by: John Caddell
Auto-renewals of long-term contracts have a lot to like about them, at least for the seller of a product. If the customer doesn’t have the bandwidth or energy to reopen negotiations, a contract rolls over for another period–one year, three years or more. The supplier wipes his brow and relaxes, with that client’s business in the books.
But there are hidden downsides of these clauses for sellers. By “letting sleeping dogs lie,” they lose an opportunity to re-confirm their value with their clients. More importantly, they breach the relationship’s trust, putting their future business (post renewal) at risk. Let’s discuss why.
(1) Customers don’t like surprises. If a contract auto-renews, it most likely means that the client was unaware the term was ending. That client will find out eventually (surprise!), and will blame the supplier. Is that fair? Let me put it this way–if I hire you, one of the things I’m paying you for is managing your relationship with me on a win-win basis. Making sure I know, in advance, that our contract is up for renewal is part of that management job.
(2) Customers don’t want untrustworthy vendors. When suppliers let auto-renew contracts roll over without prior notice to the customer, it signals to the customer that the vendor is looking out for itself, and not looking out for the customer. This destroys trust and guarantees you’ll have a hard negotiation for the next renewal and, perhaps, an enemy should you try to win more business at the client.
(3) Suppliers need to know where they stand. Continual account management is critical. But renewal discussions offer a deeper window into the client’s business, strategy and priorities. Often senior executives participate in the negotiation and their thinking is especially useful. Think of it this way: if you auto-renew the contract you also auto-renew your value assumption, when you could have confirmed it instead.
I think many companies rely on auto-renew because their account managers, like all humans, dislike confrontation. Contract renewal negotations include conflict and risk. But, as we all know, lack of action also carries risk–and doesn’t eliminate conflict. It merely postpones it. And who wants to answer the phone when the client calls after realizing he’s been auto-renewed?