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Legal entity rationalization can help organizations reduce compliance costs, increase operational efficiency and improve strategic agility.
In recent years, many companies have expanded rapidly to address changing market dynamics and increasing competition. To support this growth, they have also created many legal entities. However, as these entities age and outlive their intended purposes over time, companies face cumbersome, misaligned or overly complex legal entity structures.
We believe that companies need to conduct a thorough analysis of their current legal entity structures and, if warranted per the results of such analysis, significantly reduce the number of entities. This can help them cut costs and improve efficiencies in today’s unstable economic environment, and thus, create a more agile, streamlined, scalable and focused organization.
In the Legal Entity Rationalization report, we discuss the benefits of this approach and how you can successfully optimize your company’s legal entity structure.
Explore the case studies in this report: Read how we have helped a multinational oil company and a communications and high-tech company optimize their legal entities.
Organizations have resorted to creating legal entities as a simple, quicker solution to help them in their growth initiatives—whether expanding organically in a new region or developing a new business, or inorganically through mergers and acquisitions. While these legal entities make it easier to start business-as-usual activities as soon as possible, over a period of time, they can become burdensome and expensive to maintain.
Companies need to understand that these entities, created to fulfil a specific immediate need, can become obsolete if the business or regulatory environment changes or if the company’s strategy or revenue structure shifts.
Net result: Too many legal entities can make an organization unnecessarily siloed, fragmented and complex.
We believe that by reducing the number of legal entities an organization can realize the following benefits:
Reduction in compliance costs: Companies can reduce the time and money spent on compliance-related activities. It may also result in some indirect benefits such as improved consistency and transparency of financial information, and reduced risk of non-compliance with legal and fiscal obligations.
Increase in operational efficiency: Undertaking legal entity rationalization can lead to gains in operational efficiency by reducing the number of intercompany accounts. This can help your organization eliminate activities and resources necessary to manage and reconcile intercompany transactions and balances.
Improved strategic agility: Rationalizing extraneous legal entities can remove unnecessary reporting layers, hierarchies and silos, which can allow companies to be more collaborative and enterprise-focused.
Find more details about the benefits of legal entity rationalization in this report.
Legal entity rationalization can be a long and challenging journey. We recommend a five-step framework for companies:
Step 1: Conduct an as-is organization assessment
Step 2: Design an optimal legal entity structure
Step 3: Perform a cost-benefit analysis
Step 4: Develop a transformation road map
Step 5: Execute a rationalization work plan
Once rationalization efforts have been completed and the benefits realized, companies should look at establishing a governance model to manage new entities and reassess existing entities as business needs and economic environments shift over time.
An effective governance model consists of three aspects:
Leadership: Provide individuals with the responsibility to recognize and seek out opportunities when legal entities can be added or consolidated in accordance with the organization’s goals.
Organizational structure: Form a legal entity governance steering committee with cross-functional expertise designed to provide a balanced assessment of the company’s legal entity portfolio.
Process management: Implement a formal process to periodically evaluate the company’s legal entity structure and provide recommendations for future changes.
Tom Herd leads Accenture’s Mergers & Acquisitions (M&A) practice in North America and also serves as the Global Products industries M&A lead. He focuses on helping clients in the energy, chemicals, metals and mining, consumer products, industrial equipment, automotive and life sciences industries with due diligence, merger integration, and joint venture and alliance strategy development.
William Hines is a senior manager in Accenture’s Mergers & Acquisitions practice. He focuses on helping clients in healthcare and energy industries with merger integration, and joint venture and alliance strategy development.
Dennis Yue is a manager in Accenture’s Strategy practice. He focuses on helping clients in energy and financial services industries with finance transformation, merger integration, and pricing and profitability optimization.
December 10, 2013
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