Initial Reactions to Brexit and the Impact on the Global Services Industry | Sherpas in Blue Shirts

The uncertainty of Brexit is not good for any industry. This is particularly true for the global services industry, since it is based on aligning labour forces, regulatory and legal concepts, and economics across multiple countries. When one country faces such a fundamental discontinuity, it and others intertwined with it are certain to need time to determine how to realign against the new normal.

Our initial reaction to the impact of Brexit on the global services industry follows. We will publish new advisory notes as the UK government releases more details about its exit strategy.

Overall picture:

• It is possible, but unlikely that Article 50 (A50) of the Lisbon Treaty is invoked very soon. This would mean that for two years there will be no significant change. When A50 is invoked, exit negotiations can potentially run until the next UK General Election. That is a period of three to four years of no real regulatory change. In both of these scenarios we will see the status quo largely unaffected for up to four years but investment decisions on-hold or shelved.
• Slightly longer term, another Scottish independence referendum would be likely to succeed. Also possible is an independent Scotland being fast-tracked into the EU. For Scotland the appetite for investment north of the border looks good. Who would have thought a week ago that nearshoring would have meant Scotland?
• Initially, demand for outsourcing services through new contracts is likely to stagnate, as UK companies digest and await government strategy on Brexit. Renewals of existing agreements are also now facing uncertainty – in particular, crafting legal frameworks that adapt to the changing conditions will be challenging.
• The drop in the value of the Pound will increase sales of British manufactured goods and, thereby, boost the sector. We may see increasing demand for outsourcing contracts to power manufacturing growth within the UK. Service providers will need to show agility and innovation to take on this demand to make the most of an uncertain market.
• Currency fluctuations will cause volatility in service providers’ contracts and business from the region. This could lead to different ways of hedging and potentially contract renegotiations (those that were pan EU).
• Outsourcing by the large and mature UK government sector will initially slow down pending Brexit strategy decisions. The sector, however, also has to deal with severe budget cuts. The combination of Brexit uncertainty and budget cuts will enhance demand for services by outsourcing to companies such as Atos, Capita, and HPE/CSC that are already well established in the market in the UK.
• The picture in the financial services market is a complex one and for the purposes of this discussion, we consider the UK-headquartered financial institutions. On the one hand, financial institutions might see some easing of EU-originated regulatory requirements. This could lead to changes in scope of existing outsourcing contracts. On the other hand, there will be a lot of uncertainty in the sector about its relationship and business with the EU. This could boost demand for cost-cutting outsourcing as banks batten down the hatches and brace themselves for a bumpy ride over the next few years. BFSI will also look to monitor risks better in very uncertain times. We may see increasing investment in big data for managing and monitoring risks.
• International outsourcing companies will be assessing the number of staff that they have working in the UK and EU countries and will track Brexit to ensure that they have optimized the spread of people who serve EU countries and the UK, which accounts for the largest share of the market in Europe. They will watch for clues relating to how work visas are likely to be sorted out and how this impacts the onshore-offshore model – particularly for staff that might need to travel between the UK and European countries.
• Uncertainty is often a trigger for economic slowdown and ultimately a recession. The usual outcomes of cuts in expenditure and job losses cannot be disregarded with consequences such as lowering of demand in HR-related services such as RPO. However, it may help increase use of contingent labour and we might see an acceleration in MSP.
• As the approach to Brexit becomes clearer, we would also expect to see an increase in projects required to alter operating models and data storage/access to comply with the new regulatory constructs. In the interim, many current transformation projects which involve activities that might be impacts by Brexit will be delayed or managed to allow flexibility to adapt to changing conditions.
• Once the dust has settled (and hopefully quickly), EU and UK leaders are likely go past campaign style rhetoric such as “out is out” and negotiate in order to moderate uncertainty through interim trade deals to allow business and commerce to flow. If the UK economy slows, it will tend to have negative impacts on others as well, so hopefully there should be some natural momentum to get key issues sorted in an expedited manner. However, given we are discussing a political process, that hope is likely misplaced.

Staff travel and working visas

Historically, the UK has had a long and successful sourcing relationship with countries that are outside the EU, for example, India and the Philippines. This is unlikely to change. A relatively simple visa system for outsourcing company staff who come to work in the UK has served the industry well and is likely to be duplicated for people from the EU. However, whether these staff can easily work across the UK and the EU is not yet clear.

Overall, visa and immigration-related costs will increase for service providers operating in Europe and with centers in the UK. This may lead to a preference for placing more work in Europe (such as, CEE) as service providers will be able to more easily tap into the European labor market, especially when requiring European-language support.

Delivery centres

The UK-based delivery centres mainly serve demand from the UK but some also offer services in different language to other EU countries. This is particularly true for Scotland and Northern Ireland. Staff coming from other countries with language skills are likely to come under any new working visa system that is set up.

The UK has been a popular destination for data centres to serve clients in different EU countries. The IT industry will no doubt campaign to have data protection laws that are approved by the EU. However, over time we may see some relocation of data centres to EU countries.

Nearshoring to EU countries will slowdown initially until the details of Britain’s exit from the EU are worked out.

The drop in the value of the Pound will make the cost of “importing” services from nearshore and offshore GICs higher for UK-based parent companies. This will push the need for increased efficiency and we will see increased demand for cost cutting through technologies such as automation.

Although the question of whether there will be a Brexit is now answered, the number of remaining questions just got more complicated and uncertain.