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3 Things to Look for When Cutting Costs in Contracts

    
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Many legal teams are responsible for managing contracts that dictate how an entire company operates, including agreements every department has with various vendors, suppliers, and other business partners. Due to these responsibilities, legal teams are also commonly tasked with quickly finding opportunities to reduce company overhead by cutting costs in contracts.

To expedite the process and find the most immediate and impactful opportunities, it’s important to know what to look for and where. Here are three things to look for when cutting costs in contracts.

Contract Types

When looking for ways to cut costs, there are a few important types of contracts to pay attention to regardless of company size, industry, or sector.

Subscription services

Your legal team should take a close look at your company’s subscriptions to determine if all of these agreements are needed for the business to operate effectively. Subscriptions don’t always represent significant monetary value, but if your company has a large volume of subscriptions, the costs can add up quickly.

Membership dues

Similar to subscription services, business memberships are often helpful but not critical for organizations to accomplish their goals. Consider reviewing all of your memberships to see if any of them can safely be eliminated. 

Real estate lease agreements

Lease agreements are often multi-year arrangements that lock your company into your office space for an extended period of time. If you’re tasked with identifying substantial opportunities to reduce expenses, take a hard look at your lease agreements and determine if your company should consider less expensive spaces before your agreement renews.

Vendor service agreements

Vendor service agreements often renew automatically. Because of this, you should keep a close eye on these contracts and make sure all of them are performing as expected, and amend or terminate any that aren’t making a positive impact.

Renewal Terms

Digging into the terms that dictate how your agreements are renewed, and the specific details related to altering or terminating those agreements, will help you avoid getting locked into contracts longer than necessary. Here are some things to consider to get out of non-essential, redundant, or unfavorable contracts as quickly as possible

Auto-renewals

Getting a handle on auto-renewing contracts is a simple way to start controlling expenses. According to the Gartner Group, as many as 60% of all supplier agreements automatically renew without the buyer’s knowledge - and 50% auto-renew more than once - which can lead to avoidable expenses.

Opt-out windows

Finding and keeping track of the opt-out windows attached to each contract you’re considering terminating is another critical part of the process. Identifying the contracts you want to make changes to is one thing, but you also need to keep in mind when those changes can occur.

Termination notice requirements

Since the guidelines to terminate a contract can vary greatly from one agreement to the next, be sure you’re aware of the specific requirements across your portfolio. Look for language around when you need to terminate, how you must provide notice, and any penalties for cancelling a contract outside of the stated parameters.

Clauses

There are also various types of clauses to keep track of that could potentially provide relief for your business during extenuating circumstances, including:

Force Majeure 

While Force Majeure clauses don’t guarantee financial relief and can be complicated to navigate, it’s good to know which of your contracts contain this language so you can review all of your options in unique circumstances. Be sure to note any special requirements like Prevention, Mitigation, and Notice.

Frustration or Impossibility

When Force Majeure doesn’t apply, it’s still possible that a Frustration or Impossibility clause comes into play. Like Force Majeure, however, this clause can be complex to prove and doesn’t guarantee relief.

Insurance

Depending on the situation your business is dealing with, you should understand where insurance can help cover some of the expenses or losses. 

By looking into these three aspects of your contract portfolio, you can quickly identify opportunities to reduce organizational spending and ensure your resources are going toward essential business services.

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