At my company, I’m responsible for reviewing and doing a legal sign-off on all contracts. Over the years, I’ve taught various managers to do basic contract reviews. As a result, by the time the contract makes its way to my desk, in addition to the commercial terms being set, the manager often will be able to tell me, triumphantly “Gila, I got rid of the auto-renewal and exclusivity clauses!” In response to which they always receive my warm congratulations (and chocolate, if I have any handy). Auto-renewals and exclusivity and have their place in contracts, but most of the time? They are basically the Devil’s Own Contract Clauses.
Today we are going to learn about auto-renewals and next week we’ll learn about exclusivity.
First, what is an auto-renewal?
An automatic renewal of a contract is exactly what it sounds like—your contract renews automatically. While you’ll generally find this type of term in purchases of SaaS products, online services or products, tech services, subscriptions, ongoing service contracts, apps or other similar products and services, there are lots and lots of companies that would be delighted to lock you in for a second, third or fourth year. Generally, but not always, the renewal will be under the same terms as the most recent renewal, that is, the same amount of time, the same price and so on. Some companies might include terms that they can increase the prices or change other terms and they just have to let you know.
Renewals yes, auto-renewals no
Many SaaS, subscriptions and services are sold for year-terms; you can’t buy them month-to-month. There may well be excellent reasons for that initial year term or for year-long terms in general. The service you are buying might require that the supplier purchase underlying products or services on a back-to-back basis, and these may have their own year-long commitment (e.g. hosting services). A SaaS product might require installation, integration, onboarding or training. Or a company might just do the math and realize that it makes no commercial sense for them to enter into short-term contracts where they are chasing after renewals every 30 or 90 days. In these cases, a year-long term makes sense. Renewing for another year term may also make sense, for both sides.
“Renewing”, however, is not the same as “automatically renewing”. Unless the contract term is for a month, and the auto-renewal are for additional one month periods (more on that below) there frequently is no product or service-related reason for auto-renewal, and in fact, there are plenty of points against it. For example…
- You miss out on the opportunity to review and renegotiate contract terms, compare prices or check out potential alternatives.
- You are locked into a year’s service where there’s no longer any product or service-related reason to do so. Okay, in year-one there was a two month onboarding process in which your account was set up and you were trained on the system. But once you’re set-up and trained, you’re set-up and trained. It’s not like the supplier has to erase your set up, do it over and then train you again, in honor of year-two.
Prevention is the better part of cure
What do you do to get out of auto-renewal? Avoiding an auto-renewal usually requires that you notify the supplier 30, 60 or 90 days ahead of time and tell them that you don’t want to renew. Even worse are the contracts where you have a seemingly random window of time (e.g. between so and so dates); these are even easier to miss. You missed the deadline? You are officially stuck. Haven’t used the service for 10 months because it’s turned out to be a bad match for your business? Wanted to renegotiate the terms because you realized you are being charged twice as much as you should be or the volumes aren’t in line with your current operations? Too late and too bad. Better luck next year.
One way to avoid this fate is to make up a list of every contract that has auto-renewal terms, noting when each one is supposed to renew and how much advance notice you have to give. Each month, you can review your list and notify whomever is not going to be renewed. There’s an element of financial Russian roulette here, as you are going to miss notifying someone at some point or another. Maybe you were on vacation. Maybe you didn’t realize that the German sales manager signed the company up for some wacko leads generation service using his credit card, and then forgot to tell you that it was a renewable subscription. (Trust me, it will happen. Hopefully it will be for the cheapo app subscription and not for something wildly expensive, like Salesforce).
Another option is to decide that life is just too blasted short to waste your time on this, and cut off the auto-renewal from the get-go.
- If you can remove auto-renewal from the contract, do so. When you’re negotiating the contract terms, just tell them that you don’t accept auto-renewals. They can remove it from the terms or add a note to the sales order that “auto-renewal” doesn’t apply.
- Where appropriate, suggest that you move to a month-to-month auto-renewal basis (with the ability to cancel with 30 days’ notice) once the initial term is over. This tends to make the most sense where you are paying for the service on a monthly basis.
- If you can’t remove auto-renewal, then sign the contract…and immediately provide notice. Literally send your notice back with the signed contract. Make it part of the process.
- For online services where account details and subscriptions are managed online, require that anyone purchasing an annual subscription immediately turn off the “auto-renewal” option.
Take my word for it—you will get dinged with the odd auto-renewal. You are not going to catch everything. But this reduces the exposure.
Month-to-month contracts=auto-renewals as God intended
There is one exception to my auto-renewal rule. Some service providers allow you to sign up for their services on a month-to-month basis. Generally these arrangements allow you to cancel at any time thirty days’ notice or less. In that case, it’s genuinely more convenient to have the auto-renewal than to have to purchase the service each and every month. Just the same, keep an eye on the company credit card detail, and specifically, on those monthly billing charges. Every so often, touch base with the relevant people in your company and make sure that they are still using the service, and that it’s not an expensive orphan. Here as well—you will almost certainly get dinged with one of these, but if you are keeping an eye on the credit card, it will happen less frequently.