There is white smoke in the Brexit talks. The British Government and the European Commission have reached an agreement in the first phase of the negotiations for United Kingdom’s exit from the European Union.
After an intense night of negotiations, where the border between the two Irelands was blocking progress, at dawn on Friday 8th December 2017, an agreement was reached under which there will be no physical border between Northern Ireland (Republic of Ireland) and the United Kingdom.
In addition to border issues, there were a few other hot topics in this first negotiation phase: the rights of UK citizens in EU countries and vice versa; and the financial agreement. At the end of this phase, the European Commission considered that there was a “balanced agreement” with the United Kingdom on the terms of “divorce” between the parties and decided to recommend to the Member States that they move to the second phase of negotiations on future relations.
What does Brexit mean for nearshore outsourcing?
During the London Technology Week of 2017, analysts predicted that about 180.000 IT specialists will be needed for the UK and over 650.000 for the remaining European countries by 2020. One may have doubts as to whether these specialists will be found on the local market, which is already saturated and which is already straining under the weight of a lack of manpower (not only in IT but in other industries as well). This can lead to an increase in the salaries of specialists on the local market and in fact push British companies to take advantage of outsourcing to a greater extent, in order to fill staff vacancies.
So, actually, Brexit means quite a lot for nearshore outsourcing. For example, consider what might happen if the UK and EU cannot negotiate some sort of agreement to keep open borders for European citizens. A lot of foreign tech people now working in the UK would be forced to return home. Furthermore, British tech companies may have trouble filling positions if EU citizens decide they do not want to move there permanently. This would certainly lead to new opportunities for nearshore outsourcing.
The UK has strong ties with 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.
The UK government and public sector have been a significant market for IT outsourcers over the past decade. Large deals can 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.
It is likely that during Brexit’s intergovernmental negotiations, the pace of IT sourcing decisions may slow down, but companies will seek to reduce costs and increase efficiency, so we may see a new wave of outsourcing and nearshoring.
# Currency risks
The strength of the pound to date has made IT outsourcing to the countries of continental Europe, especially Central and Eastern Europe, as well as to Asia, very profitable for the British. Brexit brought about a sell-off of the pound, while the euro, the Swiss franc, and the dollar became pretty more expensive. The cheap pound makes services abroad, including outsourcing, more expensive. The pound is also cheaper in relation to the Chinese yuan and Indian rupee (both are popular markets for outsourcing IT services).
# Time zone
In the past, large technology projects were developed in the course of several months, sometimes even years, following a structured methodology where each step followed a specific time frame.
Now, however, companies are progressively employing cloud-based technologies to work on their projects. Products time to market have been reduced, and they are improved and updated as customers make use of them. Closer time zones allow teams located in different countries to work at the same time and the ability to make an instant travel decision to head a workshop or check how things are going at the outsource partners constitute further advantages of nearshoring.
When you are building software solutions the time zone makes a big difference. Nowadays, companies use many collaboration tools such as real-time screen-sharing and knowledge-sharing portals. If you eliminate the time-difference issue, the IT team in the nearshoring location can become an extension of the UK team.
# Nearshoring locations
The development of outsourcing locations in Europe means that UK firms have several options to choose from if they want to nearshore IT services.
Companies that do not mind to spend a bit more have closer options to the UK, both culturally and geographically, which present a lower perception of risk with benefits in the long run.
Portugal in the pole position for top nearshore alternatives
The upcoming years will see great indecision and an unpredictable level of risk. The IT outsourcing industry will have to learn how to operate under such conditions. As we have seen, Brexit involves substantial risks but also brings opportunities for development. Some companies can run into trouble, but those which are most flexible and ready to take risks may turn this situation to their advantage — as usually happens in times of crisis.
What’s in Portugal?
1. Great talent at hand
Portugal has a highly skilled, experienced and driven native IT workforce, in addition to the free movement of workers from other EU member states.
2. Same time zone, low travel and communication impact
Work schedule, daily meetings or short-notice travel are a non-issue! Portugal and the UK are on the same time zone and distance between them is short when compared to other nearshoring and off-shoring destinations; there are several daily direct flights between the UK and Portugal (including low cost) with a flight time around two and a half hours.
The cost structure in Portugal is quite competitive in terms of labor costs and cost of living allowing to minimize Pound decline effects.
4. Social, political and regulatory framework
Portugal is politically and socially stable very secure, with a highly rated business environment and privileged geography, climate and quality of life; as a member state, Portugal follows EU standards and ethics namely on data protection.
5. All-time partners
Portugal and Britain have been allies since the Middle Ages; Portugal is the preferred destination for tourists and also for the vast British community that lives here.
From our point of view, in addition to looking at what is happening on Downing Street and keeping an eye on developments, Portuguese tech companies like Cleverti should keep struggling to claim Portugal as the next top outsourcing destination for British companies. After all, which other location alone can offer this set of paybacks to British companies?
Written by Cesar Fonseca | Market Director at Cleverti
This article was originally posted on Cleverti’s Blog