Great dogma of contract negotiation

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Once upon a time an ISDA Master Agreement was a new and dangerous thing, and one would drop thirty grand on the finest finance lawyer money could buy just to make sure one’s goolies were safe. It was a wonderful period of discovery for we young associates, trying to figure out what on earth Automatic Early Termination even meant, but charging some finance director £350 750 an hour while we found out.

Before long, ISDA negotiation had become quite the cottage industry. Today any good-sized institution will have hundreds of people in onboarding, AML, credit sanctioning, legal and documentation unit ISDA Master Agreements single-mindedly devoted to generating new master trading agreements.

Enter the management consultants

Now we know chief operating officers are good at spotting large aggregations of cost. That is what they do. Some would say, for better or worse, that is all they do. For some years now, the contract negotiation process has stuck out like a butcher at a chickpea fudge stall, so there is not an investment bank in the world which hasn’t repeatedly chainsawn its negotiation operation, slavishly following the Taylorist urgings of a McKinsey or a PWC.

But, like a hacked-patch of stinging nettles after a wet spring, the documentation unit just keeps growing back. The negotiation process remains one of the giant sinkholes of confusion, resentiment and nonsense in modern finance, with every new initiative more enbogged, frustrating, slow and costly.

Ask me why. Go on: ask me why.

All because the management consultants don’t observe basic principles of their own discipline. That is why.

It is a cinch to diagnose high unit costs: these are standard form customer agreements, right? Surely we can do this cheaper?

Answer: replace the current negotiation personnel with cheaper ones. Offshore. Rightsize. Downscale.

Offshoring — polite chat for “establishing a sweatshop in a low-cost location along way away” implies that, all other things being equal, the quality of the personnel stays the same: just the unit cost is cheaper. But no-one commissioned any research to prove out that conclusion: it was taken as read.

It just isn’t true.

Monkeys, peanuts

There is an old truism: you get what you pay for. If you pay peanuts you get monkeys. Legal expertise is not fungible. (If it were, would anyone hire Linklaters?) Arbitrage opportunities do not last long in any buoyant market, as any banker will tell you.

Instead, low-cost jurisdictions offered an unlimited supply of young, well-educated and ambitious graduates with boundless energy, a yen to get the hell out of their hometown and seek their fortunes somewhere else, anywhere else, and in any case, no subject matter expertise whatsoever. These kids work hard, but you only know what you know.

This might not matter if the subject matter did not need specialist expertise. But, as it is, it does. The ISDA Master Agreement is a tortured piece of legal technology, and that’s before the institutions have injected their idiosyncratic, paranoid and often senseless credit standards into it.

Now, it’s an open point whether an ISDA Master Agreement should still be so complicated — in JC’s view, it should not: this wiki is an open letter to that effect — but the fact remains that it is. And no management consultant has ever thought of simplifying the legal and credit content of the agreement before offshoring it to give the poor kids a chance.

Why? Because simplifying a complex legal document requires subject matter expertise that no management consultant has. Most lawyers and almost every credit officer alive will swear blind that it really is a matter of life and death that we maintain that cross default, complicated downgrade triggers and fifteen Additional Termination Events, and even if our one doesn’t the counterparty’s will, and in any case some McKinsey analyst simply doesn’t have the technical chops to gainsay that assertion.

So instead, the whole operation, replete with its tortured prose, over-engineered legal drafting and fantastical credit expectations, is lifted and shifted from a high-cost jurisdiction (where at least the people concerned have some institutional knowledge, some industry experience and a half-chance of understanding it) to one where the poor kids have no chance. As a result, process managers must create playbooks and negotiation guidelines which the low-cost negotiators must follow as if colouring by numbers. If issues arise that are not covered in the playbook the negotiator must escalate. Due to the lack of expertise, escalation happens more; due to the remote location, it is more protracted.

So — ?

Problems are easier to diagnose than solutions are to prescribe. But it is not hard to see that the contract onboarding conundrum has not been solved, notwithstanding three decades of increasingly strident Taylorisms and at least one of confidently-piped legaltechbros technodreams. The state of contracting is worse than ever. What should we take from this? Anything you like, readers, as long as the starting point is the current orthodoxy hasn’t worked.

Contract negotiation is not a mathematical riddle. It is not a technology play to be solved. It is a social and cultural problem. It is also central to your client relationship management effort. Throwing I7 processors at it won’t work any better than delegating it to warehouses of school-leavers in Bucharest.

See also

• Seven wastes of negotiation — Toyota comes to ISDA.
• Dogma