Konexo, the ALSP arm of Eversheds Sutherland, has formed a partnership with LikeZero, a new contract analytics business that came out of Big Four firm, PwC, and which wants to make sure we never see another 2008-style financial crisis.
The focus of the relationship will be on ‘increasing the accuracy of derivatives data used by financial institutions to decrease the risk of global economic and market collapse‘. Derivatives contracts currently represent a market valued in the trillions of dollars worldwide.
The key point is that the 2008 economic crisis was caused by little understood financial terms in complex, high value contracts that banks and other institutions held.
Or more precisely, it was caused by underperforming mortgages being packaged into what were called collateralized debt obligations (CDOs). These CDOs were a mix of both good debt and debt that could easily go bad, inexorably then leading to a default on the loans and collapsing the value of the whole contract. The mixing of good and risky debt was based on the idea that house prices can only ever go up, which in hindsight now seems to be nuts, but in the 2000s was taken as gospel.
The banks had enormous amounts of these toxic contracts, and to make it even more systemic they were also insured, largely without the insurance companies really understanding what they were insuring.
When the housing market in the US slowed in 2007 these CDOs started to come apart, which then created a snowball effect that led to the collapse of Lehman Brothers and banking crises across the world.
The snowball effect was so brutal because no-one knew who held how much debt – that information was buried in these CDOs and the banks simply didn’t have a way of finding out what the contracts all meant quickly enough. So, bankers and investors did what people always do when no-one knows what’s going on – they panicked.
Those banks which looked to be most susceptible were rapidly starved of support by the rest of the market, leading to what could have become a systemic banking collapse. Eventually Western governments stepped in, bailed out the banks, flooded the system with new cash, and stabilised the economy – which then led to a long period of budgetary austerity.
But…..it all started because people were ignorant of the risks inside their contracts and this was because the contract data was ‘out of sight and out of mind’. And this is what LikeZero is focused on. The company itself came out of PwC in late 2020, when the Big Four firm’s eDAM group spun out to create London-based LikeZero, which is headed by Michael Lines.
A key part of Konexo’s role in this partnership, the group said, is to review and capture data on bespoke or nonstandard clauses that LikeZero’s software surfaces from complex legal agreements. ‘These clauses are vital to extracting invaluable derivatives data used to reduce risk of poor investments that contribute to future economic and market collapse,’ they added.
The partnership has already also reduced costs and time taken to complete data extraction by up to 40%, the legal group added.
LikeZero also does seem to be a bit different from your average contract analyser. They have a strong focus on extracting data in a very structured way so that clients can find it again easily and have real visibility of what a complex derivatives contract really means. It also puts a very strong focus on the human element and certainly is not pushing the idea that tech can solve all the problems – see below.
Or, as they put it: ‘We transform legal documents into Smart3D contracts, which are fully digitised contracts with the added dimensions of time and meaning.
‘We rapidly analyse and collect data from documents for any use case at any time to provide necessary reporting and trusted data sets to manage risk. Our Smart3D contracts also allow you to manage known lifecycle events with confidence and move to ‘data first’ processing where changes to contracts can be made as an agreed data event rather than a long and costly legal process.’
In an extensive statement, Imogen Philp, Director of Client Services Delivery, LikeZero, said: ‘As a technology company dealing in some of the most valued data for global financial markets, we want to leverage human expertise to interpret data, rather than a machine.
‘Our proprietary data mining and matching techniques mean that where data has been captured programmatically it does not need to be checked by a human. We apply human interpretation on those clauses that have not matched, and this ‘intelligence’ is then stored in the system for re-use.
‘That’s why we needed Konexo’s legal operational know-how to be able to continue to refine and grow the breadth of the bespoke clauses we surface for in contracts, providing clients with improved value and trusted data sets.’
‘Getting accurate derivatives data is vital to reducing risk for banks, private equity firms and investors across markets. At this time, when the globe is tipping towards different and various economic concerns, a partnership such as this can provide those who have their hands on the steering wheel of global economies with better navigational tools to negotiate themselves out of trouble.
‘The derivatives data created by this partnership is already being used by clients from the likes of Acadia (formerly AcadiaSoft), a market leading risk management platform for the derivatives industry, enabling over $1 trillion in collateral exchanges daily for over 1,600 firms.’
So, there you go. You may not know they are doing it, but LikeZero is quietly beavering away in the background trying to make sure we never have another Lehman Brothers.
To conclude, Brett Aubin, Head of Projects at Konexo, added: ‘The mining of accurate derivatives data will be vital to stable economic recovery across the globe. Having accurate data to be able to confidently draw solid conclusions is critical to banks, investors, and in turn, the wider business community, which is why this partnership is so significant.
‘By using our own legal capability to refine the derivatives data that LikeZero mines and combining it with our strategic business skills, LikeZero is able to concentrate on evolving the software it loves, while we strengthen the foundations and structures of the innovative business it has created. Using Konexo’s legal services model has also cut LikeZero’s project costs by 30-40%.
‘For us, this is a project that showcases how the right legal operational knowledge can add resilience in any climate. This partnership has a very important place in the future of financial markets and we’re looking forward to building on our relationship with LikeZero.’
Overall, a great example of a law firm legal delivery team and a tech company getting together to provide a really valuable service.
P.S. if you are also interested in the 2008 crisis, then check out ‘The Big Short’ if you don’t already know it. It’s a brilliant book, and also an excellent film, that really captures the insanity of having trillions of dollars in contractual obligations that hardly anyone actually understands.
P.P.S. one could argue, and this site has a few times, that the 2008 crisis was instrumental in helping to accelerate the growth of legal tech, especially NLP tools, although this is also related to the ‘New Normal’ for legal expenditure that followed the downturn caused by the crisis.