On June 23rd 2016, the United Kingdom voted to leave the European Union in a closely contested referendum. Following the vote, the country’s economic environment looked bleak, with the pound crashing to a 31-year low. British newspaper The Independent even reported that the online currency BitCoin was more stable than the British pound soon afterwards. The country’s exit from the EU is also likely to restrict access to Europe’s single market, something that the UK’s financial services and other sectors rely on.
However, while most experts are still only speculating at this time, many believe that Brexit will actually create a positive impact on the IT sector in Latin America and the Caribbean. Nearshore Americas spoke to three thought leaders to find out the potential bright sides of such an unprecedented disruptive event.
The World is Getting Bigger Again
As noted by Carlos Amaral, Director of Alsbridge, Brexit caught many people by surprise, and the UK is seen to have started a new wave of anti-globalization. The main question now is whether this a trend or an isolated incident.
“If this becomes a trend, there is a cause for concern,” he said. “Brexit is affecting the worldwide stock market, but it will be some time before the markets go back to normal. Therefore, the IT outsourcing market will have plenty of opportunity to make the necessary adjustments.”
Amaral added that legal and tax issues have to be addressed first, with new agreements having to be written to support both UK and EU systems. “IT outsourcing is here to stay,” he said. “I really don’t see any scenarios where companies could not take advantages of labor and expertise arbitrages.”
Sarah Burnett, London-based Vice President of Research at Everest Group, said that the pace of sourcing decisions could slow down during inter-government Brexit negotiations. At the same time, she said, companies will be looking to reduce costs and increase efficiency, so we may see a new wave of outsourcing and offshoring.
New Opportunities for LatAm
There is some feeling that Brexit could have positive effects for Latin America as an IT outsourcing destination as ties between the UK and the EU countries change and new markets open up.
“The BBC came up with five possibilities for the outcome of Brexit, so how Latin America is able to capitalize will depend on the final eventuality,” said Charles Green, Director of Thought Leadership at Belatrix Software. “In times of uncertainty the use of contingent labor increases, which will be positive for IT service providers.
It is possible that talented Europeans will now leave the UK in light of Brexit, or be unwilling to move there – the UK government is giving no guarantees about their right to stay after Brexit. “The overall anti-immigration sentiment that emerged during the EU referendum is hardly conducive to attracting people to move there,” said Green. “That again may lead to a shortage of available talent in the UK, which will push up the use of nearshore and offshore service providers.”
Latin American outsourcing providers could leverage this uncertainty by pitching their services to UK businesses that are freezing hiring or considering redundancies in the wake of the Brexit decision.
Falling Currency, New Markets
Sean Goforth, Director of Research at nearshore Americas feels that the first casualty of Brexit will be currency. “In the short-term, the most prominent fallout from Brexit will be seen in currency markets, as investors seek safe havens,” he said. “Hence the Mexican peso, which is the most widely traded emerging market currency, rapidly lost dollar exchange value in the wake of the Brexit vote.” Goforth explained that currency weakness often serves as a competitive advantage for vendors, especially if the weakness owes to temporary volatility. “Now we’re going on two years of sustained weakness for certain Latin American currencies, which, given the shortening life-cycle of contract terms, could begin to put pressure on nearshore contracts,” he said.
Burnett emphasized that the UK is the biggest market for IT outsourcing in Europe. “Companies in the UK may well look to new offshore locations, including Latin America, if they move from nearshore European locations,” she said. Conversely, though, Burnett believes the falling pound will make the UK and its skills more attractive to international companies. “In particular, we might see growth in shared service centers in Northern Ireland and Scotland. The UK could become a nearshore location for Europe,” she said.
In terms of currency arbitrage, Amaral stressed that it is difficult to estimate the full impact. “Most global agreements are based on US dollars. If the pound continues to drop, the existing agreements will end up costing more,” he said, adding that he always recommends including a clause to protect against the “wild” currency oscillation, but even with this type of clause the rate will go up regardless.
Amaral does not see much change for Latin America in the short term. “Commodity prices in Latin America will fall, but this should not affect the IT work or opportunities in Latin America,” he said, adding that in the short-term, the effect will be primarily be seen in legal and tax areas. “Contracts will have to be reviewed and potentially modified to accommodate UK and EU rules and regulations. Clients will have to review their existing master service agreements (MSAs), which may fall under UK jurisdiction but contain EU rules.”
In the mid to long term, Amaral said that everything will depend on the anti-globalization sentiments. “Latin American IT prices will remain steady or even decline to attract more services thus making the Latin American market potentially more attractive for services provided from Latin America,” he said.
Opportunity Out of Chaos
The cost of services provided into Latin America will go up, because the US dollar is likely to continue its ascent. “This is very concerning because Latin American IT is going through some difficult times, particularly Brazil, which is going through the worst financial crisis in decades,” said Green.
The UK government and public sector has been a significant market for IT outsourcers over the past decade. “Expect large deals to be put on short-term hold. The negative economic impact of Brexit will push up demand for outsourcing from the public sector, which will need to cut costs. However, Latin American providers do not have any significant exposure to this sector,” explained Green.
The Brexit Effect on Other Markets
The UK has strong ties with India and Indian outsourcers, so the decline in the pound may mean Indian outsourcers have to renegotiate outsourcing contracts. That could lead to companies changing providers and looking to alternative options.
Then there is the Caribbean with its strong ties to both the UK and Europe. Green noted that one of the pillars of the Leave campaign was to strengthen ties and trade with other countries beyond Europe. “In the long-term Brexit may be positive for Caribbean IT outsourcing,” he said.
Burnett agrees, adding that “The UK may well look to Caribbean for tech resources. There is opportunity here if you market your services and get more mindshare.”
Amaral added: “Latin American and Caribbean based IT companies can view this market turmoil as an opportunity. Their rates will decrease against the ‘mighty’ US dollar – the preferred IT outsourcing currency – but the biggest obstacle to increase their international presence is their own country polices.”
For years, Brazil, Mexico, and other Latin American countries have needed to improve the business climate as a way to increase their international footprint presence. “The political classes do not understand the benefits and the impact that the international technology trade can bring to their countries. Barriers should be lifted and better commerce should be allowed,” concluded Amaral.
Ultimately, the only certainty of Brexit is that the future is uncertain: no-one knows what the impact of this unprecedented move may be, but analysts agree that it could potentially have a positive effect on IT services in Latin America and the Caribbean. But how should companies capitalize on the aftermath of this upheaval? “Keep calm and carry on, of course,” said Goforth. “There’s unlikely to be permanent damage to Latin America from an exogenous shock like Brexit, which in any case will take years to transpire. However, all bets are off if Brexit inspires more countries to leave and EU begins to really unravel.”