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contract best practices
11 min read

Contract Management Best Practices: Cutting Costs

We’re sharing more contract management best practices to help your team save time and money. If you missed part one of this helpful blog series, check it out here. Today, we’ll go over how to cut costs with client contract renewals and how to standardize sales contracts. Let’s dig in. 

Categorize and Prioritize Client Contract Renewals

You can improve your bottom line by protecting your existing client revenue. When you understand which customer contracts are up for renewal, you can prioritize those relationships and uncover potential risks and opportunities within those agreements. 

For example, which client contracts have negotiated opt-outs or termination for convenience? Of those that have scheduled renewal dates, which have a client option to renew within the next 90 days? 

Being able to identify these key terms allows your account management team to focus their internal resources on the right customers at the right time. This not only mitigates risk, but also ensures revenue retention.

Standardize Sales Contracts

Nothing slows down the sales process like having to negotiate a contract from scratch for every deal. Having templates for your sales team to choose from or a standard contract that is the basis for all sales is a great way to lower this friction. By some accounts, having a standard sales contract can decrease close times by 90 percent. 

Standardize Client Payment Terms

When business slows -- especially during unexpected economic panics -- many customers will find every possible means to avoid timely payment of their bills. Here are the common contract problem areas you need to address before customers start ignoring your invoices.

Payment Delinquency

Your company may have agreed to payments 90 days from receipt of the invoice. Starting today, all new contracts should get that figure down to 30 days net of the invoice date. For software-as-a-service solutions, it should be pay-as-you-go with a set payment date each month.

Moreover, your client contracts should have a clear schedule of how many payments a customer can miss or deliver late before penalties are incurred or they can be summarily terminated. You don't want to negotiate cancellation and payback terms after a customer owes you money because your leverage will be slim to none.

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Monthly Minimums and Implementation Fees

If you have a transaction-based pricing model, where you get a percentage of every sale or payment for every action a customer undertakes with your software or services, then you need to consider monthly minimum payments and/or implementation fees to cover your setup and support costs. 

If you're expected to help install, implement, and train a customer on a product they aren't currently using, and you don't get paid until they use it, that's a problem. Monthly minimums ensure your costs are covered, even if a customer slows their transaction flow or altogether stops using your solution because of their own economic issues.

Automatic Price Adjustments

It's a law of the universe that the price of doing business increases over time, and your contracts should make it clear the prices that customers pay today may not be the prices they pay tomorrow. Too many companies, new SaaS providers in particular, lock in current prices in perpetuity. Your client contracts should clearly spell out the circumstances under which you can increase costs.

A bad economy may be a good reason to keep prices steady (or even drop them), but your client contracts should ensure those price adjustments are at your discretion, not the customer's.

Standardize Cancellation Policies

When the economy slows, some of your customers will tighten their belts by canceling their agreements with you. While every contract should have an explicit termination clause, it should be a bit more even-handed and thorough than "you can quit whenever you like, instantly."

Minimum Notice Requirements

There are very few circumstances where a client should be allowed to terminate an agreement unilaterally, with no advance notice. To keep cash flow stable and help even out customer churn, client contracts should require a minimum notice of anywhere from 30 to 365 days for cancellation. This also gives your account management team a window to win the business back or let the economy improve enough that the customer rethinks their cancellation on their own.

Pro-rating Fees for Ending Mid-Term

If you invoice at the end of the month, a client canceling mid-month shouldn't mean you gave away several days of services for free. Vague contracts bring these possibilities, and they only get worse if you bill quarterly or annually. Client contracts should clearly spell out what portion of the billing period a client is responsible for if they cancel mid-term.

Return of Equipment

In many cases, delivering your products and services requires loaning or renting physical equipment to a client. When an agreement is terminated, that equipment must be returned, but too many contracts don't specify much beyond "equipment must be returned." 

Your contracts should explicitly lay out a timeline by which equipment must be returned, the acceptable condition of returned equipment, which party must pay for return shipping, and the penalties for non-compliance. If the client doesn't return equipment in good condition by a clear deadline, you should be able to charge them for it. 

Standardize Variations on Your "Standard" Contract

There are always circumstances where a sales rep will need to alter the standard contract to accommodate special customer needs or special client scenarios. Both the legal team and the sales team need a clear process to handle this situation. Three things to consider: 

  • The sales team should have clear rules about which customers qualify for discounts and the legal team should have clear language and pricing tables that can be substituted when circumstances require. (This avoids the need for manual legal reviews when the standard contract is altered.)
  • The standard contract should have addendums on hand that spell out the obligations of a reference customer. Very well-known companies (or individuals) may be entitled to special consideration if they agree to sign on as reference customers. These considerations need to include explicitly described compensatory obligations from the reference custom -- allowing the use of their names and logos, listing your company as an official partner on their website, agreement to a regular cadence of press releases that quote their executives as customers, minimum notice timelines to terminate this arrangement, etc. -- so there is no confusion. The special pricing or considerations offered for reference customers should also be clearly spelled out so the sales rep can include these addenda with little to no legal review.
  • Customers in particular industries may have special needs that must be reflected in their contracts, such as HIPAA compliance, GDPR compliance, and special non-profit tax reporting. Contract addenda need to be at the ready so sales reps can apply them to the right customers without explicit legal micromanagement. 

LinkSquares Can Help

Manually reviewing contracts to find opportunities to cut costs can prove to be a daunting task.   LinkSquares can help you calculate your risk profile and identify contracts that need to be budgeted for or renegotiated now before bad contract language turns into a potential financial disaster. Contact us today to learn more. 

Alyssa Verzino is a Senior Content Marketing Manager at LinkSquares.