Anyone managing contracts knows about the evergreen contract. Evergreen agreements stand out for their ability to self-renew - offering a blend of convenience and continuity for both parties. However, this same perpetual nature can pose unique challenges in evergreen provisions tracking and management. In this blog, we will explore the intricacies of evergreen contracts; we will examine how sophisticated yet user-friendly tools of leading contract management software can streamline and optimize 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, upon 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 favorable renegotiation process.
As this scenario highlights, there are substantial risks borne of complacency with evergreen contracts. Organizations 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 centralized 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 oversight gives contract managers an ample period of time 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 analyze spend over time, revenue, workflow efficiency, and other factors. Various performance indicators can be analyzed month-to-month, over the course of 60 days, year-to-year, or whichever other periods of time the team needs.
- Centralized 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 oversight due to personnel changes).
- Renewal Management: These tools specifically allow organizations 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 for if/when the organization terminates an evergreen contract and using alerts to get the team going on collaborating on the contract provisions of a new contract once the organization terminates the agreement.
What Makes Cobblestone Different in Managing Evergreen Contracts
In line with the goals above, CobbleStone Contract Insight® provides several specific tools to assist in these areas:
- CobbleStone's Calendar and Alert System: This feature can be utilized to set reminders for review periods of every term of the contract - virtually ensuring that no auto-renewal date passes unnoticed.
- Intelligent Workflow: CobbleStone’s intelligent workflows can automate the approval process for terms and conditions renegotiation or termination, making it efficient and timely. Task escalations can help ensure that, even if there is a cog in the machine, the gears keep turning.
- IntelliSign® eSignatures: CobbleStone Software's electronic signature software boosts approval efficiency, provides comprehensive visibility, and cuts send-to-sign time by up to twenty percent. Organizations can quickly approve of changes made to those pesky evergreen contracts!
- VISDOM® AI: CobbleStone's proprietary contract AI engine with machine learning offers redlining of renewal terms with preferred clauses, rapid data extraction, risk management, and more.
- Version Tracking: CobbleStone® 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: CobbleStone's robust, evergreen clause and template library allows for quick updates and standardization of contract terms - essentially ensuring that the most favorable terms are always used during renegotiations. Organizations 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 organization can maintain vigilant oversight of evergreen contracts, thereby avoiding the risks associated with unintended auto-renewals and ensuring contracts remain competitive and aligned with the company’s financial interests.
To see these features and many others in action, book a free demo of CobbleStone Contract Insight today!
*Legal Disclaimer: This article is not legal advice. The content of this article is for general informational and educational purposes only. The information on this website may not present the most up-to-date legal information. Readers should contact their attorneys for legal advice regarding any particular legal matter.