Contract Renewals May Be The Secret To Your Organization's Success

By Bill Pollock, chief research officer, The Service Council, www.theservicecouncil.com, wkp@theservicecouncil.com

Contract renewals may not be the hottest or trendiest topic, but it’s certainly an important one.

When compared with discussions relating to the cloud, workforce management, scheduling optimization, field mobility, and the like, the allure of contract management typically pales. However, it represents an area that applies to virtually all service organizations, and one that can truly have a significant impact on the business’ overall ability to drive service revenue.

The Service Council’s benchmark survey on The Role of Service Culture in Driving Service Revenues (conducted in September-October 2012) identified contract renewal rates as among the greatest tools for driving service revenue. In fact, they also drive profitability, customer satisfaction, and new service product development. Let me explain.

The top four sources of service revenue as reported by the survey’s more than 500 respondents are:

• Service performed under SLAs (service level agreements) or contracts
• Service performed on a T&M (time & materials) basis
• Sales of SLA/service contract renewals
• Sales of service parts

The common thread among all of these sources is simple: Once you have the customer in your grasp, you can depend on them to contribute additional revenue through add-on offerings, including extended warranty contracts, contract renewals, and parts sales. Even T&M customers typically come to you because they have purchased your products and/or services in the past.

How Does Your Service Organization’s Contract Renewal Rate Compare?
The key to success, however, may be evidenced more in terms of which services organizations are, in fact, promoting and selling contract renewals. For example, overall, the mean contract renewal rate among survey respondents is 54%. However, this percent jumps to 67% for organizations currently realizing service profit margins of 30% or greater and up to 76% for those offering self-renewal contracts. However, as is generally the case in business, one size does not fit all.

From a number of follow-up conversations conducted with a representative sampling of survey respondents, we have learned the following key empirical pieces of information. One major services organization suggests that, at the very least, for high-ticket and/ or high-volume major, national, or key accounts, the organization’s C-level executives need to get involved in the renewal process at an early stage. In this organization, the top 25 to 30 accounts have their own sales and account manager personnel directly assigned to them. However, each account also has a C-level executive assigned to assist or facilitate in drawing the account closer to renewal. The overall process starts at least 75 days in advance and continues until the renewal is signed. By the way, this organization currently boasts a 96% renewal rate.

Another organization that we spoke with has a very different take on contract renewals — basically because it sells and supports very high-ticket equipment and systems for large enterprise accounts. Because the types of equipment it sells may have a usable life span of up to 14 years (or more), this organization focuses its contract attachment, extension, and renewal efforts on multisystem, multiyear (i.e. five years or more) agreements. In most cases, the renewal process is not designed to be “automatic” but, rather, is joined to a comprehensive systems/equipment assessment that oftentimes leads to an equipment upsell rather than simply a contract renewal. Things change — and as they do, so must the contract extensions. As the purchase decision cycle for these types of high-ticket capital equipment can often take up to six months (or more), the renewal/upsell process typically starts 14 to 15 months in advance of the multiyear contract expiration.

Where does your organization fit into the overall spectrum of contract management? Well, it could be anyplace along the overall continuum. However, one thing still remains clear. Nobody should have a better shot at capturing additional service revenue from your customers than your organization. Such revenue is essentially yours to lose — and you may lose it if you do not have effective contract attachment and renewal processes. That’s why a majority of services organizations have already taken this route.