very similar to the previous agreement.
Contract extensions lengthen the period stated in the original contract. The confusion ensues because both result in a continued working relationship between two parties, often in a similar capacity.
