Contract Renewal Mistakes Have Steep Costs. Here’s How to Avoid Them!
Once again, in-house legal professionals are being tasked with an all-too-familiar challenge: to find even more ways to trim down their budgets. The 2024 ACC Chief Legal Officers Survey found 42% of CLOs were asked to slash expenses last year. In fact, these financial headwinds pose a problem here and now, giving each decision or action an outsized impact on the bottom line.
As a result, in-house counsel needs to stay vigilant and conduct risk management to prevent what we like to call unforced errors, whether they’re needless reoccurring expenses or the financial consequences of unplanned events. Poor oversight of the contract management lifecycle can lead to those costly mistakes, especially in the current climate.
For example, 32% of respondents in Lexion’s The Current State of Legal Tech said they had a bad or very bad experience with their CLM implementation. Even those organizations reporting a neutral or positive experience might not be using their platform to the fullest, creating blind spots in areas which often feel low stakes.
Contract renewals and terminations are the primary examples. The routine nature of these clauses give organizations a false sense of security, prompting them not to apply the same level of scrutiny they would elsewhere. Here’s why you need to look out for common contract renewal mistakes now.
What Can Happen If Contract Analysis Is Overlooked
The potential threats from neglected contract analysis span a variety of possibilities.
- A contract for a legacy software platform auto renews, locking your organization into another year of expenses for tools you’re not using.
- An essential contract for critical high-volume supplies (like gauze or sterilizers for a hospital) terminates prematurely, disrupting operations or requiring an expensive rush order.
- An active SOW is invalidated when you find out the original MSA is inactive due to a faulty renewal clause or even just standard termination.
This is just a sampling of the expensive hiccups that not only hurt profitability but performance, safety, and even trust. Why does this still happen? There are several possibilities.
Sometimes, the pressure to generate revenue feel as if it outweighs the need to conduct proper risk management. In the Lexion survey, 44% of respondents said that documents are not returned at the speed at which they need them. Whether those expectations are realistic or are ignoring existing bandwidth and resource shortages is beside the point. What matters is that external pressures from sales and management can result in contractual flaws or omissions surviving beyond pre-execution drafting because of the fast turnaround times..
Overextended legal resources are another common cause. When contracts appear straightforward, they are often assigned to paralegals, legal assistants, or non-practicing attorneys as a more cost-effective measure. Though these professionals often deliver quality work, attorneys with greater seniority don’t have visibility into the terms and can miss issues or impending deadlines, especially if they are across distributed work environments.
There’s also risk from the increased complexity of business or commercial arrangements. Deals with overlapping terms or amendments to compounding contract families can create blind spots into renewals or expirations if attorneys failed to review the corpus of retailed contracts and documents. Given complex arrangements and families, even the best attorneys would need to dig through an entire family to figure out what’s going on.
Yes, a mature contract management strategy can help to avoid these issues, but even so, there are instances where renewal or termination issues slip through the cracks during times of heightened stress or work volume. It’s better for legal organizations to perform streamlined contract analysis to avoid expensive risks.
How Our Contract Analysis Services Can Simplify Risk Mitigation
Most renewal clauses are simple and clearly labeled, making them prime fodder for AI-enhanced technology to parse and structure into clear reports. When given a cache of contracts, properly trained algorithms can pick out not only the vendor’s name and type of service but also information that’s critical for maintaining a healthy contract lifecycle:
- What is the initial contract duration?
- Is the document the primary, foundational master agreement or an ancillary document that ties back to another agreement?
- Is the contract fully executed?
- Is there an upcoming contract end date?
- Does the contract automatically renew or are there options to extend the agreement on the same terms?
- Does the autorenewal mechanism ever expire?
- What is the cost of and frequency of the goods/services subject to the agreement?
- Are there termination fees and what can trigger them?
These and other questions can be written into the custom queries proposed to a well-designed AI platform. However, the human element is still important in these contract review processes. You might assume that every contract is going to be formulaic, but some contracts are written in an obtuse way or with easy-to-miss nuances or carve outs. Experienced attorneys know how to watch for these types of irregularities and can even double check the work of AI to verify the end results.
Our own contract analysis services combine the two, providing the speed of artificial intelligence with the savvy of legal professionals to provide structured data for your business. That way, you don’t have to assume everything is okay or spend hours digging through data. Whether you are maturing in contract lifecycle management or auditing renewals and expirations for due diligence, the right partner can help you act now to protect your bottom line later.