Great dogma of contract negotiation

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In which the curmudgeonly old sod puts the world to rights.
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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 negotiating ISDA Master Agreements had become quite the cottage industry. Today any good-sized institution will have literally hundreds of people in onboarding, AML, credit sanctioning, legal and documentation unit ISDA Master Agreements single-mindedly devoted to generating new master trading agreements.

Now we know management consultants and COOs are good at spotting large aggregated costs in an organisation. That is what they do. Some would say that, for better or worse, 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 taken a chainsaw to its negotiation operation, slavishly following the simplistic urgings of a McKinsey or a PWC. Most have done this many times, as it is a favourite gambit of an incoming COO.

Yet contract negotiation remains a giant sinkholes of confusion, resentment and nonsense in modern finance. With ever new initiative 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.

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. Set up in low-cost jurisdictions. Downscale.

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 research to prove out that conclusion: it was taken as read. It just isn’t true.[1]

There is an old truism: 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 into it. 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 simplifying a complex legal document requires subject matter expertise[4] 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.

See also


  1. Okay; neither have I. But at least I have anecdotal evidence and the basic rules of supply and demand on my side.
  2. And its — well — low incomes, you know?
  3. In your humble correspondent’s view, it should not: most institutions impose absurd credit standards — this whole wiki is a testament to that.
  4. Legal and credit.