LegalHub: theory

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So let us state the manifest failings of reg tech: rent-seeking and iatrogenics.

Rent-seeking

Rent-seeking in that no reg tech provider has figured out a business model for how to be suitably paid, other than by extracting rent. This they commonly do 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 one would be required to hire to produce it without this new piece of kit. Why “ironic”? Because it is odd to hear a bedrock intellectual foundation of Marxism babbling from the mouths of small-time rentier capitalists, that’s why.

Cynics might wonder how these reg tech thought leaders can know how much money their technology will save, and how much time they have spent calculating the indirect costs of its implementation.

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 the price is that he can 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 even just while our documents collect dust on his server (this is called “hosting”)?

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?

Iatrogenics

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 took 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: it must still remain sufficiently dependent on their code, their systems, their expertise, that the it clients 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!

Here is a challenge: one day, out of the blue, ask any of these people who insist that it is important 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 default or acceleration, as to level and symmetry of thresholds, what counts as indebtedness, what sorts of grace periods should be allowed, whether to include derivatives, deposits, or to carve out operational errors or settlement failures, and move the people who handle this and like issues out to Hanoi — all of that to cater for a contingency that has never arisen in the history of the derivatives market — or just strike it out of your contract forms altogether? 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.

So where does this leave us?

Rent-seeking encourages us to squirrel away verbal mush on the grounds that it is “proprietary technology”: we straight-facedly say “my fifteen minutes of effort, wherein I rendered a Contracts (Rights of Third Parties) Act clause, must perpetually be rewarded.” This is a profoundly awful disposition. Sorry, folks, but there is nothing — utterly nil — that is special, clever or even desirable about legal boilerplate. It is to witness marginal utility at the point it touches zero: it is the dreary formality one must go through to get to the heart of the deal. The same goes, my friends, for your 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 act; it is the rubber johnny and the duly witnessed consent and disclaimer you need before you get on with it. It is the mask you need to go into the supermarket.

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 further 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 the rent-seeking re-intermediated support structure that has evolved an some kind of extended phenotype: a beaver dam; an adaptation wrought on the environment to ensure the process can survive, or is it the opposite? Is the process is an external adaptation that this rent-seeking infrastructure depends upon to survive. Which way does the causal arrow flow? Who has domesticated whom?

Now bear in mind this: staying with this process is not a zero-cost option. Staying with this infrastructure is monstrously expensive. Every year, this is costing you tens or hundreds of millions of dollars. Each. There is good money to spend to stop you throwing other good money after bad. Contract negotiation is not a profit centre for any client. It is a cost.

What to do

Design a system with feedback loops that push us towards a simplified, standardised centre, that emphasises transparency and commonality, not proprietary technology. In essence, a GitHub for legal terms:

• A centralised hub with free, unlimited access for everyone whether as a user or a contributor.
• A phased approach moving gradually from traditional text-based contracts — how folks do things now, for better or worse — to networked, authenticated smart contracts.

• Day 1: Purely a text repository to enable people to do more easily what they already do today.
• Day 2: Expect development to be sloooooooow at first. So design a permissive, developable architecture rather than designing a fixed structure now with an future state in mind. We are hopeless at predicting the future.
• Day 100: Expect usage to develop the system iteratively, like an adaptive Ouija board, according to demand.

• Give content away. Freely. Allow people to use all of your stuff without limit. The more of your stuff is on there the greater the chance it will become a standard.
• Be permissive: Allow people to copy, derive, refine and improve without limit. Assuming it is version controlled you can keep your model. But allow the world to make it better.*Find strategic partners. Especially firms who nominally have conflicting interests to yours. So: (i) competitors; (ii) buyside firms; (iii) small firms; (iv) users
• Pay for it. All of it. Pay a lot. Consider this a down-payment on the savings you will make when you unwind the military-industrial complex that is your outsourcing arrangements have become over 20 years. Encourage other strategic partners to pay too, but no penalties if they don’t. The more you all pay, the better the product will be. Pay to make it easy for anyone to engage and use.
• Reputation management techniques to surface most popular forms, segments, components.

See also

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