Outsourcing faces Brexit and other political challenges

Few sectors straddle borders like outsourcing. The European Union made borders meaningless allowing the free movement of goods and people. Now Brexit is building those borders again, giving up to a lot of business and legal advantages the UK enjoyed under the EU’s umbrella.

There are many scenarios on the horizon, and nothing is certain. But if the UK will cease to be part of the EU falls back to trading under WTO rules, barriers and tariffs will rise again.

A future of uncertainty

Despite Brexit, the outsourcing sector seems to be responding well. Although some people are preparing for the worse, others are more optimistic and look at Brexit as an opportunity for the industry.

“Overall, it is a bad thing,” says Romek Lubaczewski, a partner at PwC Poland. “There are many benefits of being part of a whole. But what is really interesting is that nobody knows what the outcome will be. Many clients are expressing concerns, especially those with big accounts in the UK, and they are thinking about offshoring.”

“It will definitely have a significant impact but people are looking beyond. Businessmen are no longer looking for places with the cheapest living costs, they are looking for low-cost labour forces plus transformation, technology and all the innovation we have seen over the last couple of years,” Charles Aird, partner at Sanford Black & Co, tells Emerging Europe.

“It is a combination of all these things that have an impact. Clients are more sophisticated than there were five years ago and they are looking for service providers that do more, like help them transform standard processes in more efficient ways.”

In this sense the UK might turn into a cheaper destination, and therefore more competitive not only for economic reasons but also because of the advanced technologies it has already developed.

“We do not know what Brexit actually means. There are good signs for manufacturing and goods but outsourcing services have not been addressed so far. My clients are preparing for a hard Brexit,” says Elias van Herwaarden, EMEA service leader at Deloitte.

“But let’s be realistic and think that business has survived for millennia, facing many challenges. Brexit is just another challenge, it means finding solutions. Of course, companies that have done the same things for many years will find it more challenging. But change is always good for business. More specific problems will include GDPR and data exchange,” he tells Emerging Europe.

“I’m always optimistic because history has shown that on a macro scale market corrections always follow initial shocks,” adds Tom Quigley, CEO at the Emerging Europe Alliance for Business Services, Innovation and Technology.

“Already at market level businesses are forming new partnerships and collaborating on ways to move forward irrespective of what respective governments are proposing. There is an old saying that ‘water will find its own level everytime’ and this is my belief about the market, where there is a demand someone will find a way to provide a supply. There continues to be political posturing and perhaps even the odd politician will fall on their sword, but after the short term pain that Brexit will inevitably cause, the market will prevail.”

Cheap is not always good

Overall, there are many challenges that need to be addressed. Right after the vote in 2016, the UK Stock Exchange plunged and the pound was down 10 per cent against the dollar and more than seven per cent against the Euro. A cheaper currency allows Poland, the Czech Republic and Hungary to remain competitive on cost.

“If the GDP drops, salaries will drop as well. So it is quite unlikely that the UK will become more competitive than central and eastern Europe,” PwC’s Mr Lubaczewski tells Emerging Europe.

“It’s a challenge to determine the truth from the scaremongering perpetuated by the press and the politicians,” adds Mr Quigley.

Aside from the weakness of the pound, we need to take into account the weakened position of the UK from a trade negotiation perspective and the potential constraints around labour mobility.

“The Chequers Plan has fallen flat and already there has been significant fallout from within the government itself. If the trade bills continue to gridlock the process there could still be another referendum yet,” he continues.

It is estimated that five per cent of the UK’s GDP will evaporate during the exit process. As a result, the overall level of investments in innovations and new technologies will decline, creating negative impacts on the entire IT industry. Lacking clarity, companies may delay large outsourcing projects, slowing down order flows to big IT service providers.

“Cheap doesn’t mean good,” says Deloitte’s Mr van Herwaarden. “Costs are important but throughout the outsourcing industry clients are more interested in innovation, people, teams. The days of cheap outsourcing are over. Sometimes clients cannot find what they need in the UK and they have to look to Warsaw for example, or Belarus, or Moldova, to source more talent.”

Offshoring is not the way

Robert Barbus, operations director for the Slovakia-originated Soitron Group, said that Brexit will more than likely lead to an increase in offshore outsourcing in order to compensate for less freedom of movement of skilled workers into the UK.

“Offshoring might require language skills other than English and in this sense, central and eastern Europe is doing much better than India. India has skilled people and technology but there are many things that cannot be done there,” Mr van Herwaarden argues. “Today there is an increasing need for interaction and it is easier for someone to travel from London to Prague than to New Delhi.”

“I think there will be a continuing trend of work activities (not necessarily whole jobs) being undertaken in other countries (the terms outsourcing and offshoring are becoming increasingly obsolete as most mid-large sized businesses these days have operations in other countries either directly or indirectly through partnerships,” Mr Quigley adds.

“A big problem for the UK (and this isn’t the result of Brexit) is the dearth of IT skills available in the country which is going to be a considerable problem over the next five years. Brexit might well hamper the movement of such resources into the country but most IT work activities can be undertaken remotely these days, so it will matter less if it’s done in the UK or Romania.”

Can Trump affect the movement of people?

But it is not only about Brexit. Many other political challenges are shaping business worldwide. The latest is US president Donald Trump’s trade war.

After having launched an investigation aiming to find out whether car and truck imports are weakening the US economy and affecting national security, Mr Trump imposed a 25 per cent duty on steel and 10 per cent on aluminium imported from the EU, Canada and Mexico and he is thinking of applying a 20 per cent tariff on cars imported from the EU.

“The best thing concerning outsourcing are salaries and people. Unless we can foresee Mr Trump impacting the movement of labour, I don’t think it is an important issue,” Mr Lubaczewski tells Emerging Europe.

“People are starting to pay attention to that. I just came back from China and there, people are very well concerned about acquisitions,” Mr Aird adds.

Populism in emerging Europe

Mr Trump is not the only far-right conservative politician causing problems. Hungary’s Viktor Orbán and Poland’s Mateusz Morawiecki are raising concerns due to their policies targeting migrants, foreigners and NGOs.

“Populism has always existed, in particular in the US and in parts of Europe, it is just becoming more apparent because it is being leveraged more publicly as a political football,” comments Mr Quigley.

“From an outsourcing perspective, the political volatility of a potential outsourcing delivery destination has always been a factor in the decision-making process so that in itself isn’t new. I think protectionism is more prevalent in the European Union rather than the rest of Europe, and I think this provides a clear advantage for the CEE region from a sourcing perspective; in my experience the CEE region is more welcoming than its western European neighbours and has been working harder than ever to attract FDI (foreign direct investment), all the way from central and local governments down through IPAs to the service providers themselves. If these countries can continue to integrate their working practices, labour policies and infrastructure further they will be in a very advantageous position to attract substantial investment post-Brexit.”

However, delisted hard strategies, all these governments are not targeting business so far.

“It is more about power than business. But the fact that many people are asking me about this is already an indication that these governments are shaping the industry, as this concern was never raised a few years ago,” Mr Lubaczewski says.

Mr van Herwaarden points out that 265,000 additional jobs will be created in the region by 2020 and this is what people are looking for. “Far right movements are not stopping business from growing.” he says.

Neither does Brexit appear to dissuade British companies from outsourcing, especially if the lack of competent IT professionals will further strangle the British economy. According to London Technology Week, the demand for IT professionals in Europe will reach 850,000 by 2020, while the UK alone needs 180,000. This can push up the salaries of locally-based UK IT professionals, forcing British companies to further leverage outsourcing. As the UK is no longer able to resort to intra-EU immigration, it could become more open to high-skilled immigrants from other non-EU countries.