Now the UK Has Triggered Brexit Process – What’s ahead for the Outsourcing Industry?

When Britain’s Prime Minister Theresa May triggered the formal two-year process of negotiations that led to Britain leaving the European Union after 44 years, she also fired the starting pistol on the outsourcing industry’s dash to adjust to its changed operating environment.

Britain’s vote to leave the European Union may impact the outsourcing sector more than many, but early indications are that the sector is responding robustly to the uncertainty and potential complexity of Brexit.

Robust Platform for Change

Coming to 2017, Britain’s outsourcing sector was buoyant. The United Kingdom is currently the second largest outsourcer in Europe and outsourcing greatly supports Britain’s economy. According to the Arvato Outsourcing Index, some £3.91 billion in contracts were signed in the first half of 2016, a rise of 19 per cent year on year. Local government spending on outsourcing, which nearly doubled during the same period (+84 percent) accounted for much of this growth.

While the industry is exploring potential productivity benefits promised by emerging technologies such as robotic process automation, the Brexit vote triggered a wave of uncertainty for the industry. Few sectors have embraced globalization as enthusiastically as outsourcing. Brexit does indeed mean Brexit, but the strategic outlook for an industry long comfortable with straddling borders remains unclear.

Impact on UK and EU Job Markets

The decision to leave the European Union will undoubtedly pose challenges for Britain’s economy. Firstly, Britain may experience a skills gap. Most migrants currently residing in the UK are employed in construction, IT, engineering, and healthcare. If those workers decide to return home in any numbers, the UK will experience a major skills shortage. These shortages may prompt businesses to outsource, stimulating more offshore outsourcing deals.

The UK Treasury estimated leaving the EU could reduce Britain’s trade in goods and services by between 9 and 24 percent. Market isolation could follow with signs Britain’s weakening currency will reduce the cost-related benefits of outsourcing.

Economic Uncertainty

Although Brexit brings with it many uncertainties, industries are already factoring in some assumptions. Labor costs will edge higher, as the limited labor movement begins to restrict access to low-cost labor. Similarly, the lack of harmonization around privacy laws is expected to make outsourcing more challenging to implement in between the UK and the new trading partners in the absence of bilateral trade agreements.

Outsourcing, in particular, is facing potential changes in taxation, VAT calculations, and continued foreign exchange volatility. While the precise effects of this turbulence remain to be seen, the ‘settling down’ period alone may induce a slowdown in the outsourcing market. Many changes will take years to be fully felt.

Impact on EU Companies Who Depend On UK Outsourcing

Things will change! It is clear British businesses will encounter issues due to greater tax tariffs and regulations. Leaving EU means UK businesses will no longer be able to trade and do business with companies from the EU tax-free.

Many British businesses have integrated their supply chains with European partners. Outsourcing sectors most affected by this include the automotive, chemical and financial services. New regulatory and administrative procedures may lead to higher prices, and greater downtime as outsourced products will take longer to get from EU suppliers to Britain. Costs will increase on both sides.

Component prices are going to become more expensive. For businesses in the EU, this means raising their prices to reflect higher transport costs, while UK companies will need to raise their selling prices to cover these cost increases.

As Robert Barbus, operations director for the Slovakian Soitron Group, observed, “Brexit may make it difficult for skilled Polish and other European IT workers to gain UK work permits. Equally, for on-shoring businesses, which depend on staff from within the EU the cost of gaining work visas, may not make this form of outsourcing viable. These will more than likely lead to an increase in offshore outsourcing to compensate for less freedom of movement of skilled workers into the United Kingdom.”

Impact on India’s Outsourcing Industry

Thanks to its historical ties with Britain and the substantial Indian population resident in the UK, Britain has long been the entry point for India to access EU outsourcing opportunities.

Given the UK will be looking to replace the 53 preferential trading agreements between the EU with the rest of the world; it can be expected to prioritize certain markets. India is a prime candidate for fast tracking treatment. Britain is the largest G20 investor in India and India invests more in the UK than in rest of the EU combined.

A fortnight after the Brexit vote, the then- British business minister Sajid Javid flew to Delhi to meet the Indian commerce minister and finance minister, for preliminary talks on a potential trade agreement. The Indian private sector supported this initiative.

As Chandrajit Banerjee Director General of the Confederation of Indian Industry observed of a potential Anglo-Indian free trade deal – “With Britain’s departure from the EU, India will have to negotiate a free trade agreement with the UK which may be easier to accomplish at a bilateral level… This could well be the best era for our industries to collaborate.”

An Uncertain Future for Outsourcing

One outcome of Brexit is the opportunity to open new outsourcing markets for British businesses. As Britain will not be restricted by EU regulations in dealing with new markets outside the EU, companies might be able to source attractive, good outsourcing options and continue to operate much as they did previously albeit at a higher cost.

Realigning these commercial relationships involves solving two key challenges. Firstly, how straightforward will it be in practice to source collaborative partners and secondly, what will their service quality be like? Gains in pushing pricing down in real terms will be quickly offset by any decline in quality standards.

Answering these questions will go some way to offsetting the disruption to their existing EU supplier and client relationships.

While some outsourcing industry identities believe Brexit could create the momentum for more outsourcing and help to accelerate the culmination of these deals, Britain’s outsourcing market is relatively mature. It is well along the adoption curve for cloud computing, automation, and cognitive computing.

Hence the imperative to save money post-Brexit is more likely to accelerate automation strategies, which offer greater savings rather than propelling further outsourcing around labor arbitrage. Much of this work has already moved offshore, lowering the ceiling for further offshoring demand.

From Turbulence Comes Opportunity

In identifying a strategy to deal with the uncertainty and turbulence surrounding Brexit, companies would be well served to look to find new ways for creating profitable business partnerships. The paradox of Brexit is those companies that make great use of their new environment may be able to increase their profits. Those that don’t will almost certainly lose money.

Conclusion

Although post-Brexit predictions span doom and gloom through to minor blip on the nation’s economic performance, Brexit can be expected to have a significant impact on the outsourcing industry. Much rests on what deal the UK is able to negotiate with the EU after its withdrawal and what fresh trade agreements a newly independent post-Brexit Britain can put in place with its trade suitors. What we do know is that many elements will require a sustained period of adjustment for both Government and the private sector. Much still depends on the deal struck with the EU.

– BackOfficePro