Part 1 in the “SAP Ariba and Deloitte Brexit” series.
This article was written in collaboration with Deloitte.
While chatting with some non-technology colleagues recently, I learned many believe Brexit may drive a level of technology change within organizations comparable to the Y2K bug in the late 1990s. The high level of technology replacement for Y2K (or the Millennium Bug, as it was also called) was driven by the risk that many systems would simply quit operating at midnight on 1 January 2000. There was a significant degree of nervousness, grounded partially in commercial reality but short of some of the wilder predictions, like that planes might fall out of the sky. Organizations had to make significant preparations for the “worst case scenario” to protect themselves from the most disruptive potential outcomes.
It’s an intriguing thought that Brexit may be as big as Y2K for technology, but let’s be clear, Brexit is not like Y2K. Put simply, most organizations will not have to rip out their core financial and operational systems, whatever the reality of the UK’s eventual exit from the EU. However, changes will be necessary.
The technology implications of Brexit will not be about systems stopping working or failing on a given date, rather that those systems may not be able to accommodate the necessary changes to data gathering, tracking, reporting, and compliance that a new UK-EU trade and immigration regime will require without enhancement or integration with new systems.
Unlike Y2K, where there was a defined risk and problem to solve, Brexit poses significantly more uncertainty and therefore perhaps a wider range of risks to review.
“Brexit will change the way we do business, but as of now, nobody knows what will change exactly. That’s a huge challenge for global supply chains and procurement, as you don’t know what you don’t know.” Dr. Marcell Vollmer, chief digital officer, SAP Ariba
The outcome of the Brexit process is still not clear with less than a year to go until the UK leaves the EU. No one knows where the negotiations will land and whether the planned transitional period will manifest, let alone what the future UK-EU relationship will look like. A “hard Brexit” is still on the table if an agreement on how to manage the Irish border is not established and a framework for the future UK-EU relationship cannot be agreed in time. The risk of “no deal” is higher than ever given recent political tensions in the UK. Therefore, businesses are not yet clear on the level of change required. However, they can still plan for changes by considering different Brexit scenarios and understanding levels of exposure under those scenarios.
Given the uncertainty and increasing likelihood of no deal, we are already seeing businesses taking action to mitigate some of the risks: manufacturers, including a leading automotive company and a medical devices company, are making decisions to significantly increase their stock holdings. Both public and private sector organizations are pre-booking shipping and air freight and reviewing transportation routes. Organizations that have yet to take such action may find it difficult to do so in the near future, as warehousing space in the UK is running out and costs are increasing dramatically. This highlights the need for businesses to start considering their Brexit strategy with respect to their supply chains and procurement and to take mitigating actions, even if the eventual outcomes are uncertain.
Where Brexit is like Y2K is that it requires detailed contingency planning so that businesses are prepared for change.
It’s unsurprising that CFOs, not only close to home but globally, are citing uncertainty and outcomes of trade negotiations as one of the most significant market risks. As a result, CFOs are reacting by prioritizing cost reduction and new product and market developments as their top business strategies for the next 12 months. Businesses need to look not only at the risks presented by Brexit but also how to optimize business processes and performance to withstand and even thrive beyond Brexit.
The opportunity beyond managing risk
It’s been all too easy to cite only the likely risks and pain points associated with Brexit. While this blog is not a debate about the pros or cons of leaving the EU, we know change is coming and change can create opportunities.
There is an interesting technology-specific notion in all this: Brexit creates an environment where we may see technology innovation and adoption accelerate to fill the voids created by Brexit and also to seize such opportunities. This goes beyond survival and managing risk to an impending event that forces change and enables market leaders to take disruptive positions ahead of others.
Brexit creates a real driver for major innovation. What if we could eliminate the movement of large volumes of physical goods through the use of technology where the real trade would be in intellectual property as digital assets? Imagine if a manufacturing company could source component product designs from anywhere in the world and have them produced locally, either in-house or by specialist services companies and contract manufacturers, as part of a digital global supply network? What if the rights associated with the digital assets could be tracked and traced with follow-on financial settlement via blockchain? Will some of the more popular emerging technologies, such as blockchain, robotics, Internet of Things, 3D printing, and artificial intelligence (AI) bring even more valuable propositions to organizations in our post-Brexit world? Or do we need to revisit some of the more foundational technologies in cloud, automation, connectivity, and analytics?
Cynics could argue that the technology isn’t really there at the moment, and disciplines such as additive manufacturing and AI are in their infancy in terms of capability. However, Brexit could provide a stimulus to bring these innovations to scale faster and redefine supply chains.
Some immediate changes
Businesses need to consider some immediate, required changes to their systems and processes to accommodate new trading and immigration regimes for workers post-Brexit. What these changes look like will vary across different industries and by organization depending on the nature and scale of operations and the reliance on pan-EU supply chains or free movement to enable workforce mobility.
There is no doubt that government and its agencies will require some of the most significant changes. For instance, HM Revenue and Customs will need to ensure that its new Customs Declaration Service (CDS) is fit-for-purpose post-Brexit. The Home Office will have to consider how its systems need to be upgraded both to account for the new “settled status” for EEA nationals and to cope with any additional checks going forward.
While not necessarily at the same end of the spectrum, private sector organizations will also require technology changes.
The level of change required for companies with trade links for goods and services between the UK and EU is a bit more uncertain. We know that indirect taxes and customs duties, for example, will be subject to change and therefore systems need to be able to accommodate different data capture and reporting requirements. For manufacturing, there will be potentially large-scale impacts on end-to-end demand and supply chains as the arrangements for moving and tracking goods will become more complex, and potentially more costly, post-Brexit.
Procurement and supply chain teams are uniquely placed to leverage leading technologies to engage the various internal and external stakeholders in safeguarding businesses while exploiting opportunities. We’ll dive into the details in our summer blog series, which includes:
- Readiness for tax and customs: Organizations need to prepare not only for the potential cost impact of tariffs in their supply chains but also the practicalities and cost of managing the scale of tax and customs declarations in cross-border trade with the EU. Are organizations ready, and will this provide the stimulus to look more globally?
- The Brexit opportunity in digital supply: When it comes to innovation, Brexit can be a catalyst to accelerate progress. Do the latest developments in areas such as additive manufacturing, blockchain, AI, and digital networks not only provide an alternative supply channel but help to create new points of differentiation?
- Plan B sourcing and contracting: Many organizations are already considering alternative sources of supply, but plan B shouldn’t necessarily be considered a downgrade; it can be just as attractive, if not more so. What’s needed to help organizations exploit plan B to its maximum potential?
- Integrated business agility: As established supply chains become disrupted and both demand and supply planning become more dynamic, how will business become more responsive to change and collaborate with new business partners to keep business moving?
- Managing the new face of risk: Any change brings new risks to manage, particularly when operating with new global supply markets. How will businesses leverage these new supply markets while protecting the brand from new, complicated risks?
Join our Webinar, “Integrating Supplier Risk Management into Your Procurement Processes” on Wednesday, October 31, 2018, at 10:00 a.m. GMT / 11:00 a.m. CET.