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 twenty or thirty grand with the finest finance lawyer money could by 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 an hour while we found out.

Before long, ISDA Master Agreements were common, and their negotiation within financial service firms had been quite the cottage industry. Any good-sized institution will have literally hundreds of people devoted to producing these beasts: in onboarding, AML, credit sanctioning, netting and negiotiating ISDA Master Agreements and like-minded master trading agreements.

Management consultants and COOs are good at spotting large aggregated costs in an organisation and the contract negotiation process sticks out like a butcher at a chickpea curry stall. There is not an investment bank in town who hasn’t taken a chainsaw to its document negotiation operation — most many times over the last 15 years — and yet contract negotiation remains one of the massive sinkholes in modern finance. The process gets more bogged down, more frustrating, and more expensive.

Ask me why. Go on, ask me why.

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

They diagnosed high personnel and unit costs in producing what were (by now) standard form customer agreements. Answer: to replace the personnel operating the process and negotiating the agreements with cheaper personnel, in low-cost jurisdictions.

Low-cost jurisdiction implies that, all other things being equal, the quality of the personnel stays the same: just the unit cost that is cheaper. No-one commissioned any serious research on that topic before reaching that conclusion — it was taken as read — and it just isn’t true. If you pay peanuts you get monkeys.

There is an old truism, however: you get what you pay for. Arbitrage opportunities do not last long in any buoyant market, as any banker will tell you.