Brexit’s Impact on Outsourcing Sector

Monday, May 20, 2019

Britain’s vote to leave the European Union could impact the outsourcing sector of more offshore deals. Early signs are of a robust response.

British Outsourcing sector is one of the most buoyant ones. Contracts worth £3.91 billion were signed in the first half of the year 2019, a +19% year on year, according to the Arvato Outsourcing Index. Local government spending almost doubled on outsourcing in the same period. Further new developments for Outsourcing rely on cutting-edge technologies, such as robotic process automation, enhancing sector’s quality of service and delivery standards. However, there are issues to be encountered even in this sector that goes well. United Kingdom leaving the EU triggered a mass of questions for the outsourcing industry. Few sectors straddle borders like Outsourcing.

Firstly, Outsourcing seems to have carried on with business as usual. No slow down phenomena. That is borne out by transaction numbers and investor confidence. Alex John, director at international mergers and acquisitions consultants Livingstone, which works heavily in outsourcing deals, says: “We are not seeing any drop in investor confidence. In fact, we are seeing good levels of investor interest, from both UK and overseas investors. The present view on Brexit seems to be that the UK economy is weathering the storm extremely well and therefore remains a good market for investment.” When Brexit actually occurs we may see a few changes. Trade with the EU will depend on the final deal’s status. We have no idea what that deal will be. We do know that the UK will lose a large number of trade agreements with the rest of the world, currently enjoyed under the EU umbrella. Reverting to World Trade Organization rules, with no additional deals, is an option in many cases. The downside is that tariffs may be higher. And there might be areas of conflict and lack of legal clarity.

Prioritising India

Since the UK will be trying to replace 53 preferential trading agreements currently held by the EU with the rest of the world, it may need to prioritise certain markets. India is a prime jurisdiction. The UK 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, then-business minister Sajid Javid flew to Delhi to meet the Indian commerce minister and finance minister, both of whom confirmed India would be keen to start work on a deal as soon as possible. The Indian private sector positively responded to this.

The new department for Brexit will need to resolve some tricky issues. For example, the physical location of data is a hot question in Outsourcing. Mark Turner, vice president of IT delivery at T-Systems, the corporate customer arm of Deutsche Telekom, explains: “Location is now a key question for UK Chief Information Officers (CIO’s). Brexit will have pushed the accelerator, but the direction of travel was already set by the worries surrounding the reach of US jurisdictions.UK companies that only operate in the UK are looking for data centres located in the UK, whereas companies that operate in Europe and need to adhere to European data security rules want to locate their data in Europe. Three years ago, CIOs didn’t care where their data was as long as it was safe; now location is central to decision-making.

On-shore versus off-shore

The on-shoring vs. off-shoring debate will be renewed by Brexit. Trends may be counter-intuitive. For example, a lack of free movement might result in more off-shoring. This will more than likely lead to an increase in off-shore outsourcing in order to compensate for less freedom of movement of skilled workers into the UK.

Robert Barbus, operations director for the Slovakia-originated Soitron Group, says: “Brexit may make it difficult for skilled Polish and other EU-CEE [central and eastern European] IT workers from gaining work permits in the UK. Equally for on-shoring businesses, which depend on staff from within the EU, it’s most likely the CEE region, including Slovakia, Czech Republic and Bulgaria, will find it hard to gain visas, and the cost of gaining work visas may not make this form of outsourcing viable.

This will more than likely lead to an increase in offs-shore outsourcing in order to compensate for less freedom of movement of skilled workers into the UK.” Obviously no one can say what Brexit will look like. As a result, we’ll see a more cautious approach to outsourcing – not fewer deals, but simply higher risk management. There are signs this is already happening.

The outsourcing industry has a proud history of flourishing in the face of perverse trade deals, legal bureaucracy and political uncertainty. Brexit may throw up challenges, but so far there is no reason to think the industry won’t simply march on regardless.