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BREXIT effects on IT industry

BREXIT – effects on the IT industry

Two weeks ago UK voted to leave the EU in the BREXIT referendum. Now that some time has passed we can analyze the effects on the IT industry. So far the general feeling among IT professionals remains calm. The main reason is that IT companies are on average more flexible and globally oriented. On the other hand outsourcing experts expressed concerns about the future. In this article we will take a look at the most popular predictions and risk for short and long-term changes caused by BREXIT.

IT spending after BREXIT

Since the release of the referendum results the GBP has dropped with 10-15% to the US dollar. This has led to higher costs for UK-based companies. Before the BREXIT vote UK IT spending was estimated to grow by 1.7% in 2016. Now experts forecast a significant reduction in IT spending. In a recent Gartner analysis the prediction is for five percent drop in the next two years. Even worse is that this will affect Western Europe’s spending. Instead of the anticipated 0.2%  growth rate it will turn negative solely because of UK.

We can already see this in practice. According to 451 Research’s Cloud Price Index before the referendum you could buy 18.5 hours of cloud services with £1. Only several days later the amount of hours per sterling has dropped to 16.  Because of this companies in the UK have started moving to US-based cloud services. Consider also the fact that pretty much every hardware component is imported and you can see why prices are rising.

Despite these figures, however, experts recommend that reducing budgets will only make things worse. According to a Forrester analyst companies should invest in DevOps, automation and cloud solution. Although the market fluctuations make such investments less worthy than before the referendum they will still cut operation costs. If investments in the next two years are done right, in the long-term they will pay off.

Digital transformation and projects

IT projects in UK-based companies will inevitably suffer from BREXIT. Many organizations may delay or put on hold IT projects until the situation stabilizes. This approach will not be effective says analyst Laura Koetzle in here recent Forrester analysis. According to her, technology executives should continue and even push harder with their digitalization plans. Although the current situation is not very favorable, BREXIT should not be the reason to lose even more international competing power. Furthermore UK companies should focus on efficiency and cutting costs in the long-term. Some organizations might renegotiate contracts with outsourcing partners but projects and initiatives should not be stopped. Digital transformation is of crucial importance in avoiding yet another crisis.

One of the great examples about the importance of digitalization is the UK government Digital Economy Strategy. Till now this strategy revolved around the UK being part of the single EU digital economy. Unfortunately, because of all the changes awaiting the kingdom this strategy might have to be rewritten almost entirely.

Another interesting discussion is about moving datacenters from the UK to other countries. Companies should very carefully asses the risk of such decisions. A datacenter migration is not an easy task and it might take more than a year until things start working in full-scale again. In addition some corporations have even said they are thinking about moving headquarters to mainland Europe. Such an initiative might take years during which the political and economic uncertainty in Britain will have settled down.

BREXIT outsourcing affects - Eastsource

IT skill demand and outsourcing

UK leaving EU will have a huge impact on the country’s outsourcing industry. The National Outsourcing Association surveyed British outsourcing companies about their desire to leave the EU. Almost 75% of those asked said they want UK to stay in the union in order to maintain good outsourcing opportunities.

Because of the reduced value of the GBP outsourcing has already become more expensive for UK companies. In the same time when the kingdom leaves the EU there will be fewer people moving there for work. This will push companies to outsource more despite the higher prices. Britain already has a massive shortage of IT professionals. Exiting the EU at a time when the business needs skilled immigrants will have a huge impact. The gap between the supply and demand of IT services will increase even more. Executives of companies dependent on EU labor force should come up with alternatives to grow their business. Because of that good outsourcing opportunities and relationships are now more important than ever. Companies should be even more careful about the quality they receive from offshore service providers.

To sum it up, the currency fluctuations will lead to outsourcing levels dropping in the short-term. In the long-term, however, they will increase because of the widening gap between supply and demand of IT services within UK. To avoid future losses companies should rework their strategies and push for digital transformation. Cutting budgets and delaying projects will only make things worse. What should be the focus now is efficient and quality work with the right partners. Those who succeed in this will be the market leaders of tomorrow.

Interesting times are ahead of us. Stay tuned for more software and outsourcing news.

2 Comments

  1. I think you touched very well on the strategic impact the currency fluctuation will have on the industry across EU and UK alike. I would like to hear your ideas about what you think will happen in the future, the next steps and implications of these long-term trends in the upcoming 6-12 month. Keep it up!

    1. Hi Vlad,
      Thank you for your comment!
      We think that impact will be different depending on company size. Smaller companies are more flexible to changes so they are more likely to continue doing business as usual. Big corporations, however, where even 1-2% difference in expected RoI is important, will go through some hard times.
      Anyway, a good strategy for everyone at the moment is to focus on building a solid relationship with oursourcing partners. Within couple of years it will be harder for UK companies to do so.

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