Denise: LER also creates efficient business organizations by virtue of streamlining processes and locating inherent operational synergies. The byproduct of this, that most companies are interested in and need at this time, is typically significant operational cost reduction from both a hard cost perspective as well as freeing up resources to focus on revenue-generating activities.
Cost reduction seems to be a core LER benefit. Where in the business organization do these costs originate?
Torsdon: There are a number of hard costs and soft costs that can result from LER. Examples of quantifiable costs include legal, tax, financial and regulatory filing obligations, eliminating duplicative functions, maintaining minimum working capital requirements, fees — such as bank account fees, software licensing fees, data warehousing fees, insurance premiums, legal directors’ fees and translation fees, etc. — as well as the resources required to fulfill all these obligations.
Chris: I would add that softer costs could include inefficiencies and risks created by an unrefined and outdated legal entity structure, intellectual property and IT systems usage. By refining and updating legal entity structures, LER inherently eliminates these costs.
What are the key opportune times to deploy LER across a business organization?
Chris: At any point when a business organization is holding a large number of legal entities, LER should definitely be deployed to reduce the myriad of costs that are associated with that structure. Now, even more so, a large legal entity structure may hinder growth or exacerbate the financial challenges many companies may be facing. For that reason, LER is used as a tool to assist in business simplification or transformation. For example, as market conditions continue to put increasingly more pressure on supply chains, LER is a necessary solution to identify the legal entities that cause delays and friction in the efficient flow of goods and services.
What is a common misconception about LER?
Denise: A common misconception is that LER is only focused on eliminating dormant legal entities, which is not the case. While it is true that a thorough examination of a structure will generally identify quick wins via the elimination of dormant entities, such as through an ERP (enterprise resource planning) system implementation, LER is more so focused on holistically streamlining an organizational structure and will often identify legal entities that serve no stand-alone purpose, the rationalization of which will provide operational synergies.
How has COVID-19 impacted LER execution?
Torsdon: LER continues to be an important tool for businesses to preserve margin and headcount as revenues across a multitude of industries are impacted by COVID-19. It’s one of those tools that business leaders may prefer to utilize to manage costs without sacrificing the quality of products, services or critical business investments. LER execution is also compatible with the new remote work culture resulting from COVID-19, as most necessary information is obtained in a virtual environment. For example, LER may be performed with a mix of short interviews (that may be virtual) and questionnaires, as appropriate, to gather the relevant information. We also review publicly available corporate registry data and readily available tax, legal and financial data to assist in our analysis.