I'll have to test Diplomacy a bit, and see to what extent it allows players to game the system by gaining things without having to fight, or getting out of fights. I'll take a look at when working on build 1.07.
From my experience Diplomacy isn't all that powerful from the player perspective. You can send an emissary to "Conclude a nonaggression treaty" which amounts to either a 20 or 30 day truce between the two factions, if the other faction agrees. In my games, most times they refuse. Then you'll see where other AI factions are concluding trade agreements, defensive pacts and alliances. I've never been able to do this, even while test cheating I spent 120000 denars sending gifts to other factions. One choice is you spend 6000 to send horses to the faction and get 2 or 3 points to the relationship. You can also handover fiefs for 5 points IIRC. So I had 55 - 65 points with a faction and I had the nonaggression treaty in place but there were no other options to do trade agreements or the like. Perhaps I'm missing a step somewhere but it seems those agreements are AI specific.
Longterm, I think you do more fighting in Diplomacy because once your own faction is 1/3 of the map, or so, you're lucky to have one faction as a friend as the others you've been fighting create alliances and suddenly instead of warring with two, you're at war with all but one and in some cases at war with all of them. You get a peace offer and take it, but then an alliance is reissued and suddenly two days after making peace you're back at war with that faction.
Diplomacy is great for delegation within your own faction. At least, that's what I love about it. Pay someone to gather recruits for you at over double the costs I think, you risk losing the recruits to various scum, plus you can't pick and choose this way so you may end up with sarranid skirmishers when all you want from them are troops from the mamluke branch. You can send gifts to lords and ladies, but this isn't an easy task because you must gather the goods that the system will use in order to send them. Also, you pay to send them and then risk loosing the caravan to the various scum wandering around. Three Oils to a lord gets you 5 points added to the relationship. That can get very expensive as does three velvets to a lady for +5, so without test cheating, I'd never even consider sending those gifts.
Among lots of other minute things, there are also government settings available to the player and AI, but I've not seen any real differences in economy nor the troops that lords generally employ. I think it boils down to faction relationships based on government choices, but I could be wrong!~
For me, the best qualities from that mod are the customized patrols where you can pick troop type and quantity of the patrol from the garrison and where to send it, the treasury system so you aren't forced to carry your fortune around with you... imagine that... and the ability to release lord prisoners for either honor gain or because the faction is gone and you're stuck with them. Recruiters are great, but you already have that covered, albeit differently.