As we edge nearer to the main event of Brexit – the actual departure itself – the thorny issue of what kind of deal the United Kingdom will strike has now become the main talking point. It is apparent that negotiations may take some time to finalise, with the default option looking like it will be no deal. At the moment, there are three potential types of arrangement that might occur, a benign deal for the UK, a poor deal for the UK (possibly dressed up to be something it is not), and ‘no deal’. Based purely on the pace of progress and the attitude shown by the EU in discussions to date, it appears we can discount any form of favourable deal.
Based on that assumption, many things are going to change in the UK regarding how we do business across borders and the costs to both business and consumers. IT is a global market. From a hardware perspective, most components are manufactured in the Far East but traded in US dollars. In the software market sector, the US is by far the dominant player – Silicon Valley has a GDP greater than some countries, although local software authors and resellers are found across the globe. IT services are generally local, and therefore subject to the economic fluctuations of the country in which they reside. The exception, however, is the offshore services market, which itself relies on cheaper labour and overheads in various parts of the world where Brexit is of little relevance.
Given this, one striking point is clear; there has been no mention of either the Euro or the pound as a core currency in the IT market. However, it is mostly irrelevant from a consumer point-of-view, as UK-based IT clients are affected by any changes in the global market, which has been impacted by the fallout from the whole Brexit situation. The three main Brexit issues influencing IT in the UK are:
1.Price Rises Due to Exchange Rates
This has already happened once when the initial Brexit decision was announced and will almost certainly happen again. Stock market investors in the US are likely to take a negative view, resulting in the same circumstances – a weakening of the pound followed by a rise in transfer pricing to both the UK and Europe to compensate for the reduction in income.
2.Price Rises Due to Tariffs
These are less certain, but under a no-deal scenario, in particular, it becomes a distinct possibility; this is because under the WTO rules, imports of European IT will become more expensive. Fortunately, these are few in comparison to our trade in IT with the rest of the world, although prospective purchasers of SAP may want to have a re-think.
3.Staff Costs are Already on the Rise After Years of Stagnation
As the availability of skilled European labour diminishes through issues with eligibility to work (under a no-deal scenario), with uncertainty and reluctance under any other scenario, the economic laws of supply and demand are likely to push up labour costs and hence onshore services pricing.
Is this all gloom and doom? Unfortunately, for the most part, it is. Neither businesses nor consumers can affect it and will have to bear the consequences which means they can only take individual actions to try to minimise the impact locally. But what should those actions be?
Businesses will want to try to control the core issues of risks and costs as much as possible. In order to do this, it is necessary to leave as little to chance as possible –which means acting now.
This statement will surprise those readers who believe investors should wait until the conditions are more predictable – the traditional stance of investors and senior management. We advocate action now because it’s more likely to provide control and predictability for businesses than waiting for events to unravel, which could have a devastating effect on costs, investment and ultimately business performance.
The two actions businesses should take now are:
1. Bring forward intended post-Brexit IT purchases into 2018, irrespective of budgetary limitations.
This is because present and future costs are best controlled by pre-point of purchase negotiation, where future costs can be shaped and protected in contract.
2. Conduct an IT cost review and rationalisation exercise across the entire IT estate to:
a. Ensure best value is in place
b. Lockdown pricing where possible for the medium term
Expense Reduction Analysts IT Practice is presently conducting a number of the above projects for a range of clients and can take on more at this time. We provide impartial analysis and utilise our network and expertise to implement the best cost reduction strategies for your business. We urge clients to act now and to involve us in this process, as waiting is unlikely to produce a positive outcome.
Article by: Simon Atkinson