As the impact on the pound’s valuation is going to expand with the issuance of a Brexit agenda, lots of British offshore outsourcing companies have done their maths. Given that the majority of them are exposed to the euro or dollar production zones and that the employment costs count for roughly 50% of their revenue, their EBITDA could experience a 7- to 10-point drop… in an industry generating 7 to 15% average net margins! Indeed, salaries in those countries are very often negotiated in or exposed to the € (Eastern Europe) or $ (Former USSR, India, Malaysia…).
Good news for Brexiters, bad news for the sector! And this is just the currency impact while the real Brexit effects are still to come…
Whatever the reliability of the national economy, the UK’s digital business sector is widely exposed to the euro zone. The country was like an airlock for US companies, a link between US and EU regulations.
As of now, observers are also expecting a huge tendency of salary growth in the UK as lots of EU citizens have exit plans … Also think of the ones who will never join the EU. In this context, the whole national digital productivity might be affected and offshore outsourcing might seem the only solution to absorb both the work load and inflation.
In my opinion, there will be 2 kinds of offshore/nearshore operators. Companies with a huge fingerprint in the UK and handling legacy and BPO activities will suffer a lot from the new paradigm. Their overseas employees will continue to expect salary growth while the opportunity for renegotiation with the customers will be extremely reduced in a context of flat growth or even recession. I am typically talking about British-owned companies with an aging portfolio of customers and activities. For those ones, yes, it could be harsh.
On the contrary, companies owned and managed outside the UK and with a small wallet share in the country should monitor the tension on the internal HR market and propose new services centers for customers suffering from the attrition of local candidates.
Anxiety has already touched the sky in India and questions are arising in Eastern Europe amongst the employees of the outsourcing companies working for UK customers. Every financial-related activity where Brexit is buzzing is even more stressful, like a double penalty, and for sure there will be blood on the pavement of the city streets.
That situation is a perfect illustration of today’s economic complexity. How could we have envisioned that a nation of entrepreneurs like the British ones would make a so anti-business decision? Risks are never assessed enough, while geo-diversification of revenue sources is no longer an option even in outsourcing, especially in outsourcing. This is probably why Pentalog has invoiced over 10 countries this year.
The geopolitics configuration turns insane while Europe needs to reinforce its internal defense and security collaborations. Is Brexit the start of the dismantling of Europe exactly when the continent’s prosperity and way of life are overwhelmed by threats coming from everywhere? From Russia to Iraq? Or internally, like France, Belgium and now Germany? It is not my business to find answers to such questions. There are experts and teachers for that… our role as CEOs is to protect our companies and their stakeholders by spreading the news about the existing risks, whatever their type (portfolio of customers, currencies, geopolitics, software production sites). Brexit just reminds us that the outsourcing of the 2000s is dead. Our companies sell neither Java coders, nor solutions or services centers anymore. We sell reasons and meaning. We sell acceleration and leverage, risk management, access to talent pools and cost control.
Services are today much more sophisticated than software products, counting tons of complex features and requiring fine-tunings like accessibility (language, cultural gap management, time shift), quality (process and agility), availability (24/7, 7/7), coverage (all techs and business domains), risk evaluation and control (geopolitics, currency fluctuation).
Brexit should not be more than this for a 2016 CEO: both an incident and an opportunity.*