June 29, 2016 6:50 pm | Updated 1 year ago.
Exit of Britain from EU and Impact on Asian Offshore IT Services Providers
Whether right or wrong, a referendum was sought and the people of UK have voted to exit out of EU. The trends seem to indicate that younger people who want more globalization and want to be part of a global economy voted to remain in The EU, while the older generation who wanted the country to themselves voted to Leave. While a lot has been said in the Press and there will be a lot more discussions as Britain puts the necessary steps to exit EU, we would like to give D2E’ perspective of how this exit of Britain from EU will affect Indian Offshore IT services providers, or for that matter all Asian Offshore IT Services providers.
In our opinion, the following factors insulate the Offshore IT Services providers, especially the Indian Offshore IT Services providers being overly affected by this exit of Britain:
i. Robust business model: Over the last few decades of growth of Indian IT industry, the Indian Offshore IT services providers have developed robust business models with de-risking against a specific geography or a specific industry as an integral part of the business model. Even within a specific country, the revenues for most well managed companies may have been de-risked across multiple customer accounts and multiple Lines of Business (LOB), thus reducing the overall impact to a large degree.
ii. Created a niche: Many Indian IT Services providers have created a niche for themselves in specific solution offerings and LOBs, thus giving them the resilience to retain their customers and in some cases, even renegotiate the contracts for better rates.
iii. Proper hedging guidelines: In the last 10 to 15 years the industry has seen some very wild currency fluctuations, due to which, most IT Services providers have sound hedging policies in place and do not usually take extreme position on any single currency.
Having said the above, it will be too simplistic to assume that the impact of Britain exiting EU will be minimal on the Indian IT Services Providers, especially given that UK accounts for 17% of Indian IT exports and EU, as a whole, accounts for a whopping 30%. The steps, in our opinion, that need to be put in place are:
a. Renegotiation of rates, possibly tagged to US$: Most Indian IT companies have their contracts with their UK customers in Pound-Sterling, and British Pound having fallen to a 31 year low against US Dollar, in most cases it will be desirable to renegotiate the contract rates, even though it may be quite difficult to do so given the volatility.
b. Separate HQ for UK and EU: A number of Indian IT Services providers, use their offices in the UK for business development in EU. This strategy may need to be revisited and one of the European countries may be looked as a hub for business development in EU. The impact of higher costs and language issues will need to be duly considered and addressed.
c. Focus on Geographies other than UK and EU: Given the volatility that will be in place over the next 2 years from Britain exiting EU, many British companies will substantially reduce their IT spend, especially discretionary spending. The Indian IT companies may need to step up their sales activities in other geographies, while not losing focus on British or European customers and prospects.