Buy Now Save Later? Why Brexit Could See a Supply Chain Rush
I work in the IT industry, which like most sectors, runs on the basis of supply and demand. Procurement decisions can come to a plethora of factors; including timing, cash flow, value and long term planning. But one issue that plenty of UK businesses will need to start considering soon is Brexit, which has the potential to put a spanner in the works of the procurement process, or at the very least influence it.
Brexit is going to have some interesting economic consequences, some of which may mean cost reductions will need to be made. Technology is becoming a significant part of indirect spend within businesses, and where technology comes from could turn out to be an important element of how companies deal with the UK’s exit from the European Union.
Take a look around at the devices which are part of your IT infrastructure. If they are sold by manufacturers such as HP, Microsoft, IBM, Dell, VMWare or Citrix, they all have one thing in common – their pricing is derived in US Dollars. Because a lot of technology cost is dependent on US based manufacturers, currency risk and pound strength is therefore a potential variable which many businesses are going to need to manage post Brexit.
When the Brexit vote went through, and the GBP dived, the supply chain had a nightmare because they couldn’t work out how to price most of the major tech products. People were predicting a collapse of the pound, which made USD based products really expensive. Suppliers were putting quotes out with a five day validity because they were worried that the currency fluctuation would cause them to sell at a loss.
There is also the question of IT support which is sourced from outside the UK. If the pound drops, the cost of labour will increase. Roughly speaking, the cost of providing an IT service is; 70% labour, 20% software, 10% hardware - this tells us that companies being billed in a currency other than GBP will see an increase in their labour costs proportionate to the pound’s reduction.
When Brexit finally happens, there is no guarantee what is going to happen to the pound, but the sensible money is on a drop in value to some degree. Wise IT buyers will probably want to hedge their IT spend into a period where you have some stability in terms of currency risk. The chances of the pound getting stronger after Brexit seem slim, so bringing supplier negotiations, contract renewals or hardware refreshes into a pre-Brexit period would be sensible. That way companies know what they are spending.
It all adds up to some careful Brexit considerations which need to be taken in terms of timing. We could see a rush of companies across the UK to negotiate new supplier contracts or find new UK based suppliers, before the post-Brexit period of uncertainty hits the pound.
It’s a simple equation which can be applied to many industries – whatever uncertainty we see at present, greater economic challenges could lie ahead. For this reason, wrapping up supplier arrangements now can be preferable to the other side of Brexit, when conditions are significantly different.
Phil Clark is Managing Consultant at the £Embedded IT Directory.