CIOs Must Act to Prepare for Changes Triggered by Brexit


Published: 27 June 2016 ID: G00313343

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Summary

Businesses in Europe will see a stall in IT spending as a result of the U.K. vote to leave the European Union. CIOs need to provide frequent, open communication and create a task force to prepare for the changes.

Overview

Key Findings

  • For CIOs in the U.K, the Brexit vote will likely increase costs for dollar-dominated IT products and services.

  • Pauses in long-term strategic projects involving the U.K. are likely for many enterprises.

  • Short-term overreaction to a long-term challenge could lead to more negative consequences than may actually occur as a result of the Brexit decision.

  • CIOs should anticipate a potential increase in complexity in their application portfolios.

Recommendations

  • Create a small, virtual task force to prepare for the eventual changes related to cost optimization, people and talent, applications, suppliers and partners, data management, analytics, governance and operating model changes, and risk management.

  • Provide frequent, open and honest communication about developments.

  • Frame decisions and actions in the context of a long-term view, avoiding short-term reactions driven by market instability.

Analysis

After the U.K. referendum vote on 23 June 2016 to leave the European Union, the U.K. government is expected to activate the EU's Article 50 in October 2016. That means CIOs and business leaders have several months to explore and discuss the potential implications of this decision, commonly known as the "Brexit vote." The U.K. will negotiate its exit from the EU over two years.

The Short-Term Impact

For CIOs in the U.K., the immediate implications of the Brexit vote will most likely be felt through more expensive costs for dollar-dominated IT products and services, as well as near-term restrictions in hiring as CFOs struggle to cope with considerable volatility effects. The uncertainty caused by the vote will most likely lead to pauses in any long-term strategic projects involving the U.K. for many enterprises, at least through 2017.

Fortunately, the challenge of leading in uncertain times is not new for CIOs. Faced with another wave of volatility and complexity, CIOs in the U.K. and Europe must remain calm, but not complacent. All decisions and actions should be framed in the context of a long-term view, avoiding short-term reactions driven by market instability.

However, CIOs still need to take action in the short term in order to prepare for the coming changes triggered by the Brexit vote. Although some CIOs might be tempted to take a "wait and see" approach until things become clear, there are a number of practical actions that CIOs with enterprises based in the U.K. or working regularly with the U.K. can, and should, start in the coming weeks.

Create a Task Force

As leaders, CIOs should first and foremost handle this issue as they have learned to handle uncertainty in the past: by providing frequent, open and honest communication about the situation, and by staying close to the discussions and decisions among their peers to sense and respond to issues as they arise.

At a pragmatic level, CIOs should create a small, virtual task force, or "Office of Brexit," to act as a project team preparing for the eventual changes. Nominate an IT leader to take responsibility for this initiative, and ensure enough time is reserved on regular IT management meeting agendas to discuss plans and review progress. Transparency to what is being discussed and decided at different levels of the organization will be vital to successfully navigating any complexity and uncertainty. This team can also provide the IT contribution to any similar business task force created at an enterprise level. If the Brexit triggers further instability in EU membership or even within the U.K., this office may expand its remit.

Ensure that the Office of Brexit task force preparation plan at least addresses the following capabilities: cost optimization, people and talent, applications, suppliers and partners, data management, analytics, governance and operating model changes, and risk management.

Cost Optimization

For many enterprises, especially conservative or risk-averse ones, uncertainty will lead to frozen spending and reduced budgets. CIOs should anticipate the cost challenges that will result, and aim to get ahead of the inevitable cuts before they are requested. Cost optimization should continue to be a high priority for CIOs, but focus should especially shift to demand portfolio optimization. CIOs should identify any nonessential projects or major, long-term transformations that have been scheduled for 2016 and 2017, and begin discussing with business leadership whether any should be postponed until the full impact of the Brexit vote can be assessed.

In addition to demand portfolio optimization, CIOs should explore potentially deeper cost-cutting opportunities to free up investment to disentangle complex solutions that cut across U.K. and EU borders today. CIOs must be diligent in securing budgets and resources to ensure that the required actions are taken within the two-year Brexit time frame.

CIOs and IT leaders should collaborate with the CFO and finance department to analyze their cost base and identify where they are exposed to currency variations. This is the first step in planning how to minimize any potential impacts.

People and Talent

While there is likely to be no short-term change to the free movement of staff between the U.K. and EU, there will certainly be concern and anxiety among employees who stand to be impacted by the final Brexit. At the very least, this will become a distraction. There is also the risk of losing key talent who are not willing to wait and see how the situation will play out, as well as a limitation in potential recruitment candidates due to the uncertainty. In response to these factors, CIOs should:

  • Reduce uncertainty in their workforce by communicating proactively about the situation and the actions their business is taking to protect the rights and benefits of staff.

  • Create a list of key staff who may be impacted by long-term changes, and work with HR teams to provide support, guidance and reassurance.

  • Revisit the location strategy for IT staff, identifying where the key hubs for specialized skills are located today, and how these hubs might be affected after the Brexit occurs.

  • Examine the recruitment strategy to find opportunities to recruit previously reluctant talent by offering employment certainty, or by changing incentives to compete with employers who are able to offer greater certainty.

  • Examine current offshoring arrangements to determine whether Brexit might have some direct effect on teams based in places such as India and other non-EU countries.

Applications

CIOs should anticipate a potential increase in complexity in their application and service delivery portfolio as a result of the vote, driven by questions of where applications are hosted today and what this means for transactions that cross the U.K. border. In response, they should collaborate with business users to interpret the regulations on tariffs and cross-border value-added tax (VAT) management, which will inevitably demand nontrivial modifications to many business applications and e-commerce websites.

In response to this complexity and uncertainty, where cause and effect will not always be clear, CIOs should consider taking a bimodal approach (if they haven't already). This means creating a separate mode of operation that allows them to explore and experiment, and to take greater risks, with some of the more complex and disruptive changes required, while continuing in parallel to run the business-as-usual activities following traditional modes of operation.

Suppliers and Partners

CIOs must also initiate a complete review of all of their IT services and contracts to identify any cross-border services that could particularly be affected by Brexit. While no immediate action should be taken, CIOs need to know if their data is being stored inside the U.K., which may (depending on the specific details of the Article 50 negotiations) be deemed to be in contravention of EU data privacy rules. As part of the review, CIOs should work with their legal departments to check U.K.-based IT contracts for potential references to U.K. or EU laws and regulations whose applicability may change over time. This may include the free circulation of goods and services that might suffer some restrictions or higher costs through the impact of customs or tariffs.

In the early days following the decision, it is enough for CIOs to have visibility to potential issues and to create a sourcing strategy that identifies two or three strategic options for the enterprise, depending on how the Brexit negotiations play out.

Data Management

The General Data Protection Regulation (GDPR), Regulation (EU) 2016/679 will determine data security and privacy policies for members of the European Economic Area (EEA) starting from 25 May 2018. While the Brexit vote applies to the U.K. leaving the EU, it does not address the question of whether the U.K. will remain within the EEA (for example, Iceland, Norway and Liechtenstein are members of the EEA, but not the EU). Consequently, CIOs with data located in the U.K. will still need to continue with plans to comply with the new regulation until more information is provided on the U.K.'s future position in the EEA.

As with the advice in previous sections, the first step for CIOs is to ensure transparency as to which applications, if any, host data within the U.K. This will enable informed decision making once more details of the Brexit decision become clear.

Additionally, any decision on the location of new data centers (for both internal [private cloud] data centers and contracts with public cloud hosting providers) or outsourcing service providers should be examined carefully, and possibly postponed until there is greater clarity about data retention conflicts.

Analytics

An immediate and intense period of investment in diagnostic and predictive analytics is likely. Enterprises will attempt to out-analyze one another to best predict and exploit future uncertainty, and therefore find competitive advantage. Business leaders will look to simulate and model a wide range of potential business outcomes from slower growth rates, higher costs and currency fluctuations, as well as to anticipate changing customer behaviors and supplier logistics. This provides an opportunity for CIOs to proactively engage with the senior leadership team around the enterprise data and analytics strategy, ensuring the right people are involved in the work, and reprioritizing projects as needed to free up resources and funding.

Governance and Operating Model Changes

CIOs should determine whether their company needs to create a new legal entity subsidiary for IT support in the U.K., the EU countries or one of the non-EU European countries (e.g., Norway, Switzerland, Turkey) to minimize disruption and ensure long-term continuity of the status quo. Such an arrangement might include an actual operating subsidiary or a paper-based arrangement following the business registration process currently used in some countries.

Risk Management

Clarity and visibility are essential to determining the impacts of the Brexit vote on near-term and long-term IT risks. CIOs should initiate a review of current risks and work with the IT leadership team to identify potential impacts that the separation process may have on already-identified risks.

Additionally, CIOs should use this review to identify new risks that may arise in areas of access to skills, sourcing and supplier management, data security and privacy, changes in regulations, and impact on business continuity. By taking proactive action on reviewing risks, CIOs can provide early insight into C-level discussions on the strengths and weaknesses of business decisions being considered in response to the vote.

Bottom Line

The most important action for CIOs in the early days following the Brexit vote is to provide a calm, tempered response that focuses on clarifying decision making for the long term, rather than reacting in the short term. This is another chance for CIOs to build on their skills as enterprise leaders, providing clarity and guidance to their peers and colleagues across business and IT teams.

As a practical first step, CIOs should form a task force that can assist them in providing transparency into the current situation, and in identifying and addressing potential risks and issues that may arise. As leaders, CIOs must focus on frequent, open and honest communication, and work closely with their C-level peers to sense and respond to issues as they arise.

Finally, bear in mind that the process for fully unraveling the U.K. from the EU will take years, with many people actively working to minimize the potential disruption. Short-term overreaction to a long-term challenge could lead to more negative consequences than may actually occur as a result of the Brexit decision.

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