The Bottom Line

Four Reasons Not To Neglect the Contract Auto-Renewal Cycle

Posted by Russ Bourne and Bret Herbert on Jul 18, 2018 9:00:00 AM

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It seems like basic blocking and tackling on the surface, but you’d probably be surprised with how often it slips through the cracks. Most financial institution vendor contracts include a requirement that the client file a “notice of non-renewal,” otherwise the agreement will automatically renew at “expiration” on pre-defined terms. A multi-million dollar organization should have no trouble tracking such administrative to-dos as vendor contract management, right?

Not entirely. Often, basic things such as a promotion or someone leaving to pursue other opportunities are the cause. In the process seemingly minor details like fine print in a contract with two or three years to run can get lost in the shuffle. In SRM’s experience, institutions fail to file such notice between one-quarter and one-third of the time. Let’s look at four reasons you should not let your bank or credit union become part of this group.

  • Satisfaction Is No Excuse. An institution owes it to stakeholders to test the market periodically to confirm it is sourcing the best solutions on favorable terms. It’s easy to lose track of market dynamics over the life of a multi-year contract. New players may have entered the fray and, at a minimum, best practice due diligence would require you at least understand how they differ from the incumbent. Maybe your financial institution’s strategy has evolved since the last deal was signed impacting what is needed from a vendor.
  • Riding the Pricing Curve. Most financial technology solutions have seen declines in pricing over recent years. By contrast, most auto-renewals include a CPI inflator. Therefore, even if you’re happy with current pricing, an auto-renewal will likely trigger an increase at a time when a reduction is in order. In an environment where every dollar counts, this may be an easy path to some “found money.”
  • A Return Trip to the Goodie Jar. A newly signed contract often includes upfront incentives and/or ongoing credits that reduce the total cost of ownership. Allowing a contract to auto-renew typically forfeits the opportunity to any “goodies” of this type. Since a vendor calculates its ability to recoup these payments over the contract’s life, it stands to reason they should again be on the table. After all, if you were considering a competitor to the incumbent, they would certainly be happy to oblige.
  • Hanging Tough. We have found many vendors to be surprisingly rigid in enforcing auto-renewal provisions. Most contracts require 120-180 days advance notice, although we’ve seen periods as long as a year. Missing this deadline can cause the contract to roll over for another year, if not more. Even if in vendor contract negotiations the partner agrees to broker some long-term goodwill, the financial institution will have at minimum lost significant leverage in terms of any credible threat of changing suppliers, given the typically onerous mid-term exit penalties.

Of course, there is an exception to every rule. It’s conceivable that an existing agreement may include language favorable to the financial institution (related to service level agreements, for instance) that a vendor would refuse to match in the current market. In this case, the bank or credit union may make the determination that preserving the benefit is worth forgoing a lower price, additional signing bonus, etc.

Nonetheless, in the majority of cases financial institutions should take care not to overlook their auto-renewal windows as there may be opportunities to realize cost savings or revenue enhancements. It will require some investment of time to scour existing agreements, but is well worth the effort.    

Topics: Vendors & Contracts