The last few months have been challenging, but also a chance for companies to review their current marketing activities and suppliers.
We often engage with new clients when they are unhappy or feel they have outgrown their current supplier. One of the issues they run into is that they have long terms left to go on their contracts, sometimes up to 18 months. But are long term contracts bad, or even avoidable?
Why do suppliers request long-term contracts?
The investment it takes to work with a new client is significant; the cost is often higher than the return for an initial period. Depending on the size of the contract, it could mean employing more people, investing in new technology or services. Companies need to protect themselves and not risk a high upfront investment for a neutral or negative return.
Many suppliers request rolling contracts or auto-renewal terms. The benefit of this is that you don’t need to get into distracting and lengthy contract discussions every renewal date. The downside is that if you are not aware of this, you could end up in a longer-term contract than planned.
Why would a client approve a long-term contract?
Often contracts are dealt with by procurement, not by the marketing teams using the services. Last year I attended an enlightening session by someone that had a lengthy career in procurement. They have targets to hit, and quotas to reach like any other part of the business, and signing an improved deal on a 3-year contract might well be part of that. It’s also positive that an advertiser might want to commit to a long term engagement with a supplier; it shows loyalty, trust and the desire to build a long term partnership.
There is an alternative view, that if you are doing an excellent job for a client, why do you need a contract term, they won’t want to leave you?
Contracts are not a problem when things are going well; they only become a problem when things are not going so well, for either advertiser or supplier. So what’s the answer, how do you create a term length that is acceptable to all parties?
A quote I always remember is “In a good negotiation, both sides are unhappy”, the point being that to build a good relationship, both sides have to make compromises.
Key areas to consider when approaching contracts
It’s fair for a supplier to ask for a term that protects their business and investment into your programme, it’s also reasonable for advertisers to have protection if things don’t go to plan.
A few areas to consider for current and future contracts:
- Is there an auto-renewal or rolling contract term? Know the date this triggers from and what conditions are in place after that date (i.e. termination, contract term).
- Be fair in your compromises. You want a supplier that is motivated and able to perform for you. If one party feels more beat up than the other, it doesn’t bode well for a future relationship.
- Ensure your pricing is fair, cheap isn’t always best. As a general rule, the more you invest, the better outcome you get.
- Set service level expectations and KPIs from the start. Everyone is aligned and clear on what the measure of success is.
- Check your out clause, especially if this is a new service or partner. Make sure you can get out if things are not going as planned, such as an early break clause or failure to deliver the services to an agreed standard or KPIs.
- Consider the future implications of the contract term. While it may feel great now, what if that changes, what if your team changes? Think about elements you can weave into the contract to mitigate these issues.
- Use a long-term commitment to your advantage; ask for a discount on price or additional services.
Ultimately, the purpose of a contract is to protect businesses and people. Understanding what both parties want from the relationship, what your compromises are and measuring risk are crucial to getting to an agreement which works for everyone.