This article discusses how automatic contract renewals can affect an organization’s business processes and how to obtain better terms without automatic contract renewals.
In the public procurement sector of some countries, the automatic renewal of contracts may be limited by the need to purchase certain goods and services in a competitive environment. This is one procurement practice that companies can adopt: extending contracts by conducting sourcing events.
Automatic contract renewals can be used when the company regularly purchases certain goods or services. Managers do not have to waste time and effort searching and evaluating alternatives. And why should the alternatives be considered if the purchaser is satisfied with everything and strong business relationships (sometimes even friendly relationships) have been established with the suppliers?
Example: Company X provides cleaning services. Every month, the company needs a number of cleaning supplies (PPE, rags, detergents, etc.). The company buys all these items from a single supplier that was selected a few years ago. The supplier is reliable, and the price increase for the items is generally in line with the overall increase in the cost of goods and services in the supply chain. A contract with this supplier contains an automatic renewal clause on an annual basis. Extending without additional agreement and clarification appears to be mutually beneficial: buyers do not have to waste time searching for other suppliers, reviewing alternatives, conducting sourcing events, negotiating better terms, etc.
Since the procurement manager does not monitor prices and offers on the market, opportunities to reduce purchasing costs are lost. The number of violations on the part of the supplier does not decrease: defective items, delays in delivery, etc. And why should the supplier try to offer better terms if the customer is already satisfied?
To avoid overpaying and missing opportunities to get the best terms from suppliers, it is not necessary to abandon the practice of contract renewal altogether. You just need to prepare in advance, which means controlling all the key events and terms of the next renewal. Even if there are only a few dozen suppliers, it is already difficult. This means that a mechanism should be implemented that will soon allow us to control the extension of cooperation with one or another supplier. This will give a manager more time to prepare for negotiations and get better terms from suppliers.
For example, Acquirell, an all-in-one SaaS procurement solution, gives managers complete control over the company’s contract management workflow, from initiating contracts and ensuring compliance to renewing contracts. The system sends reminders for all important contract events so that users never miss important data. Book a demo to discover more features.
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