Risks in Entity Diagramming

Lauren Mcmenemy
A visualization of how a company is structured will always be a key part of the legal operations and compliance arsenal. The ability to see at a glance the entire organization, or the key parts of an individual entity's structure, is invaluable when you're dealing with Board-level decision-making or trying to understand the bigger picture when devising growth strategies. The visualizations can also play a role in compliance oversight, highlighting issues or impending deadlines that may have been forgotten.

These entity visualizations can be a key visual input to show the relationships between key places, people or systems within an organization. Yet entity relationship diagramming, as this process of visualization is known, isn't without its issues. A valuable tool it may be, but there are risks in entity diagramming that cannot be overlooked.

Like any challenges, though, knowing these risks in entity diagramming exist is the first step to mitigating them. Whether you're just embarking on your journey with entity management software or are an old hand, be aware of these risks in entity diagramming and ensure you have a risk mitigation strategy in place.

Old data paints an incorrect picture

Legal operations professionals and those working in compliance and governance departments create entity relationship diagrams to see the state of an entity or group of entities. They want to know about how things are right now or how they were back then. They want to dig further into what's happening or why the entity was set up. And they want to do this to help drive strategic business decisions.

The strategic drive behind an entity relationship diagram reveals the first of several risks in entity diagramming: You cannot and should never make strategic business decisions based on outdated information. How can you be sure the information at hand is up-to-date? That there hasn't been a different version created in another system that you don't have access to? When you're creating visualizations by hand or from siloed systems, you run the risk of incorporating old information.

Of all the risks in entity diagramming, this is both the biggest risk and the easiest to overcome. We'll look at how to mitigate this risk in a moment; but first, let's look at more risks in entity diagramming.

A picture doesn't convey context

Visualizations are great. A picture paints a thousand words, after all, and by incorporating entity relationship diagramming into legal operations, compliance and governance teams, as well as risk managers, can identify at a glance any potential issues or risks in the group structure.

We've written before about how an entity relationship diagram tells the story of an entity's current state, and can be used to show the potential ways that structures and organizations within an entity can be altered, as well as the potential changes of these effects.

But, of all those thousands of words painted by the entity diagram picture, none of them is the word 'context.' You won't necessarily see at a glance why an entity was set up. You won't see whether it's non-trading or dormant. You won't know why Director X is or isn't on the board, or whether the entity has moved into a group through an M&A process and is now being asked to perform a function for which it is not optimally structured.

While entity diagramming definitely helps to bring in much more context than any spreadsheet-based data visualizations ' organizational charts created using entity management software automatically link to relevant documents or timelines, for example ' there are still risks in entity diagramming coming from a lack of context.

The complexity of M&A can be difficult to visualize

Context is key, too, in times of merger or acquisition. It's in these times of great change or important strategic decisions that legal operations teams are most likely going to require entity diagrams, yet, as we wrote earlier, one of the big risks in entity diagramming is basing strategic, business-changing decisions on outdated information. That is doubly so in the case of M&A, when business leaders are trying to assess whether a merger will work, how the new entities should be brought into the business without impacting tax efficiency or causing too much workforce displacement, and whether an acquisition will have the desired effect on business growth and profit.

What business leaders need during an M&A process is full access to all entity-related information. They need to understand both current context and future challenges, and creating an entity diagram through using entity management software can certainly help to bring that extra information to an easily accessible point.

But M&A is still complex, and one of the risks in entity diagramming is that a simplified visualization may not bring that complexity to life in a way that has impact. Business leaders would do well to dig behind the visualization, to try to mitigate the risks of entity diagramming by seeking the fuller picture as well as the at-a-glance image.

Use technology to mitigate the risks in entity diagramming

We've definitely come a long way since the days when organization charts were created in PowerPoint or Visio ' or, worse still, by hand. Technology today can help to create these entity relationship diagrams at the flick of a switch, pulling information from a range of databases and systems to create a seamless, robust visualization of an entity or group of entities.

But the visualizations are only as good as the data that feeds them. And today, considering that so many legal operations professionals use entity relationship diagramming to link to important documents and contracts related to the entities, those entity diagrams need to have constant access to real-time data.

Entity management software, such as that offered by Diligent, helps to ease the burden of information and create robust, up-to-date entity diagrams that can be impactful for all stakeholders. Entity management software acts as a central repository and single source of truth for all entity-related information, meaning that any time the button is pressed to make an entity diagram, only the relevant information is sourced without any version-control issues.

Get in touch and schedule a demo to discover how the risks in entity diagramming can be mitigated with entity management software.
Related Insights
Lauren McMenemy

Experienced journalist Lauren McMenemy has been writing about compliance and governance for several years, and has covered finance, professional services, healthcare, technology, energy and entertainment.