TOUGH TIMES OR NOT… DON’T MISS THE VALUE OF NEGOTIATING RENEWALS
INSIGHTS TO THE OFTEN MISSED OPPORTUNITY TO WIN WITH RENEWALS, INCLUDING A 5-POINT TECHNICAL CHECKLIST FOR BETTER UNDERSTANDING YOUR RENEWALS.
Brian Bahnsen
Sourcing and Vendor Management Consultant
It was the end of the year. There was a big table and several people around it. The conversation was lively among the two teams (Seprio and the Client) working together, planning to seize opportunity in 2020 by prioritizing and working vendor strategic sourcing projects.
We identified priority opportunities, stakeholders, how to define value in each opportunity, preliminary deal strategies, risks, creating competition to generate leverage…“the whole nine”. As the discussion developed, it became clear that all the focus was on NEW deals.
It could be no clearer than when the following perspective rang out, “If only this were as easy as a renewal, we would not have to work so hard to figure this out!” Some agreed, while others in the room paused to consider that statement, me included. He continued to elaborate, “There is no real ROI in a renewal. You just let the agreement renew. Don’t spend a lot of time on it, and it will effectively take care of itself.”
On the surface, that’s an understandable conclusion. An initial 3-year (or 5-year) deal worth millions can be a tough sourcing project. A lot of work goes into getting it right in the first place (note all the conversation among the teams in the opening story). As part of all that hard work, renewal language is commonly embedded within initial agreements.
Yes, there are a variety of types of exit language that protect a business from being helplessly trapped in a deal if or when things change down the road. In some cases there is “no-fault-out” language, other agreements include exit language for failure to perform, and most agreements include something to the effect of a “notice of non-renewal”…something that would prevent “evergreen” language from persisting.
It’s easy to get comfortable with initial agreements. After all, relationships develop, value is exchanged, and the people in both businesses are in a groove together. Reaching the milestone of a renewal is usually a sign of a healthy engagement. That’s why it’s commonly define as a “renewal” rather than an “expiration”.
But in many cases, this does not mean things cannot or should not be objectively evaluated for improvement. In time, things change. People change. Views change. Priorities change. Even how an organization sources and manages vendors changes. Change often creates opportunity. In this context, there is seldom a better time to explore opportunity than during the renewal phase.
Before digging into performing a technical evaluation of whether or not to negotiate a renewal, it’s important to identify the business reasons why (or why not). Each vendor relationship is unique. So, uncovering the business reasons why you and your team may want to negotiate a renewal ensures a clear purpose.
Some reasons why include:
The organization is struggling financially and needs to improve the P and L.
The business requires additional functionality not currently included.
New leadership has a different philosophy for engaging vendor partners.
Some reasons why not include:
Things are simply too good to disrupt the relationship.
The cost to change is too high for the organization.
Depending on your organization, you may have a dozen more reasons why or why not. The point is that the team identifies the reasons, prioritizes them, and agrees that they merit triggering a negotiation…or not.
Next, apply the following 5-point technical checklist for further qualifying your renewal for negotiation…or not.
Understand the end date. When auto-renewal (evergreen) language is in there, the team is subject to the risk of indifference. Simply put, out-of-sight-out-of-mind is a slippery slope with any relationship…especially one with a vendor where contracts are involved. Nonetheless, in there or not, you need to be clear on the end date.
Identify notice requirements. Many agreements require notice of intent to renew or terminate. This may seem less important with an agreement that ends at a specified time. However, without proper notice to renew (as required by the agreement), the agreement may trigger [or cause loss of] provisions not in your favor. For example: price increase protection is nullified if notice to renew is not given at least 30 days prior to the end of the then current term. That is an unnecessary way to write such language. But that is a topic for another blog.
On the other hand, risk is elevated when the agreement “ends” completely when the intent to renew is real. Why? If it ends, it will open up the agreement for renegotiation and, now that the vendor has history and is embedded in the organization, leverage favors them.
A quick story to illustrate the point of what can happen if a renewal is dismissed. An organization that just engaged us had an agreement that required one-year termination notice Well, they missed it and triggered an evergreen provision. Unfortunately, it gets worse. The provision triggered a 5-year renewal.
Review contract management insights. When an agreement is being managed properly, the oversight and maintenance is set up in a proper contract management system, with the right organization overseeing it on your behalf (be it internal or external). If there is anything in contract management that delivers intel about missed SLAs or other “flags of offense” committed by the vendor, those things can serve as leverage in a negotiation.
Evaluate the outcome. Is the outcome of the first term consistent with what the stakeholders expected going into it? This will take some digging, phone calls, and emails. But it’s worth the exercise to achieve the best outcome.
Identify fee increases (or not). If any increase in fees is allowed (or prohibited/contained) within the master agreement; a) do you have an interest in extending for a longer term in order to drive the price down; and, b) are there any new players in the space to offer a competitive bidding process?
If the business whys and the technical evaluation lead you and your team to conclude a renewal is worth the pursuit, activate the same best practice applicable in strategically sourcing an initial engagement. In the end, renewals have repeatedly proven to be a tremendous, usually untapped, source of opportunity for businesses.
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