More and more heads of legal departments are aware that maintaining the status quo is not future proof and are turning to legal operations as a potential solution. Within legal operations, entity management plays a crucial role. But what exactly is entity management, and why is it so important for legal departments? In this blog, we will explore the core principles, benefits, and best practices of entity management which were discussed during our executive roundtable in September 2024. A special thanks to Jan Bosmans and Rozemie Defrancq for their valuable input.
What is Legal Entity Management?
Legal Entity Management (LEM) is the process of managing and maintaining the legal, regulatory, and compliance status of a company's entities, regardless of whether they operate in one or multiple jurisdictions. This involves corporate governance, adherence to local and international regulations, and managing key corporate documentation.
Entity management can be centralised (which is often the case) or decentralised, depending on the company's needs. In a centralised approach, all legal entities are managed from a single system, promoting consistency and reducing administrative burdens. The downside is that those responsible are not present at the local frontline, making good communication lines crucial for success. A decentralised approach can be beneficial for organisations with highly diverse activities or where local autonomy is a priority.
Why is Entity Management Essential?
A well-developed legal entity management programme offers several benefits:
- Enhanced Compliance: Meeting legal obligations is vital, especially for businesses with multiple entities across various jurisdictions. A centralised overview of all legal obligations helps prevent fines or penalties for non-compliance.
- Risk Mitigation: Effective entity management enables the early identification and addressing of risks. This not only helps minimise operational risks but also supports a robust governance structure.
- Streamlined Processes and Cost Savings: Automating repetitive tasks and centralising data lead to efficiency gains, saving both time and costs. One of the large companies present at the roundtable even mentioned it saved 2.5 FTE thanks to LEM. Insights from the recent roundtable highlighted that even smaller legal departments benefit from automating entity management to reduce overhead.
- Better Decision-Making: With a structured, up-to-date overview of the legal status of all entities, business leaders can make better-informed decisions, particularly in strategic initiatives like mergers, acquisitions, or expansions into new markets.
When Should You Start with Entity Management?
The answer is simple: it is never too early to start with entity management, but the approach depends on the organisation's needs and maturity. For all companies, structuring all the information that needs to be kept is crucial. For small and medium enterprises (SMEs), simplicity is often key. This means beginning with basic software tools or even spreadsheets to track their entities, as long as these methods effectively meet their requirements. Larger organisations, and especially multinationals, require a more advanced approach. They use specialised software solutions for automation and centralised control. As discussed during the roundtable, the complexity of large structures can only be managed by effectively using advanced technologies and a dedicated team.
Best Practices for Effective Entity Management
- Create Clear Policies: Establishing clear rules for managing legal entities ensures that everyone in the organisation knows what is expected of them. E.g. provide local people with a list mentioning that they need to inform you in case the local legislation changes in a way that impacts LEM.
- Centralise Data Where Possible: Storing data in a central location allows the legal team to work more efficiently and respond more quickly to regulatory changes.
- Automate Routine Tasks: Manual tasks, such as updating corporate records or preparing annual reports, should be automated to reduce errors and free up valuable time for more strategic activities.
- Regular Audits and Assessments: Conducting regular internal audits helps keep compliance issues under control and ensures continuous improvement of processes.
- Proactive Collaboration: Legal entity management is a multidisciplinary activity. Involving teams such as IT, finance, tax, compliance and HR is essential to ensure all aspects of entity management are well-covered and that compliance standards are maintained.
Which LEM tool to use?
When choosing a Legal Entity Management tool, organisations are often faced with the decision between dedicated LEM software and a "DIY" approach using general-purpose tools like SharePoint, Excel, or Power Automate. LEM software, such as Corporify, DiliTrust, Klea or Athennian, is specifically built for in-house legal teams and offers comprehensive features, including cross-functional collaboration and integration of document management. These tools are robust but can face challenges such as complex data migration, high costs, and the need for custom integrations. On the other hand, a DIY approach offers a low-budget solution that stakeholders may already be familiar with, making it ideal for smaller companies with less administrative burden. However, these DIY tools are not purpose-built for legal entity management, leading to limited features, a lack of automation, and potential hidden IT maintenance costs. Choosing between these options depends largely on the complexity of the organisation's needs and available resources.
How do you implement a LEM tool?
Implementing a Legal Entity Management tool requires a structured, multi-phase approach to ensure success and effective adoption. The first phase involves assessing the organisation's needs and consulting stakeholders to gain their buy-in. Including IT and data privacy teams from the outset is essential for addressing technical requirements and ensuring compliance. Building a strong business case, securing the budget, forming a project team, and appointing a capable project manager are also critical initial steps. The next phase is focused on tool selection: issuing a Request for Information (RFI) and Request for Proposal (RFP), involving IT again for evaluation, and conducting standard and custom demos (trials) to shortlist the best options. Once a contract is signed, the implementation phase begins, involving a detailed implementation plan with a phased rollout approach. Successful adoption requires comprehensive training, a clear communication plan, and strong change management practices to help users adapt to the new system. Repeated focus on change management throughout the implementation ensures that the new tool is effectively integrated into day-to-day operations.
Another significant consideration discussed during the roundtable is the concept of data hub integration. Dedicated LEM software often requires multiple individual integrations, meaning that each time an update or change is required, a new API must be implemented. This not only adds complexity but also raises potential security concerns, as managing numerous separate integrations can introduce vulnerabilities. By utilizing a data hub, these issues can be mitigated. A data hub centralises data management, reducing the need for multiple integrations while providing better control over data flow. This approach not only simplifies the IT infrastructure but also ensures that the legal team has reliable access to consistent, up-to-date information across all entities. Consequently, this streamlines compliance and governance processes effectively.
Conclusion
Legal entity management is an essential aspect of legal operations that allows companies to manage their legal obligations efficiently and effectively. Whether you are a small business just starting out, or a multinational with a complex structure, the importance of structured entity management cannot be overstated. By leveraging the right tools and processes, you can not only save costs and mitigate risks but also improve decision-making and ensure robust governance.
