How Finance Teams Can Use Contract Management to Cut Costs During An Economic Downturn
We’ve all seen debates on the news about whether the US economy is technically in a recession. Either way, outlooks aren’t great.
Many Chief Financial Officers (CFOs) and similar business leaders will need to focus on cutting costs through unpleasant methods like spending freezes, budget cuts, hiring freezes, or even layoffs.
Fortunately, there are other options. Most legal agreements have more “wiggle room” than non-legal staffers suspect, and finding those cost-saving and revenue-boosting opportunities are some of the best services a legal team can provide during difficult economic conditions.
By taking a good hard look at your contract portfolio, your finance and legal teams can join forces to cut costs without necessarily cutting employee headcount. Below are contract management steps you can take to improve your bottom line during an economic downturn.
Evaluate Vendor Agreements
Having full visibility into your vendor agreements ensures that you know when existing vendor agreements automatically renew and/or offer no-penalty cancellation with sufficient notice. By examining your vendor contracts in detail, you can make an informed decision to cancel, extend, and/or renegotiate a new payment structure with any supplier or service provider.
Clarify IT Department Contract Obligations and Priorities
Your IT department has a very thorough list of procedures for protecting and repairing your software and data after a system failure or security breach -- but do those procedures match up with your contractual obligations to your clients? If not, your company could be racking up a great deal of unnecessary expenses -- ones the legal team could help you avoid.
Service Level Agreements w/ outage compensation
Your legal team should provide IT with a list of these cases, so they can properly prioritize repairs during a mass outage and avoid unnecessary client payouts.
Terms of Service or Privacy Policies that require notification of a data breach within a specific time frame
Helping IT handle system failures in a contract-conscious manner saves money. If particular clients are due compensation – or can terminate an agreement – if they receive late notice of a data breach, those clients should be the first ones IT notifies in the event of a cyberattack.
Categorize and Prioritize Client Contract Renewals
You can improve your bottom line by protecting your existing client revenue. By understanding 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. Not only does this mitigate risk, it ensures revenue retention.
Clarify IT Department Contract Obligations and Priorities
You can still sell during tough economic times, but nothing slows down the sales process like having to negotiate a contract from scratch for every deal. Having 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, 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
When the economy is strong, it can be easy for your company to agree to payment 90 days from receipt of invoice, and some clients even negotiate absurd agreements like 180-day payment terms. Starting today, all new contracts should get that figure down to 30 days net of invoice date. For software-as-a-service (SaaS) solutions, it should be pay-as-you-go with a set payment date each month.
Moreover, your client contracts should have a very 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.
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 and unless 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 that the price customers pay today may not be the price 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 prices.
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 cancelling 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 your cash flow stable and help even out customer churn, your 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 cancelling mid-month shouldn’t mean you gave away several days of services for free. Unfortunately, vague contracts leave open 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 Partnership Agreements
If a channel partner no longer wants to sell your products and services, a joint venture wants to shut down, or a reference customer wants to sever their agreement, you need to have clear contract conditions in place to handle the thornier parts of this separation.
Accounting Process for Calculating Revenue Shares
When times are tough, partners start to quibble over how you derived the exact value of their compensation. Your contracts should have exact and explicit formulas and processes for calculating these figures, such that there are no gray areas when it comes to payouts and fiduciary promises. This goes doubly when you’re the one getting paid, rather than doing the paying.
Standardize Variations on your "Standard" Contract
There are always circumstances where a sales representative will need to alter the standard contract to accommodate special customer needs or special client scenarios (like, say, a worldwide pandemic). Both the legal department and the sales team need a clear process to handle this situation.
1. 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.)
2. 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 customer – 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.
3. Customers in particular industries may have specific needs that must be reflected in their contracts. For example, HIPAA compliance, GDPR, and special non-profit tax reporting needs. Contract addenda need to be at the ready so sales reps can apply them to the right customers without explicit legal micromanagement.
Quantify Force Majeure
Legal teams must examine force majeure clauses -- the common contract language that adjusts legal obligations and financial options in the event of unforeseeable events such as a global pandemic. This is where most “emergency” contract analysis begins and ends, because it can nullify contractually guaranteed revenue and eliminate contractually obligated costs.
Find every single one of your contracts that includes a force majeure clause and determine exactly how any invocation of that clause affects your cash flow.
Finance Should Partner With Legal to Protect Revenues
Finance teams have a special responsibility during times of economic crisis. By partnering with in-house legal teams, you can use advanced contract management techniques to identify often-overlooked cost-saving opportunities, and secure revenue that might otherwise be lost.
LinkSquares Can Help
Manually reviewing contracts to find opportunities to cut costs is a daunting task, especially when economic downturns demand swift responses. Fortunately, modern artificial intelligence (AI)-powered solutions can parse, categorize, and even mark up problematic contracts at the speed of software.
LinkSquares is that solution. 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. If you’re ready to use contract management to help weather hard economic times, contact LinkSquares today.