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IT services sector faces freeze amid Brexit wrangling

The IT services sector across the globe will be hit by the uncertainty around the UK's future relationship with the EU, but a spending freeze will eventually thaw

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Outsourcing

While politicians in Britain’s big two parties jostle for position following the unexpected EU referendum result, deals in the IT services sector will be put on hold.

With the UK by far the biggest market for IT and business process services in western Europe, this will have ramifications for the IT services industry in the UK and beyond.

Figures from outsourcing market intelligence company ISG, for example, show the importance of the UK to the IT and business process outsourcing (ITO and BPO) industries. In the first three months of 2016, UK organisations spent €890m on these services. Total spend in Europe for the period was €2.15bn. The research records deals worth over €4m.

The Nordic region was the next biggest spender, investing €550m in ITO/BPO services. French organisations spent €120m, the Dach (German-speaking) region a collective €280m, the Benelux €90m and southern Europe €220m.

Outsourcing lawyer Mark Lewis of Berwin Leighton Paisner said IT service providers will suffer from Brexit in the short term. “Deals are being put on hold for now, until some greater certainty emerges or customers decide on UK/European strategy and location.”

Uncertainty is perhaps highest in the financial services market, the biggest outsourcer of services, as doubts are raised about whether, after a British exit from the EU, UK-based banks will still be able to sell certain products and services into the EU without further authorisation, a practice known as passporting.

Finance to exit

Lewis said: “There is a potentially significant impact on financial services outsourcing because of the need for global institutions to access the EU markets, and therefore a possible move of middle and back-office operations, along with some front-office operations, to EU countries. That would leave smaller operations in the UK, so outsourcing would go elsewhere. But scale of loss of operations/outsourcing remains to be seen.”

He added that in the long term there might be some opportunities for the IT services sector with “more work for ITO/BPO providers in re-engineering operations and processes on Brexit relocation”.

Widespread disquiet

Beyond the UK, an EU exit by the UK is seen as bad news. Peter Schumacher, director at global business consultancy at the Value Leadership Group, which operates from Germany and the US, described it as “a fundamental shift in the European economic and political landscape that will create a lot of additional uncertainty and trigger significant changes across Europe”.

He said the ramifications will reach India, with IT services firms there likely to be hit.

“The UK is the second largest market for the Indian IT services sector and the leading companies generate roughly 60% of their European revenues in the UK. TCS, for example, generates about 15% of its total revenue in the UK and another 11% from across continental Europe – in total about $4.5bn in annual revenue.

“Until customers have more clarity around the political and economic roadmap going forward and the implications thereof, investment decisions will be delayed. Indian IT services firms should expect new business deals to hit a hard stop and current business to slow.”

But Schumacher added that, despite many challenges, the longer-term view remains favourable for the Indian IT services sector in the UK and Europe.

“I don’t see the Indian IT services sector losing the significant position it holds in the UK to local providers or other competitors,” he said. “Regardless of the decision to exit the European Union, the UK economy will need to continue to increase its investments in IT and digital transformation.”

He added that adjusting to the new realities will also lead to new investments.

Users still need to spend

John Keppel, partner and president of ISG, also believes a UK exit from the EU will not stop companies from making vital IT service investments.

“Regardless of timing or the exact nature of a UK exit from the EU, enterprise buyers continue to confront the challenges and the opportunities of digital and cloud, and this supports a healthy outlook for IT services demand,” he said.

Perhaps more worrying for people who work in the services sector could be if suppliers decide to relocate operations within the EU. Banks are already talking about doing this to protect their right to sell across the EU, and Vodafone has said it may pull its headquarters out of the UK.

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