LegalHub: theory

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The reg tech proposition is obvious: replace this laborious, error-prone, analogue process with an authenticated, governed, audited, straight-through processed, fast online digital interaction. So why doesn’t it work, and what can we do about it?

Reg tech’s shortcomings present in different ways but boil down to the same thing: rent-seeking.

• It’s iatrogenic: Because the provider’s primary interest is its annuity, the cure tends, in practice, to be worse than the disease.
• It’s expensive: Every participant is in it to make a turn. Their interest is in participating, and making a turn first, and only then in the “desired outcome”.
• It’s inflexible: Its proprietary nature means reg tech tends to be tightly controlled, top-down managed and targeted abstractly at a perceived demand and an anticipated future state, neither of which will neatly address the exact problem a specific user is trying to solve as that problem develops. Therefore reg tech, requires continual maintenance. And maintenance means rent.
• It’s prone to obsolescence: Being high-maintenance makes it innately prone to unplanned obsolescence. The future imagined by thought leaders of the reg tech space was forged in the past. As with other imagined futures in the past — flying cars, self-cleaning tablecloths, colonisation of Mars — predicting the future is hard. The answer is not to try: to leave the architecture open to users to imagine as they go. But “leaving everything to the user” doesn’t leave a rentier capitalist much to do, so rent-seeking businesses constrain their businesses, requiring paid-for development, and consigning themselves to ultimate obsolescence.
• It’s prone to competition: To treat what should be a utility as a profit opportunity exposes you to another source of obsolescence. Competition. How can you know your platform will be the platform? How do you keep that position once you’ve got it? Friends Reunited ring a bell?

The problem

Rent-seeking

We’re yet to find a reg tech provider who has figured out a business model for how to be paid, other than by extracting rent. This they commonly justify by reference to the value their product provides, which they equate to the total cost of labour and infrastructure it saves.

Historians, and lovers of crushing irony, will note the resemblance of this notion to the labour theory of value — that the economic value of a service is equals the total amount of labour required to produce it — or in this case, that you would have to hire to produce it without this new piece of kit.

In any case you might wonder how they can know how much money their technology will save a specific client, much less what the indirect costs of implementation of their “solution” will be.

But should we be so fixated on cutting the wage bill of a handful of school-leavers in Sarajevo, that we will pay a guy in Old Street for code he bought from some school-leavers in Bucharest, if he can then intermediate our process for the hereafter, adding nothing but the cheerful chime of a clipped ticket each time his machine spits out another document, or while it collects dust on his server?

Wasn’t the promise of the information revolution something grander than that? Wasn’t stuff meant to be free, not just marginally cheaper and more complicated?

The cure and the disease

Iatrogenic — it is a cure that is worse than the disease — in that in promising to alleviate the tedium of the boilerplate, pernickitiness and low-level wrangling over representations and warranties, technology throws open the window wide on a panoramic vista of unlimited low-level tinkering. The cost of infinite pedantry has dropped through the floor.

Before the information revolution, the anality of contracts was bounded by any lawyer’s natural capacity — deep, to be sure, but ultimately finite — to hold a superstructure of piecemeal salutary conditionality in her head. With a laptop and an adeptness with JavaScript, that limit has now been taken away. Contracts can be infinitely pedantic, variable, customisable. We can cater for any predilection, whim, doubt or proviso. We can find and propagate Biggs constants at will. We can put one in every line, if that is our wish. We can command that a space between words must be italic. When the great J. M. F. Biggs first isolated and documented a Biggs hoson in the wild — the celebrated bold full stop in a “Boats” repackaging — it was a once-in-a-generation event.

This should not be a surprise. The invention of the word-processor did not shorten legal discourse. The arrival of email did not truncate the nature or volume of our communication. Andy gaveth, but it was not Bill, but our innate gift for verbal diarrhoea that tooketh away.

Note the misalignment of interests here: those providing the “cure” have a direct incentive — in fact, a need — to continue helping, because that is how they get paid. They design their disintermediating machines to only disintermediate so far: users must remain sufficiently dependent on their code, their systems and their expertise, that they are obliged to pay an annuity for it. To pay rent.

The fault in our stars

Our friends in the management consulting profession (also rent-seekers, needless to say) encourage this disposition through the dogma of outsourcing. Here the gist is: if you have a convoluted process that is costing you time and money, outsource it, to someone better specialised, incentivised and remunerated to do it, who can do it cheaper, better and — thanks the magic of Adam Smith’s invisible hand — at the optimal cost. In this way do we entrench rent-seekers, by building an entire (rent-seeking) infrastructure around this newly articulated process — with its own middle management, operations, compliance, internal audit, procurement, you name it — without ever asking whether the process was that important in the first place.

But the new machinery is so costly to remove, that it is easier just to live with it, from time to time tweaking it, optimising it, adjusting it, relocating it from a service centre in Bangalore to one in Manilla, every little fiddle keeping that entire bureaucratic iron lung fully engaged. And no management consultant will tell you the obvious truth: had you decomplicated the process in the first place — just got rid of it — perhaps giving away some peripheral protections in the mean time, none of this would have been necessary.

But, but, but! The risk! The organisation must be protected!

The solution

So where does this leave us?

The cross default challenge Here is a challenge: one day, out of the blue, ask a risk officer to explain, exactly, what cross default is and how it works. On the spot. No phone-a-friend. No ask-the-audience. Expect blank looks and notebooks. Now ask yourself this: it it better to keep that peripheral right to cross default with all the tedious arguments it invites — whether triggered by default or acceleration, as to the level and symmetry of thresholds, what counts as indebtedness and whether to include derivatives or deposits, what sorts of grace periods should be allowed, whether to carve out operational errors or settlement failures — is it better to keep all of that fidgetery and move the people who handle it out to Hanoi — or just strike it out of your contract forms altogether? Does it change your answer to discover that a cross default right has never been exercised in the history of the derivatives market? As long as cross default seems like a competitive advantage; as long as we think our boilerplate is some kind of proprietary technology, we consign ourselves to a permanent arms race with our own shadows.

Satisfaction is unsatisfactory

Mick Jagger and Keith Richards composed Satisfaction in 15 minutes whilst sitting by a pool in Florida. They are still, 55 years later, reaping colossal dividends from that inspired quarter hour. Fair play to them: this may be what the law prescribes, but it is bad law and it is a horrible model for reg tech.

Rent-seeking encourages us to squirrel away verbal mush on the grounds that it is “proprietary technology”: rentiers straight-facedly say “my fifteen minutes of effort must perpetually be rewarded.”

This is a profoundly awful disposition. There is nothing — utterly nil — that is special, clever or even desirable about legal boilerplate.

To behold boilerplate is to witness marginal utility at the point it touches zero. Legal negotiation is the dreary formality one must go through to get to the heart of the deal. The same goes for that ISDA schedule — yes, friends, the whole god-forsaken thing, even the customised ATEs. No-one cares. No-one likes it. No-one wants it. It is a regrettable externality; a grim fact of life. It is not the sausages; it is the mask you need to put on so you can go into the supermarket and get the sausages.

Extended phenotypes and the mercurial arrow of causation

So these feedback loops drive us away from the place we want to go. Instead of a self-service ethos of simplified, standardised, user-friendly components that, though continual refinement, are honed, standardised and simplified, we have processes which keep their existing convolution, get worse, all the time supporting a more elaborate infrastructure that purportedly is there to support them.

Recall once again, Yuval Harari’s observation about the domestication of wheat, and apply it here: is your reg tech implementation and its attendant support structure some kind of extended phenotype that has evolved: a marvellous beaver dam; an adaptation wrought magically on the environment so delicate but vital process can survive?

Or is it the opposite? Is the process it purports to fix an adaptation, an extended phenotype upon which the whole rent-seeking infrastructure depends to survive?

Which way does the causal arrow flow? Who domesticated whom?

Staying with this process is not a zero-cost option. This infrastructure is monstrously expensive. Every year, it costs tens or hundreds of millions of dollars. For each firm. Contract negotiation is not a profit centre for anyone but its practitioners.

The pitch

Spend good money here, instead of throwing it after bad money you’ve spent there. Design an open source, open-architecture system with feedback loops that push us towards a simplified, standardised centre, rather than away from it. Emphasise transparency and commonality, not proprietary technology. In essence, build a GitHub for legal terms.

See ClauseHub for a high-level technical articulation of the platform.

See also

• Outsourcing
• Service level agreement
• Management consultant
• Subject matter expert
• Metrics
• ClauseHub: theory
• ClauseHub
• Legal services delivery
• Why is reg tech so disappointing?