Great dogma of contract negotiation
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Negotiation Anatomy™
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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.[1]
There is an old truism, however: you get what you pay for. If you pay peanuts you get monkeys. 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[2] 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. Now, it’s an open point whether an ISDA Master Agreement should still be so complicated[3] 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 making that case requires subject matter expertise (legal and credit) that a management consultant does not have. Most lawyers and almost every credit officer you ever meet will swear blind that it really is a matter of life and death that we maintain that cross default and those complicated downgrade triggers, and the management consultant doesn’t have the technical chops to gainsay such an assertion.
So instead, the whole operation, replete with its tortured prose, over-engineered legal terms and fantastical credit experctations, is lifted and shifted from a high-cost jurisdiction (where at least the people concerned have a half-chance of understanding the Byzantine concepts they are expected to negotiate) 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 skill escalation is a more frequent occurrence than previously; due to the remote location, it is more protracted.
So, to recap: shifting the negotiation process from skilled (but expensive) negotiators in London and New York to less skilled negotiators in low-cost jurisdictions removes autonomy and increases the frequency and duration of horizontal escalations.
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References
- ↑ While it is true that neither have I, I can at least point to anecdotal evidence and the basic rules of supply and demand.
- ↑ And its — well — low incomes, you know?
- ↑ In your humble correspondent’s view, the standards required by most institutions of their master trading agreements are absurd — this whole wiki is a testament to that.