As I write this, Theresa May has just finished her speech, outlining her present vision of the European Union exit path. Over the next few weeks and months we will undoubtedly hear more of this and the effects, both anticipatory and real, on the financial and trading health of British companies. In Expense Reduction Analysts, we will also see changes to the supply chain and cost bases of our clients, some of which will be caused by the march towards Brexit.
What will this mean for consumers of Information Technology? Some firms have already seen significant rises in both hardware and software costs resulting from swift changes in exchange rates and corresponding action taken by suppliers to attempt to recoup the foreign exchange losses. It is likely there will be further rises.
However, there is one particular trick that we would urge consumers to watch out for, which is once again a product of the £/$ relationship.
In the UK, we have generally been used to a reasonably high £/$ exchange rate which is beneficial to the UK. In fact, over the last 5 years, the rate has averaged £1:$1.52 (source: US IRS historical rates). At this precise point of writing, the rate is £1:$1.23 (source: FT.Com) and had dropped below $1.2 in anticipation of the contents of the Prime Ministers speech.
We already know about the price rises levied due to the IT market being based on USD. Irrespective of this, there has always been a debate in US-headquartered technology companies about the calculation of prices outside of the US – not just what the prices should be, but how they should set them.
Various methods are employed, some fairer than others, but the favourite for simplicity was also the least beneficial to the UK – which was simply to change the currency symbol. This conveniently ignored any real-world exchange rate or adjustment to local market conditions and it created a very profitable overseas sale position for those companies. One problem with this is that it does become a lot less credible if the rate rises. When the £/$ rate was approaching £1:$1.6, this tactic was difficult to maintain in a more transparent global market and suppliers would then fall back on hedging rates and setting transfer pricing at a more realistic, though still inflated rate. It also raised ethical questions, because it is fundamentally wrong.
Now, as the rates are much closer to the 1:1 relationship and price rises have already been executed and are seen to be legitimate, watch out for a return to the days of the ‘symbol swap’. It may not even be obvious unless you are able to obtain US pricing, but it guarantees a healthy profit for those suppliers willing to reintroduce it and it can only be aided by the confusion over Brexit.
Expense Reduction Analysts are experts in our field – helping clients to reduce their costs, maximising value in IT and other spend categories. For advice regarding your technology costs contact us today.
Article by: Simon Atkinson