General counsel have a chance to save their company money as inflation pinches by mitigating price increases before contracts renew at higher amounts, Evisort co-founder and CEO Jerry Ting said.
The tactic works best if you have a cushion of time, because if you wait until the last week before the contract expires, you lose your leverage, he said.
“If you're capturing it late … and you don't want to do the renewal, they’ll turn the system off and you’ll face a business continuity issue,” Ting told Legal Dive. “But if you find that renewal at the beginning of the quarter, when you’re doing quarterly planning, you can use your leverage to say you’re not renewing unless we get rid of this term. That puts a lot of leverage back in the hands of GCs.”
Big savings
A McKinsey analysis found that companies save an average of 9% of annual revenue by renegotiating contract pricing. That comes to about $2.5 trillion in savings for the Fortune 500.
Ting says his contract management company is working with a Fortune 100 company that’s been paying contract increases by default because it can’t go through its contracts quickly, early and cost-effectively enough because it’s still using lawyers to go through each contract manually.
“They’re just signing the renewals because they have no choice,” he said.
Many contracts have automatic annual price escalation clauses built into them, like a 2% or 5% increase each year or an inflation-adjusted increase, like CPI-plus 3%.
For general counsel, the goal is to go through all contracts so you can pick out the ones that don’t have that kind of automatic escalation. That way you can reach out to the vendor and open the renegotiation process.
Ting touted his company’s CLM software as a tool that can help by sorting contracts by the type of pricing increase and other indicators like that.
“We can pull these data points out of contracts automatically, without needing humans,” he said. “When does it expire? Is there an automatic renewal? Is there a price escalation clause or a rebate clause or an early-pay discount?”
Ting said he did this kind of work manually when he worked in a law firm. “ I was charging $400, $500 dollars an hour,” he said.
He would look through a 300-page document and summarize the key terms for stakeholders in a cover memo. “Wouldn’t that be much easier to do with technology instead of having to pay a lawyer?”
Small-scale contracts
For companies that are going through contracts manually, it’s not uncommon to limit the searches to those with the biggest dollar amounts, like anything over $100,000. For the rest, the contracts are left to renew automatically at whatever price increase because the manpower isn’t there to go through them all.
“They just assume that as a cost of doing business,” Ting said.
By taking the automated approach, he said, general counsel can go through all of their contracts, no matter how small the dollar amount, to find those that can be renegotiated.
“That's where the GC becomes strategic,” he said. “By having data analytics, GCs can impact the bottom line.”
