By Dean Kaplan, The Kaplan Group
Everyone knows vendors prefer auto renewal contracts, in part because they provide a steady cash flow and income stream, as well as keep vendors from having to undergo repeated sales cycles. Auto renewals also can benefit your customers using a service, but the last thing they want is to come in one day and find it’s no longer working because they forgot to mail a check.
For businesses without large accounts payable departments, auto renewals can be a great time saver as well. However, if not handled correctly, auto-renewals can wind up costing your clients money in unused services or get them in trouble with collections.
As a commercial collection agency, we often see auto-renewals after things have gone wrong, giving us an insider’s view of the correct way to handle them. In general, we see four common reasons a vendor and customer might be in a dispute about an auto-renewal agreement. Understanding these and consistently communicating them to your clients as a value-add creates the kind of stickiness IT service providers desire in their quest to become indispensable client partners.
- The customer did not give appropriate notice before ending the service. For example, the vendor requires 30-days’ notice and only one-day notice was given.
- Notice of cancellation wasn’t given in the way the vendor requires. For example, a customer told the vendor over the phone they wanted to cancel but the vendor required the cancellation in writing. Or, a customer sent the cancellation via email to their vendor who manages the service for them, not directly to the service provider.
- The customer did not realize there was an auto-renewal in place because they weren’t tracking it.
- An early stage customer pivots to an alternative business approach or has limited financial resources and no longer can justify the expenditure for the remaining term.
Unfortunately for your clients, none of these are reasons that legally absolve them of their requirement to pay the amount owed. Although we always advise our clients who are pursuing a debt to think about things from their customer’s point of view, legally there’s no requirement that they do so.
There is one fairly simple way to help ensure your clients do not get caught in an unwanted, or unexpected, auto-renewal system. In an established, well-organized company agreements should always go to the legal department to review before signing. Although smaller companies may not have a legal department, it’s still important to have a lawyer review all contracts. A lawyer can prevent your clients from agreeing to unreasonable terms and point out potential benefits and downsides to the agreement.
Whether you or your client(s) have a legal department or not, after the agreement is reviewed it should be entered into a system to track. The system should keep track of when a cancellation notice is due and who, whether an internal client contact or you as the reseller/service provider, is responsible for the system.
Having a system in place to track auto-renewals also protects your clients if the employee who agreed to the contract leaves. We have seen many cases where an employee leaves a company under bad terms and the company winds up owing large amounts in contracts that they didn’t even know they had. Even in small companies it is critical there be more than one person who knows what the auto-renewal contracts are, or where to find them. In a tightly-controlled application environment overseen by a managed service provider, this could even be an excellent value-added or monetized service opportunity.
We generally advise both our clients and their debtors against going to court, since doing so costs additional time and money. However, you should know that if your client does go to court, no judge is going to accept “we forgot” or “we don’t have a system in place for tracking” or “Jane in accounting hated us” as a valid excuse.
However, if the auto renewal provisions are hidden or not in the actual agreement your client signed — for example if the agreement they signed has a “link” to terms and conditions — then your client may have a case for not paying. We would still advise them to try and work out an agreement with the vendor, or the vendor's collection agency, without going to court. No matter who “wins” in court, everyone except the lawyer loses time and money.
Auto-renewal provisions are often an efficient way to receive great service, and if discounts are offered for long-term contracts, they can save your clients money on needed services. But, unfortunately, auto-renewal agreements can’t just be set up and forgotten about. It’s your clients' responsibility as the company using the service to make sure they fully understand the provisions of the agreement and their obligations.
About The Author
Dean Kaplan, President of The Kaplan Group, has 35 years of business leadership, training, and consultation to many industries including software companies.