This blog first appeared on Cobblestone Software’s site. Four are distributors of Cobblestone’s contract management system, Contract Insight.
Anyone managing contracts knows about the evergreen contract. Evergreen agreements stand out for their ability to self-renew – offering both parties a blend of convenience and continuity. However, this same perpetual nature can pose unique challenges in evergreen provisions tracking and management. In this blog, we’ll explore the intricacies of evergreen contracts and examine how sophisticated yet user-friendly tools of leading contract management software can streamline and optimise the lifecycle of these agreements.
Evergreen contract meaning
An evergreen contract (also known as an auto-renewal contract) is an agreement that continuously renews after the expiration of the initial term until one of the parties decides to terminate the contract.
When considering an evergreen contract, it’s important to pay attention to (among other factors):
- the notification period required for termination
- the changes in terms if it automatically renews
- any changes in costs upon renewal
- the implications of long-term engagement without renegotiation.
When the evergreen option goes sideways
Imagine a medium-sized enterprise that has an evergreen contract with a paper supplier. The contract auto-renews annually, with a stipulation for a 3% price increase with each renewal. Over the years, the contract management process was neglected due to staffing changes and the assumption that the contract would simply ‘take care of itself’. However, the market price for paper decreased significantly, yet the company’s costs increased due to the automatic price escalation per the evergreen terms.
Five years down the line, the enterprise is unknowingly paying 15% more than the market rate, which on discovery causes a scramble to renegotiate terms. The delay in addressing the auto-renewal terms not only resulted in financial loss but also strained the relationship with the supplier, leading to an urgent and less favourable renegotiation process.
As this scenario highlights, there are substantial risks borne of complacency with evergreen contracts. Organisations need a means of proactively managing evergreen contracts to avoid financial pitfalls and maintain advantageous contract terms.
Contract management software steps in
Contract management software provides a centralised platform that can effectively prevent the mismanagement of evergreen contracts by automating key processes and providing timely alerts. Some leading CLM features to help with the management of these contracts include:
- Automated alerts and notifications: Contract management software can be configured to send alerts well before an auto-renewal deadline; this gives contract managers an ample period to review the terms, assess the market conditions, and decide whether to renegotiate or implement a notice of termination and establish an expiration date.
- Contract analytics: Contract analytics tools allow contracting teams to track and analyse spending over time, revenue, workflow efficiency, and other factors. Various performance indicators can be analysed month-to-month, over the course of 60 days, year-to-year, or whichever other periods of time the team needs.
- Centralised repository: All contract documents and terms are stored in a single location, making it easy to access and review the history and current details of the contract (preventing any oversight due to personnel changes).
- Renewal management: These tools specifically allow organisations to manage and oversee the auto-renewal process more efficiently – including a time period for when the contract will automatically renew. CLM functionality is also helpful with mapping risk if/when the organisation terminates an evergreen contract and uses alerts to get the team to collaborate on the contract provisions of a new contract once the organisation terminates the agreement.
What makes Contract Insight different for evergreen contract management
In line with the goals above, Contract Insight provides several specific tools to assist in these areas:
- Calendar and alert system: This feature can be utilised to set reminders for review periods of every contract term – virtually ensuring that no auto-renewal date passes unnoticed.
- Intelligent workflow: Contact Insight’s intelligent workflows can automate the approval process for terms and conditions renegotiation or termination, making it efficient and timely.
- IntelliSign®eSignatures: Contract Insight’s electronic signature software boosts approval efficiency, provides comprehensive visibility, and cuts send-to-sign time by up to twenty per cent. Organisations can quickly approve of contract changes.
- VISDOM® AI: Contract Insight’s proprietary contract AI engine with machine learning offers redlining of renewal terms with preferred clauses, rapid data extraction and risk management.
- Version tracking: Users can keep track of all contract versions (numbered in order), which is crucial for understanding the evolution of contract terms over time and making sure the correct contract is presented to counterparties.
- Clause library: Contract Insight’s robust, evergreen clause and template library allows for quick updates and standardisation of contract terms – essentially ensuring that the most favourable terms are always used during renegotiations. Organisations can retain evergreen contract clauses and evergreen contract templates – both of which can be merged with newly introduced contract data so that contracts are tidy and consistent. Evergreen clause examples include simple evergreen clauses, evergreen clauses with price escalation, evergreen clauses with limitation, and evergreen clauses with conditional renewal.
Key takeaway
By employing these tools and others, an organisation can maintain vigilant oversight of evergreen contracts, avoiding the risks associated with unintended auto-renewals and ensuring contracts remain competitive and aligned with the company’s financial interests.
Four Business Solutions
Four Business Solutions are global business consultants and software integrators specialising in business process improvement. If you’d like to find out more about how Contract Insight can help your business, we’d be delighted to talk to you. Why not get in touch?