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The many faces of flexibility: Weighing up short and long-term contracts

For a lot of companies, one of the key things when signing long-term contracts is flexibility – especially for small businesses, where it might be difficult to predict what the future will bring.
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When choosing a provider, one of the first decisions a business needs to make is whether to sign up for a fixed term contract. What are the pros and cons of short and long-term contracts?

For a lot of companies, one of the key things when signing a new contract is flexibility – especially for small businesses, where it might be difficult to predict what the future will bring.

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You don’t want to sign your business up for a three-year contract, only to find that it doesn’t suit your needs a year down the line. On the face of it, it would seem that the solution is to agree short-term contracts, and shop around frequently for the best deals. However, as with many things in business, it’s not quite that simple. The best deal for one business could look totally different from another.

Pay-as-you-go, or fixed term?

According to a report from Ofgem, the majority of businesses (93 per cent) have a fixed term contract for gas and electricity – that’s opposed to pay-as-you-go models. This figure does not vary much by business size, but is higher amongst businesses within the transport, food and accommodation sectors (97 per cent) and lowest within business services sectors (90 per cent).

Although pay-as-you-go means only paying for what you use, this suggests that businesses are more likely to value the convenience of a monthly payment and consistent supply. In addition, it is worth noting that pay-as-you-go energy is often charged at a higher rate in the first place.

The report found that, of the businesses with fixed-term contracts, around 32 per cent had contracts for one year, 34 per cent had them for two years and 20 per cent had them for three years.

Again, there is little variation by business size, but companies in transport, food and accommodation sectors are more likely than average to have five year or longer fixed-term contracts (seven per cent compared to three per cent of all businesses).

“We have a fixed term contract with our energy supplier.  We use a lot of power to run our operations here in the office, so we need to know we’re not going to be overcharged at any point.  Fixed term contracts also make for easier tax returns,” explained Thomas Spires at See Your City.

So, what does that mean for flexibility? What kind of contract would give your business the most freedom – short or long-term contracts?

Committing to a provider

In our switching suppliers article, we explored why it is important to keep track of your contracts. Every energy contract has a switching period – if you fail to terminate the contract or re-negotiate a new deal during this window, your deal gets rolled over onto a new and, often, more expensive tariff.

Around 35 per cent of businesses that have shopped around in the last 12 months believe that savings do not always materialise when switching. However, 46 per cent of frequent switchers (classed as having switched providers at least three times in the last five years) disagree.

In other words, keeping track of your contracts is common sense, and switching will often result in significant savings – but you can’t bank on it.

Signing up to short contracts might keep you flexible, but it doesn’t guarantee any savings boosts. In fact, depending on the resources at your disposal, there’s an argument to be made for increased flexibility from longer-term contracts.

For some smaller business owners, signing up to contracts a year at a time, researching new providers and renegotiating deals year after year might be a drain on time and resources that they can’t afford.

In addition, given that it’s possible the process won’t even save any money, many might decide not to switch and to sign up for a longer-term fixed contract. This method provides certainty for the business to plan for the years ahead which, despite being locked in to a contract, giving each the flexibility in other areas.

“We prefer to secure long-term contracts with our energy supplier because it’s very important to be able to forecast costs. We need to know whether our current profit is going to be affected by cost increases later down the line,” said Spires.

“This way my input is rarely needed, and I can focus on customer relationship management and innovation.”

Find your fit

Ultimately, what works for your business is likely to be a highly personalised thing. Do you want flexibility in the form of short contracts that you can opt-out of after a year, or do you want reliable, fixed costs that you enable you to plan for the years to come with the certainty of long-term contracts?

On a final note, consider this: the top reason for not switching contracts was a general satisfaction with the current supplier, cited by 77 per cent of non-switchers. Of those that did switch, the average number of suppliers contacted, either directly or through a broker, was four.

The moral of the story is that if you are looking to switch, make sure you shop around for real savings – don’t let it be a fruitless exercise. On the other hand, if you’re happy with the service and the price, there’s no need to switch and longer-term contracts may suit you down to the ground.

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About Author

Letitia Booty

Letitia Booty is a special projects journalist for Real Business. She has a BA in english literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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