Tracking Auto-Renewal provisions can save you millions.
Modern businesses specialize in the core products or services they want to sell. To do so, each must depend on the specialization of partners, suppliers, vendors, and contractors to supply necessary products and services for its business to operate. For example, you are probably reading this website using software from one company and Internet access from another.
Specialization creates efficiencies but if we don’t know the secret trick of managing it, costs skyrocket. Increasingly, modern supply contracts last for a defined length of time and then auto-renew. These auto-renewal provisions lock in price increases and eliminate the ability to negotiate a better deal when circumstances change.
When purchasing a particular service, we often spend the time and effort to shop around and identify the ideal pricing plan. Odds are high, however, that the same pricing plan won’t be right for your company’s circumstances forever. Your company may grow or it may shrink; market prices may change; a vendor’s quality may suffer; or you may simply decide to change directions. Buying outsourced services gives you more flexibility but only if you stay on top of Auto-Renewals in your contractual relationships. Many Auto-Renewal provisions require you to notify the supplier by a certain date (the Notice Date) if you want to terminate the agreement before it auto-renews. If you miss that Notice Date, your company will be stuck for another term - which could be a year or a half a decade depending on the contract.
A fast-growing Internet company used a software system to manage aspects of its customer relationships. Due to exponential growth in headcount over the preceding year, the company’s use of the software grew by 900%. Suddenly an $8,000 per month expense became an $63,000 1 per month expense. After the CFO expressed concerns about the costs to a friend, her friend remarked: “Wow, we pay only half that price per seat! Who did your negotiating?”
The CFO returned to her office ready for battle. When she looked at the contract, she realized it had just auto-renewed at the same price a mere three weeks earlier. She would have to postpone this battle for another 11 months. Had the company been notified about the impending auto-renewal in advance, it could have sought competitive bids or pushed to renegotiate.
Knowing contracts economics doesn't matter if you miss Notice Dates.
Sometimes price escalations are based on certain criteria being met, ranging from external market developments to performance by one of the parties. Monitoring the external conditions and triggers is key, but all for naught if you miss key Notice Dates to signal your intent. A city in California learned this lesson the hard way.
The city negotiated a contract with its teachers in which the city could forgo salary increases for its teaching staff if property tax revenue did not increase enough to match projections. As the school year began, teachers inquired about their raise for the year. The city, having tallied recent property tax returns, had known for months that insufficient tax revenue would enable the city to forgo the raise. However, the city forgot to read its contract -- which required it to provide advance notice to the teachers before it could cancel salary increases. The city failed to give the required notice. As a result, the city was obligated to pay another $6 million in salary increases -- triggering drastic budget cuts elsewhere to counteract the shortfall.
The lesson is simple: knowing and watching external triggers is essential but all your hard work will be lost if you fail to study and abide by the Notice requirements in your contracts.
Differences of Opinion Are Good When Trying to Get a Deal Done.
Most people think deal making requires everyone to have the same views about how the future will play out. The secret real dealmakers know is that differences of opinion drive deals.
Every deal is based on a set of assumptions about what the future holds. For example, some may think gold prices will rise while others expect gold prices to fall. These people should do a deal together: one wants to buy and one wants to sell.
Many businesses fail to question their assumptions or those of their clients when making deals. Figure out your business’ biggest cost drivers and ask clients about their assumptions related to how much their usage of your service will impact those cost drivers. For example, if customer support is a major expense, ask your clients how often they will actually call you. Then work on tiered pricing based on the client’s assumptions. If the client thinks he will call your Support Desk infrequently, but you believe otherwise, then offer variable pricing based on the amount of support calls. Your client’s underestimation (or your overestimation) of the amount of support required is an opportunity for agreement based on tiered pricing.
You will be amazed how much you can lower your sales expenses by tailoring pricing to capitalize on differences in assumptions.
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