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Outsourcing after Brexit – a Central / Eastern European view

04 July 2016

After the referendum in which the British decided to leave the European Union, there has been an abundance of comments, analyses and forecasts of what will happen after the so-called ‘Brexit’. Much of the world is in shock. All the countries, industries and companies operating on the European market must verify their current strategy and adapt it to the new reality as soon as possible. Since Friday 24 June, we have been reflecting on what the outlook for outsourcing is, and whether the UK’s exit from the EU will affect the development prospects of Polish outsourcing companies. Let’s put emotion to one side and calmly try to identify areas of risk and – if possible – to find potential opportunities for development.

Let’s start with what we have to lose. Piotr Zyguła, CEO of JCommerce SA, is moderately pessimistic. “The share of profits from the UK market in terms of the total export earnings of our company is about 7%, so any problems with maintaining this figure will not significantly affect the financial position of JCommerce. However, in recent years this share of earnings has consistently increased, and we saw further cooperation agreements as an opportunity to build a strong position on Western markets. For our employees, who of course are key stakeholders, it’s an opportunity to work on interesting international projects. It would be hard to give all that up.”

In theory, not much will change in the near future. Until completion of the “divorce” from the EU, which will probably take a few years, the United Kingdom remains a member of the Union and all parties are obliged to abide by the existing rules. In practice, however, they may be “lost years” because Brexit is inherently associated with great uncertainty about the future form of relations between the EU and the UK, which in turn has a negative effect on the markets and can stifle business relations, which do not take kindly to risk. Among other things, it is why EU officials have already called on the British government to begin the Brexit process.

Currency risk

The strength of the pound to date has made IT outsourcing to the countries of continental Europe, especially Central and Eastern Europe, as well as to Asia, very profitable for the British. Brexit brought about a sell-off of the pound, while the dollar, the euro and the Swiss franc became relatively more expensive. The cheap pound makes services abroad, including outsourcing, more expensive. The pound is also cheaper in relation to the Chinese yuan and Indian rupee (both are popular markets for outsourcing IT services). In our region of Europe the countries that stand to lose most of all are those that have adopted the Euro, such as the Baltic countries, Slovakia and Slovenia.

What does all this mean for Poland? “Just like the currency of Hungary, and the Czech Republic, the zloty is getting cheaper. Paradoxically, these problems act to stabilize the position of domestic outsourcing companies – a cheaper currency allows you to remain competitive. Outsourcing in Estonia, Slovenia, India, and China is more expensive because of the cheaper pound, so Poland is becoming more attractive for British business partners. The only question is whether the mood associated with Brexit will lead them to avoid cooperating with us?”– wonders Piotr Zyguła.

Life after Brexit – the new legal reality

Some of the major advantages of outsourcing IT services to other countries of the European Union for British companies were the similar legal systems and the universality of EU standards. British companies collaborating with business partners – for example from Poland – can count on the same treatment as Polish companies, so they can claim damages without major problems, as guaranteed by EU law.

After the UK leaves the EU, depending on the model of further cooperation, the systems might become more and more different. Piotr Zyguła expresses his doubts: “Will the United Kingdom continue to participate in the single EU market, which implies the free movement of goods, capital, services and workers? If so, to what extent, if not, what barriers will arise, and how much will they cost? In this context, will we be able to remain competitive?” Business abhors a vacuum, so sooner or later, both sides will be forced to find new business partners. But will it bring them increased benefits? And how many companies will go under in the meantime? It is difficult to estimate at this point.

A weaker union, a weaker market

The outlook for the outsourcing industry could be adversely affected by a potential economic slowdown. Some estimates say that Britain could lose up to 5% of its GDP within the first few years, during the process of its exit from the Union. On the other hand, the economy of the Community will also suffer, although the effects will be spread more evenly throughout the individual member states. The EU budget also stands to suffer losses, which will mean fewer resources to support innovation and new technologies, which will probably affect the entire IT industry, indirectly at least. Years of uncertainty, falling investor confidence and – most likely – price increases will probably reflect negatively on the level of IT investment, both in the UK and other European countries. A domino effect will probably arise that could affect Polish companies as well.

Will a Polish plumber replace a fellow Pole?

Perhaps, however, these problems will not dissuade British companies from outsourcing, especially if it turns out that the lack of suitable staff will begin to further strangle the British economy. After leaving the EU, the British labor market may be (although not necessarily) closed or restricted. This doesn’t just affect the proverbial Polish plumbers, as it will also complicate matters for the IT industry, and as a result the number of vacancies for engineers may increase. During this year’s London Technology Week, analysts predicted that about 850,000 more IT specialists will be needed in Europe by 2020, of which 180,000 will be required in the UK alone. One may have doubts as to whether these specialists will be found on the local market, which is already saturated and which is already straining under the weight of a lack of manpower (not only in IT, but in other industries as well). This can lead to an increase in the salaries of specialists on the local market, and de facto push British companies to take advantage of outsourcing to a greater extent, in order to fill staff vacancies.

Brexit3

The British view

Brexit itself is of course not universally popular with the British people, 48% of whom voted Remain.  Andrew Kirby, a teacher for Dynamic English in Katowice, Poland, which has been co-operating with JCommerce for three years now, expresses uncertainty about how the British decision will affect his countrymen, having voted by proxy in the referendum. “It is scary to think that 1.3 million people” – the difference between the number of Leave and Remain voters – “can determine the fate of not just our country, but the entire continent of 500 million people.” However Kirby stresses that nobody really knows at this stage just what the effects will be.

Andy Gillin, CEO of Dynamic English, is also unsure of what to expect. “Nobody knows what’s going to happen, that’s what people are afraid of.  I don’t think Brexit will be an easy process, but all we can do is hope that business is not affected too dramatically.  Perhaps it could even bring about some unforeseen opportunities in business – we’ll see! But we just don’t know.”

Conclusions

The coming years will see great uncertainty and an unpredictable level of risk. The IT outsourcing industry will have to learn how to operate under such conditions. As we have seen, Brexit involves significant risks, but also brings opportunities for development. Some companies can run into trouble, but those which are most flexible and ready to take risks may turn this situation to their advantage – as usually happens in times of crisis. So what can be done today? I guess – along with the rest of the world – we can only look at what is happening in Downing Street and keep an eye on developments.

Radosław Szmit

International Business Manager

Experienced manager, working in IT technologies in the UK and Poland for over 10 years. In JCommerce responsible for gaining new strategic clients and international sales. Highly educated in cross-reference areas of IT, electronics, business development, sociology and psychology. Privately fan of Scottish weather and Slovenian mountains.

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