How To Manage Auto-Renewal Contracts
Auto-renewal provisions plague every company. Those renewals trigger expenses which drain profits. It is easy to forget about auto-renewals. Here are 5 simple steps to stay on top of auto-renewals.
- Tag the contract and documents as auto-renewing.
- Set an automatic alert well in advance.
- Create a task to collect the renewal decision.
- Create a task to send the notice.
- Run a report of all auto-renewing contracts.
For purposes of this article, we will assume that the contract has an expiration date with an auto-renewal feature. To prevent the auto-renewal, one of the parties has to send written notice at least 30 days in advance.
Need a refresher on auto-renewal and evergreen contracts? Check out "When will this contract end?"
Tag the contract or documents as auto-renewing
The first step to manage an auto-renewing contract is to flag it right after it is executed. No one will remember the next day.
There are several ways to tag the contract depending on the level of contract detail you want to manage. If you use a simple spreadsheet to manage contacts, then you might track auto-renewals like this:
|Contract||Auto-Renewal||Notice Due Days Before|
|XYZ Facility Maintenance||X||45|
|ABC Professional Services||X||30|
|DEF Tech Agreement|
If you use contract management software, then you have three options, depending on how granular you want the tracking.
To tag a contract as auto-renewal in a contract management system, do one of the following:
- Select the auto-renewal tag for the contract record,
- Select the auto-renewal tag for the specific document which contains the renewal provision, or
- Capture the provision as a contract requirement.
The choice just depends on your broader contract reporting needs. When possible, avoid unnecessary detail.
Set an automatic alert well in advance
The problem with auto-renewals is pretty simple. On a good day, people remember the contract expiration, but not the auto-renewal notice date. The effect is that we realize too late that the contract has renewed for an additional period, maybe 5 or 10 years depending on the auto-renewal terms.
To avoid this problem, it is crucial to set at least one alert far enough before the expiration date so that you have time to act.
For example, a contract is set to expire on December 31. The auto-renewal provision requires a party to send notice of cancellation at least 30 days before expiration. If you do not send notice by December 1, you are on the hook for another term.
How long does it take your organization to make contract decisions? That is how far in advance you need an alert to remind everyone about the auto-renewal notice date.
Create a task to collect the renewal decision
Relying on an automated alert pushes the task to make the decision offline. To improve on the alert tip, you can assign a task to the people who have to make the decision.
Lawyers and contract managers are often charged with managing the contract but do not have the authority or responsibility for the business decision about whether to renew.
Approval tasks typically fall into one of two buckets. Sometimes it is enough just to get approval from a single person. Alternatively, several people might need to approve the task.
It is important to assign the auto-renewal approval task due date far enough before the notice due date so that you have time to prepare and send the notice.
Create a task to send the notice
To close the loop on the process, schedule a task for yourself, or the appropriate person in your organization, to actually send the notice.
It would be awkward indeed for the business owners to request termination and the contract management team not to send the notice on time!
Separate the auto-renewal approval task from the send notice task, because those are often different people and they have different deadlines. The notice task is also dependent on the approval task.
Run a report of all auto-renewing contracts
Technically, you are done when you complete Steps 1 through 4. There is, however, an opportunity to exceed expectations and improve your organization's financial performance: auto-renewal reports.
You can anticipate auto-renewals across the entire contract portfolio. When you tag contracts as containing an auto-renewal feature, you can run a report which shows, for example, "All Auto-Renewal Contracts Due in the Next 9 Months."
Those are powerful insights which transform contract management from an administrative task into a competitive asset.
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