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In an age of uncertainty, now is the time to rethink your outsourcing strategy

Brexit and Trump are not only creating challenges but also opportunities in the outsourcing sector, and outsourcing deals will need to be flexible to exploit them

Britain is now journeying towards Brexit: prime minister Theresa May triggered Article 50 on 29 March 2017, and has called a general election for 8 June in the hope of reinforcing her mandate.

We’re set for at least two years of negotiations, by the end of which everyone will hope Britain has secured the best possible terms for the country’s departure from the European Union (EU).

Whatever the outcome of those discussions, it seems likely that the UK will have additional restrictions and controls in place relating to immigration and the free movement of labour across borders.

Our counterparts in the US seem to be walking a similar path. Donald Trump has shown himself to be prone to as many uncertainties as Brexit, but Trump is certainly intent on giving his country a renewed focus on the domestic market in the hope that internal growth, confidence and employment will follow.

Witness the “buy American, hire American” executive order aimed at stopping skilled worker visa abuse in the United States.

Trump’s policy of forcing federal government agencies to source domestically produced products as well as successful efforts during the presidential election to embarrass American manufacturers to reverse their decisions to locate factories in Mexico.

But how will outsourcing be impacted by Brexit and Trump, not least given the likelihood of further political shockwaves following European elections in two key EU countries, Germany and France?

Brexit implications

There’s a lot at stake in the UK. According to the Arvato outsourcing index, contracts worth £3.91 billion were signed in the first six months of 2016, representing a 19% year on year rise. The private sector was responsible for the bulk of this, with a spend of £2.2bn.

IT outsourcing spend also grew, with the value of contracts across both public and private sectors growing 63% year-on-year to £2.63bn. On top of that, local government spending on outsourcing almost doubled in the first half of 2016.

Key concerns for the British outsourcing market post Brexit must be the stated manifesto pledge of the Conservative party to limit net migration to the tens of thousands. The underlying worry must be whether in the medium to long term restricting mobility in the workforce will drive service provision costs (and hence prices) upwards as UK domiciled businesses compete for talent.

Continental Europe

In France the Macron victory appears to have forestalled immediate prospects of an unstable Europe. With a centrist President at the helm it seems likely that at least within continental Europe the status quo in relation to free movement of labour and services will reign. This effectively means that the market considerations for sourcing in that country will be driven by existing considerations (including the competitiveness or otherwise of France’s labour laws). 

Even a Schulz victory, the German elections for chancellor do not present the same potential schism for global services companies that Le Pen’s victory might have brought about in France.

The Trump factor

The US is an altogether different prospect. Trump’s defining characteristic to date has been unpredictability untrammelled by usual political dogma. What is clear is an underlying passion to restore blue collar manufacturing and service jobs to the US.

So far, this attention has not been directed at major sourcing companies, but it is clear what they think the outcome is likely to be – Infosys, a leading Indian service provider recently stated its intent to create 10,000 continental US jobs – no doubt a response to the potential risk of being frozen out of the US market, and other companies are following suit.

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President Trump marked his first week in office by signalling his country’s withdrawal from the Trans-Pacific Partnership (TPP). He also pledged to renegotiate the North American Free Trade Agreement (NAFTA), a trade treaty between the US, Canada, and Mexico that has been in force since 1 January 1994.

As with Brexit, time will tell whether the impact of these moves is seismic or merely a gentle tremor, but with protectionism the order of the day US businesses will be encouraged to look at onshoring or, perhaps, to focus on potential beneficiaries of mooted bilateral relationships, such as China and Canada.

A return to India?

If no one knows what Brexit will look like yet, the timing of then business minister Sajid Javid’s visit to India – just two weeks after the Brexit vote – points to a potential return to growth for that country's stagnating offshore outsourcing industry.

Javid was quick to make an appearance in Delhi to start negotiations for a trade deal between India and Britain, a scenario prohibited during Britain’s EU tenure and now welcomed by India’s government and private sector alike. As Chandrajit Banerjee, Confederation of Indian Industry director general, put it: “With Britain’s departure from the EU, India will have to negotiate a free trade agreement with the UK which may be easier to accomplish at a bilateral level. This could well be the best era for our industries to collaborate.”

Post-Brexit, EU workers may find it harder to obtain work visas; moreover, UK businesses may find themselves subject to a new raft of legal and administrative issues, were they to look to outsource to countries such as Poland and those in Central and Eastern Europe.

When it comes to labour, then, offshore outsourcing, particularly to India, is likely to be a tried and tested reliable option.

Don’t forget data

What about data, another vital cog in the outsourcing machine? A brave new world is shortly to begin, when the General Data Protection Regulation (GDPR), which was agreed in Brussels in 2016, becomes enforceable in 2018. The GDPR will affect the vast majority of businesses in the EU, and it packs a punch: failure to comply with new, tightened rules of the processing of personal data runs the risk of a maximum penalty of the greater of €20 million or 4% of a company’s worldwide turnover. Does Brexit mean UK businesses are free of the GDPR?

Not a bit of it. The UK government confirmed it would implement the GDPR, meaning that UK businesses need to be compliant by the time it is enforceable on 25 May, 2018. And albeit that Britain, post-Brexit, is a work in progress, with regard to data it is clear either that the GDPR will continue to apply – if, for example, Britain joins the European Economic Area – or that the country will continue to operate a legal framework that is the same or very similar to the GDPR - as, indeed, is the case with the raft of EU legislation that will fall under the Great Repeal Bill.

In a dynamic, rapidly evolving political and economic scene, you need to know what’s tucked away in your commercial agreements – and keep a keen eye on the regulatory landscape. On top of that, be nimble: quickly responding to changes will help ensure that your business rides outsourcing’s looming challenges – and makes the most of its opportunities.

Translated into contractual language and approaches, this means ensuring flexibility in matters such as pricing and tax (bearing in mind the potential imposition of WTO tariffs), change control procedures and allowing for termination in circumstances which may not necessarily be confined to breach but also where the cost of providing the services becomes uneconomic. Amid so much flux, one thing, for in-house counsel and information officers, is crystal clear: the need for a contractual stocktake is paramount.

John Buyers is a commercial outsourcing and information technology specialist at international legal practice Osborne Clarke.

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