Effectively Audit Your Customer Contracts: Part 1

By Alyssa Verzino

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When it comes to contract management best practices, legal teams are encouraged to audit contracts to identify any overlooked legal liabilities. But that’s not the only audit you need to complete. It’s also important to audit your customer contracts to identify the revenue you're at risk of losing. 

In this two-part blog series, we'll cover the four simple steps you can take to quantify the customers and revenue at risk in the near future -- and how to get ahead of it. Let’s start with the first half of the process, ranking customer contracts in terms of expected revenue and identifying the ones that are up for renewal.

Step 1: Rank Customer Contracts by Expected Revenue

Who are your most valuable customers? It's almost impossible to run a successful sales organization without knowing this answer, but it's the starting point for any revenue audit. Customer relationship management (CRM) and accounting software should be able to tell you which clients and which accounts bring in the most money and drive the biggest profits. 

Then the legal team comes in to tie this revenue to contracts.  

For example, you may have a service contract that represents the primary revenue from a major client, and an ancillary contract that only covers their tech support and customer service costs. Terminating the primary service agreement has a very different revenue impact than terminating the support contract. Understanding which agreements represent what revenue is the first and most important step in identifying revenues that are contractually at risk.

Key Metrics for Legal Teams

Step 2: Identify Customer Contracts Up for Renewal

If you have an ongoing service agreement with a customer, the first question you need to answer is: will that agreement automatically renew, or do I need to win the client again? Customers that must choose to stay require more sales and support attention. 

For those that don't auto-renew, you also need to know the date that those contracts expire. The ones that end sooner are a high priority. If two contracts will terminate on the same date, attention should go to the contract that represents more revenue. 

At the end of Part 1, you should have a master list of all your contracts with their associated monthly recurring revenue, and each contract should be flagged as “does” or “does not” auto-renew, with a specific renewal date. We’ll be back tomorrow with Part 2 of the full contract audit process. Can't wait? Download this eBook to learn the whole process now. 

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Topics: Contract Management