Brexit and the UK technology sector - read our analysis of the implications
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CIOs may have to rethink their IT plans, especially those relating to future upgrades, as a result of the outcome of the UK referendum and the country’s decision to leave the European Union (EU).
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In the past few days, sterling has traded between 10-15% lower with the US dollar than prior to the Brexit vote.
The strong US dollar previously affected the financial results of many IT suppliers, leading many to increase costs of their products outside the US.
The political uncertainty arising from Tory leadership challenges and the wranglings in Labour, combined with negotiations to leave the EU, are fuelling business uncertainty, leading to experts predicting a UK IT slump.
Analyst firm Canalys revised its UK spending forecast, projecting IT spending to fall by up to 10% in 2016, based on public sector and businesses cutting expenditure to reduce risk.
Matthew Ball, principal analyst at Canalys, said: “The outlook for 2017 could be even worse, with up to a 15% decline as IT budgets are set lower on the prediction of a tough year ahead and ongoing uncertainty.”
In its Understand the Brexit Impact on IT paper, analyst Gartner warned there is likely to be continued political volatility, business confidence erosion and price increases.
The analyst also revised its forecast for IT spending in the UK downwards. “The current forecast growth for UK IT spending is 1.7%. The Brexit will drop this figure between 2% and 5 %. In other words, UK IT spending growth will certainly be negative in 2016,” said Gartner vice-president John Lovelock.
“Post-Brexit, the pound’s recovery will likely take longer, making dollar-denominated IT products and services in the UK relatively more expensive for an extended period as technology providers adjust pricing upward to cover costs and to protect margins.”
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Canalys’s Ball said: ‘In the short term, contracts will have to be renegotiated and proposals requoted due to the strong shift in value. Any new activity will be suspended until rates stabilise.”
Given the fluctuations in currency arising from the vote of leave, one member of the Itam Review forum for software asset managers said there may be an increase in software audits. Most software companies report earnings in US dollars.
“The pound used to bring in $1.50. Now it brings in $1.32, the lowest level in more than 30 years. Microsoft’s SAM [software asset management] Engagement teams are going to have to hustle to make up for lost earnings,” said the Itam Review member.
Sterling’s fall has added to its continuing volatility against the US dollar, which has been an issue since the start of 2016, according to Canalys. It could feasibly drop below the US$1.20 mark if confidence deteriorates further and capital continues to flow to safer assets, the analyst firm warned.
When asked whether software licences may need to be renegotiated, Martin Thompson, who chairs the Itam Review, said: “Where there is a territory limitation, it is mostly by country, not by region. So licensing may not have so much of an affect.”
Thompson urged companies to do a risk assessment, as “some of the less scrupulous software companies may try to sell British licences,” he warned.
Another concern is the second-user software market. On 3 July 2012, the European Court of Justice ruled that the owner of copyright in software cannot prevent a perpetual licensee who has downloaded the software from the internet from selling their"used" licence.
One commentator in the Itam Review forum noted: “One downside of Brexit could be the used software market. I believe the EU ruling would not be applicable anymore and it would require a new court ruling to return these rights to be generally used.”
A post-Brexit IT budget
Speaking to Computer Weekly after the referendum vote, the UK representative of EuroCIO Ben Booth said many organisations may defer major IT projects. Budget priorities are likely to shift in the short term.
In its Quick Take: UK Firms Must Drive Innovation In The Age Of The Customer, Despite Brexit report, analyst Forrester expected the short-term effect on CIO budgets will be that spending devoted to risk management, regulatory compliance and operational process issues will likely increase.
However, Forrester recommended that IT chiefs “relentlessly strip costs out of your IT operations so you can continue to invest in meeting rising customer expectations for service and speed.”
The analyst recommended businesses invest more in IT to support customer initiatives. With costs set to increase, and spending in IT set to fall, Forrester recommended that CIOs use cloud computing, DevOps, automation and cognitive systems to help their businesses strip out IT operations costs.